<PAGE>
As filed with the Securities and Exchange Commission on December 22, 1999
Registration 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
LOUDEYE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 7371 91-1908833
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
Times Square Building
414 Olive Way, Suite 300
Seattle, Washington 98101
(206) 832-4000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Martin Tobias
Chief Executive Officer
Loudeye Technologies, Inc.
Times Square Building
414 Olive Way, Suite 300
Seattle, Washington 98101
(206) 832-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies To:
<TABLE>
<CAPTION>
<S> <C>
William W. Ericson Nora L. Gibson
John W. Robertson Lindsay C. Freeman
Ivan A. Gaviria Angela C. Hilt
Michelle A. Gail Jennifer J. Massey
Venture Law Group Brobeck, Phleger & Harrison LLP
A Professional Corporation Spear Street Tower
4750 Carillon Point One Market St.
Kirkland, Washington 98033 San Francisco, California 94105
(425) 739-8700 (415) 442-0900
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration
statement.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ___________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ___________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price(1) Registration Fee
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<S> <C> <C>
Common Stock, par value $0.001.... $57,500,000.00 $15,180
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act.
---------------
The registrant hereby amends this registration statement on that date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on the date as the Commission, acting
pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 2000
Loudeye Technologies, Inc.
(formerly encoding.com, Inc.)
Shares
Common Stock
Loudeye Technologies, Inc. is offering shares of its common stock.
This is our initial public offering and no public market currently exists for
our shares. We anticipate that the initial public offering price will be
between $ and $ per share.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "LOUD."
--------------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 8.
--------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting Discounts and Commissions.................... $ $
Proceeds to Loudeye....................................... $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Loudeye has granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments. FleetBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on 2000.
--------------
Robertson Stephens Hambrecht & Quist
CIBC World Markets
The date of this prospectus is , 2000
<PAGE>
Inside Cover:
Towards top of page
Loudeye logo (formerly encoding.com logo)
Enabling a new experience of audio and video on the Internet
Mid-section of page
Digital media services and applications
to encode, manage and distribute
audio and video content for the Internet
Lower portion of page
Media and Entertainment Solutions
Treatment showing:
Film studios, record labels, stock footage houses, music and video
distributors, web aggregators, and new media.
Being served with solutions for:
product promotions (trailers & clips), download delivery, electronic
marketing, web communities, content acquisition, and rich media
advertising
Enterprise Solutions
Treatment showing:
High tech industry, manufacturing, finance, education, and government.
Being served with solutions for:
corporate communications, electronic commerce (digital media product
descriptions), electronic education, electronic marketing,, and rich
media advertising
Gatefold:
Towards top of page
Loudeye logo
providing the Internet media infrastructure to enable audio and video
on every Web page
Process Diagram - (illustrates parallels to traditional media and digital
media) (illustration to show the following being addressed by both Digital
media services and Digital media applications)
Starts with input source material symbols such as:
Compact disks, videos, floppy disk, tapes, cassettes, cameras
Encoding: signal acquisition, relational data capture, image capture,
encode to formats
Insert facts: over 1 million music files encoded
over 300,000 minutes of video encoded
Management: digital asset management, indexing, security, archival
storage
Distribution: electronic commerce, syndication, rights management,
delivery
Ends with content showing up on example Web page/s
Towards bottom of page
Digital Media Services & Digital Media Applications
High Quality, large volume, and Quick turnaround
Complete Solution
Format and Platform Independent
Flexible and Reliable
1
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 8
Special Note Regarding Forward-Looking Statements........................ 23
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 26
Selected Financial Data.................................................. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 36
Management............................................................... 54
Certain Relationships and Related Transactions........................... 65
Principal Stockholders................................................... 67
Description of Capital Stock............................................. 69
Shares Eligible for Future Sale.......................................... 73
Underwriters............................................................. 75
Legal Matters............................................................ 78
Experts.................................................................. 78
Change in Independent Accountants........................................ 78
Additional Information................................................... 79
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Loudeye and encoding.com are our service marks; mediaupgrade.com,
myslideshow, online media syndicator, media syndicator and media syndicator pro
are our trademarks. This prospectus also includes trade dress, trade names,
trademarks and service marks of other companies. Use or display by Loudeye of
other parties' trademarks, trade dress or products is not intended to and does
not imply a relationship with, or endorsement or sponsorship of Loudeye by, the
trademark or trade dress owners.
3
<PAGE>
SUMMARY
You should read the following summary together with the more detailed
information in this prospectus, including "Risk Factors," and our financial
statements and notes to those statements appearing elsewhere in this prospectus
regarding our company and the common stock being sold in this offering.
Loudeye Technologies, Inc.
We are a leading provider of Internet media infrastructure services and
applications that create a complete solution for the media, entertainment and
enterprise markets. With the millions of hours of existing audio and video
content and the thousands of hours of new audio and video content created each
day, media owners have become increasingly aggressive in exploring new ways to
reach audiences and distribute their content. Our solution simplifies and
accelerates the process of delivering audio and video content to the Web. Our
proprietary technologies and processes enable high quality, high volume,
platform neutral processing of significant quantities of digital media. Our
customers include Atom Films, BMG Music, Disney Enterprises, Inc., EMusic.com
Inc., Hewlett-Packard Company, Kankaris Communications, Inc., Microsoft
Corporation, Sony Music Entertainment, Inc. and Sony Trans Com.
The widespread acceptance of digital audio and video media is the next phase
in the evolution of the Internet. Media and technology companies are seeking to
leverage the Internet by creating a Web experience consistent with the quality
of traditional media such as compact disks, tapes, film, radio and television.
The development of numerous streaming media technologies and the increased
availability of high-speed access have helped to create a viable platform for
delivery of audio and video on the Internet. However, a significant factor
limiting the use of audio and video on the Internet is the lack of software
applications, facilities or processes for transforming traditional media into
Internet compatible streaming technologies that can be distributed to end users
in all formats.
Our digital media services and applications enable our customers to manage
their Web-based audio and video content. We offer complete digital media
services and applications that provide our customers with an end-to-end
solution encompassing the conversion, encoding, management and distribution of
digital media. The benefits of our solution include high quality, large volume,
accelerated time to market, format and platform independence, superior
reliability and flexibility.
We intend to enhance our leadership position in encoding technology and
services by continuing to develop superior technologies and processes through a
platform and format independent strategy. We plan to build on and expand our
capabilities to include software-based solutions that allow Web destinations
and media companies to offer complete digital media services to their end users
in a complete Web environment. As new formats and technologies emerge, we will
quickly expand our services to incorporate these new capabilities. In this way,
we plan to continue to define an emerging Internet media infrastructure layer
that links audio and video content creators and owners with millions of
Internet users.
We were formed as a limited liability company in Washington in August 1997
under the name Encoding.com, LLC and incorporated in Delaware in March 1998 as
encoding.com, Inc. In December 1999, we changed our name to Loudeye
Technologies, Inc. Our principal executive offices are located at the Times
Square Building, 414 Olive Way, Suite 300, Seattle, WA 98101, and our telephone
number is (206) 832-4000. Our World Wide Web site is www.loudeye.com. The
information contained on our Web site is not part of this prospectus.
4
<PAGE>
Recent Developments
In December 1999, we acquired Alive.com, Inc., a multimedia applications
developer, and issued 2,508,848 shares of our common stock and 91,134 options
to acquire our common stock to shareholders and optionholders of Alive.com in
exchange for all outstanding shares, and options to acquire shares, of
Alive.com common stock.
In addition, in December 1999, we sold an aggregate of $47.8 million of
Series D preferred stock to a number of strategic and financial investors,
including America Online Inc., CBS Corporation, Microsoft Corporation and
National Broadcasting Company, Inc.
On December 17, 1999, we entered into a commercial agreement with Valley
Media, Inc., a leader in Internet fulfillment and the full-line distribution of
music, video and digital video disk products, in which we will provide our
digital media services to enable Valley Media's catalog of over 150,000
commercial compact disks to be incorporated into a digital media clip service.
We have agreed to jointly commercialize this clip service and jointly explore
other business opportunities.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Loudeye....................... shares
Common stock to be outstanding after the offering..... shares
Use of proceeds....................................... We intend to use the net
proceeds for general
corporate purposes,
including working
capital and capital
expenditures. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol................ LOUD
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at December 20, 1999.
This number excludes:
. 4,129,252 shares subject to outstanding options as of December 20, 1999
at a weighted average exercise price of $0.97 per share;
. 2,634,938 additional shares available for grants under our stock option
and stock purchase plans; and
. 691,053 shares subject to outstanding warrants as of December 20, 1999 at
a weighted average price of $9.52 per share.
----------------
Except as otherwise noted, all information in this prospectus:
. reflects the automatic conversion of 21,063,236 shares of preferred
stock, including our Series D preferred stock issued in December 1999,
into common stock at the closing of the offering;
. assumes that the underwriters' option to purchase additional shares is
not exercised; and
. reflects the acquisition of Alive.com with respect to information given
after December 14, 1999.
6
<PAGE>
Summary Financial Data
The statements of operations data for the years ended December 31, 1997 and
1998 are derived from our audited financial statements appearing elsewhere in
this prospectus. The statement of operations data for the nine-month period
ended September 30, 1998 and 1999 and the balance sheet data as of September
30, 1999 are derived from unaudited interim financial statements appearing
elsewhere in this prospectus.
The balance sheet data displayed in the "Pro Forma" column reflect the effect
of the purchase of Alive.com through the issuance of 2,508,848 shares of common
stock valued at $6.00 per share and 91,134 options to purchase shares of common
stock valued at fair market value using the Black-Scholes option pricing model
and the application of the net proceeds from the sale of 7,510,989 shares of
Series D preferred stock at $6.37 per share. The "Pro Forma as Adjusted" column
reflects the effect of the purchase of Alive.com, the sale of the Series D
preferred stock and the conversion of all shares of outstanding preferred stock
into shares of common stock upon the closing of this offering and the
application of the net proceeds from the sale of shares of common
stock offered by us at an assumed initial public offering price of $ per
share, after deducting the underwriting discount and estimated offering
expenses. See "Use of Proceeds" for a description of how we intend to use the
net proceeds of this offering.
The summary financial data should be read in conjunction with our financial
statements and the related notes included elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See note 2 of notes to financial statements for an explanation of
the determination of the number of weighted average shares used to compute pro
forma net loss per share amounts.
<TABLE>
<CAPTION>
Period from
August 1997
(inception) Fiscal Year Nine-Month
through Ended Periods Ended
December 31, December 31, September 30,
------------ ------------ -----------------
1997 1998 1998 1999
------------ ------------ ----- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenues.......................... $10 $ 286 $ 107 $ 1,597
Gross margin...................... (7) (218) (48) (111)
Total operating expenses.......... 88 1,466 773 4,905
Net loss.......................... (95) (1,650) (788) (5,036)
Basic and diluted pro forma net
loss per share................... $ (0.17) $ (0.32)
Weighted average shares
outstanding used to compute basic
and diluted pro forma loss per
share............................ 9,585,049 15,511,924
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
---------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.......................... $ 6,171 $54,436 $--
Working capital.................................... 5,146 53,256 --
Total assets....................................... 10,403 74,154 --
Long-term obligations, less current portion........ 1,279 1,378 --
Total stockholders' equity......................... 6,714 70,092 --
</TABLE>
7
<PAGE>
RISK FACTORS
Any investment in our shares of common stock involves a high degree of risk.
You should consider carefully the following information about these risks,
together with the other information contained in this prospectus, before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition would likely
suffer. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
Risks Related to Our Operations
We have a limited operating history, making it difficult for you to evaluate
our business and your investment
Loudeye was formed as a limited liability company in August 1997 and
incorporated in March 1998. We therefore have a very limited operating history
upon which an investor may evaluate our operations and future prospects.
Because of our limited operating history, we have limited insight into trends
that may emerge and affect our business. In addition, the revenue and income
potential of our business and market are unproven. Because of the recent
emergence of the Internet media infrastructure industry, none of our executives
have significant experience in this industry. As a young company, we face risks
and uncertainties relating to our ability to implement our business plan
successfully. Our potential for future profitability must be considered in
light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets, such as the Internet media
infrastructure industry, using new and unproven business models.
Because we expect to continue to incur net losses, we may not be able to
implement our business strategy and the price of our stock may decline
We have incurred net losses from operations of $6.7 million during the period
August 12, 1997 (inception) through September 30, 1999. Given the level of our
planned operating and capital expenditures, we expect to continue to incur
losses and negative cash flows for the foreseeable future. To achieve
profitability, we must, among other things:
. successfully scale our current operations;
. introduce new digital media services and applications;
. implement and execute our business and marketing strategies;
. develop and enhance our brand;
. adapt to meet changes in the marketplace;
. respond to competitive developments in the Internet media infrastructure
industry;
. continue to attract, integrate, retain and motivate qualified personnel;
and
. upgrade and enhance our technologies to accommodate expanded digital
media service and application offerings.
We might not be successful in achieving any or all of these objectives.
Failure to achieve any or all of these objectives could have a serious adverse
impact on our business, results of operations and financial position. Even if
we ultimately do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis. Additionally, we expect
to increase significantly
8
<PAGE>
our operating expenses in the near future as we attempt to expand our digital
media service and application offerings, grow our customer base, enhance our
brand image and improve our technology infrastructure. We expect the number of
our employees to continue to grow significantly. These higher operating costs
will likely increase our quarterly net losses for the foreseeable future.
Accordingly, our ability to operate our business and implement our business
strategy may be hampered and the value of our stock may decline.
Our quarterly financial results are subject to fluctuations which may make it
difficult to forecast our future performance and could cause our stock price to
decline
Our quarterly operating results have fluctuated in the past, and we expect
our revenues and operating results to vary significantly from quarter to
quarter due to a number of factors, including:
. variability in demand for our digital media services and applications;
. market acceptance of new digital media services and applications offered
by us and our competitors;
. introduction or enhancement of digital media services and applications
offered by us and our competitors;
. willingness of our customers to enter into volume purchase orders;
. the mix of distribution channels through which our products are licensed
and sold;
. changes in the growth rate of Internet usage;
. variability in average order size;
. changes in our pricing policies or the pricing policies of our
competitors;
. technical difficulties with respect to the use of our products;
. governmental regulations;
. the amount and timing of operating costs and capital expenditures
related to expansion of our business operations and infrastructure; and
. general economic conditions and economic conditions specifically related
to the Internet.
Our limited operating history and new and unproven business model further
contribute to the difficulty of making meaningful quarterly comparisons. We
expect our operating expenses to increase significantly in absolute dollars.
Our current and future levels of operating expenses and capital expenditures
are based largely on our growth plans and estimates of future revenues. These
expenditure levels are, to a large extent, fixed in the short term. Thus, we
may not be able to adjust spending in a timely manner to compensate for any
unexpected shortfall revenues and any significant shortfall in revenues
relative to planned expenditures could have an immediate adverse effect on our
business and results of operations. If our operating results fall below the
expectations of securities analysts and investors in some future periods, our
stock price will likely decline. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for more information on our
quarterly operating results.
Although we have recently achieved significant percentage increases in our
quarterly revenues, this does not mean that future quarters can be expected to
show similar percentage revenue increases. We rely on our customers to deliver
their content to us in a timely manner. If our customers do not deliver their
content to us in a timely manner or if our customers refuse to enter into
volume purchase orders, our ability to forecast revenues will be adversely
affected and could contribute to increased fluctuation in our quarterly
results.
9
<PAGE>
We are dependent on the development and rate of adoption of digital media and
the delay or failure of this development would seriously harm our business
The development of commercial applications for digital media content is in
its very early stages. If widespread commercial use of the Internet does not
develop, or if the Internet does not develop as an effective medium for the
distribution of digital media content to consumers, then we will not succeed in
executing our business plan. Many factors could inhibit the growth of
electronic commerce in general and the distribution of digital media content in
particular, including concerns about the profitability of Internet-based
businesses, bandwidth constraints, piracy and privacy.
Our success depends on users having access to the necessary hardware,
software and bandwidth to receive high quality digital media over the Internet.
Congestion over the Internet and data loss may interrupt audio and video
streams, resulting in unsatisfying user experiences. In order to receive
digital media adequately, users generally must have multimedia personal
computers with certain microprocessor requirements and at least 28.8 Kbps
Internet access as well as streaming media software. The success of digital
media over the Internet depends on the continued roll-out of broadband access
to consumers on an affordable basis. Users typically download digital media
software and install it on their personal computers. This installation may
require technical expertise that some users do not possess. Furthermore, some
information systems managers block reception of digital media over corporate
intranets because of bandwidth constraints. Widespread adoption of digital
media technology depends on overcoming these obstacles, improving audio and
video quality and educating customers and users in the use of digital media
technology. If digital media technology fails to overcome these obstacles, our
business could be seriously harmed.
We rely on strategic relationships to promote our services and for access to
licensed technology; if we fail to maintain or enhance these relationships, our
ability to serve our customers and develop new services and applications could
be harmed
Our ability to provide our services to users of multiple technologies and
platforms depends significantly on our ability to develop and maintain our
strategic relationships with key streaming media technology companies
including, among others, Apple Computer, Inc., Microsoft Corporation,
RealNetworks, Inc. and Terran Interactive, Inc. and hosting and distribution
companies including, among others, Digital Island, Inc., Enron Corp. and iBEAM
Broadcasting. We rely on these relationships for licensed technology to
maintain our ability to service RealNetworks, RealMedia, Microsoft Windows
Media and Apple Quicktime platforms and applications. Due to the evolving
nature of the Internet media infrastructure market, we will need to develop
additional relationships to adapt to changing technologies and standards. We
cannot be certain that we will be successful in developing new relationships or
that our partners will view these relationships as significant to their own
business or that they will continue their commitment to us in the future. If we
are unable to maintain or enhance these relationships, we may have difficulty
strengthening our technology development and increasing the adoption of our
brand and services.
If our customers do not agree to enter into volume purchase orders, or do not
meet their volume commitments, our ability to manage production resources,
forecast revenues and operate efficiently could be seriously harmed
Historically, we have priced our digital media services based on agreements
with projected service volumes. In the future, we plan to provide digital media
services through volume purchase
10
<PAGE>
orders with prices determined by customers committing to specific service
volumes and schedules and paying nonrefundable deposits. We plan to use those
volume purchase orders to schedule time in our production facilities, to staff
our operations efficiently and to forecast revenues and cost of revenues. If
our customers do not accept these volume purchase orders or if they do not
fulfill their commitments under volume purchase orders, our business could be
seriously harmed.
If we are ineffective in managing our rapid growth, our business may be harmed
We have rapidly and significantly expanded our operations and anticipate that
further rapid expansion will be required to execute our business strategy. This
growth has accelerated since January 1, 1999; from January 1, 1999 to December
20, 1999, we have grown from 41 to 210 employees. In December 1999, we acquired
Alive.com. In addition, we have recently leased additional space and are in the
process of installing additional production equipment for our digital media
services. Integrating additional production facilities with our existing space
has placed a significant strain on our employees, management systems,
information systems, accounting systems, encoding systems and other resources.
If we do not manage our growth effectively, our business, results of operations
and financial condition could be seriously harmed.
Our current systems are insufficient to accommodate our targeted level of
future operations. Effectively managing our expected future growth will
require, among other things, that we successfully upgrade our production
processes and systems, expand the breadth of products and services we offer,
improve our management reporting capabilities and strengthen internal controls
and accounting systems. We will also need to attract, hire and retain highly
skilled and motivated officers and employees. We must also maintain close
coordination among our marketing, operations, development and accounting
organizations. We plan to add sales offices and production facilities in New
York, New York and Los Angeles, California as well as internationally. This
broad expansion will create significant challenges for us. If we are unable to
meet these challenges effectively, our business could be harmed.
Technological advances may cause our services and applications to be
unnecessary
As more audio and video content is originally created in digital media
formats, the need for our encoding services may decrease. In addition the
enhancement of features in streaming media software applications from
Microsoft, RealNetworks and others may incorporate services and applications we
currently offer, or intend to offer, making our services or applications
unnecessary or obsolete. This could seriously harm our business.
If we are unable to scale our capacity sufficiently as demand increases, we may
lose customers which would seriously harm our business
The average volume of orders we have had to fulfill has been below our
designed capacity, and we cannot be certain that our facilities and employees
will be able to manage a substantially larger number of customer orders while
maintaining current levels of performance. Our failure to achieve or maintain
high capacity for our production facilities may cause us to lose customers or
fail to gain new ones, reducing our revenues and causing our business and
financial results to suffer.
The failure to retain and attract key technical personnel and other highly
qualified employees could harm our business
Because of the complexity of our services, applications and related
technologies, we are substantially dependent upon the continued service of our
existing product development personnel. In
11
<PAGE>
addition, we intend to hire additional engineers with high levels of experience
in designing and developing software and rich media products in time-pressured
environments. There is intense competition in the Puget Sound region for
qualified technical personnel in the software and technology markets. New
personnel will require training and education and take time to reach full
productivity. Our failure to attract, train and retain these key technical
personnel could seriously harm our business.
As we continue to introduce additional applications and services, and as our
customer base and revenues continue to grow, we will need to hire a significant
number of qualified personnel in every other area of operations as well.
Competition for these personnel is also extremely intense, and we may not be
able to attract, train, assimilate or retain qualified personnel in the future.
Our failure to attract or retain qualified personnel could seriously harm our
business, results of operations and financial condition.
Finally, our business and operations are substantially dependent on the
performance of our executive officers and key employees, all of whom are
employed on an at-will basis and have worked together for only a short period
of time. We do not maintain "key person" life insurance on any of our executive
officers. The loss of Martin G. Tobias, our founder and chief executive
officer, could seriously harm our business, as could the loss of several other
key executives.
Competition may decrease our market share, revenues and gross margins which may
cause our stock price to decline
The market for digital media services and applications is relatively new, and
we face competition from in-house encoding services by potential customers,
other vendors that provide outsourced digital media services and companies that
directly provide digital media applications. If we do not compete effectively
or if we experience reduced market share from increased competition, our
business will be harmed. In addition, the more successful we are in the
emerging market for digital media services and applications, the more
competitors are likely to emerge including turnkey Internet media application
and service providers such as Yahoo! Broadcast Services, InterVU, Inc. and V-
Stream; streaming media platform developers such as Apple, Microsoft,
RealNetworks and Liquid Audio, Inc.; and video post-production houses. Our
digital media services business may face competitive services from companies
such as Globix Corporation, Magnum Design, Sonic Foundry and STV Group, Inc.
Our digital media applications business may face competitive products from
companies like AudioSoft, AudioTruck, InterTrust Technologies Corporation,
Microsoft, RealNetworks, Versifi and Vignette Corporation.
We also may not compete successfully against current or future competitors,
many of which have substantially more capital, longer operating histories,
greater brand recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. These competitors may
also engage in more extensive development of their technologies, adopt more
aggressive pricing policies and establish more comprehensive marketing and
advertising campaigns than we can. Our competitors may develop products and
service offerings that are more sophisticated than our own. For these or other
reasons, our competitors' products and services may achieve greater acceptance
in the marketplace than our own, limiting our ability to gain market share and
customer loyalty and to generate sufficient revenues to achieve a profitable
level of operations.
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Our business model is unproven, making it difficult to forecast our revenues
and operating results
Our business model is based on the premise that digital media content
providers and developers will outsource a large percentage of their encoding
services needs and content management needs. Our potential customers may rely
on internal resources for these needs. In addition, technological advances may
render an outsourced solution unnecessary, particularly as new media content is
created in a digital format. Market acceptance of our services will depend in
part on reductions in the cost of our services so that we may offer a more cost
effective solution than both our competitors and our customers doing the work
internally. Our cost reduction efforts may not allow us to keep pace with
competitive pricing pressures or may not lead to improved gross margins. In
order to remain competitive, we must reduce the cost of our services through
design and engineering changes. We may not be successful in reducing the costs
of our services.
Average selling prices of our services may decrease, which may harm our gross
margins
The average selling prices for our services may be lower than expected as a
result of competitive pricing pressures, promotional programs and customers who
negotiate price reductions in exchange for longer term purchase commitments or
otherwise. The pricing of services sold to our customers depends on the
duration of the agreement, the specific requirements of the order, purchase
volumes, the level of sales and service support and other contractual
agreements. We expect to experience pricing pressure in the future and
anticipate that the average selling prices and gross margins for our products
will decrease over product life cycles. We cannot assure you that we will be
successful in developing and introducing on a timely basis new products with
enhanced features that can be sold at higher gross margins.
If we fail to enhance our existing services and applications products or
develop and introduce new digital media services, applications and features in
a timely manner to meet changing customer requirements and emerging industry
standards, our ability to grow our business will suffer
The market for Internet media infrastructure solutions is characterized by
rapidly changing technologies and short product life cycles. Our future success
will depend in large part upon our ability to:
. identify and respond to emerging technological trends in the market;
. develop and maintain competitive digital media services and
applications;
. enhance our products by adding innovative features that differentiate
our digital media services and applications from those of our
competitors;
. bring digital media services and applications to market on a timely
basis at competitive prices; and
. respond effectively to new technological changes or new product
announcements by others.
We will not be competitive unless we continually introduce new services and
applications and enhancements to existing services and applications that meet
evolving industry standards and customer needs. In the future, we may not be
able to address effectively the compatibility and interoperability issues that
arise as a result of technological changes and evolving industry standards. The
technical innovations required for us to remain competitive are inherently
complex, require long
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development cycles and are dependent in some cases on sole source suppliers. We
will be required to continue to invest in research and development in order to
attempt to maintain and enhance our existing technologies and products, but we
may not have the funds available to do so. Even if we have sufficient funds,
these investments may not serve the needs of customers or be compatible with
changing technological requirements or standards. Most development expenses
must be incurred before the technical feasibility or commercial viability of
new or enhanced services and applications can be ascertained. Revenue from
future services and applications or enhancements to services and applications
may not be sufficient to recover the associated development costs.
If our systems fail and cause interruption of our services, or if our facility
is damaged, our business could be seriously harmed
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation and our ability to
provide high quality customer service and attract and retain customers,
suppliers, users and strategic partners. Currently, our infrastructure and
production systems are located at one site in Seattle, Washington. We depend on
our single-site infrastructure and any disruption to this infrastructure
resulting from a fire, natural disaster or other event could result in an
interruption in our service, delays in responding to customers' orders and, if
sustained or repeated, could impair our reputation and the attractiveness of
our services. We have no mirror sites or redundant systems backing up our
infrastructure in the event of serious damage or destruction.
Our systems and operations are vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunications failures, break-
ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. We do not have a formal disaster recovery plan, and we do not carry
sufficient business interruption insurance to compensate us for losses that
could occur. The occurrence of any of these conditions could seriously harm our
business.
We cannot be certain that we will be able to protect our intellectual property,
and we may be found to infringe proprietary rights of others, which could harm
our business
Our intellectual property is important to our business, and we seek to
protect our intellectual property through copyrights, trademarks, patents,
trade secrets, confidentiality provisions in our customer, supplier and
strategic relationship agreements, nondisclosure agreements with third parties,
and invention assignment agreements with our employees and contractors. We
presently have six provisional patent applications on file with the U.S. Patent
and Trademark Office and are currently in the process of preparing and filing
six patent applications that claim priority filing dates to those provisional
patent applications. We cannot assure you that any or all of the patent
applications will be granted. We cannot assure you that measures we take to
protect our intellectual property will be successful or that third parties will
not develop alternative solutions that do not infringe upon our intellectual
property. In addition, we could be subject to intellectual property
infringement claims by others. These claims, and any resultant litigation,
should it occur, could subject us to significant liability for damages
including treble damages for willful infringement. In addition, even if we
prevail, litigation could be time-consuming and expensive to defend and could
result in the diversion of our time and attention. Any claims from third
parties may also result in limitations on our ability to use the intellectual
property subject to these claims unless we are able to enter into agreements
with the third parties making these claims. Our failure to protect against
misappropriation of our intellectual property, or claims that we are infringing
the intellectual property of third parties could have a negative effect on our
business, revenues, financial condition and results of operations.
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If we fail to successfully establish our new Loudeye name or brand or if we
incur significant expenses in promoting and maintaining our name or brand, our
business could be harmed
In December 1999, we changed our name from encoding.com, Inc. to Loudeye
Technologies, Inc. to better represent the diversity of our digital media
services and applications. The importance of brand and name recognition will
increase as more companies provide outsourced encoding solutions and content
management applications. If our efforts to build our brand and name identity do
not succeed, our business, financial condition and results of operations could
be seriously harmed. These efforts have required and will continue to require,
significant expense. We cannot assure you that these efforts will be
successful. Additionally, our new Loudeye brand and name may cause confusion to
current and potential customers, which may harm our business, financial
condition and results of operations. There can be no assurance that we will be
able to enforce rights related to the Loudeye Technologies, Inc. name and
brand, that we will be free to use the name in all jurisdictions, that there
will be no challenges to the use of that name or that we will not be required
to expend significant resources in defending the use of that name.
Any failure to integrate Alive.com into our business could compromise our
growth strategy and harm our business
On December 14, 1999, we completed our acquisition of Alive.com. To execute
our business plan, we must integrate Alive.com's and our operations and
services into a cohesive, combined entity. Our acquisition of Alive.com has
increased the size of our workforce and expanded the demand on our physical
facilities. These increased demands on our management of operations increase
the risk that we will fail to gather and communicate information and ideas
effectively, including technical knowledge and expertise, throughout our
organization which could have a harmful impact on our business. In addition,
our acquisition of Alive.com is being accounted for using the purchase method
of accounting. Because most software and professional services business
acquisitions involve the purchase of significant amounts of intangible assets,
acquisitions of these businesses also result in goodwill and significant
amortization charges and may also involve charges for acquired research and
development projects. For example, as a result of our acquisition of Alive.com,
we expect to record an aggregate of $14.9 million in goodwill and other
intangible assets which will be amortized over a three-year period and will
reduce our earnings and profitability for the foreseeable future.
If standards for the secure digital delivery of recorded music and video are
not adopted, our customers' piracy concerns might not be satisfied, and they
might not use our products and services
Because some streaming media formats do not contain mechanisms for tracking
the source or ownership of digital media, users are able to download and
distribute unauthorized or "pirated" copies of copyrighted media, including
music, over the Internet. We plan to release an application that deals with
encryption techniques and security measures that may have these problems. This
piracy is a significant concern to companies who might use our digital media
services and applications, and is the reason some record companies are
reluctant to digitally deliver their recorded music over the Internet. If
standard formats for secure digital delivery of digital media are not adopted,
pirated copies of recorded music and other media may continue to be available
on the Internet and reduce the willingness of content providers to utilize our
products and services.
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We depend on a limited number of large customers for a majority of our revenues
so the loss or delay in payment from one or a small number of customers could
have a significant impact on our revenues and operating results
A limited number of large customers have accounted for a majority of our
revenues and will continue to do so for the foreseeable future. During the year
ended December 31, 1998, two customers, National Emergency Training Center and
Microsoft Corporation, accounted for 14% and 12% of our revenues, respectively.
In the nine months ended September 30, 1999, Kanakaris Communications, Inc. and
Energy Film Library each accounted for 14% of our revenues. We believe that a
small number of customers may continue to account for a significant percentage
of our revenues for the foreseeable future. Due to high revenue concentration
among a limited number of customers, the cancellation or delay of a customer
order during a given quarter is likely to significantly reduce revenues for the
quarter. If we were to lose a key customer, our business, financial condition
and operating results could suffer. In addition, if a key customer fails to pay
amounts it owes us, or does not pay those amounts on time, our revenues and
operating results could suffer. If we are unsuccessful in increasing our
customer base, our business could be harmed.
If we are unable to keep up with rapid technological and other changes, our
business would be harmed
The Internet media infrastructure and streaming media markets are
characterized by rapid technological change, frequent introductions of new or
enhanced hardware and software products, evolving industry standards, and
changes in customer preferences and requirements. These market characteristics
are heightened by the emerging nature of the Internet and the continuing trend
of companies from many industries to offer Internet-based applications and
services. Our competitors often introduce new applications and services with
new technologies. These changes and the emergence of new industry standards and
practices could render our existing Web site and operational infrastructure
obsolete. The widespread adoption of new Internet, networking, streaming media
or telecommunications technologies or other technological changes could require
us to incur substantial expenditures to modify or adapt our operating practices
or infrastructure. To be successful, we must enhance the responsiveness,
functionality and features of our services, acquire and license leading
technologies, enhance our existing digital media services and service
applications, and respond to technological advances and emerging industry
standards and practices in a timely and cost effective manner. We may not keep
up with any of these or other rapid technological changes, and if we do not,
our business, results of operations and financial condition could be seriously
harmed.
The length of our sales cycle is uncertain and therefore could cause
significant variations in our operating results
Our largest customers are typically large corporations that often require
long testing and approval processes before making a purchase decision.
Therefore, the length of our sales cycle--the time between an initial customer
contact and completing a sale--has been and may continue to be unpredictable.
The time between the date of our initial contact with a potential new customer
and the execution of a sales contract with that customer ranges from less than
two weeks to more than six months, depending on the size of the customer, the
application of our solution and other factors. Our sales cycle is also subject
to delays as a result of customer-specific factors over which we have little or
no control, including budgetary constraints and internal acceptance procedures.
During the sales cycle, we may expend substantial sales and management
resources without generating corresponding
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revenues. Our expense levels are relatively fixed in the short term and are
based in part on our expectations of future revenues. As a result, any delay in
our sales cycle could cause significant variations in our operating results,
particularly because a relatively small number of customer orders represents a
large portion of our revenues.
The technology underlying our services and applications is complex and may
contain unknown defects that could harm our reputation, result in product
liability or decrease market acceptance of our services and applications
The technology underlying our digital media services and applications is
complex and includes software that is internally developed and software
licensed from third parties. These software products may contain errors or
defects, particularly when first introduced or when new versions or
enhancements are released. We may not discover software defects that affect our
current or new services and applications or enhancements until after they are
sold. Furthermore, because our digital media services are designed to work in
conjunction with various platforms and applications, we are susceptible to
errors or defects in third-party applications that can result in a lower
quality product for our customers. Because our customers depend on us for
digital media management, any interruptions could:
. damage our reputation;
. cause our customers to initiate product liability suits against us;
. increase our product development costs;
. divert our product development resources;
. cause us to lose sales; or
. delay market acceptance of our digital media services and applications.
We plan to expand our business into international markets which will require
significant resources and will subject us to new risks that may limit our
return from our international sales efforts
One of our strategies to increase our sales is to add an international sales
force and operations. This expansion will involve a significant use of
management and financial resources, particularly because we have no previous
experience with international operations. We may not be successful in creating
international operations or sales. In addition, international business
activities are subject to a variety of risks, including:
. the adoption of laws detrimental to our operations;
. currency fluctuations;
. actions by third parties; and
. political and economic conditions.
Any of these risks could restrict or eliminate our ability to do business in
foreign jurisdictions.
Any acquisitions we make, including our recent acquisition of Alive.com, could
disrupt our business and harm our financial condition
We may attempt to acquire businesses, technologies, services or products that
we believe are a strategic fit with our business. Except for the acquisition of
Alive.com, which was completed in
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December 1999, we currently have no commitments or agreements with respect to
any material acquisition and no material acquisition is currently being
pursued. If we do undertake any transaction of this sort, the process of
integrating an acquired business, technology, service or product may result in
unforeseen operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for ongoing development
of our business. Moreover, we cannot assure you that the anticipated benefits
of any acquisition will be realized. Future acquisitions could result in
potentially dilutive issuances of equity securities, the incurrence of debt,
contingent liabilities, or amortization expenses related to goodwill and other
intangible assets and the incurrence of large and immediate write-offs, any of
which could seriously harm our business, results of operations and financial
condition.
In addition, recent changes in the Financial Accounting Standards Bureau and
SEC rules for merger accounting may affect our ability to make acquisitions or
be acquired. For example, elimination of the "pooling" method of accounting for
mergers increases the amount of goodwill that we would be required to account
for if we acquire another company, which would have an adverse financial impact
on our future net income. Further, the reduced availability of write-offs for
in-process research and development costs under the purchase method of
accounting for mergers in connection with an acquisition could make an
acquisition more costly for us.
We have in the past experienced returns of our customers' encoded content, and
as our business grows we may experience increased returns, which could harm our
reputation and negatively affect our operating results
In the past, we have had on occasion difficulty monitoring the quality of our
service. A limited number of our customers have returned encoded content to us
for our failure to meet the customer's specifications and requirements. It is
likely that we will experience some level of returns in the future and, as our
business grows, the amount of returns may increase. Also, returns may harm our
relationship with potential customers and business in the future. If returns
increase, our reserves may not be sufficient and our operating results would be
negatively affected.
We may be liable to third parties for music, software and other content that we
distribute or make available on our site
We may be liable to third parties for the content that we encode, distribute
or make available on our site:
. if the music, text, graphics, software or other content on our Web site
or in our products or on our site violates their copyright, trademark or
other intellectual property rights;
. if our customers violate the intellectual property rights of others by
providing content to us or by having us perform digital media services;
or
. if content that we encode or otherwise handle for our customers is deemed
obscene, indecent or defamatory.
In addition, we face the risk of our customers misrepresenting to us that
they have all necessary ownership rights in the content for us to perform our
encoding services. Any alleged liability could harm our business by damaging
our reputation, requiring us to incur legal costs in defense, exposing us to
awards of damages and costs and diverting management's attention which could
have an adverse effect on our business, results of operations and financial
condition.
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Because we host audio and video content on our Web site and on other Web
sites for customers and provide services related to digital media content, we
face potential liability for negligence, copyright, patent, trademark,
defamation, indecency and other claims based on the nature and content of the
materials that we host. Claims of this nature have been brought, and sometimes
successfully pressed, against Internet content distributors. In addition, we
could be exposed to liability with respect to the unauthorized duplication of
content or unauthorized use of other parties' proprietary technology. Any
imposition of liability that is not covered by insurance or is in excess of
insurance coverage could harm our business.
We cannot assure you that third parties will not claim infringement by us
with respect to past, current or future technologies. We expect that
participants in our markets will be increasingly subject to infringement claims
as the number of services and competitors in our industry segment grows. In
addition, these risks are difficult to quantify in light of the continuously
evolving nature of laws and regulations governing the Internet. Any claim
relating to proprietary rights, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays or require
us to enter into royalty or licensing agreements, and we can not assure you
that royalty or licensing agreements will be available on terms acceptable to
us or at all.
We would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant
Many computer programs have been written using two digits rather than four
digits to define the applicable year. This could pose a problem at the end of
the century because these computer programs may recognize a date using "00" as
the year 1900, rather than the year 2000. This in turn could result in major
system failures or miscalculations and is generally referred to as the Year
2000 problem.
As a technology company, we are dependent, to a very substantial degree, on
the proper functioning of our computer systems. The very way in which we do
business depends not only on the proper functioning of our computer systems,
but those of all of our customers as well. Any problems associated with the
Year 2000 problem that impede our systems or those of our customers or the
Internet in general could seriously harm our business, results of operations
and financial condition.
We cannot assure you that our own systems, or those of our customers or those
of the Internet network providers or Internet service providers, will be Year
2000 compliant in a timely manner. Moreover, we cannot assure that costs
related to Year 2000 compliance will not be significant. We also cannot assure
you that customers will be able to access our Web site or other Web sites
without serious disruptions arising from the Year 2000 problem. Given the
pervasive nature of the Year 2000 problem, disruptions may occur to the
Internet as a whole or to specific industries or market segments in the entire
economy.
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Risks Related to the Internet
Our success depends on the continued growth of our customers' Internet-based
businesses and any failure of Internet-based commercial activities to continue
to grow at the rates currently anticipated would seriously harm our business,
results of operations and financial condition
Our business model depends on our customers developing successful businesses
based on the Internet and digital media. For our business to succeed, the use
of the Internet must continue to grow and gain widespread acceptance in order
that our customers' businesses succeed. Many factors could inhibit this growth
of the Internet including inadequate network infrastructure, inconsistent
quality of service, and unavailability of cost-effective, high-speed access to
the Internet. The failure of Internet-based commercial activities to continue
to grow at the rates currently anticipated would seriously harm our business,
results of operations and financial condition.
We could face additional burdens associated with government regulation of and
legal uncertainties surrounding the Internet
A number of legislative and regulatory proposals under consideration may lead
to laws or regulations concerning various aspects of the Internet, including
electronic commerce. Furthermore, it is uncertain as to how existing laws will
be applied to the Internet. The adoption of new laws or the application of
existing laws may decrease the growth of the Internet or the use of Web sites
dedicated to the distribution of rich media content. Future government
regulations could relate to liability for information received from or
transmitted over the Internet, online content regulation, intellectual property
rights, user privacy, taxation and quality of products and services provided
over the Internet. The implementation of these regulations could impair our
marketing efforts and seriously harm our business, results of operations and
financial condition.
Risks Related to this Offering
Because the Nasdaq stock market is likely to experience extreme price and
volume fluctuations, the price of our stock may decline even if our business is
doing well
Although the initial public offering price will be determined based on
several factors, the market price for our common stock will vary from the
initial offering price after this offering. The market price of our common
stock may fluctuate significantly in response to a number of factors, some of
which are beyond our control, including:
. quarterly variations in operating results;
. changes in financial estimates by securities analysts;
. announcements by us or our competitors, of new products, significant
contracts, acquisitions or strategic relationships;
. publicity about our company, our digital media services and applications,
our competitors, or electronic commerce in general;
. additions or departures of key personnel;
. any future sales of our common stock or other securities; and
. stock market price and volume fluctuations of publicly-traded companies
in general and Internet-related companies in particular.
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The trading prices of Internet-related companies have been especially
volatile and many are at or near historical highs. Investors may be unable to
resell their shares of our common stock at or above the offering price. In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We may be the target of similar litigation in the future. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could seriously harm our business and operating results.
Because there has been no prior public market for our common stock, we cannot
be certain that our stock price will not decline after this offering
Prior to this offering, there has not been a public market for our common
stock. We cannot predict the extent to which a market will develop or how
liquid that market might become. The initial public offering price for the
shares of our common stock will be determined by negotiations between us and
the representatives of the underwriters and may not be indicative of the prices
that will prevail in the market following this offering.
Because our principal stockholders and management may have the ability to
control stockholder votes, the premium over market price that an acquiror might
otherwise pay may be reduced and any merger or takeover may be delayed
Upon completion of this offering, our officers and directors will, in the
aggregate, beneficially own approximately % of our outstanding common
stock. As a result, these stockholders, acting together, will have the ability
to control substantially all matters submitted to our stockholders for
approval, including:
. the election or removal of our board of directors;
. the amendment of our certificate of incorporation or bylaws; and
. the adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving us.
These stockholders will have substantial influence over our management and
our affairs. Accordingly, this concentration of ownership may have the effect
of impeding a merger, consolidation, takeover or other business consolidation
involving us, or discouraging a potential acquirer from making a tender offer
for our shares. This concentration of ownership could also adversely affect our
stock's market price or lessen any premium over market price that an acquiror
might otherwise pay.
Our management has broad discretion in using the proceeds from this offering,
which might not be used in ways that increase our operating results or market
value
We estimate the net proceeds from this offering to be approximately $
million, after deducting estimated expenses of the offering. Our management
will have broad discretion in how we use the net proceeds of this offering,
including uses which do not increase our operating results or market value. We
currently expect to use these proceeds for general corporate purposes,
including capital expenditures and working capital. We also may use a portion
of the net proceeds for the future acquisition of companies, technology or
services that complement our business, or for strategic alliances with, or
investments in, companies that provide complementary products and services. You
will not have the opportunity, as part of your investment decision, to assess
whether the proceeds are being used appropriately.
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We may need to raise additional capital in the future, and if we are unable to
secure adequate funds on terms acceptable to us, we may be unable to execute
our business plan
We believe that the net proceeds of this offering, together with our other
existing and available funds, will be sufficient to meet our anticipated needs
for working capital, capital expenditures and business expansion through at
least the next 18 months. Thereafter, we may need to raise additional funds. We
may have to raise funds even sooner in order to fund more rapid expansion, to
develop new or enhanced services or products, to respond to competitive
pressures, to acquire complementary products, businesses or technologies or
otherwise to respond to unanticipated requirements. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced. We cannot assure you
that additional financing will be available on favorable terms or at all. If
adequate funds are not available or are not available on acceptable terms, we
may not be able to fund our ongoing operations and planned expansion, take
advantage of unanticipated acquisition opportunities, develop or enhance
services and applications or respond to competitive pressures. This inability
could seriously harm our business, results of operations and financial
condition.
We have certain anti-takeover defenses that could delay or prevent our
acquisition which could reduce the value of an investment in us
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of Loudeye, even if an acquisition would be
beneficial to our stockholders. See "Description of Capital Stock" for more
information on our charter and by-law provisions.
A substantial number of our shares of common stock are eligible for future
sale, and the sale of these shares may depress our stock price, even if our
business is doing well
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of our common stock and could impair
our ability to raise capital through the sale of additional equity securities.
Upon completion of this offering, we will have shares of common stock
outstanding with shares outstanding if the underwriters' option to
purchase additional shares is exercised in full. The shares of
common stock sold in this offering, which would be shares if the
underwriters' option to purchase additional shares is exercised in full, will
be freely tradable without restriction or further registration under the
Federal securities laws unless purchased by our "affiliates" as that term is
defined in Rule 144. The remaining 29,725,894 shares of common stock
outstanding upon completion of this offering will be "restricted securities" as
that term is defined in Rule 144.
All of our stockholders, option holders and warrant holders are subject to
agreements that limit their ability to sell their shares of common stock. These
securityholders cannot sell or otherwise dispose of any shares of common stock
for a period of at least 180 days after the date of this prospectus without the
prior written approval of FleetBoston Robertson Stephens Inc. or us in certain
cases. When these agreements expire, these shares and the shares underlying the
options will become eligible for sale, in some cases only pursuant to the
volume, manner of sale and notice requirements of Rule 144.
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Because the initial public offering price will be substantially higher than the
book value per share of our outstanding common stock, new investors will incur
immediate and substantial dilution in the amount of $ per share
The initial public offering price will be substantially higher than the book
value per share of our common stock outstanding immediately after this offering
based on the total value of our assets less our total liabilities. Therefore,
if you purchase common stock in this offering, you will experience immediate
and substantial dilution of approximately $ per share in the price you pay
for the common stock as compared to its book value. Furthermore, investors
purchasing common stock in this offering will own only % of our shares
outstanding even though they will have contributed % of the total
consideration received by us in connection with our sales of common stock. To
the extent outstanding options to purchase common stock are exercised, there
will be further dilution.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as may, will, should,
expect, plan, anticipate, believe, estimate, predict, potential or continue,
the negative of terms like these or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined in "Risk Factors" above. These
factors may cause our actual results to differ materially from any forward-
looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.
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USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock
we are offering hereby are estimated to be $ million, assuming an initial
public offering price of $ per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $ million.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate our future access
to the public capital markets and to increase our visibility in the retail
marketplace. We have no specific plans for the remaining proceeds. This
allocation is only an estimate and we may adjust it as necessary to address our
operational needs in the future. For instance, we may also use a portion of the
net proceeds to acquire complementary technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations with respect to any transactions of this nature. Pending use of
the net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
24
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999 on
an actual, pro forma and pro forma as adjusted basis:
. The "actual" column reflects our capitalization as of September 30,
1999, without any adjustments to reflect subsequent events or
anticipated events;
. The "pro forma" column reflects our capitalization as of September 30,
1999 with adjustments to give effect to the purchase of Alive.com
through the issuance of 2,508,848 shares of common stock valued at $6.00
per share and 91,134 options to purchase shares of common stock valued
at fair market value using the Black-Scholes option pricing model, the
application of the net proceeds from the sale of 7,510,989 shares of
Series D preferred stock at $6.37 per share and amendments to the
certificate of incorporation in connection with the sale Series D
preferred stock; and
. The "pro forma as adjusted" column reflects our capitalization as of
September 30, 1999 with adjustments to give effect to: (1) the
conversion of all shares of outstanding convertible preferred stock into
21,063,236 shares of common stock upon the closing of this offering;
(2) the receipt of the estimated proceeds from the sale of our common
stock offered hereby after deducting the estimated offering expenses and
underwriting discounts and commissions; and (3) the change in the
authorized number of shares upon the completion of this offering.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
(unaudited)
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term obligations........................... $ 1,952 $ 2,141 $
Stockholders' equity:
Preferred stock, par value $0.001 per share;
25,000,000 shares authorized actual,
13,552,247 shares issued and outstanding
actual; 41,000,000 shares authorized,
21,063,236 shares issued and outstanding, pro
forma and 5,000,000 shares authorized, no
shares issued and outstanding pro forma as
adjusted...................................... 13,059 60,904
Common stock, par value $0.001 per share;
34,000,000 shares authorized actual, 6,018,937
shares issued and outstanding actual;
100,000,000 shares authorized, 8,527,785
shares issued and outstanding, pro forma; and
100,000,000 shares authorized,
shares issued and outstanding, pro forma as
adjusted and additional paid-in-capital....... 2,784 18,317
Deferred stock compensation.................... (2,485) (2,485)
Accumulated deficit............................ (6,644) (6,644)
------- ------- --------
Total stockholders' equity...................... 6,714 70,092
------- ------- --------
Total capitalization............................ $ 8,666 $72,233 $
======= ======= ========
</TABLE>
This table excludes the following shares:
. 3,649,063 shares of common stock issuable upon the exercise of options
under our stock option plan consisting of:
(1) 3,324,525 shares of common stock underlying options outstanding as
of September 30, 1999 at a weighted average exercise price of
$0.23 per share, of which 201,000 were fully vested as of
September 30, 1999; and
(2) 324,538 shares of common stock underlying options available for
future grants; and
. 41,053 shares that could be issued upon exercise of Series C preferred
stock warrants outstanding as of September 30, 1999 with a weighted
average exercise price of $1.90.
25
<PAGE>
DILUTION
Our net tangible book value as of September 30, 1999 was $6.7 million or
approximately $0.34 per share. Net tangible book value per share represents the
amount of our total tangible assets less total liabilities, divided by the
number of shares of common stock outstanding, after giving effect to the
conversion of all shares of outstanding preferred stock into 13,552,247 shares
of common stock upon the closing of this offering. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of common stock in the offering made hereby
and the net tangible book value per share of common stock immediately after the
completion of this offering. After giving effect to the sale of the
shares of common stock offered by us hereby at the initial public
offering price of $ per share and after deducting the underwriting
discount and estimated offering expenses payable by us, our net tangible book
value at September 30, 1999 would have been $ million or approximately
$ per share. This represents an immediate increase in net tangible book
value of $ per share to existing stockholders and an immediate dilution of
$ per share to new investors of common stock in this offering. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......................... $ --
Net tangible book value per share as of September 30, 1999...... $0.34
Increase per share attributable to new investors................ --
-----
Net tangible book value per share after the offering............. $ --
-----
Dilution per share to new investors.............................. $0.34
=====
</TABLE>
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
--------------------- ---------------------- Price Per
Number Percentage Amount Percentage Share
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 19,571,184 -- % $15,778,445 -- % $0.81
New investors...........
---------- ----- ----------- ----- -----
Total................. 100.0% 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of the underwriters' overallotment
option and excludes the following shares:
. 3,649,063 shares of common stock issuable upon the exercise of options
under our stock option plans consisting of:
(1) 3,324,525 shares of common stock underlying options outstanding as
of September 30, 1999 at a weighted average exercise price of $0.23
per share, of which 201,000 were exercisable as of September 30,
1999; and
(2) 324,538 shares of common stock underlying options available for
future grants; and
. 41,053 shares that could be issued upon exercise of warrants to purchase
Series C preferred stock outstanding as of September 30, 1999 with an
exercise price of $1.90.
26
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our financial statements and the related notes thereto
included elsewhere in this prospectus. The statement of operations data set
forth below for the period from August, 1997 (inception) to December 31, 1998
and the selected balance sheet data as of December 31, 1998 have been derived
from our audited financial statements included elsewhere in this prospectus.
The selected financial data as of September 30, 1999 and for the nine-month
periods ended September 30, 1998 and 1999 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring adjustments, which we consider necessary for a
fair presentation of the results of operations for this period. The "Pro Forma"
balance sheet data reflects the effect of the purchase of Alive.com through the
issuance of 2,508,848 common shares valued at $6.00 per share and 91,134
options valued at fair market value using the Black-Scholes option pricing
model and the application of the net proceeds from the sale of 7,510,989 shares
of Series D preferred stock at $6.37 per share. The "Pro Forma as Adjusted"
balance sheet data reflects the effect of the purchase of Alive.com, the sale
of the Series D preferred stock and the conversion of all shares of outstanding
preferred stock into shares of common stock upon the closing of this offering
and the application of the net proceeds from the sale of shares of
common stock offered by us at an assumed initial public offering price of
$ per share, after deducting the underwriting discount and estimated
offering expenses. The historical results are not necessarily indicative of
results to be expected for any future period.
See note 2 of notes to financial statements for an explanation of the
determination of the number of weighted average shares used to compute pro
forma net loss per share amounts.
<TABLE>
<CAPTION>
Period from Nine-Month Periods
Aug. 12, 1997 Fiscal Year Ended September 30,
(inception) to Ended (unaudited)
December 31, December 31, ----------------------
1997 1998 1998 1999
-------------- ------------ --------- ----------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................... $ 10 $ 286 $ 107 $ 1,597
Cost of revenues........... 17 504 155 1,708
--------- --------- --------- ----------
Gross margin............... (7) (218) (48) (111)
Operating expenses:
Research and
development............. 12 204 98 662
Sales and marketing...... 39 588 313 2,223
General and
administrative.......... 37 674 362 1,816
Stock-based
compensation............ -- -- -- 204
--------- --------- --------- ----------
Total operating
expenses................ 88 1,466 773 4,905
Other income (expense),
net....................... -- 34 33 (20)
--------- --------- --------- ----------
Net loss................... $ (95) $ (1,650) $ (788) $ (5,036)
========= ========= ========= ==========
Basic and diluted net loss
per share................. $ (0.41) $ (0.93)
Basic and diluted pro forma
net loss per share........ $ (0.17) $ (0.32)
Weighted average shares
outstanding used to
compute basic and diluted
net loss per share........ 4,039,444 5,429,877
Weighted average shares
outstanding used to
compute basic and diluted
pro forma net loss per
share..................... 9,585,049 15,511,924
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
(unaudited)
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $ 6,171 $54,436 --
Working capital.................................. 5,146 53,256 --
Total assets..................................... 10,403 74,154 --
Long-term obligations, less current portion...... 1,279 1,378 --
Total stockholders' equity....................... 6,714 70,092 --
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
our financial statements and notes thereto appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may
differ materially from those anticipated in these forward-looking statements
as a result of certain factors including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this prospectus.
Overview
We are a leading provider of Internet media infrastructure services and
applications for the media entertainment and enterprise markets that enable
our customers to optimize the use of digital media content over the Internet
and intranets. We provide our customers with outsourced end-to-end solutions
that include encoding services, publishing and distribution of rich media and
hosting services. To date, we have performed digital media services for over
250 customers.
We began our operations as a Washington limited liability company in August
1997 and were incorporated as a Delaware corporation in March 1998. We began
providing encoding services in 1997 for both audio and video content, and
recorded our first revenues from sales of our services in September 1997. From
inception through December 31, 1998, our operating activities related
primarily to recruiting personnel, raising capital, purchasing operating
assets, conducting research and development, building our brand and providing
encoding services. During 1999, we accelerated our investment in our research
and development capabilities, our sales and marketing organization, our
manufacturing operations and facilities, and our general and administrative
infrastructure.
Substantially all of our revenues to date have been generated by sales of
digital media services. Digital media services revenues consist primarily of
encoding services to convert audio and video content into Internet media
formats, as well as other services for deployment of media over the Internet.
These other services include digital watermarking, distribution and management
services, indexing services, metadata collection and analysis, search engine
indexing, rights management and consulting services. We charge our customers
on either a time and materials basis or a fixed fee basis which depends on a
variety of factors, such as volume and type of content provided and number and
type of output formats requested. We generally recognize digital media
services revenues as the service is provided.
Our digital media applications consist of a set of targeted vertical
applications based on our media application platform, such as photo albums
applications, media-enhanced auction and classified listing applications and
media-enhanced advertising and marketing applications. We anticipate digital
media application revenues will consist of licensing fees, per use charges and
maintenance and support fees. As of September 30, 1999, we had not recorded
any revenues from licensing of our digital media applications.
We market our digital media services and applications primarily to the
media, entertainment and the enterprise markets through our direct sales
force, reseller and co-marketing partners and our Web
28
<PAGE>
site. We expect that sales derived through indirect channels will increase as a
percentage of total revenues as we expand our international efforts and system
integrator relationships. Historically, we have provided our services pursuant
to volume purchase agreements with prices determined by projected volume. In
the future, we anticipate providing digital media services pursuant to volume
purchase orders with prices determined based on specific committed volume and
schedules. We believe these anticipated commitments will improve our ability to
schedule production and forecast revenues.
We have recorded stock-based compensation expense related to stock options
granted below fair market value through September 30, 1999 of $2.7 million. Of
this amount, we amortized approximately $204,000 through that same period. This
amount represents the difference between the exercise price of these stock
option grants and the deemed fair value of the common stock at the time of
grant. In addition, we expect to incur additional deferred stock-based
compensation expenses of $3.9 million related to 894,300 options granted since
September 30, 1999. The remaining $2.5 million, and the additional amount of
stock-based compensation from recent grants, will be amortized over the
remaining vesting period of the options, generally four and one-half years or
less. As a result, the amortization of stock-based compensation will impact our
reported results of operations through fiscal 2004.
We have granted approximately 220,000 options to consultants which vest on
the same terms as options granted to employees. These terms require that the
individuals continue their current consulting relationship with us in order to
continue vesting. These options are accounted for in accordance with the
provisions of SFAS 123 and EITF 96-18. Accordingly, using the Black-Scholes
option pricing model and assuming a term of five years, a risk-free interest
rate of 5.50% and expected volatility of 75%, the options are marked to fair
value at each reporting period through charges to stock-based compensation in
the statements of operations.
We have sustained losses and incurred negative gross margins on a quarterly
and annual basis since inception and we expect to continue to sustain losses
and incur negative gross margins for the foreseeable future as we expand our
operations and production facilities. As of September 30, 1999, we had an
accumulated deficit of $6.7 million. Our net loss was approximately $95,000
from inception to December 31, 1997, $1.6 million in fiscal year 1998, and $5.0
million in the nine-month period ended September 30, 1999. These losses
resulted from significant costs incurred in the development and sale of our
products and services. We expect to experience significant growth in our
operating expenses in all functional areas in order to execute our business
plan. As a result, we anticipate that these operating expenses, as well as
planned capital expenditures, will constitute a material use of our cash
resources. We expect to incur additional losses and continued negative cash
flow from operations in the future. We cannot assure you that we will achieve
or sustain profitability.
Our limited operating history makes the prediction of future operating
results difficult. In view of our limited operating history and the rapidly
evolving nature of our business, we believe that period-to-period comparisons
of our operating results, particularly for the year ended 1997 and the year
ended 1998, are not meaningful and should not be relied upon as an indication
of future performance. Our business prospects must be considered in light of
the risks and uncertainties often encountered by early-stage companies in the
Internet-related products and services market. We may not be successful in
addressing these risks and uncertainties. We have experienced significant
percentage growth in revenues in recent periods; however, we do not believe
that prior growth rates are sustainable or indicative of future growth rates.
It is likely that in some future quarter our
29
<PAGE>
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may fall
significantly.
In December 1999, we acquired Alive.com, Inc., whose principle business is
the development of streaming media applications, in exchange for 2,508,848
shares of our common stock and the issuance of options to purchase 91,134
shares of our common stock and the assumption of liabilities, representing a
total purchase price of $15.5 million. This acquisition was accounted for using
the purchase method of accounting. We recorded intangibles and goodwill of
$14.9 million, which will be amortized on a straight-line basis over three
years.
In December 1999, we sold $47.8 million of Series D preferred stock in a
private equity placement with a number of strategic investors pursuant to the
terms of a stock purchase agreement which was entered into on December 14, 1999
as amended on December 17, 1999. These investors included AmericaOnline, Inc.,
CBS Corporation, Microsoft Corporation, National Broadcasting Company, Inc.,
Olympic Venture Partners, RRE Ventures and Wasserstein Adelson Ventures. We
issued a total of 7,510,989 shares of Series D preferred stock at price of
$6.37 per share. The Series D preferred stock will convert to common stock at a
one-to-one ratio upon the closing of this offering. The Series D preferred
stock contains substantially the same rights and preferences as the Series B
and Series C preferred stock.
Results of Operations
The following table sets forth our historical operating information as a
percentage of our total revenues represented by each item for the periods
indicated:
<TABLE>
<CAPTION>
Nine-Month
Year Ended Periods Ended
December 31, September 30,
--------------- ---------------
1997 1998 1998 1999
------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Revenues.............................. 100 % 100 % 100 % 100 %
Cost of revenues...................... 170 176 145 107
------ ------ ------ ------
Gross margin.......................... (70) (76) (45) (7)
Operating expenses:
Research and development............ 120 71 92 41
Sales and marketing................. 390 206 293 139
General and administrative.......... 370 236 338 114
Stock-based compensation............ -- -- -- 13
------ ------ ------ ------
Total operating expenses............ 880 513 723 307
Other income (expense), net........... -- 12 31 (1)
------ ------ ------ ------
Net loss.............................. (950)% (577)% (737)% (315)%
====== ====== ====== ======
</TABLE>
Nine-Month Periods Ended September 30, 1998 and 1999
Revenues. Revenues were approximately $107,000 and $1.6 million for the nine-
month periods ended September 30, 1998 and 1999, respectively. The increase was
due primarily to an increase in the number and average size of sales of our
digital media services generated by a larger sales force in the 1999 period
and, to a lesser extent, higher prices in the 1999 period.
Cost of revenues. Cost of revenues includes cost of personnel expenses, the
allocated portion of facilities and equipment. Cost of revenues increased
1,097% to $1.7 million in 1999 from
30
<PAGE>
approximately $155,000 in 1998 for the nine-month periods ended September 30,
1999 and 1998, respectively. The increase in absolute dollars was due primarily
to increased sales volumes. The decrease in percentage terms was due to more
efficient use of our production facility and staff.
Gross margins may be affected by the volume of services provided, the mix of
distribution channels used by us, the mix of services and applications
provided, and the average order size. We typically realize higher gross margins
on direct channel sales relative to indirect channels. If sales through
indirect channels increase as a percentage of total net revenues our gross
margins will decrease.
Operating expenses. Operating expenses increased 634% to $4.9 million in 1999
from approximately $773,000 for the nine-month periods ended September 30, 1999
and 1998, respectively. Without the effect of stock-based compensation charges,
operating expenses for the 1999 period would have been $4.7 million, an
increase of $3.9 million, or 608% from the same period in 1998.
Research and development expenses. Research and development expenses consist
primarily of salaries and consulting fees to support development and costs of
technology acquired from third parties to incorporate into applications
currently under development. To date, all research and development costs have
been expensed as incurred. We believe that continued investment in research and
development is critical to attaining our strategic objectives and, as a result,
expect research and development expenses to increase significantly. Research
and development expenses increased 676% to approximately $662,000 from
approximately $98,000 for the nine-month periods ended September 30, 1999 and
1998, respectively. The increase was due primarily to increases in development
personnel, travel and consulting expenses. We expect to continue to increase
our level of expenditures in future periods.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of salaries, commissions, consulting fees paid, trade show expenses,
advertising and cost of marketing collateral. We intend to continue our
aggressive branding and marketing campaign and therefore expect sales and
marketing expenses to increase significantly. Sales and marketing expenses
increased 703% to $2.2 million from approximately $313,000 for the nine-month
periods ended September 30, 1999 and 1998, respectively. The increases were due
in large part to growth in sales personnel, commissions and costs related to
the continued development and implementation of our branding and marketing
campaigns.
Other income (expense), net. Net other expense is a combination of earnings
on our cash and cash equivalents and short-term investments and interest
expense on working capital and equipment financing. This combined total equaled
approximately $20,000 in net expense and approximately $33,000 in net income
for the nine-month periods ended September 30, 1999 and 1998, respectively. The
increase was due primarily to interest expense resulting from equipment lease
financing.
Period of August 12, 1997 (Inception) to December 31, 1997 and Year Ended
December 31, 1998
Revenues. Revenues increased to approximately $286,000 in 1998 from
approximately $10,000 in 1997. The increase was due primarily to an increase in
the number and average size of sales of our encoding services generated by a
larger sales force in the 1998 period and, to a lesser extent, higher prices in
the 1998 period.
31
<PAGE>
Cost of revenues. Cost of revenues includes cost of equipment, personnel
expenses and overhead. Cost of revenues increased to approximately $504,000 in
1998 from approximately $17,000 in 1997. The increase in absolute dollars was
due primarily to higher sales volume and the need to establish production
capacities to meet future growth at a rate faster than the revenue growth
during the period.
Operating expenses. Operating expenses increased to $1.5 million in 1998 from
approximately $88,000 in 1997. There were no stock-based compensation charges
in 1998 or 1997.
Research and development expenses. Research and development expenses
increased to approximately $204,000 in 1998 from approximately $12,000 in 1997.
The increase was due primarily to increases in internal development personnel,
travel and consulting expenses.
Sales and marketing expenses. Sales and marketing expenses increased to
approximately $588,000 in 1998 from approximately $39,000 in 1997. The
increases were due in large part to growth in sales personnel, commissions and
costs related to the continued development and implementation of our branding
and marketing campaigns.
General and administrative expenses. General and administrative expenses
increased to approximately $674,000 in 1998 from approximately $37,000 in 1997.
The increase was primarily a result of increased personnel and facility
expenses necessary to support our growth.
Other income (expense), net. Net other income was none and approximately
$34,000 for 1997 and 1998, respectively. The increase was due primarily to
interest income resulting from additional invested cash and cash equivalents
and short-term investments.
32
<PAGE>
Selected Quarterly Operating Results (unaudited)
The following table sets forth certain unaudited quarterly statement of
operations data for the five quarters ended September 30, 1999. In the opinion
of management, this information has been prepared substantially on the same
basis as the audited financial statements appearing elsewhere in this
prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations. The quarterly data should be
read in conjunction with our audited financial statements and the notes thereto
appearing elsewhere in this prospectus. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three-Month Periods Ended
------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1999 1999 1999
--------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................... $ 34 $ 179 $ 301 $ 528 $ 768
Cost of revenues.............. 111 349 388 530 790
------ ------ ------- ------- -------
Gross margin.................. (77) (170) (87) (2) (22)
Operating expenses:
Research and development.... 57 105 142 202 318
Sales and marketing......... 183 275 470 927 826
General and administrative.. 231 312 422 590 804
Stock-based compensation.... -- -- -- 8 196
------ ------ ------- ------- -------
Total operating expenses.... 471 692 1,034 1,727 2,144
Other income (expense), net... 26 1 (10) (10) --
------ ------ ------- ------- -------
Net loss...................... $ (522) $ (861) $(1,131) $(1,739) $(2,166)
====== ====== ======= ======= =======
</TABLE>
Our total net revenues have increased in all quarters presented due to a
combination of external and internal factors. Internally, we have diversified
our sales channels, expanded our direct sales efforts and entered into
strategic relationships with numerous customers. Additionally, the market has
changed related to streaming media. The increase in broadband applications and
acceptance of our products and services has contributed significantly to our
continued growth in net revenues.
Operating expenses increased in each quarter, reflecting increased spending
on developing, selling, marketing and supporting our products, as well as
building our market presence. Research and development expenses have increased
as a result of continued enhancements to existing products and development of
new products. Sales and marketing expenses increased as a result of increased
sales personnel and commissions and an aggressive branding and marketing
campaign. The decrease in sales and marketing expenses from the quarter ended
June 30, 1999 to September 30, 1999 reflects a decision to reprioritize and
reschedule certain programs during the quarter. The trend of increasing general
and administrative expenses is due primarily to additional personnel and
facilities costs.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through
private sales of preferred stock and common stock and contributions of capital
by our founder, and to a lesser extent, borrowings under lines of credit. Net
proceeds from these sales, contributions and lines of credit totaled
$15.0 million.
Net cash used in operating activities was approximately $75,000 and
approximately $858,000 in 1997 and 1998, respectively. Cash used in operating
activities in 1997 was due primarily to a net loss of approximately $95,000.
For 1998, cash used in operating activities resulted primarily from a net
33
<PAGE>
loss of $1.7 million and an increase of approximately $87,000 in trade accounts
receivable, largely offset by increases of approximately $292,000 in customer
deposits, approximately $274,000 in accounts payable and approximately $131,000
in other accrued expenses. Net cash used by operating activities was $4.3
million for the nine-month period ended September 30, 1999. This was primarily
attributable to a net loss of $5.0 million, an increase of approximately
$692,000 in accounts receivable, and increases in other assets of approximately
$330,000 offset by depreciation expense of approximately $545,000, increases in
accounts payable and accrued liabilities of approximately $853,000 and an
increase in customer deposits of approximately $187,000.
Net cash used in investing activities was approximately $134,000, $1.5
million and $2.2 million for the periods ended December 31, 1997 and 1998 and
the nine-month period ended September 30, 1999, respectively. These expenses
were primarily related to purchases of equipment and increases in short-term
investments.
Cash provided by financing activities of $3.8 million in 1998 consisted
primarily of $2.2 million in net proceeds from the issuance of Series B
preferred stock and $1.5 million in net proceeds from borrowings on long-term
debt. Cash provided by financing activities of $11.2 million for the nine-month
period ended September 30, 1999 were primarily from net proceeds of $9.3
million from the issuance of Series C preferred stock and $1.9 million from
borrowings on long-term debt.
As of September 30, 1999, we had $6.2 million of cash and cash equivalents.
Our principal commitments consisted of obligations outstanding under operating
leases, a $900,000 million note payable due under our credit facility with
Imperial Bank and four notes payable, totaling $1.0 million, due under our
credit facility with Dominion Venture Finance LLC. Interest on the Imperial
Bank note is payable monthly, and the principal is due on August 30, 2002.
Interest on the Dominion Venture Finance notes is payable monthly, and the
principal is due in four equal installments on June 30, 2002, July 30, 2002,
August 26, 2002 and September 30, 2002, respectively. Although we have no
material commitments for capital expenditures, management anticipates a
substantial increase in our capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and personnel.
Since our inception, we have significantly increased our operating expenses.
We currently anticipate that we will continue to experience significant growth
in our operating expenses for the foreseeable future and that our operating
expenses will be a material use of our cash resources.
We believe that the net proceeds from the sale of the common stock in this
offering and the amounts available under the working capital line will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 18 months. Thereafter, we may find it necessary to obtain
additional equity or debt financing. In the event additional financing is
required, we may not be able to raise it on acceptable terms or at all.
Year 2000 Readiness
State of Readiness. Based on our assessment to date, we believe that our core
encoding systems used in the generation of revenues are "Year 2000 compliant."
We have recently replaced our internal management and other information systems
with a "Year 2000 compliant" system. Subsequent to December 31, 1999, we may
learn that certain of our peripheral systems do not contain all of the
necessary routines and codes necessary for the accurate calculation, display,
storage and manipulation of data involving dates.
Costs Incurred. The cost associated with the replacement of our internal
management and other information systems was approximately $200,000.
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Costs Remaining. To date we have not incurred significant costs in connection
with identifying or evaluating Year 2000 compliance issues including costs
associated with time spent by employees in the evaluation process and Year 2000
compliance matters generally. If these costs are substantially higher than
anticipated in future periods, it could harm our business, financial condition
and results of operations. The cost of Year 2000 compliance will be accounted
for as an operating expense and funded from working capital.
Contingency Plan. We have not developed a contingency plan for addressing
Year 2000 problems that are not detected and corrected prior to their
occurrence. We will continue to assess Year 2000 problems and address them as
they are detected. Any failure to address any Year 2000 issue could harm our
business.
Recently Issued Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 98-1, or SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when these costs should be capitalized.
The implementation of SOP 98-1, which is effective for financial statements for
fiscal years beginning after December 15, 1998, did not have a significant
effect on our financial condition or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The
implementation of SOP 98-5 did not have a material impact on our results of
operations.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenues for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence, or
VSOE, of the fair values of all the undelivered elements that are not accounted
for by means of long-term contract accounting, (2) VSOE of fair value does not
exist for one or more of the delivered elements, and (3) all revenue
recognition criteria of SOP 97-2 and SOP 98-9 will be effective for
transactions entered into in fiscal years beginning after March 15, 1999. We do
not expect SOP 98-9 to have any effect on our results of operations.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition", to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. We believe our revenue recognition practices are in
conformity with the guidelines in SAB No. 101.
Interest Rate Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates,
particularly because the majority of our investments are in short-term debt
securities issued by corporations. We place our investments with high-quality
issuers and limit the amount of credit exposure to any one issuer. Due to the
nature of our short-term investments, we believe that we are not subject to any
material market risk exposure. We do not have any foreign currency or other
derivative financial instruments.
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BUSINESS
Overview
We are a leading provider of Internet media infrastructure services and
applications that create a complete solution for the media, entertainment and
enterprise markets. Our solution, which encompasses the encoding, or the
transformation of audio and video content into streaming media formats, as well
as the management and distribution of digital media, simplifies and accelerates
the process of delivering audio and video content to the Web. The benefits of
our services and applications include high quality, large volume, fast time to
market, format and platform independence, superior reliability and flexibility.
Our proprietary technologies and processes enable scalable processing of large
inventories of digital media.
Digital media services and applications enable our customers to manage their
Web-based audio and video content. Our customers include Atom Films, BMG Music,
Disney Enterprises, Inc., EMusic.com Inc., Hewlett-Packard Company, Kankaris
Communications, Inc., Microsoft Corporation, Sony Music Entertainment, Inc. and
Sony Trans Com.
Industry Background
Traditional Media
The management of increasingly large inventories of audio and video content
and the ability to leverage distribution channels are constant challenges to
companies in a wide variety of global industries including corporate
communications, advertising and music and video entertainment. With the
millions of hours of existing audio and video content and the thousands of
hours of new audio and video content created each day, media owners have become
increasingly aggressive in exploring new ways to reach audiences and distribute
their content. Until recently, media and entertainment companies and other
enterprises have almost exclusively relied upon slowly evolving and inflexible
formats to deliver content to target audiences. These technologies and
standards that form the basis of traditional media and distribution, however,
are not compatible with the infrastructure supporting the Internet. Audio and
video content from compact disks and tapes, or film and video cannot be played
to a global Internet audience without significant manipulation, processing and
new technology. In order to further expand their markets and leverage the value
of their content over the Internet, these industries need to find new methods
that transfer the consistent formats and delivery methods of traditional media
into the multi-faceted and changing technologies of the Web.
The Emergence of Digital Media on the Internet
A major factor contributing to the rapid growth of the Internet is its
ability to change the way people communicate by providing capabilities that
improve traditional communication channels. Over the last few years,
significant advances in, and adoption of, streaming media technologies as well
as improved Internet infrastructure have begun to facilitate the Internet's
evolution from a mass of static, text-oriented Web pages to a highly dynamic
media environment combining text, graphics, audio and full-motion video. As a
result, the Internet is emerging as a global medium for communications,
information and transactions enabling millions of people worldwide to
communicate, engage in commerce, gather information and be entertained.
According to International Data Corporation, or IDC, there were 63 million
Internet users in the United States and 142 million users worldwide in 1998.
IDC estimates that by the end of 2003, there will be 177 million Internet users
in the United States and 502 million users worldwide.
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We believe the introduction of Internet streaming technologies and improved
access to broadband connections will increase demand for audio and video
content on the Internet and the delivery of digital media at quality and
reliability levels comparable to those of traditional media. According to
Jupiter Communications, Internet users in the United States currently spend an
average of 7.1 hours per week online as compared to 3.4 hours reading
magazines, 4.0 hours reading newspapers, 12.6 hours listening to the radio and
15.6 hours watching television. The increased momentum of audio and video
demand specifically is highlighted by the presence of over 50 million MP3
capable users today, according to Forrester Research Inc. In addition, over 140
million video digital players were downloaded by Internet users in the first
six months of 1998, according to IDC. As a result, there exists a significant
market opportunity for media, entertainment and enterprise markets to expand
the creation and use of their traditional audio and video to the Internet. In
addition, new applications for digital media include application and service
promotions for electronic commerce, Web radio, advertising, and communications
within corporations and partner networks.
Challenges to the Growth of Digital Media
Before the media, entertainment and enterprise industries can deliver
traditional media over the new medium of the Internet, they must overcome
several limitations of the current Internet infrastructure. Digital media
distribution over the Internet is a highly fragmented process with a variety of
evolving and competing media formats such as Apple, AT&T, Liquid Audio,
Microsoft and RealNetworks. In most cases, these formats are incompatible with
one another and providers are dedicated to the preservation of their own
proprietary format. In addition, there are a wide and growing number of
download technologies such as AVI, QuickTime and MPEG 1-n that are used to
transfer and play files from personal computers. Digital content is also
delivered in a streaming format that must support a number of speeds, or bit
rates. In order to take full advantage of the compelling experience that
Internet distribution of digital media can provide, distributors of audio and
video content must be able to distribute their content in a manner optimized
for each of these variables and must be able to respond as the underlying
Internet technologies evolve.
Media, entertainment and other enterprises must internally develop the
ability to deliver, or hire outside firms to migrate, their existing and newly
created audio and video content onto the Internet. The core competencies
required to complete this migration process include the following three areas:
. Media Capture. Capturing digital media involves the conversion of
content from traditional analog or digital formats to digital Internet
compatible files while maintaining the original quality. Since the
Internet is still at a formative stage of development, the formats and
technologies continue to conflict and evolve. As a result, the encoding
process for a particular item of content may need to be repeated over
time to keep pace with the introduction of new formats and the changing
preferences of online users.
. Data Management. The process of managing digital media is complex and
requires a range of processes including the creation of metadata files,
file indexing and copyright protection measures such as digital
watermarking and support for new electronic commerce models. Managing
this data effectively for archival and retrieval purposes is critical
for both internal systems and Internet search technologies so that end
users can find the content they seek.
. Distribution. Scalable and reliable methods to deliver electronic media
must be integrated with data management and encoding systems to manage
the data flow process effectively.
It is often difficult for organizations to migrate their audio and video
content onto the Internet because they often do not have the internal resources
or time, or it is not cost-effective, to develop
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the expertise necessary to address these problems without disrupting their core
business activities. Some of the most significant hurdles contributing to these
difficulties include:
. encoding is hardware and resource intensive, making it difficult to
scale in-house systems;
. access to quality equipment and trained operators is limited;
. applications enabling management, distribution and tracking of encoded
content are lacking;
. existing streaming applications encumber access to digitized media by
the entire Internet population because they only support a limited set
of proprietary formats;
. hosting companies have raw bandwidth but may not have the capability to
distribute content across multiple formats and bit rates or the ability
to integrate with data management and encoding systems; and
. current streaming media applications do not provide sophisticated search
or advanced media management tools.
Current providers of narrowly defined services and technologies fail to meet
all of the challenges associated with capturing, managing and distributing
digital media, leaving a previously unfulfilled need in the Internet media
infrastructure market. As a result, we believe companies increasingly seek a
comprehensive, technology-agnostic, outsourced solution for enabling
traditional audio and video content on the Internet.
The Loudeye Solution
We are a leading provider of Internet media infrastructure services and
applications that create an end-to-end solution for the media, entertainment
and enterprise markets. Our solution helps our customers reduce the barriers
impeding delivery of audio and video content to Internet users, improve digital
media content management and leverage the value of Internet distribution
opportunities. Our solution is based on a proprietary architecture that can
scale to meet the encoding and distribution demands of large-volume and complex
digital media content. The primary elements of our solution include:
Digital Media Services. Our digital media services provide a complete suite
of services for customers who need to manage their audio and video content for
the Web. We provide project-specific and ongoing contracts for conversion,
encoding, management, and distribution through our industry leading specialized
hosting providers. Our digital media experts can provide project analysis, as
well as consulting, integration and custom application development.
Digital Media Applications. Our digital media applications leverage our
digital media services infrastructure to enable companies and Web sites to
author and deliver digital media services to their end-user customers with a
complete Web-based software solution. These solutions are delivered turnkey
from a Web-based services model and can be customized or integrated into their
existing systems.
By providing this broad range of products and services, we enable the
production, management and distribution of our customers' digital media content
over the Internet. Our solutions offer customers the following key benefits:
High Quality, Large Volume, Fast Time to Market. Our proprietary encoding
process includes a combination of innovative technologies and software, trained
media professionals and professional
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quality hardware and systems. We have developed proprietary products and
services in an automated and distributed architecture of encoding, conversion
and media enhancement systems so that we can process high volumes of digital
media while simultaneously monitoring and enhancing its quality. By building
our application platform and products on this architecture, we provide a high
quality end-user experience while maintaining the scalability required by
leading Web destinations. We have invested significant resources to provide the
physical and technical capability to manage large scale encoding projects in
the rapid time frame that Internet media customers require.
End-to-End Integrated Solution. Our suite of applications and services
provides a comprehensive solution ranging from the conversion, data entry and
encoding of content to media storage, management and distribution. We offer
customers a solution to collect and deliver new and legacy audio and video
content to and from audiences over the Internet through a single outsourced
solution provider. In addition, we provide many optional services for digital
media asset protection, search engine indexing and automated updating, content
indexing, consulting and integration services. As a result, customers receive
quality and reliable service at less expense, without the need to purchase
capital equipment, develop system expertise, train personnel, or manage an
evolving industry process.
Format and Platform Independence. We have developed proprietary processes
that allow us to encode audio and video content across several platforms
simultaneously, such as Microsoft Windows Media, RealNetworks G2, AT&T a2b or
Liquid Audio. This platform flexibility enables customers to distribute their
content to the entire Internet audience. We can also input any of the wide
variety of traditional analog formats that our customers use, such as tape,
film, compact disk, or CD, or digital video disk, or DVD, all across a range of
formats during a single production run. Given that these formats and platforms
continue to evolve, the benefits of our multiple platform approach remain
applicable as new technologies emerge. We encode our customers' content in a
parallel, rather than serial, process allowing us to rapidly and cost-
effectively deliver encoded content to customers.
Superior Reliability. By connecting our hosting facility and partner Internet
service providers, or ISPs, we provide our customers with a high performance
network connecting more than 40 Internet backbones for Internet data
transmission across over 90 geographic locations, known as points of presence,
or POPs. This system creates fewer points of failure than a single network and
can be monitored for network bottlenecks or outages so the content can be re-
routed and distributed to additional resources. Customers using our services or
applications receive the benefit of redundant and high-quality Internet
distribution without having to manage or aggregate multiple relationships.
Flexible and Easy to Implement Online Audio and Video Applications. We have
created a robust digital media application platform that allows us to develop
audio and video applications for a variety of vertical markets, including
personal photo and video content, corporate presentations, advertisements and
auctions. By integrating various existing components of our core technology
platform, we can satisfy the varied needs of individual customers quickly and
cost effectively. Our development platform and turnkey applications enable Web
destinations to offer early-market digital media applications for the consumer
and enterprise markets without having to expend on significant internal
resources.
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Strategy
Our objective is to be the leading Internet media infrastructure provider of
comprehensive digital media services and applications. We seek to achieve this
objective through the following key strategies:
Leverage Leadership Position in Encoding Technology and Services. All audio
and video content must be processed in some type of encoding facility in order
to be distributed over the Internet. As an early leader in the high-end,
outsourced encoding market, we have been able to develop strong relationships
with influential customers, strategic Internet infrastructure companies and
leading streaming media industry providers. We intend to leverage these
relationships along with our leadership and industry-focused brand into
opportunities for additional products and services of managed distribution,
consulting and applications. By managing the first step in the transformation
of audio and video content onto the Internet in a dynamic technology
environment, we are in a strategic position in the streaming media industry
which we believe will enable an expansion of our technology and services as the
market matures. For example, we logically extend our conversion and encoding
services to include management and distribution applications that include
electronic commerce, rights management and syndication for digital media
publishers who want to expand their revenues and customer bases through secure
and automated distribution to partners and affiliates.
Utilize Core Technologies and Expertise to Advance Streaming Media
Applications. We plan to leverage our core infrastructure and expertise in high
quality and high capacity digital media systems into leading applications that
address a variety of end-to-end solutions. We believe that by building and
managing a leading applications platform for digital media, we can deploy
applications that address the complete cycle of capture, management and
distribution more efficiently and cost effectively than our competitors. We
believe our brand identity in the streaming media industry, together with our
industry-leading customers, gives us significant credibility. We also believe
our industry specific knowledge and streaming media consulting group will allow
us to effectively implement and integrate our applications into existing
systems.
Expand Superior Technologies and Processes. We will continue to leverage
technology and sophisticated processes to further distance ourselves from
alternative approaches that employ labor-intensive, non-automated processes.
Given the rapidly changing requirements of this evolving industry, there are
advantages in building complete systems that are optimized, tested and managed
for high quality and high volume output. This strategy allows us to be the
single, outsourced solution for digital media services and applications for our
target customers. We plan to invest significantly in expanding our research and
development efforts and building our intellectual property focused on Internet
media infrastructure.
Rapidly Deploy Format and Platform Independent Solutions. Because owners and
distributors of content require flexibility in the ability to distribute media
via competing streaming formats, we plan to maintain platform neutrality among
the expanding number of digital media technologies. Thus, we intend to maximize
flexibility for our customers as they leverage our technology to reach their
markets. Our strategy of developing solutions independent of the underlying
streaming format technology providers places us in a strategic position to
rapidly respond to customers' needs and changing developments in streaming
media technologies and provide our customers with technologically advanced
solutions. In addition, we are able to rapidly develop solutions by leveraging
and reusing components of our leading production and distribution technologies
and processes across our suite of digital media services and applications.
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Target Major Media Centers Around the World. We believe that we are well
positioned to leverage our current customer base in order to provide digital
media services and applications to all major media and entertainment companies.
In addition to expanding our presence in the United States, we plan to pursue
the opportunity for providing digital media services to international media and
entertainment companies. We have also developed relationships and plan to
expand our application services to international markets through original
equipment manufacturers, or OEM, agreements with target customers who are
capable of working with our application platform and tools to localize the
solution and interface for regional markets.
Enable Strategic Internet Infrastructure Layer. Our digital media services
and applications support the emerging media Internet infrastructure layer. This
media infrastructure layer links content creators and hosting companies,
providing final delivery of streaming media content to the consumer. By
enabling this infrastructure, we provide a critical role in the streaming media
product cycle that is distinct from the core businesses of our customers and
partners. We plan to maintain a leadership role as a mission-critical enabler
focused on technology trends in the streaming media industry.
Leverage Platform Agnostic Position with Our Streaming Media Consulting
Services. With so many competing and conflicting standards and technologies in
the streaming media market, our customers typically need help and guidance in
the design and implementation of their digital media solutions. Our expert team
of consultants and integrators continue to work with and receive training
across all platforms. This knowledge and focus establishes a credibility that
helps differentiate our offering from single platform providers and is valued
by our customers.
Pursue Strategic Alliances and Acquisitions. We will continue to look to
outside technology companies to expand and enhance our products and services.
We focus our research and development efforts on improving and expanding upon
capabilities that we believe do not currently exist in the market. We
continuously look for components and technologies to augment our solutions
through partnering with industry leaders outside of our core area of expertise.
We intend to acquire companies or technologies in order to further expand our
proprietary products and services.
Products and Services
Our products and services are divided into two categories, digital media
services and applications.
Digital Media Services
We encode audio and video content and provide other value-added services for
deployment of streaming media over the Internet. Typical digital media service
projects involve conversion from thousands of analog source media and encoding
of tens of thousands of audio compact disks and then encode those files into
hundreds of thousands of format specific digital files. Once content has been
encoded, we provide watermarking, encryption and other digital rights
management technologies to our customers to protect and manage their content. A
file created from the source materials containing specified database and
attribute data relating to a particular piece of content is then linked to that
content as part of the overall encoding process. For example, a 15-minute short
film on video tape format may be encoded into more than nine different output
files, supporting three different distribution formats, optimized for three
different baud rates, encrypted and appended with information relating to the
participants involved in producing the film.
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Encoding Services. We convert our customers' content from virtually all
commercially available input formats, and from traditional analog or digital
media to virtually all commercially available streaming media formats for
distribution over the Internet at a variety of bit rates. Customers deliver
their source content to us through a variety of means including satellite
transfer, source tapes, compact disks and electronic file transfer.
The following table illustrates some of the wide variety of input formats,
output formats and bit rates we support.
Input Formats Output Formats Bit Rates
------------- -------------- ---------
AVI Apple QuickTime 28.8 kbps
Beta SP AT&T a2b 56.6 kbps
CD-R Cinepak ISDN
DAT Emblaze DSL
D1 & D2 Intel Indeo T1
DigiBeta JPEG Cable Modem
DVCAM Liquid Audio Broadband
DVD Microsoft Windows Media
Hi-8 MP3
LaserDisc MPEG
MiniDisc RealNetworks G2
NTSC
PAL
VHS
VHS-C
WAV
Distribution and Management. We provide turnkey audio and video solutions for
management and distribution. Our customers can store video and audio clips at
our hosting facility or at hosting or managed distribution facilities provided
by our partners such as Enron, iBEAM, Digital Island and InterVU. We have built
our own data centers and manage all aspects of servers and connectivity
directly to global Internet service providers. We believe this strategy is
superior in terms of quality control, scalability and cost control over time
versus a co-location strategy. We use our internal hosting capabilities for
managing our own applications and key customers with specific requirements. The
primary distribution strategy is to service our customers through adding value
to our hosting partner network that allows for higher capacity and more
efficient routing across the global Internet.
Digital Watermarking. We provide customers with the ability to protect their
digital content by utilizing established vendors such as Verance Technologies
who focus on watermarking applications. Through this technology, information
can be embedded within digital audio or video without degrading the quality,
providing copyright and intellectual property protection. We have developed
proprietary technology to apply these watermarking technologies to audio and
video in a scalable, cost-effective manner, making the technology practical for
large-scale deployment.
Indexing. Through relationships with companies such as Excalibur Technologies
Corporation, we can provide turnkey applications for scalable, automated and
content-based indexing of digital media content. This service prepares a
customer's content for these sophisticated digital media library systems that
can be used for internal asset management or end-user file management and
search.
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Metadata Collection and Analysis. We offer customers the ability to record
and utilize a wide array of metadata relating to the encoded content, such as
artist, title, style, universal product code, album and track data and other
data that a particular customer may find useful for their particular content.
These metadata files enable customers to leverage their traditional content
over the Internet by allowing them to track and manage their digital media
content more efficiently.
Search Engine Indexing. We offer customers the ability to automatically
update the major rich media search engines, which include the traditional
internet portals such as Yahoo! and Alta Vista and specialized Internet media
portals which allow customers to find digital media content. These updates
provide consumers with access to our customers' most current digital media
content.
Rights Management. By integrating technologies and third party solutions such
as Recripicol, Inc. and Intertrust, we can provide services to our customers
who want to secure their digital assets with certification and authentication
systems that help to prevent unauthorized copying and distribution of content
or piracy.
Consulting Services. Our consulting services group helps companies create and
integrate digital media technologies and applications into key business
processes in order to increase the overall effectiveness, productivity and
profitability of the organization. Our consulting services group specializes in
enterprise-wide Internet application development for initiatives such as
distance learning and training, digital media asset management and aggregation,
digital media electronic commerce and in-house encoding and distribution
systems. The team has a broad range of cross-platform technical expertise
specific to the streaming media industry including, Web development tools and
systems, database application programming interfaces, or APIs, and streaming
server formats and integration layers. Specific areas of expertise include:
. project requirements and implementation analysis;
. project timing and resource management;
. system design and deployment;
. digital media and information security;
. custom development of Internet/intranet streaming media applications;
. legacy system integration;
. database design and development;
. digital media Web and user interface design;
. hosting and storage management;
. streaming server integration and implementation; and
. volume encoding of audio and video content.
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Digital Media Applications
We have developed a software applications platform based on our encoding
infrastructure that enables companies and Web sites to easily incorporate
digital media into their own Web-based products and services. The platform
enables developers to build custom media input modules, as well as full custom
turnkey solutions. We sell a set of targeted vertical applications based on our
media application platform, such as online photo albums, media-enhanced auction
and classified listings and media-enhanced advertising and marketing. The
foundation for our media application platform has interfaces that allow content
to be input in any form, including still digital images, analog video tapes,
digital video, telephony-based audio, digital audio files and compact disk
audio. In addition, our media application platform allows content to be
packaged and converted into a variety of streaming media formats via our
encoding services and hosted in a central media repository. By basing our
vertical applications on an extensible, flexible platform, we are able to
respond rapidly to market opportunities and provide customized digital media
applications for Web sites or other customers that want to implement digital
media, as well as create custom solutions for customers via our consulting
services group.
The following diagram illustrates our applications platform upon which we
build our custom media applications and custom turnkey solutions.
[Graphic depicting application development process and applications]
Our applications are deployed on an application services provider, or ASP,
basis whereby the software runs on equipment managed and monitored by us. Our
customers have flexibility and options to choose their individual level of
customization or integration. Where there is enough customer demand, we intend
to license components of the technology directly to corporations to run on
their own hardware and in their own facilities.
Our recent acquisition of Alive.com, a multimedia applications developer,
provides us additional technology components to add to our existing platform in
order to provide increased levels of
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customization in applications development. In addition, we added approximately
20 developers to our internal development resources enabling us to deliver a
larger set of media applications and functionality in a faster timeframe.
We currently provide the following software solutions from our application
platforms:
MediaUpgrade. We believe MediaUpgrade is the first Web-based application to
allow publishers of Web content to simply and conveniently transform legacy
source files, such as AVI, Quicktime and WAV files, to a variety of streaming
media formats. MediaUpgrade is targeted at small- and medium-sized professional
publishers that have regular encoding needs, providing a fully automated
encoding, hosting, management and publishing solution for content. MediaUpgrade
offers users a number of features and benefits:
. fully automated and secure Web-based interface for content uploading,
review and management;
. electronic commerce, tracking and report-generation capabilities for
streaming media content;
. integrated hosting of content as part of the service; and
. support for all leading digital media file formats through a single
browser based interface, without specialized desktop software for each
format.
MySlideShow. MySlideShow is a Web-based application that enables professional
and consumer end-users to create streaming slideshows and presentations from
digital photographs and standard non-streaming presentations. In a fully
automated process, end-users upload digital photos, images or traditional non-
streaming presentations, annotate the slides with words and music, choose for
the slideshow to be public or private and receive an e-mail with a link to
their hosted presentation fully assembled into a Web page. The primary
customers for MySlideShow are Web sites and portals that service consumers and
professional users and want to add Internet media creation and management to
their site. The features and benefits of the application include:
. increase of Web site "stickiness" and usage by allowing users to easily
create and share online slideshows with friends and family;
. easy integration and implementation into customer Web sites, with media
hosting at our facilities;
. simple download and installation process for end-users; and
. greater advertising inventory through targeted interstitial advertising
as well as banner ads.
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Customers
The following table lists our Fortune 1000, enterprise companies, and media
and entertainment customers for which we have performed significant digital
media services.
<TABLE>
<CAPTION>
Media and Entertainment Corporate & Government
----------------------- ----------------------
<S> <C>
A2B Music 2 Wire
Atom Films Ackerman McQueen
Beatnik, Inc. Cancer Education
BMG Music Digital Lava, Inc.
Collegemusic.com Efficient Marketing
Columbia TriStar Interactive Federal Emergency Management Agency
Deo.com Fuji Films
Disney Hewlett Packard Company
Eclips I Feel Good Network Corporation
EMI Network 24 Communications
EMusic.com Inc. OnHealth Network Company
EnergyFilm Qwest Communications
Experience Music Project Radio Active Media Partners
FEG-TV LLC School Improvement.net
GMN Classical VDAT
Kanakaris Communications, Inc. Wonderware
Mainely A Cappella
MetallicaClub
MeTV.com
Microsoft Corporation
Mjuice.com
MountainZone.com
MovieHead.com, Inc.
MyMusic Library.com
Online Music Company
Razor and Tie
Screenplay
Sony Music Entertainment Inc.
Sony Trans Com
TV Interactive
TVT Records
XOOM.com, Inc.
</TABLE>
In addition to customers with whom we have a direct relationship, we have
established a variety of relationships with other streaming media companies and
system integrators.
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Strategic Relationships and Corporate Investors
We have established a number of key strategic relationships to strengthen our
technology development, increase the adoption of our products and services and
increase the awareness of our brand. We have entered into significant
agreements with the following companies:
Streaming Media Platform and Technology Alliances
. Microsoft. We work closely with Microsoft on deployment of the Windows
Media platform and related servers and applications. We are also one of
four members of Microsoft's Net Credits program, which provides encoding
services to customers for the Windows Media platform; the other members
of the program provide hosting services. We are a member of the Windows
Media Broadband Jumpstart program, where Microsoft has partnered with
leading digital media service providers to provide encoding and hosting
for broadband content at a discount to increase the adoption and
availability of broadband content. We have a full-time account
representative managing the strategic partnership.
. RealNetworks. We have a reseller partnership which generates customer
referrals from RealNetworks. We have engaged in a number of joint
marketing efforts with RealNetworks.
. Terran Interactive. We plan to work closely with the Media Cleaner Pro
engineering team to customize and develop the Media Cleaner Pro product
line for our automated encoding production system. We believe we are the
only digital media service provider for streaming media to work with
Terran in this fashion.
Hosting and Distribution Alliances
. Digital Island, Inc. We have an agreement whereby Digital Island resells
our digital media services and is a member of our integrated
distribution network for the delivery of digital media.
. Enron Corp. We have a letter of intent with Enron whereby Enron would
resell our digital media services and is a member of our integrated
distribution network for the delivery of digital media. We believe we
are also the only encoding solutions provider integrated into Enron's
Media Transport video overlay network service which allows broadcast
networks and production studios to submit analog video content in a
secure, point to point manner to be encoding, managed and distributed
for Webcasting by us.
. iBEAM. We have an agreement whereby iBEAM resells our digital media
services and is a member of our integrated distribution network for the
delivery of digital media.
. InterVU. We have an agreement whereby InterVU resells our digital media
services and is a preferred member of our integrated distribution
network for the delivery of digital media.
Business Development Alliances
. Valley Media, Inc. We have an agreement with Valley Media to encode
their entire music catalog, which currently consists of over 150,000
commercial music compact disks. We will use this library of encoded song
files to jointly create a digital media clip service and jointly explore
other business opportunities. In connection with this agreement, we
issued Valley Media a one-year warrant to acquire 650,000 shares of our
common stock at an exercise price of $10.00 per share.
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Corporate Investors. In addition to preexisting industry and commercial
relationships, America Online, Inc., CBS, Inc., Microsoft Corporation and
National Broadcasting Company, Inc. among others recently invested an aggregate
of $15.0 million in our $47.8 million December 1999 Series D preferred stock
financing.
Research and Development
We are focused on improving our digital media services and application
through research and development. We believe that a strong emphasis on
automation and product development are essential to our strategy of continuing
to enhance and expand our capabilities.
Since inception, we have focused our efforts on building the most efficient,
scalable and quality based encoding process through superior hardware and
software. Software built to optimize encoding, combined with our expertise
learned through our automated encoding process has provided a platform upon
which we build superior digital media products and services.
Our team of developers, quality assurance engineers and program managers were
recruited from top Internet and streaming media companies, including
RealNetworks, Microsoft, Starwave and Intel. Within our development team, we
have a combined experience level of over 50 years in Java development and
database development, and significant experience in internet software
development. In addition, we have recruited senior management with significant
experience in the area of internet development, streaming media and networking.
Our core team of developers is focused in the following areas:
. digital media services, which focuses on automating capture and
encoding;
. media management which focuses on building a core component layer for
streaming media online applications; and
. media distribution and syndication, which focuses on building our
distribution and business rules application.
In addition, an application development team is focused on the fast
development of online applications, such as myslideshow and media upgrade,
based on the core components developed by the development team.
All of our product development efforts are undertaken using a structured
process developed within Loudeye. This process involves several functional
groups at all levels within our organization and is designed to provide a
framework for defining and addressing the activities required to bring product
concepts and development projects to market successfully.
Our research and development expenses were approximately $12,000 in 1997,
approximately $204,000 in 1998 and approximately $662,000 for the nine-month
period ended September 30, 1999. As of September 30, 1999, approximately
25 employees were engaged in ongoing engineering and production development
work for our services, solutions and applications.
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Operations and Technology
Our production operation is an efficient, highly automated process, optimized
to produce high volumes of audio and video encoding. The production personnel
are organized into functional teams which include project management, quality
assurance, process traffic, data capture, audio encoding, video encoding,
process research and development and engineering support.
The production system is a combination of hardware and software, developed by
our research and development organization and consists of a highly distributed
encoding system. It is designed to automate the time consuming, error prone
steps inherent in a complex encoding operation.
The production system hardware is centered around a Silicon Graphics Origin
2000 file server, housing over 11 Terabytes of RAID 5 storage. The file server
stores capture files and encoded files for both audio and video. Our
distributed computing system, which performs the audio and video capture and
encode operations, includes an array of over 100 dual Intel Pentium(R)
processors and Apple Macintosh G4s.
The encoding workflow is divided into a separated audio and video process,
staffed with technicians trained for the specific encoding function.
Audio Capture Process
The audio encoding process begins by capturing the content description
information and attributes, or metadata. A range of information, including data
on artists or speakers, track or topic titles, and copyright information, is
collected along with any related images or graphics which are all captured
electronically and entered into the centralized production database. The
collection of metadata can be managed through an automated or manual process
depending on the complexity of the data. The data is then checked for accuracy
and merged as an embedded file as part of the encoded song file delivered to
the customers.
Audio files are captured using our proprietary capture stations. The audio
capture process covers a broad spectrum of media formats and can be automated
or managed as a manual system depending on volume and complexity of the
project. Also, to significantly increase the audio capture process, additional
capture stations can be inserted into the production system architecture and
immediately begin capturing files.
The production system has a queue that knows about the files to be encoded.
To encode a file, the software locates available computing resources on the
network and requests that the resource perform the encoding work. The software
monitors the encoding operation and reports results to the control database.
The capture file and metadata are automatically encoded into all of the
streaming formats and bit rates specified by the production system job
management software and database. If required, the encoded files can be
automatically watermarked and indexed during the encoding operation. The
resulting encoded files are checked for quality and then delivered to the
customer as a collection of files or automatically routed to our partner
hosting services for direct delivery as a hosted stream, over the Internet.
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Video Capture Process
The video encoding process begins with the conversion of the customer's
source material from of wide variety of input formats, such as SVHS and Betacam
SP, using commercial grade video tape decks into a digital file. As with the
audio process, capture and quality control levels from the source can be highly
automated or manually managed depending on customer requirements and complexity
of the project. The video signals are routed through preprocessing stations to
optimize the quality of the content prior to encoding.
After capture, the video files are rendered and encoded in a single parallel
operation into to all the formats and bit rates required by the customer. If
required, the encoded files can be automatically watermarked and indexed during
the encoding operation. The encoded video is checked for quality and delivered
to the customer or hosted directly on the Internet
This encoding architecture creates an automated and highly scalable system.
As capacity demands grow, additional computing resources can be added with
little or no configuration effort, allowing us to rapidly respond to increased
encoding demands.
Sales and Marketing
We have implemented an integrated marketing campaign that consists of direct
sales, reseller and co-marketing partners, trade show and conference
participation and speakers program, our Web site, direct and email marketing
programs, monthly newsletter, Internet promotions and sponsorships and embedded
branding initiatives with customers and partners who promote our logo on the
application or next to the streaming media being delivered. Each of these
programs are deployed at various levels across the following target markets:
Media and Entertainment. We target prominent companies in this category with
a dedicated direct sales force. Smaller companies are primarily contacted
through partnerships with hosting companies, integrators and resellers. The
following outlines important vertical markets and applications in the media and
entertainment industry:
<TABLE>
<S> <C>
Markets Applications
------- ------------
Film Studios ) Product Promotions
)
Record Labels ) Business to Business
)
Stock Footage Houses ) Downloads
>
Music Distribution/Aggregate ) Electronic Marketing
)
Video Distribution/Aggregate ) Web Communities
)
New Media ) Content Acquisition
</TABLE>
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Enterprise. We target Fortune 1000 accounts with our direct sales force and
our consulting services group. In addition, we work with several of the large
and established system integrators, such as Andersen Consulting and KPMG who
are expanding their practices to include digital media groups. The following
outlines important industry markets and applications for the corporate
enterprise segment:
<TABLE>
<S> <C>
Markets Applications
------- ------------
High Tech ) Product Promotions
)
Finance ) Rich Media Advertising
)
Education ) Electronic Commerce
>
Manufacturing ) Distance Learning & Training
)
Industrial/Aerospace ) Corporate Communications
)
Government ) Electronic Marketing
</TABLE>
For smaller enterprise customers, we provide customized and vertical
applications to third parties who bundle various services to make-up a complete
solution to the small to medium enterprise market. We target these third
parties with a direct sales force with special expertise in supporting the
applications.
Consumer. To address this mass-market opportunity, we use our direct sales
force and business development resources to deliver customized and vertical
applications to Web destinations that need streaming media solutions for their
end-users.
Industry Organizations. We maintain an active presence in industry standards
and initiatives that help to mature and grow the streaming media industry. We
are a founding and active member of Secure Digital Music Initiative, or SDMI,
which includes the Recording Industry Association of America, or RIAA, and its
members and is working to create a specification for the secure digital
delivery and sale of music and help in the exposure and credibility of that
help to advance the growth. We also work closely with the quality standards
boards such as the Motion Picture Association of America, or MPAA. Our Seattle,
Washington production and encoding facility is approved by the MPAA.
As of December 20, 1999, we had 18 people in our sales organization and 16 in
our marketing organization, all of which were in the United States. We intend
to increase the size of our direct sales force and to establish additional
sales offices domestically and internationally. The direct sales force
primarily serves the large institutional customers and a telemarketing team
focuses on smaller accounts and lead generation. We have also developed a
network of over 20 resellers, whose efforts are coordinated by four sales
people and one marketing person all dedicated to the reseller channel. There
are two additional sales representatives dedicated respectively to servicing
our relationships with RealNetworks and Microsoft.
Competition in our Industry
We face competition from in-house encoding services by potential customers,
other vendors that directly address the outsourced encoding services market and
companies that directly address the digital media applications market. We
compete on the basis of service quality, capacity, price and breadth of
products and services offered.
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Our most significant competition has been from potential customers who choose
to invest in the resources and equipment to digitally encode their media
themselves on an in-house basis. In-house service is expected to remain a
significant competitor to our services, although we believe that as the volume
of content requiring optimized encoding continues to increase, companies that
currently encode their media in-house will see a significant economic advantage
to outsourcing to a third-party expert for encoding and other value-added
services.
There are a small number of companies who are providing outsourced encoding
solutions today, such as Globix, Magnum Design, Sonic Foundry and STV. We also
anticipate that as the market for outsourced encoding services continues to
grow, it will see competition from turn-key streaming media network providers
such as InterVU, V-Stream and Yahoo! Broadcast Services; streaming media
platform developers such as Apple, Liquid Audio, Microsoft and RealNetworks and
from video post-production houses. There are a number of companies that are
developing Internet media applications that will potentially compete with our
applications, such as Audiosoft, AudioTrack, InterTrust, Microsoft,
RealNetworks, Versifi and Vignette.
We also may not compete successfully against current or future competitors,
many of which have substantially more capital, longer operating histories,
greater brand recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. These competitors may
also engage in more extensive development of their technologies, adopt more
aggressive pricing policies and establish more comprehensive marketing and
advertising campaigns than we can. Our competitors may develop products and
service offerings that are more sophisticated than our own. For these or other
reasons, our competitors' products and services may achieve greater acceptance
in the marketplace than our own, limiting our ability to gain market share and
customer loyalty and to generate sufficient revenues to achieve a profitable
level of operations.
Proprietary Rights and Intellectual Property
We rely primarily on a combination of copyrights, trademarks, trade secret
laws and contractual obligations with employees and third parties to protect
our proprietary rights. We do not yet have any issued patents, but are in the
processes of filing six patent applications that claim priority to six
previously filed provisional applications. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products and
obtain and use information that we regard as proprietary. In addition, other
parties may breach confidentiality agreements or other protective contracts we
have entered into and we may not be able to enforce our rights in the event of
these breaches. Furthermore, we expect that we will increase our international
operations in the future and the laws of many foreign countries do not protect
our intellectual property rights to the same extent as the laws of the United
States.
The streaming media, digital media and software industry is characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other intellectual
property rights. Although we attempt to avoid infringing known proprietary
rights of third parties in our product development efforts, we expect that we
may be subject to legal proceedings and claims for alleged infringement by us
or our licensees of third party proprietary rights, such as patents, trademarks
or copyrights, by us or our licensees from time to time in the ordinary course
of business. Any claims relating to the infringement of third party proprietary
rights, even if not meritorious, could result in costly litigation, divert
management's attention and resources or require us to enter into royalty or
license agreements which are not advantageous to us. In addition, parties
making these claims may be able to obtain an injunction, which could prevent us
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from providing our products or services in the United States or abroad. Any of
these results could harm our business. We may increasingly be subject to
infringement claims as the number of products and competitors in our industry
grow and the functionalities of products overlap.
Furthermore, former employers of our current and future employees may assert
that our employees have improperly disclosed confidential or proprietary
information to us.
Employees
As of December 20, 1999, we had a total of 210 employees, of which 48 were in
research and development, 36 were in sales and marketing, 83 were in
production, 8 were in professional services and product support and 35 were in
finance and administration. None of our employees are subject to a collective
bargaining agreement. We consider our relations with our employees to be good.
Facilities
We are headquartered in Seattle, Washington where we lease approximately
21,125 square feet under a lease that expires on October 31, 2004. We have
exercised the option provided in the lease and will occupy an additional 14,056
square feet of space in the second quarter of 2000. In addition, we have three
other Seattle, Washington locations: a 6,000 square foot space under a lease
that expires on September 1, 2003, a 15,654 square foot space under a lease
that expires August 31, 2004 and a 9,000 square foot space under a lease that
expires November 15, 2004. We also have an additional location that we recently
leased an additional location in Santa Monica, California of approximately
4,632 square feet under a lease that expires January 1, 2005.
Legal Proceedings
We are not currently subject to any material legal proceedings.
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MANAGEMENT
Executive Officers, Key Employees and Directors
The following table sets forth information with respect to our executive
officers, key employees and directors as of December 20, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Martin G. Tobias............ 34 Chief Executive Officer and Chairman of the
Board of Directors
David C. Bullis............. 47 President and Chief Operating Officer
Larry G. Culver............. 50 Chief Financial Officer
Michael D. McHenry.......... 43 Vice President, Sales
Douglas F. Schulze.......... 40 Vice President, Marketing
James L. Van Kerkhove....... 50 Vice President, Production
David L. Weld, Jr. ......... 37 Senior Vice President, Product Development
Jeffrey R. Brown............ 37 Vice President, Operations and New Business
Implementation
Beverley J. Kite............ 30 Vice President, Core Development
Mark J. Richardson.......... 32 Vice President, Application Development
Brent D. Shepherd........... 39 Vice President, Consulting Services Group
Stuart J. Ellman (1)(2)..... 33 Director
Johan Liedgren (2).......... 35 Director
Charles P. Waite, Jr. 44 Director
(1)(2).....................
</TABLE>
- --------
(1) Member of Compensation Committee of the Board of Directors
(2) Member of Audit Committee of the Board of Directors
Executive Officers
Martin G. Tobias, our founder, has served as our chief executive officer and
chairman of our board of directors since our inception. From 1991 to 1997, he
worked for Microsoft Corporation, a software company, in several positions,
most recently as electronic software distribution strategy manager for the U.S.
channel policies group of Microsoft. Mr. Tobias is a director of
SoftwareBuyLine, Inc. Mr. Tobias holds a B.A. from Oregon State University.
David C. Bullis has served as our president and chief operating officer since
July 1999. From May 1998 to February 1999, he served as chief executive officer
and president of Data I/O Corporation, an electronic manufacturing company.
From June 1990 to April 1998, Mr. Bullis served as senior vice president and
general manager of Synopsys, Inc., a design automation company. Mr. Bullis
holds a B.S. from Iowa State University and an M.S. from Colorado State
University.
Larry G. Culver has served as our chief financial officer since August 1999.
From February 1999 to August 1999, he served as senior vice president of
finance and operations and chief financial officer of Metawave Communications
Corporation, a cellular technology company. From July 1998 to January 1999, Mr.
Culver served as senior vice president of finance and operations and chief
financial officer for Metapath Software Corporation, a cellular software
solutions company, which was acquired by Mobile Systems International Holding,
Ltd. in December 1998. From 1991 to May 1998, Mr. Culver served as executive
vice president, chief operating officer and chief financial officer for
CellPro, Inc., a biotechnology company. Mr. Culver holds a B.S. from the
University of Wisconsin, Stout and an M.B.A. from the University of Wisconsin,
Oshkosh.
Michael D. McHenry has served as our vice president of sales since September
1998. From October 1997 to September 1998, he served as vice president of sales
of iCat Corporation, an
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electronic commerce company, which was acquired by Intel in February 1999. From
October 1995 to October 1997, Mr. McHenry served as regional vice president of
sales of Giga Information Group, Inc., an electronic commerce advisory company.
From 1993 to October 1995, Mr. McHenry served as regional sales manager of
FourGen Software, Inc., a software company. Mr. McHenry holds a B.S. from the
University of Oregon.
Douglas F. Schulze has served as our vice president of marketing since
October 1999. From December 1998 to October 1999, he served as general manager
of the Intel e-Commerce division of iCat Corporation. From March 1998 to
December 1998, he served as iCat Corporation's senior vice president of sales
and marketing, and from August 1996 to March 1998, he served as iCat's vice
president of business development. From 1993 to August 1996, Mr. Schulze served
as vice president of marketing for Excalibur Technologies Corporation, a
software company. Mr. Schulze holds a B.A. from California State Polytechnic
University, Pomona.
James L. Van Kerkhove has served as our vice president of production since
November 1999. From February 1999 to November 1999, he served as vice president
of the assembly products group of Johnson Matthey Electronics, Inc., a
manufacturing company, and from July 1998 to January 1999, he served as vice
president of manufacturing of Johnson Matthey Electronics. From 1990 to April
1998, Mr. Van Kerkhove worked for Mitsubishi Silicon America Corporation, a
manufacturing company, in several positions, most recently as executive vice
president of operations. Mr. Van Kerkhove holds a B.S. from Cornell University
and an M.B.A. from Rochester Institute of Technology.
David L. Weld, Jr. has served as our senior vice president of product
development since December 1999. From March 1998 to December 1999, Mr. Weld
served as president and chief executive officer of Alive.com, Inc., a media
application software company, which we acquired in December 1999. From January
1997 to November 1997, Mr. Weld served as president of the information
applications division of Verity, Inc., a knowledge management software company.
From April 1996 to January 1997, Mr. Weld served as chief executive officer of
Cognisoft, a knowledge management software company, which was acquired by
Verity in 1997. From 1991 to April 1996, Mr. Weld worked for Microsoft in
several positions, most recently as group manager of the Microsoft Network. Mr.
Weld holds both an A.B. and an M.B.A. from Dartmouth College.
Key Employees
Jeffrey R. Brown has served as our vice president of operations and new
business implementation since December 1999. From March 1998 to December 1999,
he served as chief operating officer and senior vice president of Alive.com.
From January 1997 to October 1997, Mr. Brown served as vice president of
quality of the information applications division of verity. From November 1996
to January 1997, Mr. Brown served as vice president of quality of Cognisoft.
From 1987 to October 1996, Mr. Brown worked for Microsoft in several positions,
most recently as test manager of content technology for the Microsoft Network.
Beverley J. Kite has served as our vice president of core development since
December 1999. From October 1998 to December 1999, she served as vice president
of development. From 1996 to October 1998, Ms. Kite served as an engineering
manager for Starwave Corporation, an Internet technology company. From 1995 to
1996, Ms. Kite served as a senior developer for Midcom, Inc. a
telecommunications company. From 1994 to 1995, Ms. Kite served as a consultant
for Computer People, Inc., a computer consulting company. Ms. Kite holds a
B.S.C. from Demontfort University in England.
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Mark J. Richardson has served as our vice president of application
development since December 1999. From March 1998 to December 1999, he served as
vice president of product development of Alive.com. From January 1997 to
November 1997, Mr. Richardson served as vice president of technology of the
information applications division of Verity. From April 1996 to January 1997,
Mr. Richardson served as senior software engineer of Cognisoft. From 1988 to
1994, Mr. Richardson worked for Microsoft in several positions, most recently
as a development lead for Windows NT. Mr. Richardson holds a B.S. from the
University of Akron.
Brent D. Shepherd has served as our vice president of the consulting services
group since July 1999. From 1997 to July 1999, he worked for Mosaix Inc., a
customer relationship management company, in several positions, most recently
as vice president of enterprise customer management consulting. From 1994 to
1996, Mr. Shepherd worked at Digital Systems International in several
positions, most recently as director of the strategic business consulting team.
Mr. Shepherd holds a B.A. from the University of Montana.
Directors
Stuart J. Ellman has served as one of our directors since August 1999. Mr.
Ellman has served as general partner of RRE Ventures II LP and its affiliates
since co-founding RRE Ventures in 1994. Mr. Ellman serves as a director of
Watchguard Technologies, Inc. and several private companies. Mr. Ellman holds a
B.A. from Wesleyan University and an M.B.A. from Harvard Business School.
Johan Liedgren has served as one of our director of Loudeye since April 1998.
Since October 1997, Mr. Liedgren has served as chief executive officer of
Honkworm, International, an entertainment studio. From January 1994 to August
1997, he worked for Microsoft Corporation in several positions, most recently
as director of channel policy. Mr. Liedgren serves as a director of
Netsolutions of Sweden. Mr. Liedgren attended the University of Stockholm in
Sweden.
Charles P. Waite, Jr. has served as one of our directors since June 1998. Mr.
Waite has served as a general partner of Olympic Venture Partners LP since
1987. Mr. Waite serves as a director of Verity, Watchguard and several
privately held companies. Mr. Waite holds an A.B. from Kenyon College and an
M.B.A. from Harvard Business School.
Board Composition
Our bylaws currently provide for a board of directors consisting of five
directors. Each director is elected for a period of one year at our annual
meeting of stockholders and serves until the next annual meeting or until his
or her successor is duly elected and qualified.
Board Committees
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of directors
reviews and makes recommendations to the board regarding all forms of
compensation and benefits provided to our officers. In addition, the
compensation committee establishes and reviews general policies relating to the
compensation and benefits of all of our employees. The current members of the
compensation committee are Stuart Ellman and Charles Waite.
Audit Committee. The audit committee of the board of directors reviews and
monitors our internal accounting procedures, corporate financial reporting,
external and internal audits, the results
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and scope of the annual audit and other services provided by our independent
accountants, and our compliance with legal matters that have a significant
impact on our financial reports. The current members of the audit committee are
Stuart Ellman, Johan Liedgren and Charles Waite.
Compensation Committee Interlocks and Insider Participation
The board of directors established its compensation committee in May 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. None of
the members of the compensation committee is currently, or has even been at any
time since our formation, one of our officers or employees. No member of the
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more officers serving as a
member of our board of directors or compensation committee.
Director Compensation
We currently do not provide any cash compensation to our directors for their
service as members of the board of directors, although we do reimburse the
directors for certain expenses in connection with attendance at board and
committee meetings. Under our 1998 stock option plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board or any
other administrator of the plan. See "Stock Plans" for a description of option
grants under the 1998 stock plan. In addition, following the closing of this
offering, directors will be participating in the 2000 director stock option
plan.
Executive Compensation
Martin Tobias, our chief executive officer, received $150,000 in salary and
$50,000 in bonus as compensation for services rendered to Loudeye for the
fiscal year ended December 31, 1998. Mr. Tobias received no other compensation
during the fiscal year ended December 31, 1998.
Option Grants
Martin Tobias, our chief executive officer and only officer earning more than
$100,000 in salary and bonus during the fiscal year ended December 31, 1998,
was not granted options during the fiscal year ended December 31, 1998. Mr.
Tobias did not exercise any options during the fiscal year ended December 31,
1998.
Stock Plans
1998 Stock Option Plan. Our 1998 stock option plan provides for the grant of
incentive stock options to employees (including employee directors) and
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. The purposes of the 1998 stock option plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. Our board
of directors originally adopted the 1998 stock option plan in March 1998 and
our stockholders approved the plan in March 1998. The 1998 stock option plan
was amended in September and November 1999 by the board of directors and in
September and November 1999 by our stockholders. The 1998 stock option plan
reserved 4,660,000 shares of common stock for stock option grants under the
1998 stock option plan. Unless terminated earlier by the board of directors,
the 1998 stock option plan shall terminate
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in March 2008. As of December 20, 1999, options to purchase 3,813,952 shares of
common stock were outstanding at a weighted average exercise price of $0.55,
738,686 shares had been issued upon early exercise subject to our right to
repurchase pursuant to restricted stock purchase agreements, 107,124 shares had
been issued upon exercise of outstanding vested options, and 238 shares
remained available for future grant.
The 1998 stock option plan may be administered by the board of directors or a
committee appointed by the board of directors. The administrator determines the
terms of options granted under the 1998 stock option plan, including the number
of shares subject to the option, exercise price, term and exercisability.
Incentive stock options granted under the 1998 stock option plan must have an
exercise price of at least 100% of the fair market value of the common stock on
the date of grant and at least 110% of such fair market value in the case of an
optionee who holds more then 10% of the total voting power of all classes of
our stock. Nonstatutory stock options granted under the 1998 stock option plan
must have an exercise price of at least 85% of the fair market value of the
common stock on the date of grant and at least 110% of such fair market value
in the case of an optionee who holds more then 10% of the total voting power of
all classes of our stock. Payment of the exercise price may be made in cash or
such other consideration as determined by the administrator.
The administrator determines the term of options, which may not exceed ten
years or five years in the case of an incentive stock option granted to a
holder of more than 10% of the total voting power of all classes of our stock.
No option may be transferred by the optionee other than by will or the laws of
descent or distribution. Each option may be exercised during the lifetime of
the optionee only by such optionee or permitted transferee. The administrator
determines when options become exercisable. Options granted under the 1998
stock option plan generally must be exercised within three months after the
termination of the optionee's status as an employee, director or consultant of
Loudeye, within six months if such termination is due to the death of the
optionee, or within twelve months if such termination is due to the disability
of the optionee, but in no event later than the expiration of the option's
term. Options granted under the 1998 stock option plan generally vest over a
four and half year period at a rate of 12.5% of the total number of shares
subject to the option nine months after the date of grant, an additional 12.5%
of the total number of shares subject to the option 18 months after the date of
grant, with the remaining shares vesting in equal quarterly installments
thereafter.
If we are acquired by another corporation in a transaction in which options
and stock purchase rights outstanding under the 1998 stock option plan are
being assumed or replaced with substitute options by our acquiror, or are being
replaced with a cash incentive program of our acquiror based on the value of
the awards at the time of the acquisition, the vesting of these outstanding
awards will accelerate as to 25% of the underlying shares then unvested upon
closing of the transaction. If our acquiror did not agree to assume or
substitute outstanding awards or replace such awards with a cash incentive
program, then the vesting of such awards will accelerate in full upon the
closing. If we experience a change in control event and the position of an
executive officer is terminated within twelve months of the change of control
event, vesting will accelerate with respect to 100% of the executive officer's
options. The board of directors has the authority to amend or terminate the
1998 stock option plan provided that no action that impairs the rights of any
holder of an outstanding option may be taken without the holder's consent. In
addition, we will obtain stockholder approval for any such amendments to the
extent required by applicable law.
Alive.com, Inc. 1998 Stock Option Plan. In connection with the Alive merger,
we will assume the outstanding options issued under the Alive.com, Inc. 1998
stock option plan. Upon closing of the
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merger, options outstanding under the Alive.com plan became options to purchase
an aggregate of 91,134 shares of our common stock. The terms of the Alive.com
options are similar to the terms of options issuable under our 1998 stock plan,
except that options granted under the 1998 Alive.com stock option plan
generally vest over a four year period at a rate of 25% of the total number of
shares subject to the option one year after the date of grant, with the
remaining shares vesting in equal quarterly installments thereafter. In
addition, in the event of a sale of all or substantially all of our assets or
our merger with or into another corporation, or other change in control event,
the Alive.com, Inc. 1998 stock option plan provides for 100% acceleration of
vesting for options granted prior to March 18, 1999 and 50% vesting for options
granted after March 18, 1999 if the optionee had been employed by Alive.com for
more than six months. If Alive.com's executive officers are terminated within
six months of a change of control event, the 1998 Alive.com stock option plan
provides 100% acceleration of vesting.
2000 Stock Option Plan. Our 2000 stock option plan provides for the grant of
incentive stock options to employees, including employee directors, and of
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. The purposes of the 2000 stock option plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. The 2000
stock option plan was originally adopted by our board of directors in December
1999 and will be approved by our stockholders prior to completion of this
offering. The 2000 stock option plan provides for this issuance of options and
rights to purchase up to 2,500,000 shares of our common stock, plus an
automatic annual increase on the first day of each of our fiscal years
beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser 5% of our
outstanding common stock on the last day of the immediately preceding fiscal
year, 2,500,000 shares or a lesser number of shares as our board of directors
determines. Unless terminated earlier by the board of directors, the 2000 stock
option plan will terminate in December 2009.
As of December 20, 1999, 315,300 options to purchase shares of common stock
were outstanding under the 2000 stock option plan at a weighted average
exercise price of $6.00 per share, no shares had been issued upon exercise of
outstanding options or pursuant to stock purchase rights, and 2,184,700 shares
remained available for future grant.
The 2000 stock option plan may be administered by the board of directors or a
committee of the board, each known as the administrator. The administrator
determines the terms of options and stock purchase rights granted under the
2000 stock option plan, including the number of shares subject to the award,
the exercise or purchase price, and the vesting and/or exercisability of the
award and any other conditions to which the award is subject. Incentive stock
options granted under the 2000 stock option plan must have an exercise price of
at least 100% of the fair market value of the common stock on the date of
grant. The plan does not impose restrictions on the exercise or purchase price
applicable to nonstatutory stock options and stock purchase rights, although we
expect that nonstatutory stock options and stock purchase rights granted to our
chief executive officer and our four other most highly compensated officers
will generally equal at least 100% of the grant date fair market value. Payment
of the exercise or purchase price may be made in cash or any other
consideration allowed by the administrator.
With respect to options granted under the 2000 stock option plan, the
administrator determines the term of options, which may not exceed 10 years, or
5 years in the case of an incentive stock option granted to a holder of more
than 10% of the total voting power of all classes of our stock. Generally, an
option is nontransferable other than by will or the laws of descent and
distribution, and
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may be exercised during the lifetime of the optionee only by such optionee. In
certain circumstances, the administrator has the discretion to grant
nonstatutory stock options with limited transferability rights. Stock options
are generally subject to vesting, meaning that the optionee earns the right to
exercise the option over a specified period of time only if he or she continues
to provide services to us over that period. Shares of stock issued pursuant to
stock purchase rights granted under the 2000 stock option plan are generally
subject to a repurchase right exercisable by us upon the termination of the
holder's employment or consulting relationship with us for any reason
(including death or disability). This repurchase right will lapse in accordance
with the terms of the stock purchase right determined by the administrator at
the time of grant.
If we are acquired by another corporation in a transaction in which options
and stock purchase rights outstanding under the 2000 stock option plan are
being assumed or replaced with substitute options by our acquiror, or are being
replaced with a cash incentive program of our acquiror based on the value of
the awards at the time of the acquisition, the vesting of these outstanding
awards will accelerate as to 25% of the underlying shares then unvested upon
closing of the transaction. If our acquiror did not agree to assume or
substitute outstanding awards or replace such awards with a cash incentive
program, then the vesting of such awards will accelerate in full upon the
closing. Outstanding awards will adjust in the event of a stock split, stock
dividend or other similar change in our capital stock. The administrator has
the authority to amend or terminate the 2000 stock option plan, but no action
may be taken that impairs the rights of any holder of an outstanding option or
stock purchase right without the holder's consent. In addition, we must obtain
stockholder approval of amendments to the plan as required by applicable law.
2000 Director Stock Option Plan. The 2000 director stock option plan was
adopted by the board of directors in December 1999 and will be submitted for
approval by our stockholders prior to completion of this offering. It will
become effective upon the date of this offering. A total of 250,000 shares of
common stock has been reserved for issuance under the 2000 director stock
option plan, all of which remain available for future grants. The 2000 director
stock option plan provides for the grant of nonstatutory stock options to our
nonemployee directors. The 2000 director stock option plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the board of directors. To the extent they
arise, it is expected that conflicts of interest will be addressed by
abstention of any interested director from both deliberations and voting
regarding matters in which a director has a personal interest. Unless
terminated earlier, the directors' plan will terminate in December 2009.
The 2000 director stock option plan provides that each nonemployee director
at the time of completion of this offering will automatically receive an option
to purchase 20,000 shares of our common stock. In addition, the 2000 director
stock option plan provides that each person who becomes a nonemployee director
after the completion of this offering will be granted a nonstatutory stock
option to purchase 20,000 shares of common stock on the date on which such
individual first becomes a member of our board of directors. On the date of
each annual stockholders meeting, each nonemployee director who will continue
serving on the board following the meeting and who has been a director of
Loudeye for at least six months prior to the meeting date will be granted an
option to purchase 7,500 shares of common stock.
All options granted under the 2000 director stock option plan will have a
term of ten years and an exercise price equal to the fair market value of on
the date of grant (except for options granted on the date of this offering
which will have an exercise price equal to the price at which shares are first
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sold to the public in the offering) and will be nontransferable. All initial
options granted under the 2000 director stock option plan shall vest as to 25%
of the shares underlying the option on each of the first four anniversaries of
the date of the option grant. The subsequent options to purchase 7,500 shares
granted under the director plan shall vest as to 100% of the shares underlying
the option on the first anniversary of the date of the option grant. If a
nonemployee director ceases to serve as a director for any reason other than
death or disability, he or she may, but only within 90 days after the date he
or she ceases to be a director, exercise options granted under the director
plan. If he or she does not exercise the option within such 90-day period, the
option will terminate. If a director's service terminates as a result of his or
her disability or death, or if a director dies within three months following
termination for any reason, the director or his or her estate will have
12 months after the date of termination or death, as applicable, to exercise
options that were vested as of the date of termination. In addition, if we
determine that a director has engaged in fraud, embezzlement or similar acts
against us, or if a director has disclosed information that is confidential to
us or engaged in any conduct constituting unfair competition against us, we
have the right to suspend or terminate that director's right to exercise an
option under the 2000 director stock option plan.
If we are acquired by another corporation, each option outstanding under the
2000 director stock option plan will be assumed or equivalent options
substituted by our acquiror, unless our acquiror does not agree to such
assumption or substitution, in which case the options will terminate upon
consummation of the transaction to the extent not previously exercised. In
connection with any acquisition, each director holding options under the 2000
director stock option plan will have the right to exercise his or her options
immediately before the consummation of the transaction as to all shares
underlying the options, including shares which would not have been vested and
exercisable but for the acquisition. Outstanding awards will adjust in the
event of a stock split, stock dividend or other similar change in our capital
stock. Our board of directors may amend or terminate the director plan as long
as such action does not adversely affect any outstanding option. We will obtain
stockholder approval for any amendment to the plan to the extent required by
applicable law.
2000 Employee Stock Purchase Plan. Our 2000 employee stock purchase plan was
adopted by the board of directors in December 1999 and will be submitted for
approval by our stockholders prior to completion of this offering. A total of
200,000 shares of common stock has been reserved for issuance under the 2000
employee stock purchase plan, none of which have been issued as of the date of
this offering. The number of shares reserved for issuance under the 2000
employee stock purchase plan will be subject to an automatic annual increase on
the first day of each of our fiscal years beginning in 2001, 2002, 2003, 2004
and 2005 equal to the lesser of 0.75% of our outstanding common stock on the
last day of the immediately preceding fiscal year, 300,000 shares or a lesser
number of shares as the board of directors determines. The 2000 employee stock
purchase plan becomes effective upon the date of this offering. Unless
terminated earlier by the board of directors, the 2000 employee stock purchase
plan will terminate in December 2019.
The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, will be implemented by a series of
overlapping offering periods of approximately 24 months' duration, with new
offering periods (other than the first offering period) commencing on May 1 and
November 1 of each year. Each offering period will generally consist of four
consecutive purchase periods of six months' duration, at the end of which an
automatic purchase will be made for participants. The initial offering period
is expected to commence on the date of this offering and end on April 30, 2002;
the initial purchase period is expected to begin on the date of this offering
and end on October 31, 2000, with subsequent purchase periods ending on April
30,
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2001, October 31, 2001 and April 30, 2002. The 2000 employee stock purchase
plan will be administered by the board of directors or by a committee appointed
by the board. Our employees (including officers and employee directors), or of
any majority-owned subsidiary designated by the board, are eligible to
participate in the 2000 employee stock purchase plan if they are employed by us
or a designated subsidiary for at least 20 hours per week and more than five
months per year. The 2000 employee stock purchase plan permits eligible
employees to purchase common stock through payroll deductions at a rate of not
more than 20% of an employee's compensation. The purchase price is equal to the
lower of 85% of the fair market value of the common stock at the beginning of
each offering period or at the end of each purchase period, subject to certain
adjustments as provided in the plan. Employees may end their participation in
the 2000 employee stock purchase plan at any time during an offering period,
and participation ends automatically on termination of employment.
An employee is not eligible to participate in the 2000 employee stock
purchase plan if immediately after the grant of an option to purchase stock
under the plan such employee would own stock and/or hold outstanding options to
purchase stock equaling 5% or more of the total voting power or value of all
classes of our stock or stock of our subsidiaries, or if such option would
permit an employee's rights to purchase stock under the 2000 employee stock
purchase plan at a rate that exceeds $25,000 of fair market value of such stock
for each calendar year in which the option is outstanding. In addition, no
employee may purchase more than 2,000 shares of common stock under the 2000
employee stock purchase plan in any one purchase period. If the fair market
value of the common stock on a purchase date is less than the fair market value
at the beginning of the offering period, each participant in that offering
period shall automatically be withdrawn from the offering period as of the end
of the purchase date and re-enrolled in the new 24-month offering period
beginning on the first business day following the purchase date.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 2000
employee stock purchase plan will be assumed or an equivalent right substituted
by our acquiror. If our acquiror did not agree to assume or substitute stock
purchase rights, any offering period and purchase period then in progress would
be shortened and a new exercise date occurring prior to the closing of the
transaction would be set. Outstanding awards will adjust in the event of a
stock split, stock dividend or other similar change in our capital stock. Our
board of directors has the power to amend or terminate the 2000 employee stock
purchase plan and to change or terminate offering periods as long as such
action does not adversely affect any outstanding rights to employee stock
purchase stock thereunder. However, the board of directors may amend or
terminate the 2000 purchase plan or an offering period even if it would
adversely affect outstanding options in order to avoid our incurring adverse
accounting charges.
Employee Benefit Plans
401(k) Plan. In 1999, we adopted our 401(k) plan covering our full-time
employees over age twenty-one . Employees are eligible after three months
employment. The 401(k) plan is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended, so that contributions to the 401(k)
plan by employees or by us, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) plan, and so that our
contributions, if any, will be deductible by us when made. Under the 401(k)
plan, employees may elect to reduce their current compensation by up to 20% up
to the statutorily prescribed annual limit ($10,000 in 1999) and to have the
amount of such reduction contributed to the 401(k) plan. The 401(k) plan
permits, but does not require, additional matching contributions to our 401(k)
plan on behalf of all participants in the 401(k) plan. To date, we have not
made any matching contributions to the 401(k) plan.
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Employment Offer Letters
In connection with the hiring of David Bullis as our president and chief
operating officer in July 1999, we entered into a letter agreement with Mr.
Bullis. Mr. Bullis's options vest over a four year and three month period at a
rate of 18.75% of the number of shares subject to the option nine months after
the date of grant, with the remaining shares vesting in equal installments at
the end of each quarter thereafter. If we experience a change in control within
Mr. Bullis's first two years of employment, the vesting will accelerate with
respect to 50% of these options. Mr. Bullis's employment is for no specified
length of time, and either party has the right to terminate Mr. Bullis's
employment at any time with or without cause.
In connection with the hiring of Larry Culver as our chief financial officer
in August 1999, we entered into a letter agreement with Mr. Culver. In
addition, prior to Mr. Culver joining us as chief financial officer, Mr. Culver
had been hired by us as a consultant in August 1999, and in connection with
such consulting agreement, Mr. Culver was granted a nonqualified stock option.
Mr. Culver's incentive stock options vest over a four year period with 12.5% of
the total number of shares subject to the option vesting twenty-seven months
after the date of grant, with the remaining shares vesting in equal
installments at the end of each quarter thereafter. Mr. Culver's nonqualified
options vest over a two year period at a rate of 37.5% of the total number of
shares subject to the option nine months after the date of grant, with the
remaining shares vesting in equal installments at the end of each quarter
thereafter. If we experience a change in control within Mr. Culver's first two
years of employment, the vesting on his nonqualified option will accelerate
completely. Mr. Culver's employment is for no specified length of time, and
either party has the right to terminate Mr. Culver's employment at any time
with or without cause.
In connection with the hiring of Douglas Schulze as our vice president of
marketing in October 1999, we entered into a letter agreement with Mr. Schulze.
Mr. Schulze's options vest over a four year period at a rate of 18.75% of the
total number of shares subject to the option nine months after the date of
grant, with the remaining shares vesting in equal installments at the end of
each quarter thereafter. Mr. Schulze's employment is for no specified length of
time, and either party has the right to terminate Mr. Schulze's employment at
any time with or without cause.
In connection with the hiring of James Van Kerkhove as our vice president of
production in November 1999, we entered into a letter agreement with Mr. Van
Kerkhove. Mr. Van Kerkhove's options generally vest over a four year period at
a rate of 18.75% of the total number of shares subject to the option nine
months after the date of grant, with the remaining shares vesting in equal
installments at the end of each quarter thereafter. Mr. Van Kerkhove's
employment is for no specified length of time, and either party has the right
to terminate Mr. Van Kerkhove's employment at any time with or without cause.
In connection with the hiring of David Weld as our senior vice president of
product development in December 1999, we entered into a letter agreement with
Mr. Weld. Mr. Weld's options generally vest over a four year and three month
period at a rate of 12.5% of the total number of shares subject to the option
nine months after the date of grant, with the remaining shares vesting in equal
installments at the end of each quarter thereafter. Mr. Weld is treated as an
executive officer in the event of a change in control of Loudeye. In addition,
in connection with our acquisition of Alive.com Mr. Weld's right to purchase
shares of Alive.com common stock converted into a right to purchase shares of
our common stock. Mr. Weld's employment is for no specified length of time, and
either party has the right to terminate Mr. Weld's employment at any time with
or without cause.
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In addition, we have a severance arrangement with each of our officers which
provides that if an officer is terminated without cause, he or she will receive
the then-current base salary and benefits for three months, or for six months
in the case of our executive officers.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements, among
other things, provide for indemnification of our directors and officers for
expenses specified in the agreements, including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as our director or officer,
any of our subsidiaries or any other company or enterprise to which the person
provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Private Placements of Securities
Since our inception in August 1997, we have issued shares of our capital
stock as follows:
. a total of 5,288,000 shares of common stock and 4,712,000 shares of
Series A preferred stock in connection with the conversion of the
predecessor limited liability company into a Delaware corporation in
March 1998;
. a total of 2,508,848 shares of common stock in connection with the
acquisition of Alive.com;
. a total of 271,787 shares of Series A preferred stock at a price of
$0.843 per share in June 1998;
. a total of 3,259,194 shares of Series B preferred stock at a price of
$0.843 per share in June and August 1998;
. a total of 5,309,266 shares of Series C preferred stock at a price of
$1.90 per share in April and August 1999; and
. a total of 7,510,989 shares of Series D preferred stock at a price of
$6.37 per share in December 1999.
All shares of our preferred stock will convert into common stock on a one-for-
one basis upon the closing of this offering. The following table summarizes the
shares of capital stock purchased by executive officers, directors and five-
percent stockholders and their affiliates in these transactions:
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Common Preferred Preferred Preferred Preferred
Investor (1) Stock Stock Stock Stock Stock
- ---------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Martin G. Tobias (2)(3)..... 5,288,000 4,983,787 -- 278,949 117,739
Olympic Venture Partners
(2)........................ -- -- 1,779,360 1,539,474 706,437
RRE Ventures (2)............ -- -- -- 2,105,263 470,957
EnCompass Group (2)......... -- -- 1,186,240 157,895 305,023
David C. Bullis............. -- -- -- 105,263 --
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been added together
for the purposes of this chart. See "Principal Stockholders" for a chart
of beneficial owners.
(2) Holder of 5% or more of a class of our capital stock.
(3) Includes shares held by Martin Tobias's wife, Alex Tobias. In
consideration of Martin Tobias, our founder and chief executive officer,
and his wife's conversion of their membership interests in Encoding.com
LLC, we issued 5,288,000 shares of common stock and 4,712,000 shares of
Series A preferred stock. In addition, we repaid $225,000 in outstanding
principal and issued 271,787 shares of Series A preferred stock at a price
of $0.843 per share in exchange for a cancellation of the remaining
indebtedness from a note issued by us to Mr. Tobias in the aggregate
principal amount of $454,117.06.
Transactions with Officers and Directors
On December 14, 1999, we acquired Alive.com and issued 2,508,848 shares of
common stock and 91,134 options to purchase our common stock in exchange for
all outstanding capital stock and the assumption of all outstanding options of
Alive.com. In exchange for their shares of Alive.com, entities affiliated with
Olympic Venture Partners were issued 362,987 shares of our common stock. In
addition, three officers of Alive.com became officers of Loudeye. David Weld
was issued 84,896 shares of our common stock, Jeffrey Brown was issued 41,600
shares of our common stock
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and Mark Richardson was issued 41,600 shares of our common stock, in each case
in exchange for their shares of Alive.com common stock. Weld Brown LLC, of
which Mr. Weld and Mr. Brown are managers, was issued 412,559 shares of our
common stock.
Martin Tobias, our chief executive officer, is the landlord on our 3406 East
Union Street, Seattle, Washington lease and the owner of that property. We
lease 6,000 square feet under that lease that expires on September 1, 2003 with
an annual rental expense of approximately $120,000.
We have a severance arrangement with each of our officers. See "Employment
Offer Letters" for a description of the offer letters and a description of the
severance arrangement.
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of our board of directors, including a majority of the independent and
disinterested members of the board, and if required by law, a majority of
disinterested stockholders.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of December 20, 1999, assuming conversion of all
outstanding shares of preferred stock into common stock and as adjusted to
reflect the sale of common stock offered hereby by:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each director;
. our chief executive officer and other executive officers; and
. all directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table is
c/o Loudeye Technologies, Inc., Times Square Building, 414 Olive Way, Suite
300, Seattle, WA 98101.
As of December 20, 1999, there were 29,725,894 shares of common stock
outstanding. The percent of beneficial ownership for each stockholder is based
on 29,725,894 shares of common stock outstanding prior to this offering, on an
as converted basis, and shares of common stock outstanding after this
offering. Beneficial ownership is determined in accordance with the rules of
the SEC. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or will
become exercisable within 60 days after December 20, 1999 are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percentage ownership for any other person. Unless otherwise indicated
in the footnotes below, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. In addition, the
percentage calculation after the offering assumes no exercise of the
underwriters' over-allotment option.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Outstanding
Shares ------------------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
- ------------------------------------ ------------ ----------- ----------
<S> <C> <C> <C>
Martin G. Tobias (1)................... 10,631,634 35.8%
Olympic Venture Partners (2)........... 4,388,258 14.8%
2420 Carillon Point
Kirkland, WA 98033
RRE Ventures (3)....................... 2,576,220 8.7%
126 East 56th Street
New York, NY 10022
EnCompass Group U.S. Information 1,649,158 5.5%
Technology Partners (4)...............
777 108th Avenue NE, Suite 2300
Bellevue, WA 98004
David C. Bullis (5).................... 555,263 1.9%
David L.Weld, Jr. (6).................. 547,455 1.8%
Larry Culver (7)....................... 400,000 1.3%
Michael D. McHenry (8)................. 350,000 1.2%
Douglas F. Schulze (9)................. 350,000 1.2%
James L. Van Kerkhove (10)............. 250,000 *
Charles P. Waite, Jr. (11)............. 4,388,258 14.8%
Stuart J. Ellman (12).................. 2,576,220 8.7%
Johan Liedgren (13).................... 60,000 *
All directors and executive officers as 20,108,830 64.9%
a group (10 persons)..................
</TABLE>
- --------
* Represents ownership less than one percent.
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(1) Includes 10,197,338 shares held by Martin Tobias and 434,297 shares held
by Alex Tobias.
(2) Includes 3,644,753 shares held by Olympic Venture Partners IV, LP,
423,862 shares held by Olympic Venture Partners V, LP, 272,547 shares
held by OVP IV Entrepreneurs' Fund, LP and 47,096 shares of OVP V
Entrepreneurs' Fund, LP. Charles P. Waite, Jr., a general partner of
Olympic Venture Partners, is one of our directors. Mr. Waite disclaims
beneficial ownership of shares held by these entities except to the
extent of his pecuniary interest therein.
(3) Includes 510,156 shares held by RRE Ventures Fund II, LP and 2,066,064
shares held by RRE Ventures II, LP. Stuart J. Ellman, a general partner
of RRE Ventures II, LP and RRE Ventures Fund II, LP and a member of RRE
Ventures GP II, LLC, is one of our directors. Mr. Ellman disclaims
beneficial ownership of shares held by these entities except to the
extent of his pecuniary interest therein.
(4) Includes 1,422,628 shares held by EnCompass U.S. Information Technology
Partners I, LP, 156,986 shares held by EnCompass U.S. Information
Technology Partners II, LP and 69,544 shares held by Northwest Financing,
LLC.
(5) Includes 450,000 shares subject to our right of repurchase.
(6) Includes 62,400 shares subject to our right of repurchase, 412,559 shares
held by Weld Brown LLC and 50,000 shares issuable upon exercise of
outstanding options within 60 days of December 20, 1999 but subject to
our right of repurchase. Mr. Weld disclaims beneficial ownership of
shares held by Weld Brown LLC except to the extent of his pecuniary
interest in those shares.
(7) Includes 200,000 shares issuable upon exercise of outstanding options
within 60 days of December 20, 1999, and 200,000 shares, all which are
subject to our right of repurchase.
(8) Includes 43,750 shares issuable upon exercise of outstanding options
within 60 days of December 20, 1999 and 306,250 shares issuable upon
exercise of outstanding options, within 60 days of December 20, 1999 but
subject to our right of repurchase.
(9) Includes 350,000 shares issuable upon exercise of outstanding options
within 60 days of December 20, 1999 but subject to our right of
repurchase.
(10) Includes 250,000 shares issuable upon exercise of outstanding options
within 60 days of December 20, 1999 but subject to our right of
repurchase.
(11) Charles P. Waite, Jr. is one of our directors and is a general partner of
Olympic Venture Partners, Mr. Waite disclaims beneficial ownership of
shares held by Olympic Venture Partners except to the extent of his
pecuniary interest in those shares.
(12) Stuart J. Ellman is one of our directors and is a general partner of RRE
Ventures II, LP and RRE Ventures Fund II, LP, and a member of RRE
Ventures GP II, LLC. Mr. Ellman disclaims beneficial ownership of shares
held by RRE Ventures except to the extent of his pecuniary interest in
those shares.
(13) Includes 22,500 shares issuable upon exercise of outstanding options
within 60 days of December 20, 1999 and 37,500 shares issuable upon
exercise of outstanding options within 60 days of December 20, 1999 but
subject to our right of repurchase.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of December 20, 1999, there were 29,725,894 shares of common stock
outstanding, assuming the conversion of all outstanding shares of preferred
stock into shares of common stock held by approximately 134 stockholders of
record. Upon completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
The following description of our capital stock is not complete and is
qualified in its entirety by our certificate of incorporation and bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
Common Stock
The holders of common stock are entitled to one vote per share on all matters
to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy" for a description of our policy of distribution
of dividends. In the event of a liquidation, dissolution or winding up of
Loudeye, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon the closing of this offering will be
fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, the board of directors will have the
authority, without action by the stockholders, to designate and issue up to
5,000,000 shares of preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, any or all of which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things, restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the liquidation rights
of the common stock and delaying or preventing a change in control of Loudeye
without further action by the stockholders. We have no present plans to issue
any shares of preferred stock.
Warrants
As of December 20, 1999, there was a warrant outstanding to purchase a total
of 41,053 shares of Series C preferred stock at an exercise price of $1.90 per
share which will expire on the earlier of June 22, 2008, or four years after
the effective date of this offering. In addition, there was a warrant
outstanding to purchase a total of 650,000 shares of common stock at an
exercise price of $10.00 per share which will expire on December 17, 2000.
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<PAGE>
Registration Rights
The holders of 28,529,987 shares of common stock or their permitted
transferees are entitled to certain rights with respect to registration of such
shares under the Securities Act. These rights are provided under the terms of
an agreement between Loudeye and the holders of registrable securities. Under
these registration rights, beginning on the earlier of June 3, 2005, or twelve
months after the effective date of the offering contemplated by this
prospectus, holders of at least a majority of the then-outstanding registrable
securities may require on two occasions that we register their shares for
public resale. We are obligated to register these shares only if the shares to
be registered would have an anticipated public offering price of at least
$10,000,000. In addition, holders of at least 25% of the then-outstanding
registrable securities may require that we register their shares for public
resale on form S-3 or similar short-form registration up to two times per year,
provided we are eligible to use form S-3 or similar short-form registration
statement and provided further that the value of the securities to be
registered is at least $500,000. Furthermore, in the event we elect to register
any of our shares of common stock for purposes of effecting any public
offering, the holders of registrable securities are entitled to include their
shares of common stock in the registration, subject however to our right to
reduce the number of shares proposed to be registered in view of market
conditions. All expenses in connection with any registration, other than
underwriting discounts and commissions, will be borne by us. All registration
rights will terminate four years after the date of this public offering or,
with respect to each holder of registrable securities, at such time as the
holder is entitled to sell all of its shares in any three month period under
Rule 144 of the Securities Act.
Delaware and Washington Anti-Takeover Law and Certain Charter and Bylaw
Provisions
Provisions of Delaware and Washington law and our certificate of
incorporation and bylaws could make more difficult the acquisition of Loudeye
by a third party and the removal of incumbent officers and directors. These
provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure us
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized by 66 2/3% vote at an annual or
special meeting or stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is
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a person who, together with affiliates and associates, owns, or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock.
The laws of the state of Washington, where our principal executive offices
are located, also impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act, or the WBCA, prohibits a "target
corporation," with certain exceptions, from engaging in certain "significant
business transactions" with a person or group of persons who beneficially own
10% or more of the voting securities of the target corporation (an acquiring
person) for a period of five years after such acquisition unless the
transaction or acquisition of such shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition.
Such prohibited transactions include, among other things:
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
. termination of 5% or more of the employees of the target corporation as
a result of the acquiring person's acquisition of 10% or more of the
shares; or
. allowing the acquiring person to receive disproportionate benefit as a
stockholder.
After the five-year period, a significant business transaction may take place
as long as it complies with certain fair price provisions of the statute.
A target corporation includes a foreign corporation if:
. the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act;
. the corporation's principal executive office is located in Washington;
. any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares are owned of
record by Washington residents, or (c) 1,000 or more of its stockholders
of record are Washington residents;
. a majority of the corporation's employees are Washington residents or
more than 1,000 Washington residents are employees of the corporation;
and
. a majority of the corporation's tangible assets are located in
Washington or the corporation has more than $50.0 million of tangible
assets located in Washington.
A corporation may not "opt out" of this statute and, therefore, we anticipate
this statute will apply to us. Depending upon whether we meet the definition of
a target corporation, Chapter 23B.19 of the WBCA may have the effect of
delaying, deferring or preventing a change in control.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences
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<PAGE>
that could impede the success of any attempt to change control of Loudeye.
These and other provisions may have the effect of deterring hostile takeovers
or delaying changes in control or management of Loudeye.
Transfer Agent and Registrar
The transfer agent and registrar for common stock is ChaseMellon Shareholders
Service, telephone number (206) 674-3030.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale, as described below,
sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and
impair our ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding shares of
common stock. Of these shares, the shares sold in the offering, plus
any shares issued upon exercise of the underwriters' over-allotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act.
The remaining 29,725,894 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. Restricted shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of the restricted shares
in the public market, or the availability of such shares for sale, could
adversely affect the market price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of FleetBoston Robertson
Stephens Inc., the representative of the underwriters. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not be salable until such agreements expire or are waived by
the designated underwriters' representative. Taking into account the lock-up
agreements, and assuming FleetBoston Robertson Stephens Inc. does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:
. Beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market except for that portion of the shares sold in the offering
reserved for sale to our directors, officers, employees, business
associates and related persons that will be subject to lock-up
agreements.
. Beginning 180 days after the effective date, approximately 845,810
shares will be eligible for sale pursuant to Rule 701 and approximately
18,840,247 additional shares will be eligible for sale pursuant to Rule
144, of which all but 2,796,992 shares are held by affiliates.
. An additional 7,774,939 shares will be eligible for sale pursuant to
Rule 144 after December 14, 2000 and 2,244,898 shares will be eligible
for sale pursuant to Rule 144 after December 17, 2000. Shares eligible
to be sold by affiliates pursuant to Rule 144 are subject to volume
restrictions as described below.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements, which is 180 days after the date of this
prospectus, a person or persons whose shares
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<PAGE>
are aggregated who has beneficially owned restricted securities for at least
one year would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of common stock then outstanding, (which will equal approximately
shares immediately after the offering; or (ii) the average weekly
trading volume of the common stock during the four calendar weeks preceding the
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have
been our affiliate at any time during the three months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 144. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. In addition,
we intend to file registration statements under the Securities Act as promptly
as possible after the effective date to register shares to be issued pursuant
to our employee benefit plans. As a result, any options exercised under the
1998 stock option plan, the Alive.com 1998 stock option plan, the 2000 stock
option plan, the 2000 director option plan, the 2000 employee stock purchase
plan or any other benefit plan after the effectiveness of such registration
statement will also be freely tradable in the public market, except that shares
held by affiliates will still be subject to the volume limitation, manner of
sale, notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of December 20, 1999, there were outstanding
options for the purchase of 4,129,252 shares of our common stock under our
employee benefit plans.
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<PAGE>
UNDERWRITERS
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Hambrecht & Quist LLC and CIBC World
Markets Corp. have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock indicated opposite their names below. The underwriters
are committed to purchase and pay for all of the shares if any are purchased.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on , 2000.
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. ...............................
Hambrecht & Quist LLC..............................................
CIBC World Markets Corp. ..........................................
---------
Total..........................................................
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the initial public offering price located on the
cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $ per share, of which $ may be
reallocated to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
representatives. No reduction in this price will change the amount of proceeds
to be received by us as indicated on the cover page of this prospectus.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to additional shares of common stock at the same price
per share as we will receive for the shares that the underwriters
have agreed to purchase. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of additional shares that the number of
shares of common stock to be purchased by it shown in the above table
represents as a percentage of the shares offered by this prospectus.
If purchased, the additional shares will be sold by the underwriters on the
same terms as those on which the shares are being sold. We will be
obligated, under this option, to sell shares to the extent the option is
exercised. The underwriters may exercise the option only to cover over-
allotments made in connection with the sale of the shares of common
stock offered by this prospectus.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities including liabilities
under the Securities Act of 1933 and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each of our executive officers, directors and other
significant stockholders of record has agreed with the representatives, for a
period until 180 days after the date of this prospectus, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of common stock, any options or warrants to
purchase any
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shares of common stock, or any securities convertible into or exchangeable for
shares of common stock owned as of the date of this prospectus or acquired
directly from us by these holders or with respect to which they have or may
acquire the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. Additionally, each participant in the
directed share program has agreed with the representatives, for a period of 180
days after the date of this prospectus, not to offer to sell, contract to sell
or otherwise sell, dispose of, loan, pledge or grant any rights with respect to
any shares of common stock, any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchangeable for shares of
common stock owned as of the date of this prospectus or acquired directly from
us by these holders or with respect to which they have or may acquire the power
of disposition, without the prior written consent of FleetBoston Robertson
Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. There are no agreements between the
representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the 180-day
lock-up period.
Future Sales By Us. In addition, we have generally agreed that, during the
180-day lock-up period, we will not, without the prior written consent of
FleetBoston Robertson Stephens Inc., (a) consent to the disposition of any
shares held by stockholders prior to the expiration of the 180-day lock-up
period or (b) issue, sell, contract to sell or otherwise dispose of, any shares
of common stock, any options or warrants to purchase any shares of common
stock, or any securities convertible into, exercisable for or exchangeable for
shares of common stock, other than our sale of shares in the offering, our
issuance of common stock upon the exercise of currently outstanding options and
warrants, and our issuance of incentive awards under our stock incentive plans.
See "Shares Eligible for Future Sale."
Directed Shares. We have requested that the underwriters reserve up to ten
percent of the shares of common stock for sale in this offering, at the initial
public offering price, to directors, officers, employees and other individuals
designated by us. As a result, the number of shares of common stock available
for sale to the general public in the offering will be reduced to the extent
these individuals and entities purchase the directed shares. Any directed
shares not so purchased will be offered by the underwriters to the general
public on the same terms as the other shares.
No Prior Public Market. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price
for the common stock offered by this prospectus has been determined through
negotiations between us and the representatives. Among the factors considered
in these negotiations were prevailing market conditions, our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
Stabilization. The representatives have advised us that, under Regulation M
under the Securities Exchange Act, some participants in the offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the
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offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Share Purchases. On December 17, 1999, an entity affiliated with FleetBoston
Robertson Stephens Inc., one of the representatives, purchased 78,493 shares of
Series D preferred stock at a price of $6.37 per share, for an aggregate
purchase price of $500,000. On December 14, 1999, entities affiliated with
Hambrecht & Quist LLC, one of the representatives, purchased 235,479 shares of
Series D preferred stock at a price of $6.37 per share, for an aggregate
purchase price of $1,500,001.
Expenses of the Offering. The expenses of the offering are estimated at
$911,150 and are payable entirely by us.
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LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Venture Law Group, Professional Corporation, Kirkland, Washington. John
Robertson, a senior attorney at Venture Law Group, is our Secretary. Certain
legal matters will be passed upon for the underwriters by Brobeck, Phleger &
Harrison LLP. Investment partnerships associated with Venture Law Group and
individual attorneys of Venture Law Group beneficially own an aggregate of
48,399 shares of our common stock.
EXPERTS
The audited financial statements included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
Effective November 3, 1999, Arthur Andersen LLP was engaged as our
independent auditors and replaced other auditors who were dismissed as our
independent accountants on the same date. The decision to change auditors was
approved by our board of directors on November 27, 1999.
Prior to November 3, 1999, our former auditors issued a report on the period
from inception (August 12, 1997) to December 31, 1998. The report of our former
auditors did not contain an adverse opinion or disclaimer of opinion qualified
or modified as to audit scope or accounting principle. In connection with the
audit for the period from inception (August 12, 1997) through December 31, 1998
and through November 3, 1999, there were no disagreements with our former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of our former auditors, would have caused them to
make reference thereto in their report. Our former auditors have not audited or
reported on any of the financial statements or information included in this
prospectus.
Prior to November 3, 1999, we had not consulted with Arthur Andersen LLP on
items that involved our accounting principles or the form of audit opinion to
be issued on our financial statements. We have requested that our former
auditors furnish us with a letter addressed to the SEC stating whether or not
they agree with the above statements. A copy of this letter is filed as an
exhibit to the registration statement of which this prospectus forms a part.
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<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC, a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered hereby. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits and schedules thereto. For further information with
respect to Loudeye and our common stock, we refer you to the registration
statement and to the exhibits and schedules filed therewith. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. A copy of the registration statement may be
inspected by anyone without charge at the public reference section of the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of all or any portion of the registration statement may be obtained from
the public reference section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of prescribed fees. Information on the operation of
the public reference room can be obtained by calling 1-800-SEC-0330. The SEC
maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
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LOUDEYE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets--Loudeye Technologies, Inc. .............................. F-3
Statements of Operations--Loudeye Technologies, Inc. .................... F-4
Statements of Stockholders' Equity (Deficit)--Loudeye Technologies,
Inc. ................................................................... F-5
Statements of Cash Flows--Loudeye Technologies, Inc. .................... F-6
Notes to Financial Statements--Loudeye Technologies, Inc. ............... F-7
Unaudited Pro Forma Combined Financial Information....................... F-20
Unaudited Pro Forma Combined Balance Sheet............................... F-21
Unaudited Pro Forma Combined Statements of Operations (for the year ended
December 31, 1998)...................................................... F-22
Unaudited Pro Forma Combined Statements of Operations (for the nine-month
period ended September 30, 1999)........................................ F-23
Notes to Unaudited Pro Forma Combined Balance Sheet and Statements of
Operations.............................................................. F-24
Report of Independent Public Accountants................................. F-26
Balance Sheets--Alive.com, Inc. ......................................... F-27
Statements of Operations--Alive.com, Inc. ............................... F-28
Statements of Changes in Shareholders' Deficit--Alive.com, Inc. ......... F-29
Statements of Cash Flows--Alive.com, Inc. ............................... F-30
Notes to Financial Statements--Alive.com, Inc. .......................... F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Loudeye Technologies, Inc.:
We have audited the accompanying balance sheets of Loudeye Technologies, Inc.
as of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(August 12, 1997) to December 31, 1997 and for the year ended December 31,
1998. These financial statements are the responsibility of Loudeye's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Loudeye Technologies, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from inception to December 31, 1997 and for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
December 21, 1999
F-2
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity
As of December 31, As of (Note 2) as of
--------------------- September 30, September 30,
1997 1998 1999 1999
-------- ----------- ------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 200 $ 1,442,307 $ 6,170,985
Accounts receivable, net
allowance of $0, $20,000
and $76,000,
respectively............ -- 86,687 778,215
Short-term investments... -- -- 250,000
Prepaid and other
assets.................. 1,532 27,190 357,150
-------- ----------- -----------
Total current assets... 1,732 1,556,184 7,556,350
Property and equipment,
net....................... 120,808 1,383,174 2,789,647
Other assets............... -- -- 57,074
-------- ----------- -----------
Total assets........... $122,540 $ 2,939,358 $10,403,071
======== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Bank overdraft........... $ 7,590 $ -- $ --
Accounts payable......... 1,150 274,990 820,129
Accrued compensation and
benefits................ -- 17,784 270,536
Accrued liabilities...... -- 112,720 167,483
Customer deposits........ -- 292,298 478,924
Advances from
stockholder............. 198,579 -- --
Current portion of long-
term obligations........ -- 99,670 673,499
-------- ----------- -----------
Total current
liabilities........... 207,319 797,462 2,410,571
Long-term obligations, less
current portion........... -- 900,330 1,278,618
-------- ----------- -----------
Total liabilities...... 207,319 1,697,792 3,689,189
-------- ----------- -----------
Stockholders' equity
(deficit):
Preferred stock, $0.001
par value, 25,000,000
shares authorized, 0,
8,242,981, 13,552,247
and 0 issued and
outstanding, preference
in liquidation of
$13,058,932............. -- 2,981,329 13,058,932 $ --
Common stock, $0.001 par
value, 34,000,000 shares
authorized; 0, 5,288,000
and 6,018,937 issued and
outstanding, and
19,571,184 pro forma,
respectively, and
additional paid in
capital................. -- (133,169) 2,783,587 15,842,519
Members' equity.......... 10,000 -- --
Deferred stock
compensation............ -- -- (2,485,057) (2,485,057)
Accumulated deficit...... (94,779) (1,606,594) (6,643,580) (6,643,580)
-------- ----------- ----------- -----------
Total stockholders'
equity (deficit)...... (84,779) 1,241,566 6,713,882 $ 6,713,882
-------- ----------- ----------- ===========
Total liabilities and
stockholders' equity
(deficit)........... $122,540 $ 2,939,358 $10,403,071 --
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception Nine-
(August 12, Month Periods Ended
1997) to Year Ended September 30,
December 31, December 31, -----------------------
1997 1998 1998 1999
------------ ------------ ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues.................... $ 10,141 $ 285,635 $ 106,560 $ 1,596,917
Cost of revenues............ 16,645 504,187 155,144 1,707,950
-------- ----------- ---------- -----------
Gross margin.............. (6,504) (218,552) (48,584) (111,033)
-------- ----------- ---------- -----------
Operating expenses:
Research and development.. 12,270 203,506 98,113 662,188
Sales and marketing....... 38,841 587,998 312,622 2,223,345
General and
administrative........... 37,164 673,965 362,309 1,815,582
Stock-based compensation.. -- -- -- 204,374
-------- ----------- ---------- -----------
Total operating expenses.. 88,275 1,465,469 773,044 4,905,489
-------- ----------- ---------- -----------
Other income (expense),
net........................ -- 33,749 32,778 (20,464)
-------- ----------- ---------- -----------
Net loss.................... $(94,779) $(1,650,272) $ (788,850) $(5,036,986)
======== =========== ========== ===========
Basic and diluted net loss
per share.................. -- $ (0.41) $ (0.22) $ (0.93)
======== =========== ========== ===========
Weighted average shares
outstanding used to compute
basic and diluted net loss
per share.................. -- 4,039,444 3,603,674 5,429,877
======== =========== ========== ===========
Basic and diluted pro forma
net loss per share......... $ (0.17) $ (0.32)
=========== ===========
Weighted average shares
outstanding used to compute
basic and diluted pro forma
net loss per share......... 9,585,049 15,511,924
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock and
Convertible Additional Paid-in Total
Preferred Stock Capital Deferred Stockholders'
---------------------- -------------------- Members' Stock Accumulated Equity
Shares Amount Shares Amount Equity Compensation Deficit (Deficit)
---------- ----------- --------- ---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, August 12,
1997................... -- $ -- -- $ -- $10,000 $ -- $ -- $ 10,000
Net loss................ -- -- -- -- -- -- (94,779) (94,779)
---------- ----------- --------- ---------- ------- ----------- ----------- -----------
Balances, December 31,
1997................... -- -- -- -- 10,000 -- (94,779) (84,779)
Issuance of common
stock, in conjunction
with conversion from
LLC to C corporation... -- -- 5,288,000 5,288 (5,288) -- -- --
Issuance of Series A
convertible preferred
stock in conjunction
with conversion from
LLC to C corporation... 4,712,000 4,712 -- -- (4,712) -- -- --
Conversion from LLC to C
corporation............ -- -- -- (138,457) -- -- 138,457 --
Conversion of advances
to Series A convertible
preferred stock........ 271,787 229,116 -- -- -- -- -- 229,116
Conversion of notes
payable into Series B
convertible preferred
stock.................. 593,120 500,000 -- -- -- -- -- 500,000
Issuance of Series B
convertible preferred
stock.................. 2,666,074 2,247,501 -- -- -- -- -- 2,247,501
Net loss................ -- -- -- -- -- -- (1,650,272) (1,650,272)
---------- ----------- --------- ---------- ------- ----------- ----------- -----------
Balances, December 31,
1998................... 8,242,981 2,981,329 5,288,000 (133,169) -- -- (1,606,594) 1,241,566
Issuance of Series C
convertible preferred
stock.................. 4,914,529 9,327,603 -- -- -- -- -- 9,327,603
Conversion of notes
payable into Series C
convertible preferred
stock.................. 394,737 750,000 -- -- -- -- -- 750,000
Deferred stock
compensation........... -- -- -- 2,689,431 -- (2,689,431) -- --
Issuance of common stock
for the purchase of
certain assets......... -- -- 20,000 30,000 -- -- -- 30,000
Amortization of deferred
stock compensation..... -- -- -- -- -- 204,374 -- 204,374
Common stock options
exercised.............. -- -- 710,937 163,251 -- -- -- 163,251
Warrants issued in
conjunction with the
issuance of certain
credit facilities...... -- -- -- 34,074 -- -- -- 34,074
Net loss................ -- -- -- -- -- -- (5,036,986) (5,036,986)
---------- ----------- --------- ---------- ------- ----------- ----------- -----------
Balances, September 30,
1999 (unaudited)....... 13,552,247 $13,058,932 6,018,937 $2,783,587 $ -- $(2,485,057) $(6,643,580) $ 6,713,882
========== =========== ========= ========== ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception Nine-Month
(August 12, Year Periods Ended
1997) to Ended September 30,
December 31, December 31, -----------------------
1997 1998 1998 1999
------------ ------------ ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $ (94,779) $(1,650,272) $ (788,850) $(5,036,986)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization.............. 12,965 215,726 107,930 544,502
Amortization of deferred
stock compensation........ -- -- -- 204,374
Changes in assets and
liabilities:
Accounts receivable....... -- (86,687) (49,193) (691,528)
Prepaids and other
assets................... (1,532) (25,658) (84,554) (329,960)
Bank overdraft............ 7,590 (7,590) (7,590) --
Accounts payable.......... 1,150 273,840 346,927 545,139
Accrued compensation and
benefits................. -- 17,784 27,496 252,752
Accrued liabilities....... -- 112,720 3,591 54,763
Customer deposits......... -- 292,298 243,799 186,626
--------- ----------- ---------- -----------
Net cash used in
operating activities.... (74,606) (857,839) (200,444) (4,270,318)
--------- ----------- ---------- -----------
Cash flows from investing
activities:
Purchases of property and
equipment................. (133,773) (1,478,092) (944,786) (1,943,975)
Purchases of short-term
investments............... -- -- -- (250,000)
--------- ----------- ---------- -----------
Net cash used in
investing activities.... (133,773) (1,478,092) (944,786) (2,193,975)
--------- ----------- ---------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
common stock.............. -- -- -- 163,251
Advances from stockholder.. 198,579 255,537 255,537 --
Repayment of stockholder
advances.................. -- (225,000) (225,000) --
Borrowings on long-term
obligations............... -- 1,500,000 1,225,342 1,850,335
Principal payments on long-
term obligations.......... -- -- -- (148,218)
Equity contributed at
inception................. 10,000 -- -- --
Proceeds from issuance of
convertible preferred
stock, net of offering
costs..................... -- 2,247,501 2,247,501 9,327,603
--------- ----------- ---------- -----------
Net cash provided by
financing activities.... 208,579 3,778,038 3,503,380 11,192,971
--------- ----------- ---------- -----------
Increase in cash and cash
equivalents................ 200 1,442,107 2,358,150 4,728,678
Cash and cash equivalents,
beginning of period........ -- 200 200 1,442,307
--------- ----------- ---------- -----------
Cash and cash equivalents,
end of period.............. $ 200 $ 1,442,307 $2,358,350 $ 6,170,985
========= =========== ========== ===========
Supplemental disclosure of
cash flow information:
Cash paid for interest..... $ -- $ 20,616 $ -- $ 103,931
========= =========== ========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
$4,712 of members' equity was converted into 4,712,000 shares of Series A
convertible preferred stock on March 26, 1998
$5,288 of members' equity was converted into 5,288,000 shares of common
stock on March 26, 1998
$229,116 of advances from a stockholder was converted into 271,787 shares
of Series A convertible preferred stock on June 5, 1998
$500,000 of debt was converted into 593,120 shares of Series B convertible
preferred stock on June 5, 1998
$750,000 of debt was converted into 394,737 shares of Series C convertible
preferred stock on April 30, 1999
20,000 shares of common stock were issued for the purchase of $30,000 of
certain assets in August 1999
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Amounts and disclosures as of and for the nine-month periods
ended September 30, 1998 and 1999 are unaudited)
1. ORGANIZATION AND DEVELOPMENT STAGE RISKS:
The Company
Loudeye Technologies, Inc. (the Company) provides digital media
infrastructure services and applications that transform audio and video content
from traditional sources into Internet compatible formats. The Company is
headquartered in Seattle, Washington and to date has conducted business in the
United States in one business segment. The Company was organized on August 12,
1997 (date of inception) as a Washington limited liability company (LLC). On
March 26, 1998, the Company was converted to a Delaware C Corporation.
The Company is subject to a number of risks similar to other companies in a
comparable stage of development including reliance on key personnel, successful
marketing of its services in an emerging market, competition from other
companies with greater technical, financial management and marketing resources,
successful development of new services and the enhancement of existing
services, and the ability to secure adequate financing to support future
growth.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Initial Public Offering and Unaudited Pro Forma Amounts
In December 1999, the Board of Directors of the Company authorized the filing
of a registration statement with the Securities and Exchange Commission (the
SEC) that would permit the Company to sell shares of the Company's common stock
in connection with a proposed initial public offering (IPO). If the offering is
consummated under the terms presently anticipated, all the outstanding shares
of the Company's convertible preferred stock will automatically convert into
13,552,247 shares of common stock upon the closing of the proposed IPO. The
unaudited pro forma stockholders' equity at September 30, 1999 is adjusted for
the conversion of preferred stock.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market
accounts maintained with financial institutions. Recorded amounts approximate
fair value. The Company considers all cash deposits and highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Short-term Investments
Effective August 18, 1999, the Company established an irrevocable standby
letter of credit in the amount of $250,000 in conjunction with the lease of the
Company's office facility. The letter of credit is secured by a certificate of
deposit in the same amount which is required to remain until the expiration of
the letter of credit. The letter of credit expires October 31, 2000, however,
it will be
F-7
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
automatically renewed during the term of the lease. The letter of credit
contains an automatic reduction schedule reducing the amount of the letter of
credit each year by $50,000 until it reaches $100,000, and remains through the
end of the term.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, short-term investments,
trade accounts receivable, accounts payable and long-term obligations. Fair
values of cash and cash equivalents and short-term investments, which is a
certificate of deposit securing the letter of credit, approximate cost due to
the short period of time to maturity. The fair values of financial instruments
that are short-term and/or that have little or no market risk are considered to
have a fair value equal to book value. Assets and liabilities that are included
in this category are receivables, accounts payable and accrued liabilities.
The Company performs initial and ongoing evaluations of its customers'
financial position, and generally extends credit on open account, requiring
collateral as deemed necessary. The Company maintains allowances for potential
credit losses.
During 1998, two customers made up 14% and 12%, respectively, of the
Company's revenue. In the nine months ended September 30, 1999, two customers
made up 14% and 14% of the Company's revenues, respectively.
Property and Equipment
Property and equipment is stated at historical cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Improvements....................................................... 5 years
Computer and production equipment.................................. 3 years
Office equipment................................................... 5 years
Software........................................................... 3 years
</TABLE>
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized
when the sum of the expected future undiscounted net cash flows is less than
the carrying amount of the asset. The Company has identified no such impairment
losses.
Revenue Recognition
Substantially all of our revenues to date have been generated by sales of
digital media services through time and material contracts. Digital media
services revenues consist primarily of encoding services to convert audio and
video content into Internet media formats, as well as other services for
deployment of media over the Internet.
F-8
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's revenue is recognized as follows:
Time and Material Contracts: The Company recognizes revenues as services are
rendered.
Fixed-Price Contracts: Service revenues from fixed-price contracts are
recognized on the percentage-of-completion method, measured by the cost
incurred to date to the estimated total cost for the contracts. This method is
used as management considers expended costs to be the best available measure of
contract performance. Contract costs include all direct labor, material and any
other costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions and estimated
profitability may result in revisions in the estimate of total costs. Any
required adjustments due to these changes are recognized in the period in which
such revisions are determined.
Warranty Obligations
The Company generally provides warranties for 30 days after date of delivery.
Estimated warranty obligations are provided at the time of delivery of the
encoded product to the customer.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Software Development Costs
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the completion of
beta testing of a working product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this statement after
consideration of the above factors were immaterial and, therefore, no software
development costs have been capitalized by the Company to date.
Advertising Costs
Advertising costs are expensed as incurred. The Company incurred $164,000 and
$407,000 in advertising costs for the year ended December 31, 1998 and for the
nine-month period ended September 30, 1999, respectively. Advertising costs
prior to December 31, 1997 were not significant.
Income Taxes
Before March 26, 1998, the Company was taxed as an LLC, which provided that,
in lieu of corporate income taxes, the members of the LLC were taxed on their
proportionate shares of the Company's taxable income. After March 26, 1998,
when the Company converted to a C corporation, income taxes were accounted for
under the liability method.
F-9
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets,
liabilities and tax carryforwards. Deferred tax assets are then reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not based on current circumstances, are not expected to
be realized (see Note 6).
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for its stock option plan. The Company accounts for stock issued to non-
employees in accordance with the provisions of SFAS 123 and the Emerging Issues
Task Force consensus in Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, Goods or Services" (EITF 96-18).
Use of Estimates in the Preparation of Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Net Loss Per Share
In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Computation of Earnings Per Share," basic earnings per share is computed
by dividing net loss by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by
dividing net loss by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of shares of common stock issuable upon the conversion of the
convertible preferred stock (using the if-converted method) and shares issuable
upon the exercise of stock options and warrants (using the treasury stock
method); common equivalent shares are excluded from the calculation if their
effects is antidilutive. The Company has not had any issuances or grants for
nominal consideration as defined under Staff Accounting Bulletin 98. Diluted
net loss per share for all periods shown does not include the effects of the
convertible preferred stock and shares issuable upon the exercise of stock
options and warrants as the effect of their inclusion is antidilutive during
each period.
Pro forma basic and diluted net loss per share is computed based on the
weighted average number of shares of common stock outstanding giving effect to
the conversion of convertible preferred stock outstanding that will
automatically convert upon completion of the Company's initial public offering
(using the if-converted method from the original issue date). Pro forma diluted
net loss per share excludes the impact of stock options and warrants as the
effect of their inclusion would be antidilutive.
F-10
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Unaudited Interim Financial Data
The unaudited interim financial statements for the nine-month periods ended
September 30, 1998 and 1999 have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles. Results of operations for interim periods
presented herein are not necessarily indicative of results of operations for
the entire year.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS
131) during 1998. SFAS 131 requires companies to disclose certain information
about operating segments. Based on the criteria within SFAS 131, the Company
has determined that it has one reportable segment, digital media services.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specific costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on the Company's financial position or results
of operations.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP-97-2 to require that an
entity recognize revenues for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence, or
VSOE, of the fair values of all the undelivered elements that are not accounted
for by means of long-term contract accounting, and (2) VSOE of fair value does
not exist for one or more of the delivered elements, and (3) all revenue
recognition criteria of SOP 97-2 and SOP 98-9 will be effective for
transactions entered into in fiscal years beginning after March 15, 1999. We do
not expect SOP 98-9 to have any effect, on our results of operations.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. The Company believes its revenue recognition practices
are in conformity with SAB No. 101.
F-11
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. PROPERTY AND EQUIPMENT:
Property and equipment were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------- September 30,
1997 1998 1999
-------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Office equipment......................... $ 9,654 $ 85,369 $ 152,546
Software................................. -- 53,215 260,706
Improvements............................. -- 294,102 358,673
Computer and production equipment........ 124,119 1,179,179 2,599,158
Construction in progress................. -- -- 191,757
Accumulated depreciation................. (12,965) (228,691) (773,193)
-------- ---------- ----------
Property and equipment, net.............. $120,808 $1,383,174 $2,789,647
======== ========== ==========
</TABLE>
Depreciation expense was $13,000, $216,000 and $545,000 in 1997, 1998 and for
the nine-month period ended September 30, 1999, respectively.
4. LONG-TERM OBLIGATIONS:
Advances at December 31, 1997 consist of cash advances aggregating $198,579
from a stockholder to the Company. These were noninterest-bearing and converted
to Series A convertible preferred stock in June 1998, at which time the
aggregate advances equaled $229,116.
In August 1998, the Company established an equipment line of credit for up to
$1.0 million secured by the Company's property and equipment. Advances under
the equipment line are payable over 36 equal monthly installments commencing on
August 30, 1999. The equipment line bears interest at the bank's prime rate
(7.75% at December 31, 1998 and 8.25% at September 30, 1999) and had an
outstanding balance of $1,000,000 and $944,444 as of December 31, 1998 and
September 30, 1999, respectively.
In June 1999, the Company established a debt facility totaling up to $2.6
million that allows the Company to borrow funds through June 2000. Loans made
under this facility will be secured by assets financed under the agreement.
Advances under the debt agreement bear interest at 8%, adjusted for prevailing
interest rates. Rates in effect for advances outstanding range from 8.57% to
8.79% and are payable over 36 equal monthly installments plus a final payment
equal to 15% of the principal amount. As of September 30, 1999, $996,484 was
outstanding under this debt facility.
As a part of this debt facility, the lender received a warrant to purchase
41,053 shares of Series C preferred stock at a purchase price of $1.90 per
share. This warrant expires upon the earlier of June 22, 2008 or four years
after an initial public offering. The outstanding warrant contains provisions
for the adjustment of the exercise price and the aggregate number of shares
issuable upon the exercise of the warrant in the case of stock dividends, stock
splits, reorganizations, reclassifications, consolidations and dilutive
issuances of securities at prices below the then existing warrant exercise
price. The determination of fair value of the warrant was made using the Black-
Scholes option pricing model and assuming a term of two years, a risk-free
interest rate of 5.5% and expected volatility of 75%.
F-12
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future payments of long-term debt are as follows: as of September 30, 1999
<TABLE>
<S> <C>
1999 (3 months)................................................. $ 176,660
2000............................................................ 681,106
2001............................................................ 713,237
2002............................................................ 381,114
----------
$1,952,117
==========
</TABLE>
5. STOCKHOLDERS' EQUITY:
Convertible Preferred Stock
The Company is authorized to issue 25,000,000 shares of preferred stock. Shares
of preferred stock may be issued from time to time in one or more series, with
designations, rights, preferences and limitations established by the Company's
Board of Directors.
As of September 30, 1999, the Company had designated three series of
convertible preferred stock (Series A through C). Amounts are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Series A preferred stock: Issued 4,983,787 shares
in 1998, aggregate liquidation preference
$233,828, with participation to $500,000 in the
event of the liquidation or sale of the
Company......................................... $ 233,828 $ 233,828
Series B preferred stock: Issued 3,259,194 shares
in 1998, aggregate liquidation preference
$2,747,501 with participation to $5,495,001 in
the event of the liquidation or sale of the
Company......................................... 2,747,501 2,747,501
Series C preferred stock: Issued 5,309,266 shares
in 1998, aggregate liquidation preference
$10,077,603, with participation to $20,175,211
in the event of the liquidation or sale of the
Company......................................... -- 10,077,603
---------- -----------
$2,981,329 $13,058,932
========== ===========
</TABLE>
The rights and privileges of the preferred stock are as follows:
Dividends--Holders of Series A, B and C are entitled to receive dividends
of $0.07, $0.07 and $0.15, respectively, per share per annum, when and if
declared by the Board of Directors. Such dividends are not cumulative. As
of September 30, 1999, none have been declared.
Conversion--Each share of Series A, B and C is convertible, at the option
of the holders, into common stock. Each share of Series A, B and C
automatically converts into common stock upon the closing of a public
offering that meets certain conditions.
Liquidation Preferences--The Series A, Series B and Series C shares have
liquidation preferences of $0.843, $0.843 and $1.90 per share,
respectively, (with participation up to $500,000, $5,495,001 and
$20,175,211, respectively) in the event of the liquidation of the Company.
If the value of the Company on liquidation is insufficient to pay the
entire preferential amount, distribution shall be made pro rata to all
preferred shareholders in proportion to the preferential amount the
preferred shareholder is otherwise entitled to receive.
F-13
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Any assets remaining after the preferential distribution will be paid to
holders of common stock in proportion to shares held by each.
Voting Rights--The holders of each share of Series A, B and C shall be
entitled to the number of votes equal to the number of shares of common
stock into which such shares could be converted, and have voting rights
equal to holders of common stock.
The Company is prohibited from taking certain corporate actions without the
approval of the holders of the majority of outstanding Series A, Series B and
Series C shares, as well as separate class votes of the individual series in
certain circumstances. In conjunction with the sale of Series A and Series B
redeemable preferred stock, the Company, its founders, and the redeemable
preferred stock investors also entered into an investor rights agreement,
voting agreement, and a stock restriction agreement.
Stock Option Plan
Under the Company's 1998 Stock Option Plan (the Plan), the Board of Directors
and any of its committees may grant to employees, consultants and directors
options to purchase the Company's common stock at terms and prices determined
by the Board of Directors. Incentive stock options may be granted to employees
at a price set by the plan administrator. Options may generally be exercised at
anytime within 10 years of the date of grant or within three months of
termination of employment, and typically vest over 4.5 years. The Company
accounts for the Plan under APB 25.
The Company has adopted the disclosure-only provisions of SFAS 123. Had
compensation expense been recognized on stock options issuance based on the
fair value of the options at the date of grant and recognized over the vesting
period, the Company's net loss would have been increased to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1997 1998 1999
-------- ----------- -------------
<S> <C> <C> <C>
Net loss:
As reported.......................... $(94,779) $(1,650,272) $(5,036,986)
Pro forma............................ (94,779) (1,650,938) (5,262,607)
Basic and diluted net loss per share:
As reported.......................... -- $ (0.41) $ (0.93)
Pro forma............................ -- $ (0.41) $ (0.97)
</TABLE>
To determine compensation expense under SFAS 123, the Company used the
following assumptions:
. Risk-free interest rate of 5.5%
. Expected lives of 5 years
. Expected dividend yields of 0%
. Expected volatility of 0%
F-14
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Option activity under the Plan was as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Grant Date Exercise
Number Fair Value Price
--------- ---------- --------
<S> <C> <C> <C>
Outstanding, January 1, 1998
Granted.................................... 1,420,500 $0.01 $0.07
Cancelled.................................. 125,000 0.01 0.06
---------
Outstanding, December 31, 1998............... 1,295,500 0.01 0.07
Granted with exercise price equal to fair
market value.............................. 258,500 0.02 0.10
Granted with exercise price less than fair
market value.............................. 2,819,900 1.05 0.30
Exercised.................................. 710,937 0.72 0.23
Cancelled.................................. 338,438 0.04 0.11
---------
Outstanding, September 30, 1999.............. 3,324,525 0.73 0.23
=========
</TABLE>
The following information is provided for options outstanding and exercisable
at September 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------ ----------------------------
Weighted Weighted
Weighted Average Weighted Average
Average Remaining Average Remaining
Exercise Contractual Exercise Contractual
Range Number Price Life Number Price Life
----- --------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
.06-.19 1,459,625 $0.08 9.07 201,000 $0.07 9.02
.25-.40 1,864,900 0.35 9.87 -- -- --
---------
3,324,525
</TABLE>
The options outstanding at September 30, 1999 have a weighted average
remaining contractual life of approximately 9.5 years. No options were vested
or exercisable at December 31, 1998.
Stock-Based Compensation
The Company records deferred stock compensation for the difference between
the exercise price of stock options granted and the deemed fair value for
financial statement presentation purposes of the Company's common stock at the
date of grant. The deferred compensation is amortized over the vesting period
of the related options, which is generally 4.5 years. No deferred compensation
or related stock-based compensation expense was recorded at December 31, 1998.
Through September 30, 1999, the Company recorded gross deferred compensation
totaling $2,689,000 and related stock-based compensation expense totaled
$204,000.
We have granted approximately 220,000 options to consultants which vest on
the same terms as options granted to employees. These terms require that the
individuals continue their current consulting relationship with the Company in
order to continue vesting. These options are accounted for in accordance with
the provisions of SFAS 123 and EITF 96-18. Accordingly, using the Black-Scholes
option pricing model and assuming a term of five years, a risk-free interest
rate of 5.50% and expected volatility of 75%, the options are marked to fair
value at each reporting period through charges to stock-based compensation in
the statements of operations.
F-15
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Reserved for Future Issuance
The following shares of common stock have been reserved for future issuance
as of September 30, 1999 (in thousands):
<TABLE>
<S> <C>
Employee stock options.......................................... 3,649,063
Convertible preferred stock..................................... 25,000,000
Warrants........................................................ 41,053
----------
28,690,116
==========
</TABLE>
6. FEDERAL INCOME TAXES:
At September 30, 1999, the Company had net operating loss carryforwards of
approximately $5.8 million related to U.S. federal and state jurisdictions.
Utilization of net operating loss carryforwards are subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
These carryforwards will begin to expire in 2018.
The Company did not provide any current or deferred United States federal or
state income tax provision or benefit for any of the periods presented because
it has experienced operating losses since inception, and has provided full
valuation allowances on deferred tax assets because of uncertainty regarding
their realizability. This valuation allowance increased in 1998 and for the
nine-month period ended September 30, 1999 by $477,712 and $1,682,594,
respectively. Deferred taxes consist primarily of net operating loss
carryforwards and timing differences for customer deposits, stock compensation
expense and excess book depreciation.
The difference between the statutory federal tax rate of 35% (34% federal and
1% state, net of federal benefits) and the tax benefit of zero recorded by the
Company is primarily due to the Company's full valuation allowance against its
net deferred tax assets.
The components of the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1997 1998 1999
-------- --------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward............ $ 31,226 $ 411,724 $ 2,046,933
Other...................................... -- 97,214 144,599
-------- --------- -----------
Total deferred tax assets................ 31,226 508,938 2,191,532
Valuation allowance.......................... (31,226) (508,938) (2,191,532)
-------- --------- -----------
Total.................................... $ -- $ -- $ --
======== ========= ===========
</TABLE>
F-16
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. COMMITMENTS:
Operating Leases
During 1999, the Company entered into an agreement for its office facility
under an operating lease which expires in 2004. Prior to 1999, the Company had
leased office space from a related party. Minimum lease commitments as of
September 30, 1999 under noncancellable leases are as follows:
<TABLE>
<S> <C>
1999 (three months)............................................. $ 131,066
2000............................................................ 576,663
2001............................................................ 585,903
2002............................................................ 595,115
2003............................................................ 564,311
Thereafter...................................................... 410,230
----------
$2,863,288
==========
</TABLE>
Rent expense under operating leases totaled $61,328 for the year ended
December 31, 1998 and $118,119 for the nine-month period ended September 30,
1999.
Subsequent to September 30, 1999 the Company entered into a five-year office
lease with annual payments of approximately $243,000, and a five-year office
lease with annual payments of approximately $180,000.
8. RELATED PARTY TRANSACTIONS:
On September 1, 1998, the Company entered into a five-year lease agreement
with the Company's primary officer. The total monthly rental payments are
approximately $10,000 per month. Total payments during the year ended December
31, 1998 were approximately $40,000. The lease agreement provides for an early
termination payment of $52,000.
9. SUBSEQUENT EVENTS:
Acquisition of Alive.com, Inc.
Effective December 14, 1999, the Company acquired Alive.com, Inc., a
developer of multimedia applications. In connection with the acquisition, the
Company issued 2,508,848 shares of common stock and 91,134 options to purchase
shares of common stock valued at fair market value using the Black-Scholes
option pricing model in exchange for all of the outstanding capital stock and
the assumption of all outstanding options of Alive.com, Inc. The deemed fair
value of the common stock and options issued in the acquisition, for accounting
purposes, was approximately $15.5 million. The Company also incurred $200,000
in acquisition costs, for a total purchase price of $15.7 million. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of Alive.com, Inc. have been included in the consolidated financial
statements commencing on the date of acquisition. The excess purchase price of
approximately $14.9 million was allocated to goodwill, work force in place and
acquired technology, which is being amortized on a straight-line basis over an
estimated useful life of three years.
F-17
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the acquisition, net assets acquired were as follows:
<TABLE>
<S> <C>
Cash, receivables and other current assets...................... $ 738,517
Property and equipment, and other noncurrent assets............. 454,527
Total liabilities............................................... (372,274)
---------
$ 820,770
=========
</TABLE>
The following table presents the unaudited pro forma results assuming that
the Company had acquired Alive.com, Inc. at the beginning of fiscal year 1998.
This information may not necessarily be indicative of the future combined
results of the operations of the Company.
<TABLE>
<CAPTION>
Nine-Month
Year Ended Period Ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Total revenues................................ $ 286,259 $ 1,658,918
Net loss...................................... $(8,633,184) $(12,291,613)
Basic net loss per share...................... $ (1.32) $ (1.55)
</TABLE>
Series D Financing
In December 1999 the Company closed a $47.8 million private equity placement
with a number of strategic investors pursuant to the terms of a stock purchase
agreement which was entered into on December 14, 1999 and amended on December
17, 1999. The Company issued 7,510,989 shares of Series D convertible preferred
stock at $6.37 per share. The Series D convertible preferred stock contains
substantially the same rights and preferences as the previous series of
convertible preferred stock.
Services Agreement
On December 17, 1999 the Company entered into a services agreement with a
distributor of music and video entertainment products. In conjunction with the
services agreement, the Company granted 650,000 warrants to acquire common
stock at $10 per share. The warrants are exercisable immediately and expire in
December 2000.
2000 Stock Option Plan
In December 1999 the board of directors approved the creation of the 2000
Stock Option Plan. This plan provides for the grant of incentive stock options
to employees, including employee directors, and of nonstatutory stock options
to employees, directors and consultants. The 2000 plan provides for the
issuance of options to purchase up to 2,500,000 shares of the Company's common
stock, plus an automatic annual increase on the first day of each of the fiscal
years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 5% of
our outstanding common stock on the last day of the immediately preceding
fiscal year or a lesser number of shares as our Board determines.
F-18
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2000 Directors' Stock Option Plan
In December 1999 the board of directors approved the creation of the 2000
Directors' Stock Option Plan. 250,000 shares of common stock has been reserved
for issuance under the 2000 directors' plan, all of which remain available for
future grants. This plan provides for the grant of nonstatutory stock options
to the Company's nonemployee directors.
2000 Employee Stock Purchase Plan
In December 1999, the board of directors approved the creation of the 2000
Employee Stock Purchase Plan (ESPP). A total of 200,000 shares of common stock
has been reserved for issuance under the ESPP, none of which have been issued
as of December 17, 1999. The number of shares reserved for issuance under the
ESPP will be subject to an automatic annual increase on the first day of each
of the fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the
lesser of 0.75% of the Company's outstanding common stock on the last day of
the immediately preceding fiscal year or a lesser number of shares as the board
of directors determines.
F-19
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined balance sheet of Loudeye Technologies, Inc.
at September 30, 1999 gives effect to the acquisition of Alive.com, Inc. as if
it was consummated on September 30, 1999. The unaudited pro forma combined
statement of operations of Loudeye Technologies, Inc. for the year ended
December 31, 1998 and for the nine months ended September 30, 1999 gives effect
to the acquisition of Alive.com, Inc. as if it had been acquired on January 1,
1998.
The unaudited pro forma combined balance sheet and statement of operations
are presented for informational purposes only and do not purport to represent
what the Company's financial position and results of operations for the year
ended December 31, 1998 or for the nine months ended September 30, 1999 would
actually have been had the acquisition, in fact, occurred on January 1, 1998,
or the Company's results of operations for any future period. The unaudited pro
forma combined balance sheet and statement of operations should be read in
conjunction with the financial statements and related notes thereto included
elsewhere in this prospectus and the information set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Unaudited pro forma adjustments have been applied to the financial
information derived from the financial statements of Loudeye Technologies and
Alive.com to account for the merger as a purchase. Accordingly, assets acquired
and liabilities assumed are reflected at their estimated fair values which are
subject to further refinement, including appraisals and other analysis. The
unaudited pro forma consolidated financial information has been prepared based
on the assumptions described in the notes thereto and includes assumptions
relating to the allocation of the consideration paid for the assets and
liabilities of Alive.com based on preliminary estimates of their fair value.
The actual allocation of such consideration may differ from that reflected in
the unaudited pro forma combined financial information after valuations and
other procedures to be performed after the closing of the merger. In the
opinion of Loudeye Technologies, all adjustments necessary to present fairly
such unaudited pro forma combined financial information have been made based on
the proposed terms and structure of the merger. The unaudited pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of future operating results or financial position. These unaudited
pro forma combined financial statements and accompanying notes should be read
in conjunction with historical financial statements and the related notes
thereto of Loudeye Technologies and Alive.com.
F-20
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Combined
Loudeye Alive Adjustments Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 6,170,985 $ 619,651 (200,000)(a) $ 6,590,636
Accounts receivable.... 778,215 19,767 797,982
Short term
investments........... 250,000 -- 250,000
Other current assets... 357,150 99,099 456,249
----------- ----------- -----------
Total current
assets.............. 7,556,350 738,517 8,094,867
Property and equipment,
net................... 2,789,647 379,905 3,169,552
Other assets........... 57,074 74,622 131,696
Goodwill............... -- -- 10,282,390 (a) 10,282,390
Intangibles............ -- -- 4,630,000 (a) 4,630,000
----------- ----------- -----------
Total assets......... $10,403,071 $ 1,193,044 $26,308,505
=========== =========== ===========
Current liabilities:
Accounts payable....... $ 820,129 $ 108,882 $ 929,011
Accrued compensation
and benefits.......... 270,536 74,486 345,022
Other accrued
expenses.............. 167,483 -- 167,483
Deposits............... 478,924 -- 478,924
Line of credit......... -- -- --
Current portion of
long-term debt........ 673,499 90,000 763,499
----------- ----------- -----------
Total current
liabilities......... 2,410,571 273,368 2,683,939
Long-term debt......... 1,278,618 82,500 1,361,118
Deferred rent.......... -- 16,406 16,406
Mandatorily redeemable
preferred stock, net.. -- 6,017,172 (6,017,172) --
----------- ----------- -----------
Total long-term
liabilities......... 1,278,618 6,116,078 1,377,524
Common stock............. 2,783,587 369,109 (369,109)(a) 18,316,747
-- -- 15,533,160 (a)
Preferred stock.......... 13,058,932 -- -- 13,058,932
Deferred compensation.... (2,485,057) (26,867) 26,867 (a) (2,485,057)
Retained deficit......... (6,643,580) (5,538,644) 5,538,644 (a) (6,643,580)
----------- ----------- -----------
Total equity......... 6,713,882 (5,196,402) 22,247,042
----------- ----------- -----------
Total liabilities and
equity.............. $10,403,071 $ 1,193,044 $26,308,505
=========== =========== ===========
</TABLE>
F-21
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Loudeye Alive Adjustments Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................. $ 285,635 $ 624 $ 286,259
Cost of revenues.......... 504,187 21 504,208
----------- ----------- -----------
Gross margin............ (218,552) 603 (217,949)
Operating expenses:
Research and
development............ 203,506 631,793 835,299
Sales and marketing..... 587,998 941,577 -- 1,529,575
General and
administrative......... 673,965 424,941 -- 1,098,906
Stock-based
compensation........... -- -- -- --
Amortization of
intangibles............ -- -- 4,970,797(b) 4,970,797
----------- ----------- -----------
Total operating
expenses............. 1,465,469 1,998,311 8,434,577
Other income (expense),
net...................... 33,749 (14,407) -- 19,342
----------- ----------- -----------
Net loss.................. $(1,650,272) $(2,012,115) $(8,633,184)
=========== =========== ===========
Basic and diluted net loss
per share................ $ (0.41) $ (1.32)
=========== ===========
Weighted average shares
outstanding used to
compute basic and diluted
net loss per share....... 4,039,444 6,548,292
=========== ===========
Basic and diluted pro
forma net loss per
share.................... $ (0.17) $ (0.71)
=========== ===========
Weighted average shares
outstanding used to
compute basic and diluted
pro forma net loss per
share.................... 9,585,049 12,093,897
=========== ===========
</TABLE>
F-22
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Loudeye Alive Adjustments Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................. $ 1,596,917 $ 62,001 $ 1,658,918
Cost of revenues......... 1,707,950 3,854 1,711,804
----------- ----------- ------------
Gross margin........... (111,033) 58,147 (52,886)
Operating expenses:
Research and
development........... 662,188 1,409,176 2,071,364
Sales and marketing.... 2,223,345 1,742,651 -- 3,965,996
General and
administrative........ 1,815,582 430,346 -- 2,245,928
Stock-based
compensation.......... 204,374 -- -- 204,374
Amortization of
intangibles........... -- -- 3,728,098(b) 3,728,098
----------- ----------- ------------
Total operating
expenses............ 4,905,489 3,582,173 12,215,760
Other income (expense),
net..................... (20,464) (2,503) -- (22,967)
----------- ----------- ------------
Net loss................. $(5,036,986) $(3,526,529) $(12,291,613)
=========== =========== ============
Basic and diluted net
loss per share.......... $ (0.93) $ (1.55)
=========== ============
Weighted average shares
outstanding used to
compute basic and
diluted net loss per
share................... 5,429,877 7,938,725
=========== ============
Basic and diluted pro
forma net loss per
share................... $ (0.32) $ (0.68)
=========== ============
Weighted average shares
outstanding used to
compute basic and
diluted pro forma net
loss per share.......... 15,511,924 18,020,772
=========== ============
</TABLE>
F-23
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF
OPERATIONS
September 30, 1999
1. BASIS OF PRESENTATION:
The unaudited pro forma combined balance sheet gives effect to the
acquisition of Alive.com, Inc. as if it was consummated on September 30, 1999.
The pro forma adjustments are based on consideration exchanged, including the
estimated fair value of assets acquired, liabilities assumed and common stock
issued. The actual adjustments, which will be based on valuations of fair value
as of the date of acquisition, may differ from that made herein.
The pro forma combined statement of operations for the year ended December
31, 1998 and for the nine months ended September 30, 1999 gives effect to the
acquisition of Alive.com, Inc. as if it had been acquired January 1, 1998.
The pro forma combined financial statements are presented for illustrative
purposes only and should not be construed to be indicative of the actual
combined results of operations as may exist in the future. The pro forma
adjustments are based on the common stock consideration exchanged by Loudeye
Technologies, Inc. for the fair value of the assets acquired and liabilities
assumed.
2. PRO FORMA ADJUSTMENTS:
(a) To record the acquisition of Alive.com, Inc. as follows:
<TABLE>
<S> <C>
Purchase price................................................ $15,533,000
Estimated transaction costs................................... 200,000
Net assets acquired........................................... (821,000)
-----------
Excess purchase price......................................... $14,912,000
===========
</TABLE>
The purchase price of Alive.com, Inc. consists of 2,508,848 shares of
common stock based on the price of Loudeye Technologies, Inc. common stock
with an assumed fair value of $6.00 as determined by the Company's Board of
Directors and 91,134 options to purchase shares of common stock valued at
fair market value using the Black-Scholes option pricing model.
Transaction costs associated with this merger have been estimated to be
$200,000. Should the actual amount differ, the intangible asset recorded
would increase and related amortization would increase.
(b) To record amortization of intangibles as follows:
<TABLE>
<S> <C>
Twelve months of 1998 amortization............................. $4,971,000
Nine months of 1999 amortization............................... $3,728,000
</TABLE>
All intangibles are amortized over a period of three years.
(c) Basic and diluted net loss per share is computed by dividing net loss by
the weighted average number of shares outstanding during the period assuming
that shares issued for acquisitions were outstanding for the entire period. Pro
forma basic and diluted net loss per share is computed based on the weighted
average number of shares outstanding giving effect to shares issued in
F-24
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF
OPERATIONS--(Continued)
acquisitions as if they were outstanding for the entire period and to the
conversion of convertible preferred stock on an as-if converted basis from the
original issuance date.
3. RECONCILIATION OF HISTORICAL WEIGHTED AVERAGE SHARES TO PRO FORMA WEIGHTED
AVERAGE SHARES:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Historical.......................... 4,039,444 5,429,877
Alive.com, January 1, 1998-December
31, 1998; January 1, 1999-December
15, 1999........................... 2,508,848 2,508,848
--------- ---------
Pro forma........................... 6,548,292 7,938,725
========= =========
</TABLE>
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Alive.com, Inc.:
We have audited the accompanying balance sheet of Alive.com, Inc. (a
development stage company) as of December 31, 1998, and the related statements
of operations, changes in shareholders' deficit, and cash flows for the period
from inception (February 27, 1998) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alive.com, Inc. as of December
31, 1998, and the results of its operations and cash flows for the period from
inception to December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
December 21, 1999
F-26
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 243,665 $ 619,651
Accounts receivable, net allowance of $11,384 as
of September 30, 1999............................ -- 19,767
Prepaids and other assets......................... 114,967 99,099
----------- -----------
Total current assets............................ 358,632 738,517
Property and equipment, net......................... 241,257 379,905
Other assets........................................ 90,887 74,622
----------- -----------
$ 690,776 $ 1,193,044
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................. $ 429,550 $ 108,882
Accrued liabilities............................... 42,910 74,486
Note payable, current portion..................... 75,000 90,000
Convertible notes payable......................... 1,000,000 --
----------- -----------
Total current liabilities....................... 1,547,460 273,368
Note payable, net of current portion................ 150,000 82,500
Deferred rent....................................... 36,512 16,406
----------- -----------
Total liabilities............................... 1,733,972 372,274
----------- -----------
Mandatorily redeemable convertible preferred stock,
902,886 and 2,770,862 shares authorized, issued and
outstanding, liquidation preference of $6,189,976
at September 30, 1999.............................. 673,698 6,017,172
Shareholders' deficit:
Preferred stock, undesignated series, $.01 par
value, authorized 7,229,881 shares, none issued
and outstanding.................................. -- --
Common stock, $.01 par value, 20,000,000 shares
authorized, 2,322,752 and 2,301,581 issued and
outstanding at December 31, 1998 and September
30, 1999, respectively, and additional paid-in
capital.......................................... 295,221 369,109
Deferred stock compensation....................... -- (26,867)
Deficit accumulated during the development stage.. (2,012,115) (5,538,644)
----------- -----------
Total shareholders' deficit..................... (1,716,894) (5,196,402)
----------- -----------
Total liabilities and shareholders' deficit... $ 690,776 $ 1,193,044
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(February 27, (February 27, Nine-Month
1998) to 1998) to Period Ended-
December 31, September 30, September 30,
1998 1999 1999
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Revenues............................. $ 624 $ 62,625 $ 62,001
Cost of revenues..................... 21 3,875 3,854
----------- ----------- -----------
Gross margin....................... 603 58,750 58,147
----------- ----------- -----------
Operating expenses:
Research and development........... 631,793 2,040,969 1,409,176
Sales and marketing................ 941,577 2,684,228 1,742,651
General and administrative......... 424,941 855,287 430,346
----------- ----------- -----------
Total operating expenses......... 1,998,311 5,580,484 3,582,173
Other income (expense), net.......... (14,407) (16,910) (2,503)
----------- ----------- -----------
Net loss............................. $(2,012,115) $(5,538,644) $(3,526,529)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock and
Additional Paid-in
Capital Deferred Total
------------------- Stock Deficit Shareholders'
Shares Amount Compensation Accumulated Deficit
--------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances,
February 27, 1998...... -- $ -- $ -- $ -- $ --
Issuance of common
stock................. 1,753,298 188,600 -- -- 188,600
Common stock options
exercised............. 548,283 106,621 -- -- 106,621
Net loss............... -- -- -- (2,012,115) (2,012,115)
--------- -------- -------- ----------- -----------
Balances,
December 31, 1998...... 2,301,581 295,221 -- (2,012,115) (1,716,894)
Common stock options
exercised............. 106,671 27,155 -- -- 27,155
Repurchase of common
stock................. (85,500) (9,300) -- -- (9,300)
Issuance of stock
warrants.............. -- 2,475 -- -- 2,475
Deferred stock
compensation.......... -- 36,280 (36,280) -- --
Amortization of
deferred stock
compensation.......... -- -- 9,413 -- 9,413
Compensation
attributable to stock
options............... -- 17,278 -- -- 17,278
Net loss............... -- -- -- (3,526,529) (3,526,529)
--------- -------- -------- ----------- -----------
Balances,
September 30, 1999
(unaudited)........... 2,322,752 $369,109 $(26,867) $(5,538,644) $(5,196,402)
========= ======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(February 27, (February 27, Nine-Month
1998) to 1998) to Period Ended
December 31, September 30, September 30,
1998 1999 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(2,012,115) $(5,538,644) $(3,526,529)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 28,714 105,684 76,970
Common stock and warrant expense.... 132,213 148,978 16,765
Amortization of deferred stock
compensation....................... -- 9,413 9,413
Non-employee common stock
compensation expense............... -- 17,278 17,278
Changes in assets and liabilities:
Accounts receivable................. -- (19,767) (19,767)
Prepaids and other assets........... (149,467) (131,624) 17,843
Accounts payable.................... 429,550 108,882 (320,668)
Accrued liabilities................. 46,216 95,997 49,781
Deferred rent....................... 36,512 16,406 (20,106)
----------- ----------- -----------
Net cash used in operating
activities....................... (1,488,377) (5,187,397) (3,699,020)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and
equipment.......................... (269,971) (485,589) (215,618)
----------- ----------- -----------
Net cash used in investing
activities....................... (269,971) (485,589) (215,618)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net......................... $ 106,621 $ 124,476 $ 17,855
Proceeds from issuance of preferred
stock, net......................... 370,392 4,195,661 3,825,269
Proceeds from issuance of
convertible notes payable.......... 1,300,000 1,800,000 500,000
Proceeds from issuance of note
payable............................ 225,000 225,000 --
Repayment of note payable........... -- (52,500) (52,500)
----------- ----------- -----------
Net cash provided by financing
activities....................... 2,002,013 6,292,637 4,290,624
----------- ----------- -----------
Increase in cash and cash
equivalents......................... 243,665 619,651 375,986
Cash and cash equivalents, beginning
of period........................... -- -- 243,665
----------- ----------- -----------
Cash and cash equivalents, end of
period.............................. $ 243,665 $ 619,651 $ 619,651
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid--interest................. $ 15,630 $ 37,315 $ 21,685
=========== =========== ===========
Supplemental disclosures of noncash
investing and financing activities:
Conversion of convertible notes
payable and accrued interest to
redeemable convertible preferred
stock.............................. $ 303,306 $ 1,821,511 $ 1,518,205
=========== =========== ===========
Deferred compensation on grants of
stock options...................... $ -- $ 36,280 $ 36,280
=========== =========== ===========
Issuance of common stock and
warrants in exchange for software
licenses and services.............. $ 188,600 $ 191,075 $ 2,475
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
ALIVE.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Amounts and disclosures as of and for the nine-month period
ended September 30, 1999 are unaudited)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company
Alive.com, Inc. (the "Company") is engaged in the development of software
products which enable users to develop multimedia presentations over the
Internet and intranets. The Company was incorporated in the State of Washington
on February 27, 1998 (date of inception). The Company has devoted substantially
all of its efforts to date in product development, establishment of sales and
marketing distribution channels, and raising capital.
Inherent in the Company's business are various risks and uncertainties,
including the Company's limited operating history and development of the
Internet as a communications medium. The Company's success depends upon the
acceptance of the Company's technology and the Company's ability to generate
license revenues from the use of its technology.
On December 14, 1999, the Company was acquired by Loudeye Technologies, Inc.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market
accounts maintained with financial institutions. Recorded amounts approximate
fair value. The Company considers all cash deposits and highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, and trade accounts
receivable, accounts payable and long-term debt. Fair values of cash and cash
equivalents approximate cost due to the short period of time to maturity. The
fair values of financial instruments that are short-term and/or that have
little or no market risk are considered to have a fair value equal to book
value. Assets and liabilities that are included in this category are
receivables, accounts payable and accrued liabilities.
Property and Equipment
Property and equipment is stated at historical cost less accumulated
depreciation and depreciation is computed using the straight-line basis over
the estimated useful lives of the assets, which are generally three to seven
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the respective lease term or estimated useful life of the asset.
F-31
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company recognizes revenues from software license fees upon delivery of
the software product to the end-user, unless the fee is not fixed or
determinable or collectibility is not probable. Revenue from packaged product
sales to and through distributors and resellers is recorded when related
products are shipped, net of an allowance for estimated returns.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Software Development Costs
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the completion of
beta testing of a working product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this statement after
consideration of the above factors were immaterial and, therefore, no software
development costs have been capitalized by the Company to date.
Advertising Expenses
Advertising costs are expensed as incurred. The Company incurred $280,500 and
$667,400 in advertising for the period from February 27, 1998 (date of
inception) to December 31, 1998, and for the year ended December 31, 1999,
respectively.
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets,
liabilities and tax carryforwards. Deferred tax assets are then reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not based on current circumstances, are not expected to
be realized (see Note 8).
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for its stock option plan.
F-32
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force consensus in
Issue No. 96-18, "Accounting for Equity Instruments that Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Interim Financial Data
The unaudited interim financial statements for the nine-month period ended
September 30, 1999 have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles. Results of operations for interim period
presented herein are not necessarily indicative of results of operations for
the entire year.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS
131) during 1998. SFAS 131 requires companies to disclose certain information
about operating segments. Based on the criteria within SFAS 131, the Company
has determined that it has one reportable segment, software product
development.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specific costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on the Company's financial position or results
of operations.
F-33
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT:
Property and equipment were as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Office equipment................................ $108,161 $ 119,596
Software........................................ 2,356 69,707
Improvements.................................... 47,461 48,096
Computer equipment.............................. 111,993 245,814
Accumulated depreciation........................ (28,714) (103,309)
-------- ---------
Property and equipment, net................... $241,257 $ 379,904
======== =========
</TABLE>
3. OTHER ASSETS:
Other assets were as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Deferred charges, net.......................... $56,387 $42,097
Deposits....................................... 25,000 25,400
Trade name, net................................ 9,500 7,125
------- -------
$90,887 $74,622
======= =======
</TABLE>
4. NOTE PAYABLE:
In August 1998, the Company entered into a financing arrangement with a bank
which provided for a $250,000 line of credit for operating needs and equipment
financing. Under the terms of the agreement, the maximum borrowing on the
revolving line of credit is reduced by the amount of equipment financed.
Borrowings under the line of credit bear interest at the bank's prime rate plus
1.0% (9.00% at December 31, 1998 and 9.25% at September 30, 1999) and are
collateralized by substantially all of the Company's property and equipment.
The line of credit matures in February 2000, and equipment financing is payable
in 36 equal installments of principal, plus interest, commencing on March 27,
1999.
During 1998, the Company financed $225,000 of equipment purchases under the
terms of the arrangement.
Future principal payments are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 90,000
2001.............................................................. 82,500
--------
$172,500
========
</TABLE>
F-34
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. CONVERTIBLE NOTES PAYABLE:
The Company issued convertible notes payable in connection with the Series A
redeemable preferred stock and Series B redeemable preferred stock financings.
The notes were unsecured and due on demand with interest at the federal short-
term interest rate. Note principal and accrued interest were converted to
Series A redeemable preferred stock and Series B redeemable preferred stock at
a conversion price of $0.858358 and $2.90 per share, respectively.
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
During July 1998, the Company issued 902,886 shares of Series A mandatorily
redeemable preferred stock at $.858358 per share. In March and April 1999, the
Company issued 1,867,233 shares of Series B mandatorily redeemable preferred
stock at $2.90 per share.
A summary of convertible preferred stock is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Series A redeemable preferred stock, $.01 par
value; 902,886 shares authorized, issued and
outstanding; $775,000 aggregate liquidation
preference, net of issuance costs of
$101,302.................................... $673,698 $ 673,698
Series B redeemable preferred stock, $.01 par
value; 1,867,233 shares authorized, issued
and outstanding; $5,414,976 aggregate
liquidation preference, net of issuance
costs of $71,502............................ -- 5,343,474
-------- ----------
$673,698 $6,017,172
======== ==========
</TABLE>
Each share of redeemable preferred stock has voting rights equal to its
common stock equivalent, and is convertible at the holder's option into one
share of the Company's common stock, subject to certain adjustments. The
preferred stock automatically converts to common stock in the event of an
initial public offering of not less than $5.00 per share and for a total
offering of not less than $20,000,000, or the date specified by election of
two-thirds of the preferred shareholders voting as a class.
The holders of preferred stock will be entitled to receive non-cumulative
dividends, if and when declared by the Board of Directors, and shall be
entitled to participate pro rata in any dividends paid on the common stock on
an as-if-converted basis.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A and Series B shall be entitled to receive, in
preference to holders of common stock, an amount equal to $0.858358 and $2.90
per share subject to certain adjustments, respectively plus declared but unpaid
dividends or such amount per share as-if each share had been converted to
common stock prior to such event.
Each of the Series A and Series B redeemable preferred stock is redeemable by
the holder in three equal annual installments upon the election of a majority
of the respective shareholders on or
F-35
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
after July 2, 2003 and March 15, 2004, respectively. The redemption price of
Series A and Series B is equal to $0.858358 and $2.90 per share subject to
certain adjustments, respectively plus declared but unpaid dividends.
The Company is prohibited from taking certain corporate actions without the
approval of the holders of the majority of outstanding Series A and Series B
shares. In conjunction with the sale of Series A and Series B redeemable
preferred stock, the Company, its founders, and the redeemable preferred stock
investors also entered into an investor rights agreement, voting agreement, and
a stock restriction agreement.
7. SHAREHOLDERS' DEFICIT:
Authorized Shares
The Company has authorized for issuance a total of 30,000,000 shares,
consisting of 20,000,000 shares of common stock, and 10,000,000 shares of
preferred stock, of which 902,886 shares are designated as Series A redeemable
preferred stock and 1,867,233 shares designated as Series B redeemable
preferred stock.
Voting Agreements
Weld, Brown LLC, a Washington limited liability company ("Weld Brown"), and
certain common stock shareholders entered into a voting agreement, whereby each
shareholder has agreed to vote all shares of the Company's common stock or any
other class of voting security of the Company now or hereafter owned or
controlled by them only in the manner specified by a manager of Weld Brown.
In conjunction with the sale of the Series A and Series B redeemable
preferred stock, Allaire Corporation ("Allaire"), Weld Brown, and the Series A
and Series B investors have entered into a voting agreement whereby each has
agreed to fix the number of directors at no more than five, and each are
allowed to designate a director. The fifth board member is designated by the
other four directors.
Restricted Stock and Repurchase Agreements
On July 14, 1998, the Company entered into a contribution and restricted
purchase agreement with Allaire and issued 907,591 shares of common stock
("Allaire shares") in exchange for a license of certain of Allaire's
technology, on a royalty free basis, coupled with an agreement by Allaire to
provide certain technological, sales, and marketing support. Under the terms of
the agreement, 302,531 shares vested immediately and the remaining shares vest,
so long as the agreement is not terminated, at the rate of 50,421 shares at the
end of each three-month period. Shares issued are subject to a repurchase
option upon the occurrence of certain events, at the current fair market value
for vested shares and $0.10 per share for unvested shares.
On July 14, 1998, the Company entered into a restricted stock purchase
agreement with Weld Brown and issued 845,707 shares of common stock ("Weld
Brown shares") in exchange for certain
F-36
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
intellectual property rights. Under the terms of the agreement, 123,762 shares
were founders shares, 165,017 shares were advisory shares, and 556,928 shares
were executive shares. The founders shares were immediately vested, and
advisory and executive shares vest upon the occurrence of certain performance
and service conditions. Unvested shares were subject to a repurchase option at
$0.10 per share. During October 1998, the Company's board of directors
determined that the performance and service conditions had been satisfied and
all shares were released from the repurchase option.
The fair value of the Allaire shares and Weld Brown shares exchanged, $96,810
and $91,790, respectively was recorded as a deferred charge at the date the
performance commitment was established and is being amortized over the
respective vesting periods. The value of the shares was determined using a
Black-Scholes valuation model with the following assumptions; expected life of
three years, expected dividend yield and volatility of 50%, and a risk-free
interest rate of approximately 5%.
The Company's 1998 Stock Incentive Compensation Plan ("Option Plan") provides
for options to purchase the Company's common stock which are immediately
exercisable, however, the shares are subject to repurchase by the Company at
the exercise price paid. The Company's right of repurchase lapses over four
years, subject to certain acceleration provisions.
At September 30, 1999, 352,955 of Allaire shares and 467,079 shares of common
stock issued in connection with the Option Plan are subject to repurchase with
an aggregate repurchase amount of approximately $146,000.
Warrants
In June 1999, in connection with an office lease agreement, the Company
issued warrants to purchase 7,500 of the Company's common stock at a price of
$1.25 per share. The warrants are immediately exercisable and expire after the
earlier of August 31, 2004, the sale of substantially all of the Company's
assets, the acquisition of the Company, or an initial public offering. The
value of the warrants of $2,475 is being amortized over the life of the
agreement.
Common Stock Reserved
The Company has reserved sufficient common stock to effect the conversions of
all outstanding shares of the preferred stock. The Company has also reserved
common stock for grants pursuant to the Company's Option Plan and exercise of
common stock warrants.
Stock Option Plan
The Company's Option Plan provides for the issuance of up to 1,498,350
incentive and nonqualified common stock options for employees, directors,
consultants, or advisors of the Company. The Board of Directors is authorized
to administer the Plan and establish the stock option terms, including the
exercise price and vesting periods.
Stock options typically vest over a four-year period, expire five years from
the date of grant, and generally expire ninety days after termination of
employment or services. Stock options are
F-37
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
immediately exercisable as of the options vesting commencement date, however,
shares issued are subject to the Company's right of repurchase which lapses
over the vesting period.
The Company's repurchase price is equal to the amount the holder paid for
such shares. Any shares issued which are no longer subject to the Company's
right to repurchase are subject to the Company's right of first refusal to
purchase any Company shares such holders propose to sell, pledge, or otherwise
transfer.
The Company generally grants stock options with exercise prices equal to the
fair market value of common stock on the date of grant as determined by the
Board of Directors. During 1999 and 1998, the weighted average fair value of
options granted was $0.45 and $0.02, respectively.
On March 18, 1999, the Company amended the Option Plan to provide the
acceleration of vesting of outstanding awards upon a change in control unless
such acceleration would preclude the use of the pooling of interests method in
a business combination. The amendment specifies that for any awards granted
prior to March 18, 1999, upon a change in control, such awards immediately vest
in full and for awards granted on or after March 18, 1999, vesting is
accelerated up to 50% under various circumstances.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
-------- ------
<S> <C> <C>
Options granted.......................................... 796,054 $ 0.20
Exercised................................................ (548,283) 0.19
--------
Outstanding, December 31, 1998........................... 247,771 0.22
Options granted.......................................... 167,250 0.80
Exercised................................................ (106,671) (0.25)
Expired.................................................. (122,950) (0.63)
--------
Outstanding, September 30, 1999.......................... 185,400 0.45
========
</TABLE>
At September 30, 1999, outstanding stock options have exercise prices ranging
from $0.10-$1.25 per share and weighted average remaining contractual life of
4.31 years.
Under APB No. 25, no compensation expense is recognized when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant. Deferred stock-based compensation is
recorded for those situations where the exercise price of a stock option is
lower than the deemed fair value for financial reporting purposes of the
underlying common stock. The Company recorded aggregate deferred stock-based
compensation of $36,280 in the nine-month period ended September 30, 1999. The
deferred stock-based compensation is being amortized over the vesting period of
the underlying options.
Had the stock-based compensation for the Company's stock options been
determined based on the fair value method prescribed in SFAS 123, the Company's
net loss would have been increased by approximately $48,000 and $1,000 for the
nine-month period ended September 30, 1999 and the
F-38
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
period from February 27, 1998 (date of inception) to December 31, 1998,
respectively. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following weighted-
average assumptions: risk-free interest rate of approximately 5%, no dividend
yield, zero volatility, and a weighted-average expected life of the option of
three years. The pro forma disclosure is not necessarily indicative of future
pro-forma disclosures because of the manner in which Statement 123 calculations
are phased in over time.
8. INCOME TAXES:
At September 30, 1999, the Company has a net operating loss carryforward of
approximately $5,430,000, which is available to offset future taxable income
through 2018. The significant components of the Company's deferred tax assets
consist of the net operating loss carryforward, accrued vacation, and stock-
based compensation expense. Deferred tax assets reflect the tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Since the Company's utilization of these deferred tax assets is dependent on
future profits which are not assured, a valuation allowance equal to the
deferred tax assets has been provided.
9. RELATED PARTY TRANSACTIONS:
The Company had a cost-sharing arrangement with Weld Brown whereby the
Company reimbursed Weld Brown for office expenses (including rent, amortization
of applicable computers and furniture, and office supplies) and 50% of the
office administrator's salary. The cost sharing arrangement ceased upon the
Company acquiring its own facility. Total payments to Weld Brown for the period
from February 27, 1998 (date of inception) and for the nine-month period ended
September 30, 1999 were approximately $158,500 and $32,900, respectively.
10. COMMITMENTS AND CONTINGENCIES:
Operating Lease
The Company leases office facilities in Seattle, Washington and certain
equipment. Rent expense is amortized on a straight-line basis over the periods
in which the benefit from the property is derived. Minimum future rental
payments under these noncancelable operating leases are approximately as
follows:
<TABLE>
<S> <C>
2000............................................................ $ 369,000
2001............................................................ 473,000
2002............................................................ 553,000
2003............................................................ 627,000
2004............................................................ 621,000
Thereafter...................................................... --
----------
$2,643,000
==========
</TABLE>
F-39
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense was approximately $50,900 and $135,000 for the period from
February 27, 1998 (date of inception) to December 31, 1998, and for the nine-
month period ended September 30, 1999, respectively.
In June 1999, the Company entered into a lease agreement which provides for
the landlord to reimburse the Company for tenant improvements at the rate of
$5.00 per square rentable area. Reimbursements are payable in phases, upon
completion, and are not to exceed an aggregate of $120,215.
11. SUBSEQUENT EVENT:
Effective December 14, 1999, the Company entered into an agreement whereby
all of the outstanding stock and options of the Company would be acquired by
Loudeye Technologies, Inc. in exchange for 2,508,848 shares of Loudeye common
stock and 91,134 options to acquire Loudeye Common Stock.
F-40
<PAGE>
[Inside back cover artwork]
TO COME
Text reads Companies committed to excellence of audio and video on the
Internet. A partial customer list with customer logos appears below the text.
Beneath the customer list, the Loudeye logo appears centered.
<PAGE>
[LOGO OF
LOUDEYE TECHNOLOGIES, INC.]
(formerly encoding.com, Inc.)
Until , 2000 (25 days after commencement of this
offering), all dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Loudeye in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
Amount
to be
Paid
--------
<S> <C>
SEC registration fee.................................................. $ 15,180
NASD filing fee....................................................... 6,250
Nasdaq National Market listing fee.................................... 1,000
Printing and engraving expenses....................................... 300,000
Legal fees and expenses............................................... 350,000
Accounting fees and expenses.......................................... 200,000
Blue Sky qualification fees and expenses.............................. 5,000
Transfer agent and registrar fees..................................... 15,000
Miscellaneous fees and expenses....................................... 20,000
--------
Total............................................................... $911,150
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article VII of
Loudeye's certificate of incorporation and sections 6.1 and 6.2 of Article VI
of Loudeye's bylaws provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, Loudeye has entered into indemnification
agreements with its directors and officers. The indemnification agreements may
require Loudeye, among other things, to indemnify its directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities arising from willful misconduct of culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' insurance if
available on reasonable terms. The underwriting agreement (Exhibit 1.1 hereto)
also provides for cross indemnification among Loudeye and the underwriters with
respect to certain matters, including matters arising under the Securities Act
of 1933.
Item 15. Recent Sales of Unregistered Securities
(a) Since inception in August 1997, Loudeye has issued and sold (without
payment of any selling commission to any person except as indicated in (a)(6))
the following unregistered securities:
1. In March 1998, Loudeye issued 4,712,000 shares of Series A preferred
stock and 5,288,000 shares of Common Stock, in connection with the
conversion of Encoding.com, LLC into a Delaware corporation. The Series
A preferred stock is convertible into an aggregate of 4,712,000 shares
of common stock to two individuals in exchange for conversion of their
membership interests in the predecessor LLC.
II-1
<PAGE>
2. In June 1998, Loudeye paid $225,000 and issued 271,787 shares of Series
A preferred stock to one individual in exchange for partial cancellation
of indebtedness, convertible into an aggregate of 271,787 shares of
common stock for an aggregate purchase price of $229,116.44.
3. In June and August 1998, Loudeye issued and sold shares of Series B
preferred stock convertible into an aggregate of 3,259,194 shares of
common stock to a total of six investors for an aggregate purchase price
of $2,747,500.54.
4. In April and August 1999, Loudeye issued and sold shares of Series C
preferred stock convertible into an aggregate of 5,309,266 shares of
common stock to a total of 25 investors for an aggregate purchase price
of $10,087,605.40.
5. In June 1999, Loudeye issued a warrant to purchase 41,053 shares of
Series C preferred stock, in connection with an equipment lease line,
convertible into 41,053 shares of common stock.
6. In December 1999, Loudeye issued and sold shares of Series D preferred
stock convertible into an aggregate of 7,510,989 shares of common stock
to 44 investors for an aggregate purchase price of $47,844,999.00. In
connection with the Series D round of financing, we paid our placement
agent a commission of $2,267,249.90.
7. In December 1999, Loudeye issued a warrant to purchase a total of
650,000 shares of common stock, in connection with a commercial
agreement, convertible into a total of 650,000 shares of common stock.
8. In December 1999, Loudeye issued 2,508,848 shares of common stock in
exchange for all outstanding capital stock and the assumption of all
outstanding options of Alive.com.
9. As of December 20, 1999, 845,810 shares of common stock had been issued
upon exercise of options or pursuant to restricted stock purchase
agreements and 4,129,252 shares of common stock were issuable upon
exercise of outstanding options under Loudeye's 1998 stock option plan.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1)-(8) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering. The issuances
described in Items 15(a)(9) were deemed to be exempt from registration under
the Securities Act in reliance upon Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit
plans or pursuant to a written contract relating to compensation, as provided
by Rule 701. In addition, such issuances were deemed to be exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends where affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about Loudeye.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization dated November 19, 1999 between
Registrant and Alive.com, Inc.
3.1 Fifth Amended and Restated Certificate of Incorporation of the
Registrant
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.
3.3 Certificate of Amendment to Fifth Amended Certificate of Incorporation
of the Registrant dated December 17, 1999.
3.4* Bylaws of the Registrant, as amended.
4.1* Form of the Registrant's common stock certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1 Form of Indemnification Agreement between the Registrant and each of
its officers and directors.
10.2 1998 Stock Option Plan, as amended.
10.3 Alive.com, Inc. 1998 Stock Option Plan.
10.4* 2000 Stock Option Plan.
10.5* 2000 Director Stock Option Plan.
10.6* 2000 Employee Stock Purchase Plan.
10.7 Series A Preferred Stock Subscription Agreement dated March 26, 1998
among the Registrant and Martin Tobias.
10.8 Series A Preferred Stock Subscription Agreement dated March 26, 1998
among the Registrant and Alex Tobias.
10.9 Series A Preferred Stock Note Conversion Agreement dated June 5, 1998
among the Registrant and Martin Tobias.
10.10 Series B Preferred Stock Purchase Agreement dated June 5, 1998 among
the Registrant and Purchasers of Series B preferred stock.
10.11 Series C Preferred Stock Purchase Agreement dated April 30, 1999 among
the Registrant and Purchasers of Series C preferred stock.
10.12 Series C Preferred Stock Purchase Agreement dated August 6, 1999 among
the Registrant and Purchasers of Series C preferred stock.
10.13 Warrant to Purchase Series C Preferred Stock dated June 22, 1999
between the Registrant and Dominion Capital Management, L.L.C.
10.14 Series D Preferred Stock Purchase Agreement dated December 14, 1999
among the Registrant and Purchasers of Series D preferred stock.
10.15 Amended and Restated Investors' Rights Agreement dated December 14,
1999 among the Registrant and certain holders of our preferred stock.
10.16 Warrant to Purchase Common Stock dated December 17, 1999 between
Registrant and Valley Media, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.17 Lease Agreement dated August 10, 1999 between the Registrant and Times
Square Building LLC
for offices at Times Square Building, 414 Olive Way, Suite 300,
Seattle, Washington.
10.18 Lease Agreement dated September 1, 1998 between the Registrant and
Martin Tobias for offices at 3406 E. Union Street, Seattle,
Washington.
10.19 Lease Agreement dated October 28, 1999 between the Registrant and
Westlake Park Associates for offices at Centennial Building, 1904
Fourth Avenue, Seattle, Washington.
10.20 Lease Agreement dated June 7, 1999 between Registrant and MSI 83 King
LLC for offices at 83 King Street, Seattle, Washington.
10.21 Lease Agreement dated November 9, 1999 between Registrant and Downtown
Entertainment Associates, LP for offices at 1424 Second Street, Santa
Monica, California.
10.22+ Encoding Services Agreement dated June 30, 1999 between the Registrant
and EMusic.com, Inc.
10.23+ Services Agreement dated December 17, 1999 between Registrant and
Valley Media, Inc.
10.24 Imperial Bank Starter Kit Loan and Security Agreement dated August 4,
1998 between the Registrant and Imperial Bank.
10.25 Loan and Security Agreement with Dominion Venture Finance L.L.C. dated
June 15, 1999 between the Registrant and Dominion Venture Finance
L.C.C.
16.1 Letter from Ernst & Young LLP Regarding Change in Accountants.
23.1 Consent of Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.
(b) Financial Statement Schedules
All financial statement schedules not listed are omitted because they are
inapplicable or the requested information is shown in the financial statements
of the Registrant or the related notes to the financial statements.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
II-4
<PAGE>
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington, on December 22, 1999.
Loudeye Technologies, Inc.
/s/ Martin G. Tobias
By: _________________________________
Martin G. Tobias
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Martin G. Tobias and Larry Culver, and each one
of them, his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments), and any and all registration
statements filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, in connection with or related to the offering contemplated by this
registration statement and its amendments, if any, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof. This Power of Attorney may be signed in
several counterparts.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form S-1 has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Martin G. Tobias Chief Executive Officer and December 22, 1999
- ---------------------------- Director (Principal Executive
Martin G. Tobias Officer)
/s/ Larry Culver Chief Financial Officer December 22, 1999
- ---------------------------- (Principal Financial and
Larry Culver Accounting Officer)
/s/ Charles P. Waite, Jr. Director December 22, 1999
- ----------------------------
Charles P. Waite, Jr.
/s/ Stuart J. Ellman Director December 22, 1999
- ----------------------------
Stuart J. Ellman
/s/ Johan Liedgren Director December 22, 1999
- ----------------------------
Johan Liedgren
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization dated November 19, 1999 between
Registrant and Alive.com, Inc.
3.1 Fifth Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.
3.3 Certificate of Amendment to Fifth Amended Certificate of Incorporation
of the Registrant dated December 17, 1999.
3.4* Bylaws of the Registrant, as amended.
4.1* Form of the Registrant's common stock certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1 Form of Indemnification Agreement between the Registrant and each of
its officers and directors.
10.2 1998 Stock Option Plan, as amended.
10.3 Alive.com, Inc. 1998 Stock Option Plan.
10.4* 2000 Stock Option Plan.
10.5* 2000 Director Stock Option Plan.
10.6* 2000 Employee Stock Purchase Plan.
10.7 Series A Preferred Stock Subscription Agreement dated March 26, 1998
among the Registrant and Martin Tobias.
10.8 Series A Preferred Stock Subscription Agreement dated March 26, 1998
among the Registrant and Alex Tobias.
10.9 Series A Preferred Stock Note Conversion Agreement dated June 5, 1998
among the Registrant and Martin Tobias.
10.10 Series B Preferred Stock Purchase Agreement dated June 5, 1998 among
the Registrant and Purchasers of Series B preferred stock.
10.11 Series C Preferred Stock Purchase Agreement dated April 30, 1999 among
the Registrant and Purchasers of Series C preferred stock.
10.12 Series C Preferred Stock Purchase Agreement dated August 6, 1999 among
the Registrant and Purchasers of Series C preferred stock.
10.13 Warrant to Purchase Series C Preferred Stock dated June 22, 1999
between the Registrant and Dominion Capital Management, L.L.C.
10.14 Series D Preferred Stock Purchase Agreement dated December 14, 1999
among the Registrant and Purchasers of Series D preferred stock.
10.15 Amended and Restated Investors' Rights Agreement dated December 14,
1999 among the Registrant and certain holders of our preferred stock.
10.16 Warrant to Purchase Common Stock dated December 17, 1999 between
Registrant and Valley Media, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.17 Lease Agreement dated August 10, 1999 between the Registrant and Times
Square Building LLC for offices at Times Square Building, 414 Olive
Way, Suite 300, Seattle, Washington.
10.18 Lease Agreement dated September 1, 1998 between the Registrant and
Martin Tobias for offices at 3406 E. Union Street, Seattle,
Washington.
10.19 Lease Agreement dated October 28, 1999 between the Registrant and
Westlake Park Associates for offices at Centennial Building, 1904
Fourth Avenue, Seattle, Washington.
10.20 Lease Agreement dated June 7, 1999 between Registrant and MSI 83 King
LLC for offices at 83 King Street, Seattle, Washington.
10.21 Lease Agreement dated November 9, 1999 between Registrant and Downtown
Entertainment Associates, LP for offices at 1424 Second Street, Santa
Monica, California.
10.22+ Encoding Services Agreement dated June 30, 1999 between the Registrant
and EMusic.com, Inc.
10.23+ Services Agreement dated December 17, 1999 between Registrant and
Valley Media, Inc.
10.24 Imperial Bank Starter Kit Loan and Security Agreement dated August 4,
1998 between the Registrant and Imperial Bank.
10.25 Loan and Security Agreement with Dominion Venture Finance L.L.C. dated
June 15, 1999 between the Registrant and Dominion Venture Finance
L.C.C.
16.1 Letter from Ernst & Young LLP Regarding Change in Accountants.
23.1 Consent of Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
dated as of November 19, 1999
by and between
ENCODING.COM, INC.,
and
ALIVE.COM, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION ONE................................................................. 1
1. The Merger........................................................ 1
1.1 The Merger.................................................... 1
1.2 Closing....................................................... 2
1.3 Effect of the Merger.......................................... 2
1.4 Certificate of Incorporation; Bylaws.......................... 2
1.5 Directors and Officers........................................ 3
1.6 Effect on Capital Stock....................................... 3
1.7 Surrender of Certificates..................................... 6
1.8 No Further Ownership Rights in Alive Common Stock............. 7
1.9 Tax and Accounting Consequences............................... 7
1.10 Taking of Necessary Action; Further Action.................... 8
1.11 Withholding................................................... 8
1.12 Lost, Stolen or Destroyed Certificates........................ 8
1.13 Closing of Transfer Books..................................... 8
SECTION TWO................................................................. 8
2. Representations and Warranties of Alive........................... 8
2.1 Organization Standing and Power; Subsidiaries................. 9
2.2 Articles of Incorporation and Bylaws.......................... 10
2.3 Capital Structure............................................. 10
2.4 Authority..................................................... 11
2.5 No Conflicts; Required Filings and Consents................... 12
2.6 Financial Statements.......................................... 12
2.7 Absence of Undisclosed Liabilities............................ 12
2.8 Absence of Certain Changes.................................... 13
2.9 Litigation.................................................... 14
2.10 Restrictions on Business Activities........................... 15
2.11 Permits....................................................... 15
2.12 Title to Property............................................. 15
2.13 Intellectual Property......................................... 16
2.14 Compliance with Environmental Requirements.................... 18
2.15 Taxes......................................................... 18
2.16 Employee Benefit Plans........................................ 20
2.17 Certain Agreements Affected by the Merger..................... 23
2.18 Employee Matters.............................................. 23
2.19 Material Contracts............................................ 24
2.20 Interested Party Transactions................................. 25
2.21 Insurance..................................................... 26
2.22 Compliance With Laws.......................................... 26
2.23 Minute Books.................................................. 26
2.24 Complete Copies of Materials.................................. 26
</TABLE>
<PAGE>
2.25 Bank Accounts................................................. 26
2.26 Brokers' and Finders' Fees.................................... 26
2.27 Information Statement......................................... 26
2.28 Voting Agreement.............................................. 27
2.29 Vote Required................................................. 27
2.30 Board Approval................................................ 27
2.31 Compliance with the Hart-Scott-Rodino Act..................... 27
2.32 Accounting and Tax Matters.................................... 27
2.33 Third Party Consents.......................................... 27
2.34 Year 2000..................................................... 27
2.35 Representations Complete...................................... 28
SECTION THREE............................................................... 28
3. Representations and Warranties of Encoding.com................ 28
3.1 Organization, Good Standing and Qualification................. 28
3.2 Capitalization................................................ 28
3.3 Subsidiaries.................................................. 29
3.4 Authority..................................................... 29
3.5 Valid Issuance of Securities.................................. 30
3.6 No Conflict; Required Filings and Consents.................... 30
3.7 Litigation.................................................... 30
3.8 Intellectual Property......................................... 31
3.9 Compliance with Contracts and Other Instruments............... 31
3.10 Agreements; Action............................................ 32
3.11 Representations Complete...................................... 32
3.12 No Conflict of Interest....................................... 33
3.13 Title to Property and Assets.................................. 33
3.14 Financial Statements.......................................... 33
3.15 Changes....................................................... 34
3.16 Employee Benefit Plans........................................ 35
3.17 Tax Returns and Payments...................................... 35
3.18 Insurance..................................................... 35
3.19 Labor Agreements and Actions.................................. 35
3.20 Confidential Information and Invention Assignment Agreements.. 35
3.21 Permits....................................................... 35
3.22 Corporate Documents........................................... 35
3.23 Liabilities................................................... 36
3.24 Accounting and Tax Matters.................................... 36
3.25 Year 2000..................................................... 36
3.26 Information Statement......................................... 36
3.27 Third Party Consents.......................................... 36
3.28 Certain Agreements Affected by the Merger..................... 36
-ii-
<PAGE>
SECTION FOUR ............................................................... 37
4. Conduct Prior to the Effective Time.............................. 37
4.1 Conduct of Business of Alive and Encoding.com................. 37
4.2 Conduct of Business of Alive.................................. 38
SECTION FIVE................................................................ 40
5. Additional Agreements............................................ 40
5.1 Best Efforts and Further Assurances........................... 40
5.2 Consents; Cooperation......................................... 40
5.3 Access to Information......................................... 42
5.4 Confidentiality............................................... 42
5.5 Public Disclosure............................................. 42
5.6 FIRPTA........................................................ 42
5.7 State Statutes................................................ 42
5.8 Escrow Agreement.............................................. 43
5.9 Blue Sky Laws................................................. 43
5.10 Stockholder Approval.......................................... 43
5.11 Special Meeting of Stockholders............................... 44
5.12 Voting Agreement.............................................. 44
5.13 Maintenance of Alive Indemnification Obligations.............. 44
SECTION SIX................................................................. 45
6. Conditions to the Merger......................................... 45
6.1 Conditions to Obligations of Each Party to Effect the Merger.. 45
6.2 Additional Conditions to Obligations of Alive................. 46
6.3 Additional Conditions to the Obligations of Encoding.com...... 47
SECTION SEVEN............................................................... 49
7. Termination, Amendment and Waiver................................ 49
7.1 Termination................................................... 49
7.2 Effect of Termination......................................... 50
7.3 Expenses...................................................... 50
7.4 Amendment..................................................... 50
7.5 Extension; Waiver............................................. 51
SECTION EIGHT............................................................... 51
8. Escrow and Indemnification....................................... 51
8.1 Survival of Representations and Warranties.................... 51
8.2 Escrow Fund................................................... 51
8.3 Indemnification............................................... 51
8.4 Damages Threshold............................................. 52
8.5 Escrow Period................................................. 52
8.6 Distributions; Voting......................................... 53
8.7 Method of Asserting Claims.................................... 53
8.8 Representative of the Stockholders; Power of Attorney......... 53
-iii-
<PAGE>
8.9 Adjustment to Escrow.......................................... 54
8.10 Indemnity by Encoding.com..................................... 54
SECTION NINE................................................................ 56
9. General Provisions................................................. 56
9.1 Survival of Warranties........................................ 56
9.2 Notices....................................................... 56
9.3 Interpretation................................................ 57
9.4 Counterparts.................................................. 57
9.5 Entire Agreement; Nonassignability; Parties in Interest....... 57
9.6 Severability.................................................. 58
9.7 Remedies Cumulative........................................... 58
9.8 Governing Law................................................. 58
9.9 Rules of Construction......................................... 58
9.10 Amendments and Waivers........................................ 58
-iv-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------
This Agreement and Plan of Reorganization (the "Agreement") is made and
---------
entered into as of November 19, 1999, by and among Encoding.com, Inc., a
Delaware corporation ("Encoding.com") and Alive.com, Inc., a Washington
------------
corporation ("Alive").
-----
RECITALS
--------
A. The Boards of Directors of Alive and Encoding.com believe it is in the
best interests of their respective companies and the stockholders of their
respective companies that Alive and Encoding.com combine into a single company
through the merger of Alive with and into Encoding.com (the "Merger") and, in
------
furtherance thereof, each have unanimously approved the Merger and have approved
and adopted this Agreement as a plan of reorganization. Pursuant to the Merger,
among other things, the outstanding shares of capital stock of Alive shall be
converted into shares of the Common Stock of Encoding.com, par value $0.001 per
share (the "Encoding.com Common Stock"), at the rates set forth herein.
-------------------------
B. Alive and Encoding.com desire to make certain representations and
warranties and other agreements in connection with the Merger.
C. Concurrently with the execution of this Agreement, and as a condition
and inducement to Encoding.com's willingness to enter into this Agreement,
certain shareholders of Alive have entered into Voting Agreements substantially
in the form attached hereto as Exhibit C.
---------
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and that the Merger will be treated as a
----
"reorganization" within the meaning of Section 368(a) of the Code.
AGREEMENT
---------
The parties hereby agree as follows:
SECTION ONE
1. The Merger.
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1.1 The Merger.
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(a) Subject to and upon the terms and conditions of this
Agreement, an Agreement and Plan of Merger and Articles of Merger in such
mutually acceptable form as is required by the relevant provisions of the
Washington Business Corporations Act (the "WBCA") in substantially the
----
forms attached hereto as Exhibit A-1 and Exhibit A-2 (collectively, the
----------- -----------
"Articles of Merger") shall be duly prepared, executed and acknowledged by
------------------
Encoding.com and
<PAGE>
Alive, and thereafter delivered to the Secretary of State of the State of
Washington for filing on the Closing or before the Closing Date (as defined
below).
(b) Subject to and upon the terms and conditions of this Agreement, a
Certificate of Merger in such mutually acceptable form as is required by the
relevant provisions of the Delaware General Corporations Law (the "Delaware
--------
Law") in substantially the form attached hereto as Exhibit B (the "Certificate
- --- --------- -----------
of Merger" and together with the Articles of Merger, the "Merger Documents")
- --------- ----------------
shall be duly prepared, executed and acknowledged by Encoding.com and Alive, and
thereafter delivered to the Secretary of State of the State of Delaware for
filing on the Closing or before the Closing Date (as defined below).
(c) The Merger shall become effective upon the due and valid filing
of the Articles of Merger with the Secretary of State of the State of Washington
and the Certificate of Merger with the Secretary of State of the State of
Delaware or at such date and time thereafter as is provided in Section 1.2 (the
"Effective Time").
--------------
1.2 Closing. The closing of the transactions contemplated by this
-------
Agreement (the "Closing") shall take place as soon as practicable, (and in no
-------
event later than 5 business days after the satisfaction or waiver of each of the
conditions set forth in Section 4 below or at such other time as the parties
agree (the "Closing Date"). The Closing shall take place at the offices of
------------
Venture Law Group, 4700 Carillon Point, Kirkland, WA, or at such other location
as the parties agree.
1.3 Effect of the Merger.
--------------------
(a) At the Effective Time, Alive shall be merged with and into
Encoding.com, the separate corporate existence of Alive shall cease and
Encoding.com shall continue as the surviving corporation of the Merger.
(b) At the Effective Time, the effect of the Merger shall be as
provided in this Agreement, the Merger Documents and the applicable provisions
of the WBCA and Delaware Law. Without limiting the generality of the foregoing,
at and after the Effective Time, Encoding.com shall possess all the rights,
privileges, powers and franchises, and be subject to all the restrictions,
disabilities and duties of Alive.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) Unless otherwise determined by Encoding.com and Alive prior to the
Effective Time, the Certificate of Incorporation of Encoding.com as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of Encoding.com following the Merger.
(b) Unless otherwise determined by Encoding.com and Alive prior to the
Effective Time, the Bylaws of Encoding.com as in effect immediately prior to the
Effective Time shall be the Bylaws of Encoding.com following the Merger.
-2-
<PAGE>
1.5 Directors and Officers. At the Effective Time, the directors
----------------------
of Encoding.com immediately prior to the Effective Time shall be the directors
of Encoding.com following the Merger, and the officers of Encoding.com
immediately prior to the Effective Time, shall be the officers of Encoding.com
following the Merger, in each case until their respective successors are duly
elected or appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without
-----------------------
any action on the part of Encoding.com or Alive or any of their respective
stockholders, the following shall occur at the Effective Time:
(a) Conversion of Alive Common Stock. Each share of Common Stock of
--------------------------------
Alive, par value $0.01 per share (including shares of Alive Common Stock issued
upon conversion of the Series A Convertible Preferred Stock of Alive and the
Series B Convertible Preferred Stock of Alive or any other convertible security)
(collectively, the "Alive Common Stock"), that is issued and outstanding
------------------
immediately prior to the Effective Time (other than shares to be cancelled
pursuant to Section 1.6(b) and shares, if any, held by persons who have not
voted such shares for approval of the Merger, or have not delivered a written
consent thereto, and with respect to which such persons shall become entitled to
exercise dissenters' rights in accordance with 23B.13 of the WBCA ("Dissenting
----------
Shares")) will, by virtue of the Merger and as of the Effective Time, shall be
- ------
converted into and exchanged for such fraction of a fully paid and nonassessable
share of Encoding.com Common Stock as is equal to the Exchange Ratio (as defined
below) (such shares of Encoding.com Common Stock being received as a result of
such conversion and exchange, together with all options to purchase Encoding.com
Common Stock pursuant to Section 1.6(c), shall be referred to as the "Merger
------
Consideration"). All shares of Alive Common Stock, when so converted, shall no
- -------------
longer be outstanding and shall automatically be cancelled and retired and shall
cease to exist, and each holder of a certificate representing any such shares of
Alive Common Stock shall cease to have any rights with respect thereto, except
the right to receive the Merger Consideration therefor upon the surrender of
such certificate in accordance with Section 1.7, without interest.
For purposes of this Agreement, the "Exchange Ratio" will be a
--------------
fraction, the numerator of which is two million six hundred thousand (2,600,000)
and the denominator of which is the sum of all outstanding shares of Alive
Common Stock plus all outstanding warrants, options or other rights to acquire
Alive Common Stock as of the Effective Time.
(b) Cancellation of Alive Common Stock Owned by Encoding.com or Alive.
----------------------------------------------------------------
At the Effective Time, all shares of Alive Common Stock that are owned by Alive
as treasury stock, each share of Alive Common Stock owned by Encoding.com or
Alive immediately prior to the Effective Time shall be cancelled and
extinguished without any conversion thereof.
(c) Alive Stock Options. At the Effective Time, each stock option
-------------------
that is then outstanding under the Alive 1998 Stock Incentive Compensation Plan
(the "Alive Option Plan"), whether vested or unvested (an "Alive Option"), shall
----------------- ------------
be assumed by Encoding.com in accordance with the terms (as in effect as of the
date of this Agreement) of the
-3-
<PAGE>
Alive Option Plan and the stock option agreement by which such Alive Option is
evidenced. All rights with respect to Alive Common Stock under outstanding Alive
Options shall thereupon be converted into rights with respect to Encoding.com
Common Stock. Accordingly, from and after the Effective Time, (a) each Alive
Option assumed by Encoding.com may be exercised solely for shares of
Encoding.com Common Stock, (b) the number of shares of Encoding.com Common Stock
subject to each such assumed Alive Option shall be equal to the number of shares
of Alive Common Stock that were subject to such Alive Option immediately prior
to the Effective Time multiplied by the Exchange Ratio, rounded down to the
nearest whole number of shares of Encoding.com Common Stock (collectively, the
"Option Shares"), (c) the per share exercise price for the Encoding.com Common
- --------------
Stock issuable upon exercise of each such assumed Alive Option shall be
determined by dividing the exercise price per share of Alive Common Stock
subject to such Alive Option, as in effect immediately prior to the Effective
Time, by the Exchange Ratio, and rounding the resulting exercise price up to the
nearest whole cent, and (d) all restrictions on the exercise of each such
assumed Alive Option shall continue in full force and effect, and the term,
exercisability, vesting schedule and other provisions of such Alive Option shall
otherwise remain unchanged; provided, however, that each such assumed Alive
Option shall, in accordance with its terms, be subject to further adjustment as
appropriate to reflect any stock split, reverse stock split, stock dividend,
recapitalization or other similar transaction effected by Encoding.com after the
Effective Time. Alive and Encoding.com shall take all action that may be
necessary (under the Alive Option Plan and otherwise) to effectuate the
provisions of this Section 1.6(c). It is the intention of the parties that the
Alive Options assumed by Encoding.com qualify following the Effective Time as
incentive stock options as defined in Section 422 of the Code to the extent such
Alive Options qualified as incentive stock options prior to the Effective Time,
and this Section 1.6(c) shall be interpreted consistent with such intent.
Following the Closing, Encoding.com will send to each holder of an assumed Alive
Option a written notice setting forth (i) the number of shares of Encoding.com
Common Stock subject to such assumed Alive Option, and (ii) the exercise price
per share of Encoding.com Common Stock issuable upon exercise of such assumed
Alive Option.
(d) Adjustments; Maximum Issuance. The Exchange Ratio shall be
-----------------------------
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Encoding.com Common Stock or Alive Common Stock), reorganization,
recapitalization or other like change with respect to Encoding.com Common Stock
or Alive Common Stock occurring after the date of this Agreement and prior to
the Effective Time. The maximum number of shares of Encoding.com Common Stock to
be issued (including Encoding.com Common Stock to be reserved for issuance upon
exercise of Alive Options) in exchange for the acquisition by Encoding.com of
all outstanding Alive Common Stock and all unexpired and unexercised options and
warrants to acquire Alive Common Stock shall be 2,600,000 shares (as adjusted
for stock splits, recapitalizations and the like) of Encoding.com Common Stock,
such number of shares to be reduced by the number of shares of Encoding.com
Common Stock with respect to Dissenting Shares, if any, in accordance with
Section 1.6(a) above. No other adjustment shall be made in the number of shares
of Encoding.com Common Stock issued in the Merger as a result of (i) any
increase or decrease in the price of Encoding.com Common Stock or Preferred
Stock prior to the Effective Time, or (ii) any cash proceeds received by Alive
from the date of this Agreement to
-4-
<PAGE>
the Closing Date pursuant to the exercise of currently outstanding options or
warrants to acquire Alive Common Stock.
(f) Dissenters' Rights.
------------------
(i) Notwithstanding anything to the contrary contained in this
Agreement, any Dissenting Shares shall not be converted into or represent the
right to receive Encoding.com Common Stock in accordance with Section 1.6, and
the holder or holders of such shares shall be entitled only to such rights as
may be granted to such holder or holders in Chapter 23B.13 of the WBCA;
provided, however, that if the status of any such holder as a "dissenter" shall
not be perfected, or if such holder shall lose his, her or its status as a
"dissenter," then, as of the later of the Effective Time or the time of the
failure to perfect such status or the loss of such status, such shares shall
automatically be converted into and shall represent only the right to receive
(upon the surrender of the certificate or certificates representing such shares)
Encoding.com Common Stock in accordance with this Section 1.6.
(ii) Alive shall give Encoding.com (i) prompt notice of any
written demand received by Alive prior to the Effective Time to require Alive to
purchase shares of capital stock of Alive pursuant to Chapter 23B.13 of the WBCA
and of any other demand, notice or instrument delivered to Alive prior to the
Effective Time pursuant to the WBCA, and (ii) the opportunity to participate in
all negotiations and proceedings with respect to any such demand, notice or
instrument; provided, however, that any participation by Encoding.com shall not
prevent Alive from satisfying its obligations to holders of Dissenting Shares
under the WBCA. Subject to the foregoing, Alive shall not make any payment
(unless such payment is pursuant to a court order in which event Alive shall
give Encoding.com notice of any such court order or request therefor as soon as
practicable) or settlement offer prior to the Effective Time with respect to any
such demand unless Encoding.com shall have consented in writing to such payment
or settlement offer.
(g) Fractional Shares. No fraction of a share of Encoding.com
-----------------
Common Stock will be issued, but in lieu thereof each holder of shares of Alive
Common Stock who would otherwise be entitled to a fraction of a share of
Encoding.com Common Stock (after aggregating all fractional shares of
Encoding.com Common Stock to be received by such holder) shall receive from
Encoding.com an amount of cash (rounded to the nearest whole cent) equal to the
product of (i) such fraction, multiplied by (ii) the fair market value of a
share of Encoding.com Common Stock immediately prior to the Effective Time, as
determined in good faith by Encoding.com's Board of Directors.
(h) Restricted Shares. Shares of Alive Common Stock which are
-----------------
subject to repurchase by Alive in the event the holder thereof ceases to be
employed by Alive ("Alive Restricted Shares") shall be converted into
-----------------------
Encoding.com Common Stock on the same basis as provided in subsection (a) above
and shall be registered in such holder's name, but shall be held by Encoding.com
pursuant to the existing agreements in effect on the date of this Agreement.
Holders of the Alive Restricted Shares are identified on Schedule 1.6(h)
together with the vesting schedules associated with such shares.
-5-
<PAGE>
1.7 Surrender of Certificates.
-------------------------
(a) Encoding.com to Provide Common Stock and Cash. Promptly after
---------------------------------------------
the Effective Time, Encoding.com shall make available for exchange in accordance
with this Section 1, through such reasonable procedures as Encoding.com may
adopt, (i) the shares of Encoding.com Common Stock issuable pursuant to Section
1.6(a) less the number of shares of Encoding.com Common Stock to be deposited
into the Escrow Fund (as defined in Section 8) pursuant to the requirements of
Section 8 and (ii) cash in an amount sufficient to permit payment of cash in
lieu of fractional shares pursuant to Section 1.6(g).
(b) Exchange Procedures. Promptly after the Effective Time,
-------------------
Encoding.com shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
------------
Time represented outstanding shares of Alive Common Stock, whose shares were
converted into the right to receive shares of Encoding.com Common Stock (and
cash in lieu of fractional shares) pursuant to Section 1.6, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon receipt of the
Certificates by Encoding.com, and shall be in such form and have such other
provisions as is customary and as Encoding.com may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Encoding.com Common Stock (and cash in
lieu of fractional shares). Upon surrender of a Certificate for cancellation to
Encoding.com or to such other agent or agents as may be appointed by
Encoding.com, together with such letter of transmittal, duly completed and
validly executed in accordance with the instructions thereto, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing the number of whole shares of Encoding.com Common Stock (less the
number of shares of Encoding.com Common Stock to be deposited in the Escrow Fund
on such holder's behalf pursuant to Section 8 below) and payment in lieu of
fractional shares which such holder has the right to receive pursuant to Section
1.6, and the Certificate so surrendered shall forthwith be cancelled. Until so
surrendered, each Certificate will be deemed from and after the Effective Time,
for all corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of Encoding.com Common Stock into which
such shares of Alive Common Stock shall have been so converted and the right to
receive an amount in cash in lieu of the issuance of any fractional shares in
accordance with Section 1.6. As soon as practicable after the Effective Time,
and subject to and in accordance with the provisions of Section 8 below,
Encoding.com shall cause to be distributed to the Escrow Agent (as defined in
Section 8 below) a certificate or certificates representing 260,000 shares of
Encoding.com Common Stock which shall be registered in the name of the Escrow
Agent as nominee for the holders of Certificates cancelled pursuant to this
Section 1.7. Such shares shall be beneficially owned by such holders and shall
be held in escrow and shall be available to compensate Encoding.com for certain
damages as provided in Section 8 below. To the extent not used for such
purposes, such shares shall be released, all as provided in Section 8 below.
(c) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.7, neither Encoding.com nor Alive shall be liable to any person for
any amount
-6-
<PAGE>
properly paid to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(d) Dissenting Shares. The provisions of this Section 1.7 shall also
-----------------
apply to Dissenting Shares that lose their status as such, except that the
obligations of Encoding.com under this Section 1.7 shall commence on the date of
loss of such status and the holder of such shares shall be entitled to receive
in exchange for such shares the number of shares of Encoding.com Common Stock to
which such holder is entitled pursuant to Section 1.6 hereof and the amount of
cash payable to such holder pursuant to Section 1.6(h), if any.
(e) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions with respect to Encoding.com Common Stock with a record date
after the Effective Time will be paid to the holder of any unsurrendered
Certificate with respect to the shares of Encoding.com Common Stock represented
thereby until the holder of record of such Certificate shall surrender such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the Certificates
representing whole shares of Encoding.com Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of any
such dividends or other distributions with a record date after the Effective
Time payable (but for the provisions of this Section 1.7(e)) with respect to
such shares of Encoding.com Common Stock.
(f) Transfers of Ownership. If any certificate for shares of
----------------------
Encoding.com Common Stock is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered, it will be a
condition of such issuance that the certificate so surrendered will be properly
endorsed and otherwise in proper form for transfer and that the person
requesting such exchange will have paid to Encoding.com or any agent designated
by it any transfer or other taxes required by reason of the issuance of a
certificate for shares of Encoding.com Common Stock in any name other than that
of the registered holder of the certificate surrendered, or established to the
reasonable satisfaction of Encoding.com or any agent designated by it that such
tax has been paid or is not payable.
1.8 No Further Ownership Rights in Alive Common Stock. All shares of
-------------------------------------------------
Encoding.com Common Stock issued upon the surrender for exchange of shares of
Alive Common Stock in accordance with the terms hereof (including any cash paid
in lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Alive Common Stock, and
there shall be no further registration of transfers on the records of Alive or
Encoding.com of shares of Alive Common Stock which were outstanding immediately
prior to the Effective Time. If, after the Effective Time, Certificates are
presented to Encoding.com for any reason, they shall be cancelled and exchanged
as provided in this Section 1.
1.9 Tax and Accounting Consequences. It is intended by the parties
-------------------------------
that the Merger shall constitute a "reorganization" and that this Agreement be
treated as a plan of reorganization within the meaning of Section 368 of the
Code and be accounted for as a purchase.
-7-
<PAGE>
1.10 Taking of Necessary Action; Further Action. If at any time
------------------------------------------
after the Effective Time, any further action is necessary or desirable to carry
out the purposes of this Agreement and to vest Encoding.com with full right,
title and possession to all assets, property, rights, privileges, powers and
franchises of Alive, the officers and directors of Alive are fully authorized in
the name of their corporation or otherwise to take, and will take, all such
lawful and necessary action, so long as such action is not inconsistent with
this Agreement.
1.11 Withholding. Encoding.com shall be entitled to deduct and
-----------
withhold from the consideration otherwise payable pursuant to this Agreement to
any holder of shares of Alive Common Stock such amounts as it is required to
deduct and withhold with respect to the making of such payment under the Code or
any provision of applicable state, local or foreign tax laws. To the extent that
amounts are so withheld by Encoding.com such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to such holder in respect
of which such deduction and withholding was made by Encoding.com.
1.12 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificates shall have been lost, stolen or destroyed, Encoding.com shall issue
in exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, such shares of Encoding.com
Common Stock (and cash in lieu of fractional shares) as may be required pursuant
to Section 1.6; provided, however, that Encoding.com may, in its discretion and
as a condition precedent to such issuance, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as Encoding.com
may reasonably direct as indemnity against any claim that may be made against
Encoding.com with respect to the Certificates alleged to have been lost, stolen
or destroyed.
1.13 Closing of Transfer Books. At the Effective Time, the stock
-------------------------
transfer books of Alive shall be closed and no transfer of Alive Common Stock or
Alive Preferred Stock, if any, shall thereafter be made. Certificates presented
to Encoding.com after the Effective Time shall be cancelled and exchanged for
shares of Encoding.com Common Stock in accordance with Section 1.6, subject to
Section 8 and to applicable law in the case of Dissenting Shares.
SECTION TWO
2. Representations and Warranties of Alive.
---------------------------------------
In this Agreement, any reference to a "Material Adverse Effect" with
-----------------------
respect to any entity or group of entities means any event, change or effect
that, when taken individually or together with all other adverse changes and
effects, is or is reasonably likely to be materially adverse to the condition
(financial or otherwise), properties, assets, liabilities, business, operations,
results of operations or prospects of such entity and its subsidiaries, taken as
a whole, or to prevent or materially delay consummation of the Merger or
otherwise to prevent such entity and its subsidiaries from performing their
obligations under this Agreement; provided, however that the following shall not
be taken into account in determining a "Material Adverse Effect": (a) any
adverse change, event or effect that is directly attributable to conditions
affecting the United States economy generally unless such conditions adversely
affect such party in a materially
-8-
<PAGE>
disproportionate manner, and (b) any adverse change, event or effect that is
directly attributable to conditions affecting such party's industry generally,
unless such conditions adversely affect such party in a materially
disproportionate manner.
In this Agreement, any reference to a party's "knowledge" means the
---------
actual knowledge of such party's officers or directors provided that such
persons shall have made inquiry of those employees of such party whom such
officers or directors reasonably believe to have actual knowledge of the matters
in question.
Except as disclosed in a document dated as of the date of this
Agreement and delivered by Alive to Encoding.com prior to the execution and
delivery of this Agreement and specifically referring to a particular
representation or warranty (or subsection thereof) in this Agreement (the "Alive
-----
Disclosure Schedule"), Alive represents and warrants to Encoding.com as follows:
- -------------------
2.1 Organization; Subsidiaries.
---------------------------
(a) Alive is a corporation duly organized, validly existing and in
good standing under the laws of the state of Washington. Alive has the requisite
corporate power and authority and all necessary government approvals to own,
lease and operate its properties and to carry on its business as now being
conducted and as proposed to be conducted, except where the failure to have such
power, authority and governmental approvals would not, individually or in the
aggregate, have a Material Adverse Effect on Alive. Alive is duly qualified or
licensed as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its business makes such qualification or
licensing necessary, except for such failures to be so qualified or licensed and
in good standing that would not, individually or in the aggregate, have a
Material Adverse Effect on Alive. The Alive Disclosure Schedule contains a true
and complete list of all states in which Alive is duly qualified or licensed to
transact business as a foreign corporation. The Alive Disclosure Schedule
contains a true and complete listing of the locations of all sales offices,
development facilities, and any other offices or facilities of Alive and a true
and complete list of all states in which Alive maintains any employees.
(b) Alive has no Subsidiaries (as defined below). Alive does not own
or control (directly or indirectly) any capital stock, bonds or other securities
of, and does not have any proprietary interest in, any other corporation,
general or limited partnership, limited liability company, joint venture, firm,
association or business organization, entity or enterprise, and Alive does not
control (directly or indirectly) the management or policies of any other
corporation, partnership, limited liability company, joint venture, firm,
association or business organization, entity or enterprise. As used in this
Agreement, the word "Subsidiary" means, with respect to any party, any
----------
corporation or other organization, whether incorporated or unincorporated, of
which (i) such party or any other Subsidiary of such party is a general partner
(excluding partnerships, the general partnership interests of which held by such
party or any Subsidiary of such party do not have a majority of the voting
interest in such partnership), or (ii) at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a
-9-
<PAGE>
majority of the Board of Directors or others performing similar functions with
respect to such corporation or other organization or a majority of the profit
interests in such other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by such
party and one or more of its Subsidiaries.
2.2 Articles of Incorporation. Alive has delivered a true and correct
-------------------------
copy of the Articles of Incorporation and Bylaws or other charter documents of
Alive, as amended to date, to Encoding.com. Alive is not in violation of any of
the provisions of its Articles of Incorporation or Bylaws.
2.3 Capital Structure.
-----------------
(a) The authorized capital stock of Alive consists of 20,000,000
shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of
Preferred Stock, par value $0.01 per share, 902,886 of which are designated
Series A Preferred Stock and 1,867,233 of which are designated Series B
Preferred Stock. As of the date of this Agreement, there were issued and
outstanding 2,322,752 shares of Alive Common Stock, 902,886 shares of Series A
Preferred Stock (the "Alive Series A Preferred") and 1,867,233 shares of Series
------------------------
B Preferred Stock (the "Alive Series B Preferred" and together with the Alive
------------------------
Series A Preferred and Alive Common Stock, the "Alive Capital Stock"). The
-------------------
issued and outstanding shares of Alive Capital Stock are held of record by the
shareholders of Alive as set forth and identified in the shareholder list
attached as Schedule 2.3(a) to the Alive Disclosure Schedule. All outstanding
shares of Alive Capital Stock are duly authorized, validly issued, fully paid
and non-assessable and are free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof, and are
not subject to preemptive rights or rights of first refusal created by statute,
the Articles of Incorporation or Bylaws of Alive or any agreement to which Alive
is a party or by which it is bound. All outstanding shares of Alive Capital
Stock were issued in compliance with all applicable federal and state securities
laws. Of the issued and outstanding shares of Alive Capital Stock, 820,034
shares will be subject, as of the Effective Date (after giving effect to the
Merger), to Alive's right of repurchase at a weighted average repurchase price
of $0.18 per share.
(b) There are no other outstanding shares of capital stock or
voting securities and no outstanding commitments to issue any shares of capital
stock or voting securities after September 30, 1999 other than pursuant to the
exercise of options outstanding as of such date under the Alive Stock Option
Plan and pursuant to a warrant to purchase 7,500 shares of Common Stock (the
Landlord Warrant"). As of the date of this Agreement, Alive has reserved (i)
- ----------------
sufficient shares of Common Stock for issuance upon conversion of the Alive
Series A Preferred and the Alive Series B Preferred, and (ii) 1,498,350 shares
of Common Stock for issuance to employees and consultants pursuant to the Alive
Stock Option Plan, of which 569,454 shares have been issued pursuant to option
exercises or direct stock purchases, 185,400 shares are subject to outstanding,
unexercised options. As of the Effective Time (after giving effect to the
Merger), 190,625 shares under the Alive Stock Option Plan will be fully vested
and 564,229 shares will be subject to vesting as set forth on Schedule 2.3(b)
hereto (including any such shares subject to Alive's right of repurchase due to
early exercise of options). Since
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<PAGE>
October 31, 1999, Alive has not issued or granted additional options under the
Alive Stock Option Plan. Alive is not in active discussion, formal or informal,
with any person or entity regarding the issuance of any form of additional Alive
equity that has not been issued or committed to prior to the date of this
Agreement. Schedule 2.3(b) of the Alive Disclosure Schedule sets forth the
number of outstanding Alive Options and all other rights to acquire shares of
Alive Common Stock pursuant to the Alive Stock Option Plan and the applicable
exercise prices. Except (i) for the rights created pursuant to this Agreement,
(ii) for Alive's right to repurchase any unvested shares under the Alive Stock
Option Plan, (iii) for such rights as to which waivers have been or will be
obtained as set forth on Schedule 2.3(b) hereto, (iv) the acceleration
provisions of the Alive Stock Option Plan and related option agreements, and (v)
as set forth in this Section 2.3, there are no options, warrants, calls, rights,
commitments, agreements or arrangements of any character to which Alive is a
party or by which Alive is bound relating to the issued or unissued capital
stock of Alive or obligating Alive to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of capital stock of Alive or obligating Alive to grant, extend,
accelerate the vesting of, change the price of, or otherwise amend or enter into
any such option, warrant, call, right, commitment or agreement. There are no
contracts, commitments or agreements relating to voting, purchase or sale of
Alive's capital stock (i) between or among Alive and any of its stockholders and
(ii) to the knowledge of Alive, between or among any of Alive's stockholders,
except for the stockholders delivering Irrevocable Proxies (as defined below).
The terms of the Alive Stock Option Plan permit the assumption or substitution
of options to purchase Encoding.com Common Stock as provided in this Agreement,
without the consent or approval of the holders of such securities, the Alive
stockholders, or otherwise. True and complete copies of all agreements and
instruments relating to or issued under the Alive Stock Option Plan have been
made available to Encoding.com and such agreements and instruments have not been
amended, modified or supplemented, and there are no agreements to amend, modify
or supplement such agreements or instruments in any case from the form made
available to Encoding.com. Except as set forth on Schedule 2.3(b) to the Alive
Disclosure Schedule, there are no agreements or arrangements pursuant to which
Alive is required to register shares of its capital stock under the Securities
Act of 1933, as amended.
(c) To Alive's knowledge, all applicable elections with respect
to issued capital stock of Alive under Section 83(b) of the Code have been duly
made and timely filed.
2.4 Authority. Alive has all requisite corporate power and
---------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Alive, subject only to the
approval of the Merger by Alive's stockholders as contemplated by Section
6.1(a). Alive's Board of Directors has unanimously approved the Merger and this
Agreement. This Agreement has been duly executed and delivered by Alive and
assuming due authorization, execution and delivery by Encoding.com, constitutes
the valid and binding obligation of Alive enforceable against Alive in
accordance with its terms, except to the extent that enforceability may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other laws affecting the
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<PAGE>
enforcement of creditors' rights generally and by general principles of equity,
regardless of whether such enforceability is considered in a proceeding at law
or in equity.
2.5 No Conflicts; Required Filings and Consents.
-------------------------------------------
(a) The execution and delivery of this Agreement by Alive
does not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit under or
result in the creation of any lien upon the assets of Alive under (i) any
provision of the Articles of Incorporation or Bylaws of Alive or any of its
subsidiaries, as amended, or (ii) any material mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Alive or any of their properties or assets.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality ("Governmental
------------
Entity") is required by or with respect to Alive in connection with the
- ------
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) the filing of the Merger Documents, together
with the required officers' certificates, as provided in Section 1.2, (ii) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Securities Act of 1933, as amended (the "Securities
------------ ----------
Act"), applicable state securities laws and the securities laws of any foreign
- ---
country; and (iii) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Alive and would not prevent, or materially alter or delay any of the
transactions contemplated by this Agreement.
2.6 Financial Statements. Section 2.6 of the Alive Disclosure
--------------------
Schedule includes a true, correct and complete copy of Alive's unaudited
financial statement for the fiscal year ended December 31, 1998, and its
unaudited financial statements (balance sheet, statement of operations and
statement of cash flows) on a consolidated basis as at, and for the nine-month
period ended September 30, 1999 (collectively, the "Alive Financial
---------------
Statements"). The Alive Financial Statements have been prepared in accordance
- ----------
with generally accepted accounting principles (except that the unaudited
financial statements do not have notes thereto) applied on a consistent basis
throughout the periods indicated. The Alive Financial Statements accurately set
forth and describe the financial condition and operating results of Alive and
its consolidated Subsidiaries as of the dates, and for the periods, indicated
therein, subject to normal year-end audit adjustments. Alive maintains and will
continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
2.7 Absence of Undisclosed Liabilities. Alive does not have any
----------------------------------
material obligations or liabilities of any nature (matured or unmatured, fixed
or contingent) other than (i) those set forth or adequately provided for in the
Balance Sheet for the period ended September
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<PAGE>
30, 1999 (the "Alive Balance Sheet"), (ii) those incurred in the ordinary course
-------------------
of business and not required to be set forth in the Alive Balance Sheet under
generally accepted accounting principles, (iii) those incurred in the ordinary
course of business since the date of the Alive Balance Sheet and consistent with
past practice, and (iv) those incurred in connection with the execution of this
Agreement.
2.8 Absence of Certain Changes. Except as set forth in Section
--------------------------
2.8 of the Alive Disclosure Schedule, since September 30, 1999 ( the "Alive
-----
Balance Sheet Date") there has not been, occurred or arisen any:
- ------------------
(a) transaction by Alive except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Incorporation
or Bylaws of Alive;
(c) capital expenditure or commitment by Alive, in excess of
$15,000 in any individual transaction or series of related transactions, or in
the aggregate exceeding $30,000;
(d) destruction of, damage to, or loss of any assets
(including, without limitation, intangible assets), business or customer of
Alive (whether or not covered by insurance) which would constitute a Material
Adverse Effect;
(e) labor trouble or claim of wrongful discharge or other
unlawful labor practice or action;
(f) change in accounting methods or practices (including any
change in depreciation or amortization policies or rates, any change in policies
in making or reversing accruals, any change in respect of Taxes, as defined in
Section 2.15, including elections with respect thereto, or any change in
capitalization of software development costs) by Alive or any revaluation by
Alive of any of its assets;
(g) declaration, setting aside, or payment of a dividend or
other distribution in respect to the capital stock of Alive, or any direct or
indirect redemption, purchase or other acquisition by Alive of any of its
capital stock, except repurchases of Alive Common Stock from terminated Alive
employees at the original per share purchase price of such shares pursuant to
the terms of the Alive Option Plan and applicable option agreements;
(h) increase in the salary or other compensation payable or
to become payable by Alive to any officers, directors, employees or advisors of
Alive, except in the ordinary course of business consistent with past practice,
or the declaration, payment, or commitment or obligation of any kind for the
payment by Alive of a bonus or other additional salary or compensation to any
such person except as otherwise contemplated by this Agreement, or other than as
set forth in Section 2.16 below, the establishment of any bonus, insurance,
deferred compensation, pension, retirement, profit sharing, stock option
(including without
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<PAGE>
limitation, stock appreciation rights and performance awards), stock purchase or
other employee benefit plan;
(i) sale, lease, license of other disposition of any of the
assets or properties of Alive, except in the ordinary course of business and not
in excess of $15,000 in the aggregate;
(j) termination or material amendment of any material
contract, agreement or license (including any distribution agreement) to which
Alive is a party or by which it is bound;
(k) loan by Alive to any person or entity, or guaranty by
Alive of any loan;
(l) waiver or release of any right or claim of Alive,
including any write-off or other compromise of any account receivable of Alive,
in excess of $15,000 in the aggregate;
(m) the commencement or notice or threat of commencement of
any lawsuit or proceeding against or, to Alive's knowledge, investigation of
Alive or its respective affairs;
(n) notice of any claim of ownership by a third party of
Alive's Intellectual Property (as defined in Section 2.13 below) or of
infringement by Alive of any third party's Intellectual Property rights;
(o) issuance or sale by Alive of any of its shares of
capital stock, or securities exchangeable, convertible or exercisable therefor,
or of any other of its securities, except for the exercise of options pursuant
to the Alive Stock Option Plan;
(p) change in pricing or royalties set or charged by Alive
to its customers or licensees or in pricing or royalties set or charged by
persons who have licensed Intellectual Property to Alive;
(q) event or condition of any character that has or could
reasonably be expected to have a Material Adverse Effect on Alive; or
(r) agreement by Alive or any officer or employee of Alive
on behalf of Alive to do any of the things described in the preceding clauses
(a) through (q) (other than negotiations with Encoding.com and its
representatives regarding the transactions contemplated by this Agreement).
2.9 Litigation. There is no private or governmental action,
----------
suit, proceeding, claim, arbitration or investigation (collectively, a "Suit")
----
pending or, to Alive's knowledge, currently threatened against Alive that
questions the validity or enforceability of the Agreement or the right of Alive
to enter into it, or to consummate the transactions contemplated hereby or
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<PAGE>
thereby, or that might result, either individually or in the aggregate, in any
Material Adverse Effect on Alive, or any change in the current equity ownership
of Alive, nor is Alive aware that there is any basis for the foregoing. For the
purposes of this Section 2.9, "Suit" shall include but not be limited to any
----
action, suit, proceeding, claim, arbitration or investigation pending or, to
Alive's knowledge, currently threatened against Alive involving the prior
employment of any of Alive's current employees, such employees use in connection
with Alive's business of any information or techniques proprietary to any of
such employees' former employers, such employees' obligations under any
agreements with prior employers, or negotiations by Alive with potential
investors in Alive or its proposed business. Neither Alive nor any of its
subsidiaries is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding, claim, arbitration or
investigation by Alive or any of its subsidiaries currently pending or which
Alive or any of its subsidiaries intends to initiate.
2.10 Restrictions on Business Activities. There is no agreement,
-----------------------------------
judgment, injunction, order or decree binding upon Alive which has or could
reasonably be expected to have the effect of prohibiting or materially impairing
any current or currently proposed future business practice of Alive, any
acquisition of property by Alive or the overall conduct of business by Alive as
currently conducted or as proposed to be conducted by Alive. Alive has not
entered into any agreement under which Alive is restricted from selling,
licensing or otherwise distributing any of its products to any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.11 Permits. Alive is in possession of all franchises, grants,
-------
authorizations, licenses, permits, easements, variances, exceptions, consents,
certificates, approvals and orders necessary for Alive, to own, lease and
operate its properties or to carry on its business as it is now being conducted
(the "Alive Authorizations") and no suspension or cancellation of any Alive
--------------------
Authorization is pending or, to Alive's knowledge, threatened, except where the
failure to have, or the suspension or cancellation of, any Alive Authorization
would not have a Material Adverse Effect on Alive. Alive is not in conflict
with, or in default or violation of, (i) any laws applicable to Alive or by
which any property or asset of Alive is bound or affected, (ii) any Alive
Authorization, or (iii) any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Alive is a party or by which Alive or any property or asset of Alive is
bound or affected, except for any such conflict, default or violation that would
not have a Material Adverse Effect on Alive.
2.12 Title to Property.
-----------------
(a) Alive has good and marketable title to all of its
properties and assets, real and personal, reflected in the Alive Balance Sheet
or acquired after the Alive Balance Sheet Date (except properties and assets
sold or otherwise disposed of since the Alive Balance Sheet Date in the ordinary
course of business), or with respect to leased properties and assets, valid
leasehold interests in, free and clear of all mortgages, liens, pledges, charges
or encumbrances of any kind or character, except, in each case, for (i) liens
for current taxes not yet due and payable, (ii) such imperfections of title,
liens and easements as do not and will not
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<PAGE>
materially detract from or interfere with the use of the properties subject
thereto or affected thereby, or otherwise materially impair business operations
involving such properties, and (iii) liens securing debt which is reflected on
the Alive Balance Sheet. The plants, property and equipment of Alive that are
used in the operations of its business are in good operating condition and
repair, subject to normal wear and tear. All properties used in the operations
of Alive are reflected in the Alive Balance Sheet to the extent generally
accepted accounting principles require the same to be reflected and to the
extent acquired prior to the Alive Balance Sheet Date. Schedule 2.12(a) of the
Alive Disclosure Schedule sets forth a true, correct and complete list of all
real property owned or leased by Alive, the name of the lessor, the date of the
lease and each amendment thereto and the aggregate annual rental and other fees
payable under such lease. Such leases are in good standing, are valid and
effective in accordance with their respective terms, and there is not under any
such leases any existing default or event of default (or event which with notice
or lapse of time, or both, would constitute a default).
(b) Schedule 2.12(b) of the Alive Disclosure Schedule also
sets forth a true, correct and complete list of all equipment (the "Equipment")
---------
owned or leased by Alive, and such Equipment is, taken as a whole, (i) adequate
for the conduct of Alive's business, consistent with its past practice, and (ii)
in good operating condition (except for ordinary wear and tear).
2.13 Intellectual Property.
---------------------
(a) Alive owns, or is licensed or otherwise possess legally
enforceable rights to use all patents, patent rights, trademarks, trademark
rights, trade names, trade name rights, service marks, copyrights, and any
applications for any of the foregoing, maskworks, net lists, schematics,
industrial models, inventions, technology, know-how, trade secrets, inventory,
ideas, algorithms, processes, computer software programs or applications (in
both source code and object code form), and tangible or intangible proprietary
information or material ("Intellectual Property") that are used or proposed to
---------------------
be used in the business of Alive as currently conducted or as proposed to be
conducted by Alive.
(b) Section 2.13 of the Alive Disclosure Schedule lists (i)
all patents and patent applications and all registered and unregistered
trademarks, trade names and service marks, registered and unregistered
copyrights, and maskworks, included in the Intellectual Property, including the
jurisdictions in which each such Intellectual Property right has been issued or
registered or in which any application for such issuance and registration has
been filed, (ii) all licenses, sublicenses and other agreements as to which
Alive is a party and pursuant to which any person is authorized to use any
Intellectual Property, and (iii) all licenses, sublicenses and other agreements
as to which Alive is a party and pursuant to which Alive is authorized to use
any third party patents, trademarks or copyrights, including software ("Third
-----
Party Intellectual Property Rights") which are incorporated in, are, or form a
- ----------------------------------
part of any product offered by Alive. Alive is not in violation of any license,
sublicense or agreement described in Section 2.13 of the Alive Disclosure
Schedule, except for such violations as will not have a Material Adverse Effect
on Alive. The execution and delivery of this Agreement by Alive and the
consummation of the transactions contemplated hereby, will neither cause Alive
to be in violation or default under any such license, sublicense or agreement,
nor entitle any other party
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<PAGE>
to any such license, sublicense or agreement to terminate or modify such
license, sublicense or agreement. Except as set forth in Section 2.13 of the
Alive Disclosure Schedule, Alive is the sole and exclusive owner or licensee of,
with all right, title and interest in and to (free and clear of any liens), the
Intellectual Property, and has sole and exclusive rights (and is not
contractually obligated to pay any compensation to any third party in respect
thereof) to the use thereof or the material covered thereby in connection with
the services or products in respect of which Intellectual Property is being
used.
(c) To Alive's knowledge, there is no unauthorized use,
disclosure, infringement or misappropriation of any Intellectual Property rights
of Alive, any trade secret material to Alive or any Intellectual Property right
of any third party to the extent licensed by or through Alive, by any third
party, including any employee or former employee of Alive. Except as set forth
on Schedule 2.13(c) of the Alive Disclosure Schedule, Alive has not entered into
any agreement to indemnify any other person against any charge of infringement
of any Intellectual Property, other than indemnification provisions contained in
purchase orders arising in the ordinary course of business.
(d) Alive is not nor will it be as a result of the execution
and delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Intellectual Property or Third Party Intellectual Property Rights.
(e) All patents, registered trademarks, registered service
marks and copyrights held by Alive are valid and existing and, to Alive's
knowledge, there is no assertion or claim (or basis therefor) challenging the
validity of any Intellectual Property of Alive. Alive has not been sued in any
suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other proprietary right of any third party. Neither the conduct of the
business of Alive as currently conducted or contemplated nor the manufacture,
sale, licensing or use of any of the products of Alive as now manufactured, sold
or licensed or used, nor the use in any way of the Intellectual Property in the
manufacture, use, sale or licensing by Alive of any products currently proposed,
infringes on or will infringe or conflict with, in any way, any license,
trademark, trademark right, trade name, trade name right, patent, patent right,
industrial model, invention, service mark or copyright of any third party. Alive
has not brought any action, suit or proceeding for infringement of Intellectual
Property or breach of any license or agreement involving Intellectual Property
against any third party. There are no pending, or to Alive's knowledge,
threatened interference, re-examinations, oppositions or nullities involving any
patents, patent rights or applications therefor of Alive, except such as may
have been commenced by Alive. There is no breach or violation of or, to Alive's
knowledge, threatened or actual loss of rights under any license agreement to
which Alive is a party.
(f) Alive has secured valid written assignments from all
consultants and employees who contributed to the creation or development of
Intellectual Property of the rights to such contributions that Alive does not
already own by operation of law.
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<PAGE>
(g) Alive has taken all necessary and appropriate steps that
are commercially reasonable to protect and preserve the confidentiality of all
Intellectual Property not otherwise protected by patents, patent applications or
copyright ("Confidential Information"). Alive has a policy requiring each
------------------------
employee, consultant and independent contractor to execute proprietary
information and confidentiality agreements substantially in Alive's standard
forms and all current and former employees, consultants and independent
contractors of Alive have executed such an agreement. All use, disclosure or
appropriation of Confidential Information owned by Alive by or to a third party
has been pursuant to the terms of a written agreement between Alive and such
third party. All use, disclosure or appropriation of Confidential Information
not owned by Alive has been pursuant to the terms of a written agreement between
Alive and the owner of such Confidential Information, or is otherwise lawful.
(h) The Alive Disclosure Schedule lists all currently
effective written or oral and all past written consulting, independent
contractor and/or employment agreements and other material agreements concluded
with individual employees, independent contractors or consultants to which Alive
is a party. True and correct copies of all such written agreements have been
provided to Encoding.com or its representatives.
2.14 Compliance with Environmental Requirements. Alive is in
------------------------------------------
compliance in all material respects with all terms and conditions of all
permits, licenses and authorizations which are required under federal, state and
local laws applicable to Alive and relating to pollution or protection of the
environment, including laws or provisions relating to emissions, discharges,
releases or threatened releases of pollutants, contaminants, or hazardous or
toxic materials, substances, or wastes into air, surface water, groundwater, or
land, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants, contaminants
or hazardous or toxic materials, substances, or wastes or which are intended to
assure the safety of employees, workers or other persons, except where the
failure to obtain such authorizations or comply with such requirements could not
be reasonably expected to have a Material Adverse Effect on Alive. There are no
conditions, circumstances, activities, practices, incidents, or actions known to
Alive which could reasonably be expected to form the basis of any claim, action,
suit, proceeding, hearing, or investigation of, by, against or relating to
Alive, based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment, of any pollutant,
contaminant, or hazardous or toxic substance, material or waste.
2.15 Taxes.
-----
(a) For purposes of this Section 2.15 and other provisions
of this Agreement relating to Taxes, the following definitions shall apply:
(i) The term "Taxes" shall mean all taxes, however
-----
denominated, including any interest, penalties or other additions to tax that
may become payable in respect thereof, (A) imposed by any federal, territorial,
state, local or foreign government or any agency or political subdivision of any
such government, which taxes shall include, without
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<PAGE>
limiting the generality of the foregoing, all income or profits taxes (including
but not limited to, federal, state and foreign income taxes), payroll and
employee withholding taxes, unemployment insurance contributions, social
security taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise
taxes, gross receipts taxes, withholding taxes, business license taxes,
occupation taxes, real and personal property taxes, stamp taxes, environmental
taxes, transfer taxes, workers' compensation, Pension Benefit Guaranty
Corporation premiums and other governmental charges, and other obligations of
the same or of a similar nature to any of the foregoing, which are required to
be paid, withheld or collected, (B) any liability for the payment of amounts
referred to in (A) as a result of being a member of any affiliated,
consolidated, combined or unitary group, or (C) any liability for amounts
referred to in (A) or (B) as a result of any obligations to indemnify another
person.
(ii) The term "Returns" shall mean all reports, estimates,
-------
declarations of estimated tax, information statements and returns required to be
filed in connection with any Taxes, including information returns with respect
to backup withholding and other payments to third parties.
(b) All material Returns required to be filed by or on behalf of
Alive have been duly filed on a timely basis (taking into account all properly
requested extensions of due dates) and such Returns are true, complete and
correct. All Taxes shown to be payable on such Returns or on subsequent
assessments with respect thereto, and all payments of estimated Taxes required
to be made by or on behalf of Alive under Section 6655 of the Code or comparable
provisions of state, territorial, local or foreign law, have been paid in full
on a timely basis, and no other Taxes are payable by Alive with respect to items
or periods covered by such Returns (whether or not shown on or reportable on
such Returns). Alive has withheld and paid over all Taxes required to have been
withheld and paid over, and complied with all information reporting and backup
withholding in connection with amounts paid or owing to any employee, creditor,
independent contractor, or other third party. There is no claim for Taxes that
is a lien on any of the assets of Alive with respect to Taxes, other than liens
for Taxes not yet due and payable or for Taxes that Alive is contesting in good
faith through appropriate proceedings which are reflected as a reserve on the
Alive Financial Statements. Alive has not been at any time a member of an
affiliated group of corporations filing consolidated, combined or unitary income
or franchise tax returns for a period for which the statute of limitations for
any Tax potentially applicable as a result of such membership has not expired.
(c) The amount of Alive's liabilities for unpaid Taxes for all
periods through the date of the Alive Financial Statements do not, in the
aggregate, exceed the amount of the current liability accruals for Taxes
reflected on the Alive Financial Statements, and the Alive Financial Statements
adequately accrue in accordance with generally accepted accounting principles
("GAAP") all liabilities for Taxes of Alive payable after the date of the Alive
----
Financial Statements attributable to transactions and events occurring prior to
such date. No material liability for Taxes or amount of taxable income of Alive
has been incurred (or prior to Closing will be incurred) since such date other
than in the ordinary course of business.
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<PAGE>
(d) Encoding.com has been furnished by Alive true and
complete copies of (i) relevant portions of income tax audit reports, statements
of deficiencies, closing or other agreements received by or on behalf of Alive
relating to Taxes, and (ii) all federal, state and foreign income or franchise
tax returns and state sales and use tax Returns for or including Alive for all
periods since Alive's inception.
(e) No audit of the Returns of Alive by a government or
taxing authority is in process, or, to Alive's knowledge, threatened (either in
writing or orally, formally or informally) or, to Alive's knowledge, pending
(either in writing or orally, formally or informally). No deficiencies exist or
have been asserted (either in writing or orally, formally or informally) or are
expected to be asserted with respect to Taxes of Alive, and Alive has not
received notice (either in writing or orally, formally or informally) nor does
it expect to receive notice that it has not filed a Return or paid Taxes
required to be filed or paid. Alive is not a party to any action or proceeding
for assessment or collection of Taxes, nor has such event been asserted or
threatened (either in writing or orally, formally or informally) against Alive,
or any of its respective assets. No waiver or extension of any statute of
limitations is in effect with respect to Taxes or Returns of Alive. Alive has
disclosed on its federal and state income and franchise tax returns all
positions taken therein that could give rise to a substantial understatement
penalty within the meaning of Code Section 6662 or comparable provisions of
applicable state tax laws.
(f) Alive is not (nor has it ever been) party to any tax
sharing agreement.
(g) Alive is not, nor has it been, a United States real
property holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
Alive is not a "consenting corporation" under Section 341(f) of the Code. Alive
has not entered into any agreements where any payment thereunder would result in
a nondeductible expense to Alive pursuant to Section 280G of the Code or an
excise tax to the recipient of such payment pursuant to Section 4999 of the
Code. Alive has not agreed to, nor is it required to make, other than by reason
of the Merger, any adjustment under Code Section 481(a) by reason of, a change
in accounting method, and Alive will not otherwise have any income reportable
for a period ending after the Closing Date attributable to a transaction or
other event (e.g., an installment sale) occurring prior to the Closing Date with
respect to which Alive received the economic benefit prior to the Closing Date.
Alive is not, nor has it been, a "reporting corporation" subject to the
information reporting and record maintenance requirements of Section 6038A and
the regulations thereunder.
(h) The Alive Disclosure Schedule contains accurate and
complete information regarding Alive's net operating losses for federal and each
state tax purposes. Alive has no net operating losses and credit carryovers or
other tax attributes currently subject to limitation under Sections 382, 383 or
384 of the Code.
2.16 Employee Benefit Plans.
----------------------
(a) Schedule 2.16 lists, with respect to Alive, and any
trade or business (whether or not incorporated) which is treated as a single
employer with Alive (an "ERISA
-----
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<PAGE>
Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code,
- ----------
(i) all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), (ii) each loan
-----
to a non-officer employee in excess of $10,000, loans to officers and directors
and any stock option, stock purchase, phantom stock, stock appreciation right,
supplemental retirement, severance, sabbatical, medical, dental, vision care,
disability, employee relocation, cafeteria benefit (Code Section 125) or
dependent care (Code Section 129), life insurance or accident insurance plans,
programs or arrangements, (iii) all contracts and agreements relating to
employment that provide for annual compensation in excess of $50,000 and all
severance agreements, with any of the directors, officers or employees of Alive,
(iv) all bonus, pension, profit sharing, savings, deferred compensation or
incentive plans, programs or arrangements, (v) other fringe or employee benefit
plans, programs or arrangements that apply to senior management of Alive and
that do not generally apply to all employees, and (vi) any current or former
employment or executive compensation or severance agreements, written or
otherwise, as to which unsatisfied obligations of Alive remain for the benefit
of, or relating to, any present or former employee, consultant or director of
Alive (together, the "Alive Employee Plans").
--------------------
(b) Alive has furnished to Encoding.com a copy of each of the
Alive Employee Plans and related plan documents (including trust documents,
insurance policies or contracts, employee booklets, summary plan descriptions
and other authorizing documents, and, to the extent still in its possession, any
material employee communications relating thereto) and has, with respect to each
Alive Employee Plan which is subject to ERISA reporting requirements, provided
copies of the Form 5500 reports filed for the last three plan years. Any Alive
Employee Plan intended to be qualified under Section 401(a) of the Code has
either obtained from the Internal Revenue Service a favorable determination
letter as to its qualified status under the Code, including all amendments to
the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or
has applied to the Internal Revenue Service for such a determination letter
prior to the expiration of the requisite period under applicable Treasury
Regulations or Internal Revenue Service pronouncements in which to apply for
such determination letter and to make any amendments necessary to obtain a
favorable determination. Alive has also furnished Encoding.com with the most
recent Internal Revenue Service determination letter issued with respect to each
such Alive Employee Plan, and nothing has occurred since the issuance of each
such letter which could reasonably be expected to cause the loss of the tax-
qualified status of any Alive Employee Plan subject to Code Section 401(a).
(c) Except as required by applicable law or set forth in
Schedule 2.16(c) of the Alive Disclosure Schedule, (i) none of the Alive
Employee Plans promises or provides retiree medical or other retiree welfare or
life insurance benefits to any person; (ii) there has been no "prohibited
transaction," as such term is defined in Section 406 of ERISA and Section 4975
of the Code, with respect to any Alive Employee Plan, which could reasonably be
expected to have, in the aggregate, a Material Adverse Effect; (iii) each Alive
Employee Plan has been administered in accordance with its terms and in
compliance with the requirements prescribed by any and all statutes, rules and
regulations (including ERISA and the Code), except as would not have, in the
aggregate, a Material Adverse Effect, and Alive and each ERISA Affiliate have
performed all material obligations required to be performed by them under,
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<PAGE>
are not in any material respect in default under or violation of, and have no
knowledge of any material default or violation by any other party to, any of the
Alive Employee Plans; (iv) neither Alive nor any ERISA Affiliate is subject to
any material liability or penalty under Sections 4976 through 4980 of the Code
or Title I of ERISA with respect to any of the Alive Employee Plans; (v) all
material contributions required to be made by Alive or any ERISA Affiliate to
any Alive Employee Plan have been made on or before their due dates and a
reasonable amount has been accrued for contributions to each Alive Employee Plan
for the current plan years; (vi) with respect to each Alive Employee Plan, no
"reportable event" within the meaning of Section 4043 of ERISA (excluding any
such event for which the thirty (30) day notice requirement has been waived
under the regulations to Section 4043 of ERISA) nor any event described in
Section 4062, 4063 or 4041 or ERISA has occurred; (vii) no Alive Employee Plan
is covered by, and neither Alive nor any ERISA Affiliate has incurred or expects
to incur any direct or indirect liability under, arising out of or by operation
of Title IV of ERISA in connection with the termination of, or an employee's
withdrawal from, any Alive Employee Plan or other retirement plan or
arrangement, and no fact or event exists that could give rise to any such
liability, or under Section 412 of the Code; (viii) Alive and the Subsidiaries
have not incurred any liability under, and have complied in all respects with,
the Worker Adjustment Retraining Notification Act, (the "WARN Act") and no fact
--------
or event exists that could give rise to liability under such act; and (ix) no
compensation paid or payable to any employee of Alive has been, or will be, non-
deductible by reason of application of Section 162(m) of the Code. With respect
to each Alive Employee Plan subject to ERISA as either an employee pension plan
within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan
within the meaning of Section 3(1) of ERISA, Alive has prepared in good faith
and timely filed all requisite governmental reports (which were true and correct
as of the date filed) and has properly and timely filed and distributed or
posted all material notices and reports to employees required to be filed,
distributed or posted with respect to each such Alive Employee Plan. No suit,
administrative proceeding, action or other litigation has been brought, or to
the knowledge of Alive is threatened, against or with respect to any such Alive
Employee Plan, including any audit or inquiry by the IRS or United States
Department of Labor. Neither Alive nor any ERISA Affiliate is a party to, or has
made any contribution to or otherwise incurred any obligation under, any
"multiemployer plan" as defined in Section 3(37) of ERISA.
(d) With respect to each Alive Employee Plan, Alive has complied
with (i) the applicable health care continuation and notice provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the
-----
proposed regulations thereunder and (ii) the applicable requirements of the
Family Leave Act of 1993 and the regulations thereunder, except to the extent
that such failure to comply would not, in the aggregate, have a Material Adverse
Effect.
(e) Except for the acceleration of vesting of Alive Options
under the Alive Option Plan and related agreements, the consummation of the
transactions contemplated by this Agreement will not (i) entitle any current or
former employee or other service provider of Alive or any Subsidiary to
severance benefits or any other payment (including, without limitation,
unemployment compensation, golden parachute or bonus), except as expressly
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<PAGE>
provided in this Agreement, or (ii) accelerate the time of payment or vesting of
any such benefits, or increase the amount of compensation due any such employee
or service provider.
(f) There has been no amendment to, written interpretation or
announcement (whether or not written) by Alive or any Subsidiary relating to, or
change in participation or coverage under, any Alive Employee Plan which would
materially increase the expense of maintaining such Plan above the level of
expense incurred with respect to that Plan for the most recent fiscal year
included in the Alive Financial Statements.
2.17 Certain Agreements Affected by the Merger. Except for the
-----------------------------------------
acceleration of vesting of Alive Options under the Alive Option Plan and related
agreements, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment compensation,
golden parachute, bonus or otherwise) becoming due to any director or employee
of Alive or any of its Subsidiaries, (ii) materially increase any benefits
otherwise payable by Alive, or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
2.18 Employee Matters.
----------------
(a) Alive is in compliance in all material respects with all
currently applicable federal, state, local and foreign laws and regulations
respecting employment, discrimination in employment, terms and conditions of
employment, wages, hours and occupational safety and health and employment
practices, and is not engaged in any unfair labor practice. There are no pending
claims against Alive under any workers compensation plan or policy or for long
term disability. There is and has not been any claim against Alive or its
officers or employees, or to Alive's knowledge, threatened against Alive or its
officers or employees, based on actual or alleged race, age, sex, disability or
other harassment or discrimination, or similar tortious conduct, or based on
actual or alleged breach of contract with respect to any person's employment by
Alive, nor, to the knowledge of Alive, is there any basis for any such claim.
Alive does not have any material obligations under COBRA with respect to any
former employees or qualifying beneficiaries thereunder. There are no
controversies pending or, to the knowledge of Alive, threatened, between Alive
and any of its employees, which controversies have or could reasonably be
expected to have a Material Adverse Effect on Alive. Alive is not a party to any
collective bargaining agreement or other labor unions contract and Alive does
not know of any activities or proceedings of any labor union or other group to
organize any such employees.
(b) To the knowledge of Alive, all independent contractors have
been properly classified as independent contractors for the purposes of federal
and applicable state tax laws, laws applicable to employee benefits and other
applicable law. All salaries and wages paid by Alive are in compliance in all
material respects with applicable federal, state and local laws.
(c) The Alive Disclosure Schedule lists all persons presently
employed by Alive, setting forth for each person his or her position, salary or
rate of pay (including
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<PAGE>
bonuses), and if any such employee is currently on leave, sets forth the reason
for the leave, the date the leave commenced and the date the employee is
expected to return to active work.
2.19 Material Contracts.
------------------
(a) Subsections (i) through (viii) of Schedule 2.19(a) of the
Alive Disclosure Schedule contain a list of all contracts and agreements to
which Alive is a party and that are material to the business, results of
operations, or condition (financial or otherwise), of Alive taken as a whole
(such contracts, agreements and arrangements as are required to be set forth in
Schedule 2.19(a) of the Alive Disclosure Schedule being referred to herein
collectively as the "Material Contracts"). Material Contracts shall include,
------------------
without limitation, the following and shall be categorized in the Alive
Disclosure Schedule as follows:
(i) each contract and agreement (other than routine
purchase orders and pricing quotes in the ordinary course of business covering a
period of less than 1 year) for the purchase of inventory, spare parts, other
materials or personal property with any supplier or for the furnishing of
services to Alive under the terms of which Alive: (A) paid or otherwise gave
consideration of more than $10,000 in the aggregate during the calendar year
ended December 31, 1999, (B) is likely to pay or otherwise give consideration of
more than $10,000 in the aggregate over the remaining term of such contract, or
(C) cannot be cancelled by Alive without penalty or further payment of less than
$10,000;
(ii) each customer contract and agreement (other than
routine purchase orders, pricing quotes with open acceptance and other tender
bids, in each case, entered into in the ordinary course of business and covering
a period of less than one year and other than its form end-user licenses, a copy
of which has been provided to Encoding.com or its representatives) to which
Alive is a party which (A) involved payments by or to Alive of more than $10,000
in the aggregate during the calendar year ended December 31, 1999, (B) is likely
to involve payments by or to Alive of more than $10,000 in the aggregate over
the remaining term of the contract, or (C) cannot be cancelled by Alive without
penalty or further payment of less than $10,000;
(iii) (A) all distributor, manufacturer's representative,
broker, franchise, agency and dealer contracts and agreements to which Alive is
a party (specifying on a matrix, in the case of distributor agreements, the name
of the distributor, product, territory, termination date and exclusivity
provisions) and (B) all sales promotion, market research, marketing and
advertising contracts and agreements to which Alive is a party which: (1)
involved payments by or to Alive of more than $10,000 in the aggregate during
the calendar year ended December 31, 1999, (2) are likely to involve payments by
or to Alive of more than $10,000 in the aggregate over the remaining term of the
contract;
(iv) all management contracts with independent contractors
or consultants (or similar arrangements) to which Alive is a party and which (A)
involved payments by or to Alive or more than $10,000 in the aggregate during
the calendar year ended December 31, 1999, (B) are likely to involve payments by
or to Alive of more than $10,000 in the aggregate over the remaining term of the
contract;
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<PAGE>
(v) all contracts and agreements (excluding routine
checking account overdraft agreements involving petty cash amounts) under which
Alive has created, incurred, assumed or guaranteed (or may create, incur, assume
or guarantee) indebtedness for borrowed money or under which Alive has imposed
(or may impose) a security interest or lien on any of its assets, whether
tangible or intangible, to secure indebtedness;
(vi) all contracts and agreements that limit the ability
of Alive or, after the Effective Time, Encoding.com or any of its affiliates, to
compete in any line of business or with any person or in any geographic area or
during any period of time, or to solicit any customer or client;
(vii) all contracts and agreements to which Alive is a
party under which it has agreed to supply products to a customer at specified
prices, whether directly or through a specific distributor, manufacturer's
representative or dealer; and
(viii) all other contracts or agreements (A) which if not
already covered above are, in the judgment of Alive, material to Alive or the
conduct of its businesses, (B) the absence of which would have a Material
Adverse Effect on Alive, or (C) which are believed by Alive to be of unique
value even though not material to the business of Alive.
(b) Except as would not reasonably likely have a Material
Adverse Effect on Alive, each Material Contract is a legal, valid and binding
agreement in full force and effect and enforceable by Alive in accordance with
their terms, and Alive is not in default under any Material Contract nor has any
Alive Material Contract been cancelled by the other party; Alive is not in
receipt of any claim of default under any such agreement; and Alive does not
anticipate any termination or change to, or receipt of a proposal with respect
to, any such agreement as a result of the Merger or otherwise. Alive has
furnished Encoding.com with true and complete copies of all such agreements
together with all amendments, waivers or other changes thereto.
(c) No Material Contract contains any liquidated damages,
penalty or similar provision. To the knowledge of Alive, no party to any such
Material Contract intends to cancel, withdraw, modify or amend such contract,
agreement or arrangement. Alive is not in default under or in breach or
violation of, nor, to Alive's knowledge, is there any valid basis for any claim
of default by Alive under, or breach or violation by Alive of, any material
provision of any Material Contract. To Alive's knowledge, no other party is in
default under or in breach or violation of, nor is there any valid basis for any
claim of default by any other party under or any breach or violation by any
other party of, any Material Contract. Except as specifically indicated on the
Alive Disclosure Schedule, none of the Material Contracts provides for
indemnification by Alive of any third party. No claims have been made or, to the
knowledge of Alive, threatened that would require indemnification by Alive, and
Alive has not paid any amounts to indemnify any third party as a result of
indemnification requirements of any kind.
2.20 Interested Party Transactions. Alive is not indebted to any
-----------------------------
director, officer, employee or shareholder of Alive or Encoding.com (except for
amounts due as normal salaries and bonuses and in reimbursement of ordinary
expenses), and no such person is indebted
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<PAGE>
to Alive. Schedule 2.20 of the Alive Disclosure Schedule lists all agreements
and arrangements currently in effect, and currently proposed agreements and
arrangements, by or between Alive, on the one hand, with or for the benefit of
any current or former shareholder, director or officer of Alive, on the other
hand. Schedule 2.20 of the Alive Disclosure Schedule lists all payments of any
kind since November 1, 1998, from Alive, to or for the benefit of any current or
former shareholder, officer, director or other affiliate of Alive other than
payments to the individuals and consistent with the levels disclosed in Schedule
2.18(c). All debts of any of Alive's shareholders, officers, directors or their
respective Affiliates owed or owing to Alive are reflected in the Alive
Financial Statements.
2.21 Insurance. Alive has policies of insurance and bonds of the
---------
type and in amounts customarily carried by persons conducting businesses or
owning assets similar to those of Alive. There is no material claim pending
under any of such policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such policies or bonds. All premiums
due and payable under all such policies and bonds have been paid and Alive is
otherwise in compliance with the terms of such policies and bonds. Alive has no
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
2.22 Compliance With Laws. Alive has complied with, is not in
--------------------
violation of, and has not received any notices of violation with respect to, any
federal, state, local or foreign statute, law or regulation with respect to the
conduct of its business, or the ownership or operation of its business, except
for such violations or failures to comply as could not reasonably be expected to
have a Material Adverse Effect on Alive.
2.23 Minute Books. The minute books of Alive made available to
------------
Encoding.com contain a complete summary of all meetings of directors and
stockholders or actions by written consent since the time of incorporation of
Alive through the date of this Agreement, and reflect all transactions referred
to in such minutes accurately in all material respects.
2.24 Complete Copies of Materials. Alive has delivered or made
----------------------------
available true and copies of each document which has been requested by
Encoding.com or its counsel in connection with their legal and accounting review
of Alive.
2.25 Bank Accounts. The Alive Disclosure Schedule sets forth the
-------------
names and locations of all banks, trust companies, savings and loan
associations, and other financial institutions at which Alive maintains accounts
of any nature and the names of all persons authorized to draw thereon or make
withdrawals therefrom.
2.26 Brokers' and Finders' Fees. Alive has not incurred, nor
--------------------------
will it incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or investment bankers' fees or any similar charges
in connection with this Agreement or any transaction contemplated hereby.
2.27 Information Statement. None of the information (including
---------------------
financial data) relating to Alive supplied by Alive to Encoding.com to be
included in the Information
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<PAGE>
Statement (as defined in Section 5.14(a)) at the time the Information Statement
is mailed to holders of Alive Common Stock in connection with the solicitation
of written consents with respect to the Merger and the other transactions
contemplated hereby, and at all times subsequent to such dates up to and
including the date of the Effective Time, will contain any statement which, at
the time and in light of the circumstances under which it is made, is false or
misleading with respect to any material fact or omits to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. If at any time prior to the Effective Time any event or
information should be discovered by Alive which should be set forth in a
supplement to the Information Statement, Alive shall promptly inform
Encoding.com.
2.28 Voting Agreement. Each shareholder holding at least 5% of
----------------
the outstanding Alive Capital Stock has agreed in writing to vote for approval
of the Merger pursuant to Voting Agreements attached hereto as Exhibit C
---------
("Voting Agreements").
-------------------
2.29 Vote Required. The affirmative vote of the holders of (i) two-
-------------
thirds of the Alive Common Stock, the Alive Series A and the Alive Series B
voting together as a class, (ii) a majority of the Alive Series A voting
separately as a class and (iii) a majority of the Alive Series B voting
separately as a class, outstanding on the record date set by Alive for voting on
the Merger are the only votes of the holders of any of Alive's capital stock
necessary to approve this Agreement and the transactions contemplated hereby.
2.30 Board Approval. The Board of Directors of Alive has
--------------
unanimously (i) approved this Agreement and the Merger in accordance with the
provisions of the WBCA, (ii) determined that the Merger is in the best interests
of the stockholders of Alive and is on terms that are fair to such stockholders
and (iii) recommended that the stockholders of Alive approve this Agreement and
the Merger.
2.31 Compliance with the Hart-Scott-Rodino Act. Neither Alive's
-----------------------------------------
total assets or annual net sales exceed $10,000,000 within the meaning of, and
calculated in accordance with, the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, Section 7A(a)(3) of the Clayton Act, 15 U.S.C. (S) 18A, and
the regulations promulgated thereunder.
2.32 Tax Matters. Neither Alive nor, to the knowledge of Alive,
-----------
any of its officers, directors, shareholders or agents is aware of any
agreement, plan or other circumstance that would prevent the Merger from
constituting a "reorganization" within the meaning of Section 368(a) of the
Code.
2.33 Third Party Consents. Except as set forth in Schedule 2.33 of
--------------------
the Alive Disclosure Schedule, no consent or approval is needed from any third
party in order to effect the Merger, this Agreement or any of the transactions
contemplated hereby.
2.34 Year 2000. Alive's products are designed to be used prior to,
---------
during and after calendar year 2000 A.D., and all of Alive's products which are
material to Alive's business will record, store, process and calculate any
information dependent on or relating to such dates in the same manner and with
the same functionality, data integrity and performance as the products
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<PAGE>
record, store, process and calculate and present calendar dates on or before
December 31, 1999, or calculate any information dependent on or relating to such
dates (collectively, "Year 2000 Compliant"). To Alive's knowledge after
-------------------
reasonable investigation, all of Alive' internal computer systems, including,
without limitation, its accounting systems, are Year 2000 Compliant.
2.35 Representations Complete. None of the representations or
------------------------
warranties made by Alive herein or in any Schedule hereto, including the Alive
Disclosure Schedule, or certificate furnished by Alive pursuant to this
Agreement, when all such documents are read together in their entirety, contains
or will contain at the Effective Time any untrue statement of a material fact,
or omits or will omit at the Effective Time to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
SECTION THREE
3. Representations and Warranties of Encoding.com.
----------------------------------------------
Except as disclosed in a document dated as of the date of this
Agreement and delivered by Encoding.com to Alive prior to the execution and
delivery of this Agreement and specifically referring to a particular
representation or warranty in this Agreement (the "Encoding.com Disclosure
-----------------------
Schedule"), Encoding.com hereby represents and warrants to Alive as follows:
- --------
3.1 Organization, Good Standing and Qualification. Encoding.com is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the state of Delaware. Encoding.com has the requisite corporate power and
authority and all necessary government approvals to own, lease and operate its
properties and to carry on its business as now being conducted and as proposed
to be conducted, except where the failure to have such power, authority and
governmental approvals would not, individually or in the aggregate, have a
Material Adverse Effect on Encoding.com. Encoding.com is duly qualified or
licensed as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its business makes such qualification or
licensing necessary, except for such failures to be so qualified or licensed and
in good standing that would not, individually or in the aggregate, have a
Material Adverse Effect on Encoding.com. Encoding.com has delivered a true and
correct copy of the Certificate of Incorporation and Bylaws of Encoding.com, as
amended to date, to Alive. Encoding.com is not in violation of any of the
provisions of its Certificate of Incorporation or Bylaws.
3.2 Capitalization. The authorized capital of Encoding.com consists,
--------------
or will consist, immediately prior to the Closing, of:
(a) 35,000,000 shares of Preferred Stock: of which 5,000,000
shares have been designated Series A Preferred Stock, 4,983,787 shares of which
are issued and outstanding immediately prior to the Closing; of which 4,000,000
shares have been designated Series B Preferred Stock, 3,259,194 shares of which
are issued and outstanding immediately
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<PAGE>
prior to the Closing; of which 4,000,000 shares have been designated Series B-1
Preferred Stock, none of which are issued and outstanding immediately prior to
the Closing; of which 6,000,000 shares have been designated Series C Preferred
Stock, 5,309,266 shares of which are issued and outstanding immediately prior to
Closing; and of which 6,000,000 shares have been designated Series C-1 Preferred
Stock, none of which are issued and outstanding immediately prior to Closing.
The rights, privileges and preferences of the Preferred Stock are as stated in
the Restated Certificate. All of the outstanding shares of Preferred Stock have
been duly authorized, validly issued, fully paid and are nonassessable, have
been issued in compliance with all applicable federal and state securities laws
and are not subject to preemptive rights or rights of first refusal created by
statute, the Certificate of Incorporation or bylaws of Encoding.com or any
agreement to which Encoding.com is a party or by which it is bound.
(b) 100,000,000 shares of Common Stock, 6,138,437 shares of
which are issued and outstanding immediately prior to the Closing. All of the
outstanding shares of Common Stock have been duly authorized, validly issued,
fully paid and are nonassessable and have been issued in compliance with all
applicable federal and state securities laws. The shares of Encoding.com Common
Stock to be issued pursuant to the Merger will be duly authorized, validly
issued, fully paid, and non-assessable, have been issued in compliance with all
applicable and state securities laws and are not subject to preemptive rights or
rights of first refusal created by statute, the Certificate of Incorporation or
bylaws of Encoding.com or any agreement to which Encoding.com is a party or by
which it is bound.
(c) Encoding.com has reserved 4,660,000 shares of Common Stock
for issuance to officers, directors, employees and consultants of Encoding.com
pursuant to its 1998 Stock Option Plan duly adopted by the Board of Directors
and approved by Encoding.com stockholders (the "Stock Plan"). Of such reserved
----------
shares of Common Stock, options to purchase 3,833,900 shares have been granted
and are currently outstanding, 764,187 shares of Common Stock have been issued
upon exercise of options granted thereunder and 61,913 shares of Common Stock
remain available for issuance to officers, directors, employees and consultants
pursuant to the Stock Plan.
(d) Except for (i) outstanding options issued pursuant to the
Stock Plan and (ii) outstanding warrants to purchase 41,053 shares of Series C
Preferred Stock, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal or similar rights)
or agreements, orally or in writing, for the purchase or acquisition from
Encoding.com of any shares of its capital stock. As of the date of this
Agreement, Encoding.com has reserved sufficient shares of Common Stock for
issuance upon conversion of the Series A Series B and Series C Preferred Stock.
3.3 Subsidiaries. Encoding.com does not have any Subsidiaries.
------------
3.4 Authority. Encoding.com has all requisite corporate power and
---------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of
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<PAGE>
Encoding.com (other than, with respect to the Merger, the filing and recordation
of appropriate merger documents as required by the WBCA). This Agreement has
been duly executed and delivered by Encoding.com and constitutes the valid and
binding obligations of Encoding.com enforceable against Encoding.com in
accordance with its terms, except to the extent that enforceability may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other laws affecting the enforcement of creditors' rights generally and by
general principles of equity, regardless of whether such enforceability is
considered in a proceeding at law or in equity.
3.5 Valid Issuance of Securities. The Encoding.com Common Stock that
----------------------------
is being issued to the holders of Alive Common Stock hereunder, when issued,
sold and delivered in accordance with the terms hereof for the consideration
expressed herein, will be duly and validly issued, fully paid and nonassessable
and free of restrictions on transfer other than restrictions on transfer under
this Agreement and applicable state and federal securities laws. Based in part
upon the representations of the Alive Shareholders in the Investment
Representation Agreement and subject to the provisions of Section 3.6 below, the
Encoding.com Common Stock will be issued in compliance with all applicable
federal and state securities laws.
3.6 No Conflict; Required Filings and Consents.
------------------------------------------
(a) The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default under (with or without notice or lapse of
time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a benefit under (i) any provision of
the Certificate of Incorporation or Bylaws of Encoding.com, or (ii) any material
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Encoding.com or its properties or
assets.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to Encoding.com in connection with the execution and delivery of
this Agreement or the consummation of the transactions contemplated hereby,
except for (i) the filing of the Merger Documents, together with the required
officers' certificates, as provided in Section 1.2, (ii) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under the Exchange Act, the Securities Act, applicable state
securities laws and the securities laws of any foreign country; and (iii) such
other consents, authorizations, filings, approvals and registrations which, if
not obtained or made, would not have a Material Adverse Effect on Encoding.com
and would not prevent, or materially alter or delay any of the transactions
contemplated by this Agreement.
3.7 Litigation. There is no Suit pending or, to Encoding.com's
----------
knowledge, currently threatened against Encoding.com or any of its subsidiaries
that questions the validity or enforceability of the Agreement or the right of
Encoding.com to enter into it, or to consummate the transactions contemplated
hereby or thereby, or that might result, either individually or in the
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aggregate, in any Material Adverse Effect on Encoding.com or any of its
subsidiaries, or any change in the current equity ownership of Encoding.com or
any of its subsidiaries, nor is Encoding.com aware that there is any basis for
the foregoing. For the purposes of this Section 3.7, "Suit" shall include but
----
not be limited to any action, suit, proceeding or investigation pending or, to
Encoding.com's knowledge, currently threatened against Encoding.com or any of
its subsidiaries involving the prior employment of any of Encoding.com's current
employees, such employees use in connection with Encoding.com's business of any
information or techniques proprietary to any of such employees' former
employers, such employees' obligations under any agreements with prior
employers, or negotiations by Encoding.com with potential investors in
Encoding.com or its proposed business. Neither Encoding.com nor any of its
subsidiaries is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by
Encoding.com or any of its subsidiaries currently pending or which Encoding.com
or any of its subsidiaries intends to initiate.
3.8 Intellectual Property. To its knowledge, Encoding.com owns or
---------------------
possesses sufficient legal rights to use all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, licenses, information and proprietary
rights and processes necessary for its business as presently conducted and as
proposed to be conducted without any conflict with, or infringement of, the
rights of others. Encoding.com has not received any communications alleging that
Encoding.com has violated or, by conducting its business, would violate any of
the patents, trademarks, service marks, tradenames, copyrights, trade secrets or
other proprietary rights or processes of any other person or entity. To
Encoding.com's knowledge, there is no unauthorized use, disclosure, infringement
or misappropriation of any intellectual property rights of Encoding.com.
Encoding.com is not aware that any of its employees is obligated under any
contract (including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such employee's best
efforts to promote the interest of Encoding.com or that would conflict with
Encoding.com's business. Neither the execution or delivery of the Agreements,
nor the carrying on of Encoding.com's business by the employees of Encoding.com,
nor the conduct of Encoding.com's business as proposed, will, to Encoding.com's
knowledge, conflict with or result in a breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any such employee is now obligated. Encoding.com does not
believe it is or will be necessary to use any inventions of any of its employees
(or persons it currently intends to hire) made prior to their employment by
Encoding.com.
3.9 Compliance with Contracts and Other Instruments.
-----------------------------------------------
(a) Encoding.com is not in violation, breach or default of any
provisions of its Restated Certificate or Bylaws or of any instrument, judgment,
order, writ, decree, agreement, note, mortgage, contract or other instrument to
which it is a party or by which it is bound or, to its knowledge, of any
provision of federal or state statute, rule or regulation applicable to
Encoding.com. The execution, delivery and performance of the Agreements and the
consummation of the transactions contemplated hereby or thereby will not
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result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument, judgment, order, writ, decree, agreement, note,
mortgage, contract or other instrument or document or an event which results in
the creation of any lien, charge or encumbrance upon any assets of Encoding.com.
(b) To its knowledge, Encoding.com has avoided every condition,
and has not performed any act, the occurrence of which would result in
Encoding.com's loss of any right granted under any license, distribution
agreement or other agreement.
3.10 Agreements; Action.
------------------
(a) There are no agreements, understandings or proposed
transactions between Encoding.com and any of its officers, directors,
affiliates, or any affiliate thereof.
(b) Except for agreements explicitly contemplated by this
Agreement, there are no agreements, understandings, instruments, contracts or
proposed transactions to which Encoding.com is a party or by which it is bound
that involve (i) obligations (contingent or otherwise) of, or payments to,
Encoding.com in excess of, $50,000, (ii) the license of any patent, copyright,
trade secret or other proprietary right to or from Encoding.com or any of its
affiliates, or (iii) the grant of rights to manufacture, produce, assemble,
license, market, or sell its products to any other person or affect
Encoding.com's exclusive right to develop, manufacture, assemble, distribute,
market or sell its products.
(c) Neither Encoding.com nor any of its subsidiaries has (i)
declared or paid any dividends, or authorized or made any distribution upon or
with respect to any class or series of its capital stock, (ii) incurred any
indebtedness for money borrowed or incurred any other liabilities individually
in excess of $50,000 or in excess of $200,000 in the aggregate, (iii) made any
loans or advances to any person, other than ordinary advances for travel
expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or
rights, other than the sale of its inventory in the ordinary course of business.
(d) Encoding.com has not engaged in the past one (1) year in any
discussion (i) with any representative of any corporation, corporations,
partnership, association or other business entity or any individual
(collectively, "Person") regarding the merger of Encoding.com with or into any
------
such Person, (ii) with any representative of any Person regarding the sale,
conveyance or disposition of all or substantially all of the assets of
Encoding.com or a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of Encoding.com would be disposed
of, or (iii) regarding any other form of liquidation, sale, dissolution or
winding up of Encoding.com.
3.11 Representations Complete. None of the representations or
------------------------
warranties made by Encoding.com herein or in any Schedule hereto, including the
Encoding.com Disclosure Schedule, or certificate furnished by Encoding.com
pursuant to this Agreement, when all such documents are read together in their
entirety, contains or will contain at the Effective Time any untrue statement of
a material fact, or omits or will omit at the Effective Time to state any
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material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
3.12 No Conflict of Interest. Encoding.com is not indebted, directly
-----------------------
or indirectly, to any of its officers or directors or to their respective
spouses or children, in any amount whatsoever other than in connection with
expenses or advances of expenses incurred in the ordinary course of business or
relocation expenses of employees. To Encoding.com's knowledge, none of
Encoding.com's officers or directors, or any members of their immediate
families, are, directly or indirectly, indebted to Encoding.com (other than in
connection with purchases of Encoding.com's stock) or have any direct or
indirect ownership interest in any Person with which Encoding.com is affiliated
or with which Encoding.com has a business relationship, or any Person which
competes with Encoding.com except that officers, directors and/or stockholders
of Encoding.com may own stock in (but not exceeding two percent of the
outstanding capital stock of) any publicly traded companies that may compete
with Encoding.com. To Encoding.com's knowledge, none of Encoding.com's officers
or directors or any members of their immediate families are, directly or
indirectly, interested in any material contract with Encoding.com. Encoding.com
is not a guarantor or indemnitor of any indebtedness of any other Person. The
Encoding.com Disclosure Schedule lists all material transactions with
Encoding.com's affiliates.
3.13 Title to Property and Assets. Encoding.com owns its property
----------------------------
and assets free and clear of all mortgages, liens, loans and encumbrances,
except such encumbrances and liens which arise in the ordinary course of
business and do not materially impair Encoding.com's ownership or use of such
property or assets. With respect to the property and assets it leases,
Encoding.com is in compliance with such leases and, to its knowledge, holds a
valid leasehold interest free of any liens, claims or encumbrances.
3.14 Financial Statements. Encoding.com has made available to Alive
--------------------
its audited financial statements (including balance sheet, income statement and
statement of cash flows) as of December 31, 1998 and for the fiscal year ended
December 31, 1998 and its unaudited financial statements (including balance
sheet, income statement and statement of cash flows) as of September 30, 1999
and for the nine-month period ended September 30, 1999 (collectively, the
"Encoding.com Financial Statements"). The Encoding.com Financial Statements have
---------------------------------
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated, except that the
unaudited Encoding.com Financial Statements may not contain all footnotes
required by generally accepted accounting principles. The Encoding.com Financial
Statements fairly present the financial condition and operating results of
Encoding.com as of the dates, and for the periods, indicated therein, subject to
normal year-end audit adjustments. Except as set forth in the Encoding.com
Financial Statements, Encoding.com has no liabilities, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
subsequent to September 30, 1999 and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in the Encoding.com
Financial Statements, which, in both cases, individually or in the aggregate are
not material to the financial condition or operating results of Encoding.com.
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3.15 Changes. Since September 30, 1999, there has not been, occurred
-------
or arisen:
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of Encoding.com;
(b) any waiver or compromise by Encoding.com of a valuable right
or of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by Encoding.com, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of Encoding.com;
(d) any material change to a material contract or agreement by
which Encoding.com or any of its assets is bound or subject;
(e) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(f) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(g) any resignation or termination of employment of any officer
or key employee of Encoding.com; and Encoding.com is not aware of any impending
resignation or termination of employment of any such officer or key employee;
(h) any mortgage, pledge, transfer or grant of a security
interest in, or lien, created by Encoding.com, with respect to any of its
material properties or assets, except liens for taxes not yet due or payable;
(i) any loans or guarantees made by Encoding.com to or for the
benefit of its employees, officers, stockholders or directors, or any members of
their immediate families, other than travel advances and other advances made in
the ordinary course of its business;
(j) any declaration, setting aside or payment or other
distribution in respect to any of Encoding.com's capital stock, or any direct or
indirect redemption, purchase, or other acquisition of any of such stock by
Encoding.com;
(k) to Encoding.com's knowledge, any other event or condition of
any character that might materially and adversely affect the business,
properties, prospects or financial condition of Encoding.com; or
(l) any arrangement or commitment by Encoding.com to do any of
the things described in this Section 3.15.
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<PAGE>
3.16 Employee Benefit Plans. Encoding.com does not have any Employee
----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
3.17 Tax Returns and Payments. Encoding.com has filed all Returns as
------------------------
required by law which are true and correct in all material respects.
Encoding.com has paid all Taxes due. Encoding.com has no notice of any proposed
tax deficiency which may be asserted which would materially and adversely affect
the business, properties, prospects or financial condition of Encoding.com.
Encoding.com has not taken or agreed to take any action, and does not know of
any circumstance that would prevent the Merger from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code.
3.18 Insurance. Encoding.com has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed.
3.19 Labor Agreements and Actions. Encoding.com is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of
Encoding.com, has sought to represent any of the employees, representatives or
agents of Encoding.com. There is no strike or other labor dispute involving
Encoding.com pending, or to the knowledge of Encoding.com threatened, which
could have a material adverse effect on the assets, properties, financial
condition, operating results, or business of Encoding.com, nor is Encoding.com
aware of any labor organization activity involving its employees. The employment
of each officer and employee of Encoding.com is terminable at the will of
Encoding.com. To its knowledge, Encoding.com has complied in all material
respects with all applicable state and federal equal employment opportunity laws
and with other laws related to employment.
3.20 Confidential Information and Invention Assignment Agreements.
------------------------------------------------------------
Each employee, consultant and officer of Encoding.com has executed an agreement
with Encoding.com regarding confidentiality and proprietary information
substantially in the form or forms made available to the counsel for Alive.
Encoding.com is not aware that any of its employees or consultants is in
violation thereof, and Encoding.com will use its best efforts to prevent any
such violation.
3.21 Permits. Encoding.com and each of its subsidiaries has all
-------
franchises, permits, licenses and any similar authority necessary for the
conduct of its business, the lack of which could materially and adversely affect
the business, properties, prospects, or financial condition of Encoding.com and
it believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as presently planned to be conducted.
Encoding.com is not in default in any material respect under any of such
franchises, permits, licenses or other similar authority.
3.22 Corporate Documents. The Restated Certificate and Bylaws of
-------------------
Encoding.com are in the form delivered to counsel for Alive. The copy of the
minute books of Encoding.com made available to Alive's counsel contains minutes
of all meetings of directors
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<PAGE>
and stockholders and all actions by written consent without a meeting by the
directors and stockholders since the date of incorporation and reflects all
actions by the directors (and any committee of directors) and stockholders with
respect to all transactions referred to in such minutes accurately in all
material respects.
3.23 Liabilities. Except for those liabilities set forth on
-----------
Schedule 3.23 to the Encoding.com Disclosure Schedule and except as otherwise
disclosed hereunder, Encoding.com has no debts, commitments, obligations and
other liabilities of any nature whatsoever individually in excess of $25,000 and
in the aggregate in excess of $50,000.
3.24 Tax Matters. Neither Encoding.com nor any of its Subsidiaries
-----------
nor, to the knowledge of Encoding.com, any of their respective affiliates or
agents is aware of any agreement, plan or other circumstance that would prevent
the Merger from constituting a "reorganization" within the meaning of Section
368(a) of the Code.
3.25 Year 2000. Encoding.com's products are designed to be used
---------
prior to, during and after calendar year 2000 A.D., and all of Encoding.com's
products which are material to Encoding.com's business will record, store,
process and calculate any information dependent on or relating to such dates in
the same manner and with the same functionality, data integrity and performance
as the products record, store, process and calculate and present calendar dates
on or before December 31, 1999, or calculate any information dependent on or
relating to such dates (collectively, "Year 2000 Compliant"). To the knowledge
-------------------
of Encoding.com, all of Encoding.com's internal computer systems, including,
without limitation, its accounting systems, are Year 2000 Compliant.
3.26 Information Statement. None of the information (including
---------------------
financial data) relating to Encoding.com supplied by Encoding.com to be included
in the Information Statement (as defined below) at the time the Information
Statement is mailed to stockholders of Alive in connection with the solicitation
of written consents with respect to the Merger and the other transactions
contemplated hereby, and at all times subsequent to such dates up to and
including the Effective Time, will contain any statement which, at the time and
in light of the circumstances under which it is made, is false or misleading
with respect to any material fact or omits to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading. If at any time prior to the Effective Time any event or information
should be discovered by Encoding.com which should be set forth in a supplement
to the Information Statement, Encoding.com shall promptly inform Alive.
3.27 Third Party Consents. Except as set forth in Schedule 3.27 of
--------------------
the Encoding.com Disclosure Schedule, no consent or approval is needed from any
third party in order to effect the Merger, this Agreement or any of the
transactions contemplated hereby.
3.28 Certain Agreements Affected by the Merger. Neither the
-----------------------------------------
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including,
without limitation, severance, unemployment compensation, golden parachute,
bonus or otherwise) becoming due to any director or employee of Encoding.com or
any of its Subsidiaries, (ii) materially increase any benefits otherwise payable
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by Encoding.com, or (iii) result in the acceleration of the time of payment or
vesting of any such benefits.
SECTION FOUR
4. Conduct Prior to the Effective Time.
-----------------------------------
4.1 Conduct of Business of Alive and Encoding.com. During the
---------------------------------------------
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, each of Alive and
Encoding.com agrees (except to the extent expressly contemplated by this
Agreement or as consented to in writing by the other party), to carry on its
and, if applicable, its subsidiaries', business in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted, to
pay, and, if applicable, to cause its subsidiaries to pay, debts and Taxes when
due subject (i) to good faith disputes over such debts or Taxes and (ii) in the
case of Taxes of Alive, to Encoding.com's consent to the filing of material Tax
Returns if applicable (which consent shall not unreasonably be withheld), to pay
or perform other obligations when due, and to use all reasonable efforts
consistent with past practice and policies to preserve intact its present
business organization, keep available the services of its present officers and
key employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
to the end that its goodwill and ongoing business shall be unimpaired at the
Effective Time. Each of Alive and Encoding.com agrees to promptly notify the
other of any event or occurrence not in the ordinary course of its business, and
of any event which could reasonably be likely to have a Material Adverse Effect.
Without limiting the generality of the foregoing, except as expressly
contemplated by this Agreement, neither Alive nor Encoding.com shall do, cause
or permit any of the following, or allow, cause or permit any of its
subsidiaries, if applicable, to do, cause or permit any of the following,
without the prior written consent of the other:
(a) Charter Documents. Cause or permit any amendments to its
-----------------
Certificate of Incorporation or Articles of Incorporation, as the case may be,
or Bylaws;
(b) Dividends; Changes in Capital Stock. Declare or pay any
-----------------------------------
dividends on or make any other distributions (whether in cash, stock or
property) in respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of shares
in connection with any termination of service to it or its subsidiaries;
(c) Stock Option Plans, Etc. Except as required by the Alive
-----------------------
Option Plan, accelerate, amend or change the period of exercisability or vesting
of options or other rights granted under its stock plans or authorize cash
payments in exchange for any options or other rights granted under any of such
plans.
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<PAGE>
(d) Other. Take, or agree in writing or otherwise to take,
-----
any of the actions described in Sections 4.1(a) through (c) above, or any action
which would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not to
perform its covenants hereunder.
4.2 Conduct of Business of Alive. During the period from the date of
----------------------------
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, except as expressly contemplated by this
Agreement, Alive shall not do, cause or permit any of the following, or allow,
cause or permit any of its subsidiaries to do, cause or permit any of the
following, without the prior written consent of Encoding.com:
(a) Material Contracts. Enter into any material contract or
------------------
commitment, or violate, amend or otherwise modify or waive any of the terms of
any of its Material Contracts, other than in the ordinary course of business
consistent with past practice;
(b) Issuance of Securities. Issue, deliver or sell or
----------------------
authorize or propose the issuance, delivery or sale of, or purchase or propose
the purchase of, any shares of its capital stock or securities convertible into,
or subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities; other than (i) the issuance of shares of its Common
Stock pursuant to the exercise of stock options, warrants or other rights
therefor outstanding as of the date of this Agreement; (ii) the issuance of
convertible debt or equity securities, provided that no additional shares of
Encoding.com Common Stock shall be issued in the Merger in exchange for any such
convertible debt or equity security, and provided further that any such debt
securities issued have either been repaid or converted to Alive Common Stock
prior to the Effective Time; or (iii) repurchases of shares from former
employees, directors and consultants in accordance with Section 4.1(b) above.
(c) Intellectual Property. Transfer to any person or entity any
---------------------
rights to its Intellectual Property other than licenses granted in the ordinary
course of business;
(d) Exclusive Rights. Enter into or amend any agreements
----------------
pursuant to which any other party is granted exclusive marketing or other
exclusive rights of any type or scope with respect to any of its products or
technology;
(e) Dispositions. Sell, lease, license or otherwise dispose
------------
of or encumber any of its properties or assets which are material, individually
or in the aggregate, to its and, if applicable, its Subsidiaries', business,
taken as a whole, except in the ordinary course of business consistent with past
practice;
(f) Indebtedness. Incur any indebtedness for borrowed money or
------------
guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others in an amount in excess of $15,000 or
outside the normal course of business;
(g) Leases. Enter into any operating lease;
------
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<PAGE>
(h) Payment of Obligations. Pay, discharge or satisfy in an
----------------------
amount in excess of $15,000 in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise) arising
other than in the ordinary course of business, other than the payment, discharge
or satisfaction of liabilities reflected or reserved against in the Alive
Financial Statements;
(i) Capital Expenditures. Make any capital expenditures,
--------------------
capital additions or capital improvements except in the ordinary course of
business and consistent with past practice;
(j) Insurance. Materially reduce the amount of any material
---------
insurance coverage provided by existing insurance policies;
(k) Termination or Waiver. Terminate or waive any right of
---------------------
substantial value, other than in the ordinary course of business;
(l) Employee Benefit Plans; New Hires; Pay Increases. Adopt
------------------------------------------------
or amend any employee benefit or stock purchase or option plan, or hire any new
director level or officer level employee (except that it may hire a replacement
for any current director level or officer level employee if it first provides
Encoding.com advance notice regarding such hiring decision), pay any special
bonus or special remuneration to any employee or director, or increase the
salaries or wage rates of its employees, other than increases committed to prior
to the date of this Agreement as set forth on Schedule 2.8(h) to the Alive
Disclosure Schedule;
(m) Severance Arrangement. Grant any severance or termination
---------------------
pay (i) director or officer or (ii) to any other employee except (A) payments
made pursuant to standard written agreements outstanding on the date of this
Agreement or (B) grants which are made in the ordinary course of business in
accordance with its standard past practice;
(n) Lawsuits. Commence a lawsuit other than (i) for the routine
--------
collection of bills, (ii) in such cases where it in good faith determines that
failure to commence suit would result in the material impairment of a valuable
aspect of its business, provided that it consults with Encoding.com prior to the
filing of such a suit, or (iii) for a breach of this Agreement;
(o) Acquisitions. Acquire or agree to acquire by merging or
------------
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to its business, taken as a whole;
(p) Taxes. Other than in the ordinary course of business,
-----
make or change any material election in respect of Taxes, adopt or change
any accounting method in respect of Taxes, file any material Tax Return or any
amendment to a material Tax Return, enter into any closing agreement, settle any
claim or assessment in respect of Taxes, or consent to any
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<PAGE>
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(q) Notices. Alive shall give all notices and other
-------
information to the employees of Alive, any collective bargaining unit
representing any group of employees of Alive, and any applicable government
authority under the WARN Act, the National Labor Relations Act, the Internal
Revenue Code, COBRA, and other applicable law required to be given in connection
with the transactions provided for in this Agreement, except where the right to
receive such notice of information has been waived;
(r) Revaluation. Revalue any of its assets, including without
-----------
limitation writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business; or
(s) Other. Take or agree in writing or otherwise to take, any
-----
of the actions described in Sections 4.2(a) through (r) above, or any action
which would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not to
perform its covenants hereunder.
SECTION FIVE
5. Additional Agreements.
---------------------
5.1 Best Efforts and Further Assurances. Each of the parties to
-----------------------------------
this Agreement shall use its best efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable request of
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby.
5.2 Consents; Cooperation.
---------------------
(a) Each of Encoding.com and Alive shall use its reasonable best
efforts to promptly (i) obtain from any Governmental Entity any consents,
licenses, permits, waivers, approvals, authorizations or orders required to be
obtained or made by Encoding.com or Alive or, if applicable, any of their
subsidiaries in connection with the authorization, execution and delivery of
this Agreement and the consummation of the transactions contemplated hereunder,
and (ii) make all necessary filings, and thereafter make any other required
submissions, with respect to this Agreement and the Merger required under the
Securities Act and the Exchange Act and any other applicable federal, state or
foreign securities laws.
(b) Each of Encoding.com and Alive shall use all reasonable
efforts to resolve such objections, if any, as may be asserted by any
Governmental Entity with respect to the transactions contemplated by this
Agreement under the Sherman Act, as amended, the Clayton Act, as amended, the
Federal Trade Commission Act, as amended, and any other
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Federal, state or foreign statutes, rules, regulations, orders or decrees that
are designed to prohibit, restrict or regulate actions having the purpose or
effect of monopolization or restraint of trade (collectively, "Antitrust Laws").
--------------
(c) From the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement, each party shall promptly
notify the other party in writing of any pending or, to the knowledge of such
party, threatened action, proceeding or investigation by any Governmental Entity
or any other person (i) challenging or seeking material damages in connection
with this Agreement or the transactions contemplated hereunder or (ii) seeking
to restrain or prohibit the consummation of the Merger or the transactions
contemplated hereunder or otherwise limit the right of Encoding.com or its
subsidiaries to own or operate all or any portion of the businesses or assets of
Alive.
(d) Each of Encoding.com and Alive shall give or cause to be
given any required notices to third parties, and use its reasonable best efforts
to obtain all consents, waivers and approvals from third parties (i) necessary,
proper or advisable to consummate the transactions contemplated hereunder, (ii)
disclosed or required to be disclosed in the Alive Disclosure Schedule or the
Encoding.com Disclosure Schedule, or (iii) required to prevent a Material
Adverse Effect on Alive or Encoding.com from occurring prior or after the
Effective Time. In the event that Encoding.com or Alive shall fail to obtain any
third party consent, waiver or approval described in this Section 5.2(d), it
shall use its reasonable best efforts, and shall take any such actions
reasonably requested by the other party, to minimize any adverse effect upon
Encoding.com and Alive, their respective subsidiaries, if any, and their
respective businesses resulting (or which could reasonably be expected to result
after the Effective Time) from the failure to obtain such consent, waiver or
approval.
(e) Each of Encoding.com and Alive will take all reasonable
actions necessary to comply promptly with all legal requirements which may be
imposed on them with respect to the consummation of the transactions
contemplated by this Agreement and will promptly cooperate with and furnish
information to any party hereto necessary in connection with any such
requirements imposed upon such other party in connection with the consummation
of the transactions contemplated by this Agreement and will take all reasonable
actions necessary to obtain (and will cooperate with the other parties hereto in
obtaining) any consent, approval, order or authorization of, or any
registration, declaration or filing with, any Governmental Entity or other
person, required to be obtained or made in connection with the taking of any
action contemplated by this Agreement.
(f) Each of Alive and Encoding.com and their respective
Subsidiaries, if any, will use its reasonable best efforts to cause the Merger
to qualify as, and will not (either before or after consummation of the Merger)
take any actions or fail to take any actions that might reasonably be expected
to prevent the Merger from qualifying as a reorganization within the meaning of
Section 368(a) of the Code.
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5.3 Access to Information.
---------------------
(a) Alive shall afford Encoding.com and its accountants, counsel
and other representatives, reasonable access during normal business hours during
the period prior to the Effective Time to (i) all of Alive's properties, books,
contracts, commitments and records, and (ii) all other information concerning
the business, properties and personnel of Alive as Encoding.com may reasonably
request. Alive agrees to provide to Encoding.com and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. Encoding.com shall afford Alive and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all of Encoding.com's properties,
books, contracts, commitments and records, and (ii) all other information
concerning the business, properties and personnel of Encoding.com as Alive may
reasonably request. Encoding.com agrees to provide to Alive and its accountants,
counsel and other representatives copies of internal financial statements
promptly upon request.
(b) Subject to compliance with applicable law, from the date
hereof until the Effective Time, each of Encoding.com and Alive shall confer on
a regular and frequent basis with one or more representatives of the other party
to report operational matters of materiality and the general status of ongoing
operations.
(c) No information or knowledge obtained in any investigation
pursuant to this Section 5.3 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger.
5.4 Confidentiality. The parties acknowledge that Encoding.com and
---------------
Alive have previously executed a non-disclosure agreement (the "Confidentiality
---------------
Agreement"), which Confidentiality Agreement shall continue in full force and
- ---------
effect in accordance with its terms.
5.5 Public Disclosure. Unless otherwise permitted by this
-----------------
Agreement, Encoding.com and Alive shall consult with each other before issuing
any press release or otherwise making any public statement or making any other
public (or non-confidential) disclosure (whether or not in response to an
inquiry) regarding the terms of this Agreement and the transactions contemplated
hereby, and neither shall issue any such press release or make any such
statement or disclosure without the prior approval of the other (which approval
shall not be unreasonably withheld), except as may be required by law.
5.6 FIRPTA. Alive shall, prior to the Closing Date, provide
------
Encoding.com with a statement that the shares of Alive Common Stock do not
constitute a "United States real property interest" within the meaning of
Section 897(c) of the Code as described in Treasury Regulation Section 1.1445-
2(c)(3).
5.7 State Statutes. If any state takeover law shall become
--------------
applicable to the transactions contemplated by this Agreement, Encoding.com and
its Board of Directors or Alive and its Board of Directors, as the case may be,
shall use their reasonable best efforts to grant such approvals and take such
actions as are necessary so that the transactions contemplated by this
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Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise to minimize the effects of such
state takeover law on the transactions contemplated by this Agreement.
5.8 Escrow Agreement. On or before the Effective Time, the Escrow
----------------
Agent and the Stockholders' Representative (as defined in Section 8 below) will
execute the Escrow Agreement contemplated by Section 8 in the form attached
hereto as Exhibit D ("Escrow Agreement").
--------- ----------------
5.9 Blue Sky Laws. Encoding.com shall take such steps as may be
-------------
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable to the issuance of the Encoding.com Common Stock in
connection with the Merger. Alive shall use its best efforts to assist
Encoding.com as may be necessary to comply with the securities and blue sky laws
of all jurisdictions which are applicable in connection with the issuance of
Encoding.com Common Stock in connection with the Merger.
5.10 Stockholder Approval.
--------------------
(a) Information Statement. As soon as practicable after the
---------------------
execution of this Agreement, Alive shall prepare, with the cooperation of
Encoding.com, an Information Statement (the "Information Statement") for the
---------------------
stockholders of Alive to approve this Agreement, the Agreement and Plan of
Merger and the transactions contemplated hereby and thereby. The Information
Statement shall constitute a disclosure document for the offer and issuance of
the shares of Encoding.com Common Stock to be received by the holders of the
capital stock of Alive in the Merger.
(b) Encoding.com and Alive shall each use its best efforts to
cause the Information Statement to comply with applicable federal and state
securities laws requirements. Each of Encoding.com and Alive agrees to provide
promptly to the other such information concerning its business and financial
statements and affairs as, in the reasonable judgment of the providing party or
its counsel, may be required or appropriate for inclusion in the Information
Statement, or in any amendments or supplements thereto, and to cause its counsel
and auditors to cooperate with the other's counsel and auditors in the
preparation of the Information Statement. The information supplied by each of
Encoding.com and Alive for inclusion in the Information Statement shall not, at
(i) the time the Information Statement is first mailed to the holders of capital
stock of Alive, (ii) the time of the Special Meeting (as defined below), and
(iii) the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading. Alive will promptly advise
Encoding.com, and Encoding.com will promptly advise Alive, in writing if at any
time prior to the Effective Time either Alive or Encoding.com shall obtain
knowledge of any facts that might make it necessary or appropriate to amend or
supplement the Information Statement in order to make the statements contained
or incorporated by reference therein not misleading or to comply with applicable
law.
(c) Subject to Section 5.12 below, the Information Statement
shall contain the unanimous recommendation of the Board of Directors of Alive
that the Alive
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stockholders approve the Merger and this Agreement and the conclusion of the
Board of Directors that the terms and conditions of the Merger are fair and
reasonable to the stockholders of Alive. Anything to the contrary contained
herein notwithstanding, Alive shall not include in the Information Statement any
information with respect to Encoding.com or its affiliates or associates, the
form and content of which information shall not have been approved by
Encoding.com prior to such inclusion.
(d) The Information Statement shall include as an attachment an
Investor Representation Statement, in substantially the form attached hereto as
Exhibit E (an "Investor Representation Statement"), to be completed by each
- --------- ---------------------------------
shareholder of Alive and delivered to Encoding.com for purposes of confirming
the availability of an exemption from registration under the Securities Act for
the issuance by Encoding.com of shares of Encoding.com Common Stock in the
Merger.
5.11 Special Meeting of Stockholders. As promptly as practicable
-------------------------------
after the date hereof, Alive shall take all action necessary in accordance with
the WBCA and its Articles of Incorporation and Bylaws to solicit and obtain the
written consent of the Alive stockholders for the purposes of approving the
adoption of this Agreement and the transactions contemplated hereby and thereby.
Alive shall consult with Encoding.com regarding the date of the consent
solicitation. Alive shall use its best efforts to solicit from the stockholders
of Alive the required consents for approval of the Merger and shall take all
other action necessary or advisable to secure the consent of stockholders
required under the WBCA and its Articles of Incorporation and Bylaws to effect
the Merger.
5.12 Voting Agreement. Alive shall use its best efforts to cause
----------------
each holder of more than 5% of the shares of Alive Common Stock issued and
outstanding to execute and deliver to Encoding.com a Voting Agreement
substantially in the form of Exhibit C attached hereto concurrently with the
---------
execution of this Agreement.
5.13 Maintenance of Alive Indemnification Obligations.
------------------------------------------------
(a) Subject to and following the Effective Time, Encoding.com
shall indemnify and hold harmless the Indemnified Alive Parties (as defined
below) to the extent provided in the Bylaws or Articles of Incorporation of
Alive, in each case as in effect as of the date of this Agreement. Encoding.com
shall keep in effect such provisions, which shall not be amended except as
required by applicable law or to make changes permitted by the WBCA that would
enlarge the rights to indemnification available to the Indemnified Alive Parties
and changes to provide for exculpation of director and officer liability to the
fullest extent permitted by the WBCA. For purposes of this Section 5.12,
"Indemnified Alive Parties" shall mean the individuals who were officers,
-------------------------
directors, employees and agents of Alive on or prior to the Effective Time.
(b) Subject to and following the Effective Time, Encoding.com
shall be obligated to pay the reasonable expenses, including reasonable
attorney's fees, that may be incurred by any Indemnified Alive Party in
enforcing the rights provided in this Section 5.12 and shall make any advances
of such expenses to the Indemnified Alive Party that would be available
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under the Bylaws or Articles of Incorporation of Alive (in each case as in
effect as of the date of this Agreement) with regard to the advancement of
indemnifiable expenses, subject to the undertaking of such party to repay such
advances in the event that it is ultimately determined that such party is not
entitled to indemnification.
(c) The provisions of this Section 5.12 shall be in addition to
any other rights available to the Indemnified Alive Parties, shall survive the
Effective Time of the Merger, and are expressly intended for the benefit of the
Indemnified Alive Parties.
SECTION SIX
6. Conditions to the Merger.
------------------------
6.1 Conditions to Obligations of Each Party to Effect the Merger.
------------------------------------------------------------
The respective obligations of each party to this Agreement to consummate and
effect this Agreement and the transactions contemplated hereby shall be subject
to the satisfaction on or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall
--------------------
have been duly approved and adopted by the affirmative vote of the holders of
(i) a two-thirds of the Alive Common Stock, the Alive Series A and the Alive
Series B voting together as a class, (ii) majority of the Alive Series A voting
separately as a class and (iii) a majority of the Alive Series B voting
separately as a class, outstanding on the record date set by Alive for voting on
the Merger.
(b) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal. In the event an
injunction or other order shall have been issued, each party agrees to use its
reasonable diligent efforts to have such injunction or other order lifted. In
addition, no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal or
regulatory restraint provision limiting or restricting Encoding.com's conduct or
operation of the business of Alive and its subsidiaries, following the Merger
shall be in effect, nor shall any proceeding brought by an administrative agency
or commission or other Governmental Entity, domestic or foreign, seeking the
foregoing be pending.
(c) Governmental Approval. Encoding.com and Alive and, as
---------------------
applicable, their respective subsidiaries shall have timely obtained from each
Governmental Entity all approvals, waivers and consents, if any, necessary for
consummation of or in connection with the Merger and the several transactions
contemplated hereby, including, without
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limitation, such approvals, waivers and consents as may be required under the
Securities Act and under any state securities laws.
(d) Tax Opinion. Encoding.com and Alive shall have received a
-----------
written opinion of Heller Ehrman White & with respect to federal income tax
laws, substantially in the form of Exhibit H hereto and based upon
---------
representations of Alive and Encoding.com substantially in the form of
Exhibit I-1 and Exhibit I-2 hereto.
- ----------- -----------
(e) Escrow Agreement. Encoding.com, Alive, Escrow Agent and the
----------------
Stockholders' Representative (as defined in Section 8 below) shall have entered
into an Escrow Agreement substantially in the form attached hereto as Exhibit D.
---------
(f) Amended and Restated Investors' Rights Agreement. At
------------------------------------------------
least the requisite majority of holders of Alive Common Stock party to the Alive
Amended and Restated Investors Rights Agreement dated March 17, 1999 shall have
terminated such agreement and entered into an Investors' Rights Agreement by and
among Encoding.com, certain shareholders of Encoding.com and such Alive
stockholders in substantially the form of Encoding.com's Amended and Restated
Investors' Rights Agreement dated as of August 9, 1999 (as amended to add such
Alive stockholders and as amended as necessary in connection with any equity
financings of Encoding.com after the date hereof and prior to the Effective
Time).
6.2 Additional Conditions to Obligations of Alive. The obligations
---------------------------------------------
of Alive to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, by Alive:
(a) Representations, Warranties and Covenants (i) Each of the
-----------------------------------------
representations and warranties of Encoding.com in this Agreement that is
expressly qualified by a reference to materiality shall be true in all respects
as so qualified, and each of the representations and warranties of Encoding.com
in this Agreement that is not so qualified shall be true and correct in all
material respects, on and as of the Effective Time as though such representation
or warranty had been made on and as of such time (except that those
representations and warranties which address matters only as of a particular
date shall remain true and correct as of such date), and (ii) Encoding.com shall
have performed and complied in all material respects with all covenants,
obligations and conditions of this Agreement required to be performed and
complied with by them as of the Effective Time.
(b) Certificates of Encoding.com.
----------------------------
(i) Compliance Certificate of Encoding.com. Alive
--------------------------------------
shall have been provided with a certificate executed on behalf of Encoding.com
by its President or its Chief Financial Officer to the effect that, as of the
Effective Time, each of the conditions set forth in Section 6.2(a) and (e) above
has been satisfied with respect to Encoding.com.
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<PAGE>
(ii) Certificate of Secretary of Encoding.com. Alive
----------------------------------------
shall have been provided with a certificate executed by the Secretary or
Assistant Secretary of Encoding.com certifying:
(A) Resolutions duly adopted by the Board of
Directors of Encoding.com authorizing the execution of this Agreement and the
execution, performance and delivery of all agreements, documents and
transactions contemplated hereby; and
(B) the incumbency of the officers of Encoding.com
executing this Agreement and all agreements and documents contemplated hereby.
(c) Legal Opinion. Alive shall have received a legal opinion
-------------
from Venture Law Group, Encoding.com's legal counsel, substantially in the form
of Exhibit F hereto.
---------
(d) No Material Adverse Changes. There shall not have
---------------------------
occurred any event, change or effect that has a Material Adverse Effect on
Encoding.com, taken as a whole.
(e) Good Standing. Alive shall have received a certificate or
-------------
certificates of the Secretary of State of the State of Delaware and any
applicable franchise tax authority of such state, certifying as of a date no
more than 3 business days prior to the Effective Time that Encoding.com has
filed all required reports, paid all required fees and taxes and is, as of such
date, in good standing and authorized to transact business as a domestic
corporation.
6.3 Additional Conditions to the Obligations of Encoding.com. The
--------------------------------------------------------
obligations of Encoding.com to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, by Encoding.com:
(a) Representations, Warranties and Covenants. (i) Each of the
-----------------------------------------
representations and warranties of Alive in this Agreement that is expressly
qualified by a reference to materiality shall be true in all respects as so
qualified, and each of the representations and warranties of Alive in this
Agreement that is not so qualified shall be true and correct in all material
respects, on and as of the Effective Time as though such representation or
warranty had been made on and as of such time (except that those representations
and warranties which address matters only as of a particular date shall remain
true and correct as of such date), and (ii) Alive shall have performed and
complied in all material respects with all covenants, obligations and conditions
of this Agreement required to be performed and complied with by it as of the
Effective Time.
(b) No Material Adverse Changes. There shall not have occurred
---------------------------
any event, change or effect that has a Material Adverse Effect on Alive, taken
as a whole.
(c) Certificates of Alive.
---------------------
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<PAGE>
(i) Compliance Certificate of Alive. Encoding.com shall
-------------------------------
have been provided with a certificate executed on behalf of Alive by its
President or its Chief Financial Officer to the effect that, as of the Effective
Time, each of the conditions set forth in Section 6.3(a) and (b) above has been
satisfied.
(ii) Certificate of Secretary of Alive. Encoding.com
---------------------------------
shall have been provided with a certificate executed by the Secretary of Alive
certifying:
(A) Resolutions duly adopted by the Board of
Directors and the stockholders of Alive authorizing the execution of this
Agreement and the execution, performance and delivery of all agreements,
documents and transactions contemplated hereby;
(B) The Articles of Incorporation and Bylaws of
Alive, as in effect immediately prior to the Effective Time, including all
amendments thereto; and
(C) the incumbency of the officers of Alive executing
this Agreement and all agreements and documents contemplated hereby.
(d) Third Party Consents. Encoding.com shall have been
--------------------
furnished with evidence satisfactory to it that Alive has obtained those
consents, waivers, approvals or authorizations of those Governmental Entities
and third parties whose consent or approval are required in connection with the
Merger as set forth in Sections 5.2(a) and (e).
(e) Legal Opinion. Encoding.com shall have received a legal
-------------
opinion from Heller Ehrman White & McAuliffe, Alive's legal counsel, in
substantially the form of Exhibit G.
---------
(f) Employee Agreements. Each employee of Alive as of the
-------------------
Effective Time who shall be hired by Encoding.com shall have signed
Encoding.com's standard form Proprietary Information and Inventions Assignment
Agreement.
(g) FIRPTA Statement. Alive shall, prior to the Closing Date,
----------------
provide Encoding.com with a statement as described in Section 5.6.
(h) Investor Representation Agreements. Encoding.com shall have
----------------------------------
received from a sufficient number of holders of Alive Capital Stock an Investor
Representation Agreements in substantially the form attached hereto as Exhibit D
---------
sufficient to establish the availability of the Rule 506 safe harbor exemption
under Regulation D of the Securities Act with respect to the transactions
contemplated in this Agreement.
(i) Resignation of Directors and Officers. Encoding.com shall
-------------------------------------
have received letters of resignation from each of the directors and officers of
Alive in office immediately prior to the Effective Time, which resignations in
each case shall be effective as of the Effective Time.
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(j) Conversion of Preferred Stock. All of Alive's outstanding
-----------------------------
Preferred Stock shall have been converted into Alive Common Stock in accordance
with the Articles of Incorporation of Alive.
(k) Qualification Under Regulation D. Each unaccredited Alive
--------------------------------
stockholder (other than an Alive stockholder who has indicated such stockholder
will exercise dissenter's rights) shall have acknowledged and agreed in writing
that such stockholder has been represented by a Purchaser Representative in
considering the purchase of Encoding.com Common Stock pursuant to this
Agreement. Either (i) counsel to Encoding.com shall be satisfied in its
reasonable discretion that the requirements of the Rule 506 safe harbor
exemption under Regulation D of the Securities Act have been satisfied with
respect to the purchase of Encoding.com Common Stock to be made pursuant to this
Agreement or (ii) counsel to Encoding.com shall otherwise be satisfied that the
purchase of Encoding.com Common Stock pursuant to this Agreement is otherwise
exempt from the registration requirements of the Securities Act.
(l) Maximum Percentage of Alive Stockholders Exercising
---------------------------------------------------
Dissenters' Rights. Holders of less than two and one half percent (2.5%) of
- ------------------
Alive Common Stock issued and outstanding as of the Closing Date shall have
exercised their dissenters' rights with respect to the Merger.
(m) Good Standing. Encoding.com shall have received a
-------------
certificate or certificates of the Secretary of State of the State of Washington
and any applicable franchise tax authority of such state, certifying as of a
date no more than 5 business days prior to the Effective Time that Alive has
filed all required reports, paid all required fees and taxes and is, as of such
date, in good standing and authorized to transact business as a domestic
corporation.
(n) Cancellation of Acceleration. All Director level and higher
----------------------------
employees of Alive shall have entered into an agreement by and among such
individual, Alive and Encoding.com that any accelerated vesting resulting from
the Merger pursuant to such individual's stock option agreements with Alive
shall be cancelled and of no force and effect.
(o) Warrant Assumption Agreement. Encoding.com and the holder
----------------------------
of the Landlord Warrant shall have entered into a Warrant Assumption Agreement
in a form reasonably acceptable to Encoding.com.
SECTION SEVEN
7. Termination, Amendment and Waiver.
---------------------------------
7.1 Termination. At any time prior to the Effective Time, whether
-----------
before or after approval of the matters presented in connection with the Merger
by the stockholders of Alive, this Agreement may be terminated and the Merger
may be abandoned:
(a) by mutual consent duly authorized by the Boards of Directors
of each of Encoding.com and Alive;
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(b) by either Encoding.com or Alive, if, without fault of the
terminating party,
(i) the Effective Time shall not have occurred on or
before December 20, 1999 (or such later date as may be agreed upon in writing by
the parties);
(ii) there shall be any applicable federal or state law
that makes consummation of the Merger illegal or otherwise prohibited or if any
court of competent jurisdiction or Governmental Entity shall have issued an
order, decree, ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
shall have become final and nonappealable; or
(iii) the required approval of the stockholders of Alive
shall not have been obtained by reason of the failure to obtain the required
consent of the stockholders of Alive;
(c) by Encoding.com, if Alive shall materially breach any of its
representations, warranties or obligations hereunder and such breach shall not
have been cured within ten calendar days of receipt by Alive of written notice
of such breach, provided that Encoding.com is not in material breach of any of
its representations, warranties or obligations hereunder, and provided further,
that no cure period shall be required for a breach which by its nature cannot be
cured; or
(d) by Alive, if Encoding.com shall materially breach any of its
representations, warranties or obligations hereunder and such breach shall not
have been cured within ten calendar days following receipt by Encoding.com of
written notice of such breach, provided that Alive is not in material breach of
any of its representations, warranties or obligations hereunder, and provided
further, that no cure period shall be required for a breach which by its nature
cannot be cured.
7.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 7.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Encoding.com or
Alive or their respective officers, directors, stockholders or affiliates,
except to the extent that such termination results from the breach by a party
hereto of any of its representations, warranties or covenants set forth in this
Agreement; provided that, the provisions of Section 5.4 (Confidentiality),
Section 7.3 (Expenses and Termination Fees) and this Section 7.2 shall remain in
full force and effect and survive any termination of this Agreement.
7.3 Expenses. Whether or not the Merger is consummated, all costs
--------
and expenses incurred in connection with this Agreement and the transactions
contemplated herein including, without limitation, filing fees and the fees and
expenses of advisors, accountants and legal counsel, shall be paid by the party
incurring such expense.
7.4 Amendment. The boards of directors of the parties may cause
---------
this Agreement to be amended at any time by execution of an instrument in
writing signed on behalf
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of each of the parties; provided that an amendment made subsequent to adoption
of the Agreement by the stockholders of Alive shall not (i) alter or change the
amount or kind of consideration to be received on conversion of the Alive Common
Stock, (ii) alter or change any term of the Certificate of Incorporation of
Encoding.com to be effected by the Merger, or (iii) alter or change any of the
terms and conditions of the Agreement if such alteration or change would
adversely affect the stockholders of Alive.
7.5 Extension; Waiver. At any time prior to the Effective Time any
-----------------
party may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties, (ii)
waive any inaccuracies in the representations and warranties made to such party
contained herein or in any document delivered pursuant hereto, and (iii) waive
compliance with any of the agreements or conditions for the benefit of such
party contained herein. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
SECTION EIGHT
8. Escrow and Indemnification.
--------------------------
8.1 Survival of Representations and warranties. All covenants to
----------------------------------------------
be performed prior to the Effective Time, and all representations in this
Agreement or in any instrument delivered pursuant to this Warranties Agreement
shall survive the consummation of the Merger and continue until the first
anniversary of the Closing Date (the "Escrow Termination Date"); provided that
-----------------------
if any claims for indemnification under this Section 8 have been asserted with
respect to any such representations and warranties prior to the Escrow
Termination Date, the representations and warranties on which any such claims
are based shall continue in effect until final resolution of such claims. All
covenants to be performed after the Effective Time shall continue indefinitely.
8.2 Escrow Fund. As soon as practicable after the Effective Time,
-----------
260,000 shares of Encoding.com Common Stock that the Alive stockholders are
entitled to receive in the Merger in exchange for the Alive Common Stock
(together with the New Shares (as defined below), the "Escrow Shares") shall,
-------------
without any act of any stockholder of Alive, be deposited with, the Harris Trust
Company of California (or other institution acceptable to the Shareholders'
Representative and Encoding.com) as escrow agent (the "Escrow Agent"), such
------------
deposit to constitute the escrow fund (the "Escrow Fund") and to be governed by
-----------
the terms set forth herein and in the Escrow Agreement attached hereto as
Exhibit D (the "Escrow Agreement"). In the event that any Damages (as defined
- --------- ----------------
below) arise, the Escrow Fund shall be available to compensate the Indemnified
Persons (defined below) pursuant to the indemnification obligations of Alive
pursuant to Section 8.3 and in accordance with the Escrow Agreement.
8.3 Indemnification.
---------------
(a) Indemnified Damages. Subject to the limitations set forth in
-------------------
this Section 8, from and after the Effective Time, Alive shall protect,
indemnify and hold harmless Encoding.com and its affiliates, officers,
directors, employees, representatives and agents
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<PAGE>
(Encoding.com and each of the foregoing persons or entities is hereinafter
referred to individually as an "Indemnified Person" and collectively as
------------------
"Indemnified Persons") out of the Escrow Fund from and against any and all
-------------------
losses, costs, damages, liabilities, fees (including without limitation
reasonable attorneys' fees) and expenses (collectively, the "Damages"), that any
-------
of the Indemnified Persons incurs or reasonably anticipates incurring by reason
of or in connection with any claim, demand, action or cause of action alleging
misrepresentation, breach of, or default in connection with, any of the
representations, warranties, covenants or agreements of Alive contained in this
Agreement, including any exhibits or schedules attached hereto which becomes
known to Encoding.com during the Escrow Period (as defined below) and for which
written notice is duly given in accordance with Section 8.7 below during the
Escrow Period. Damages in each case shall be net of the amount of any insurance
proceeds and indemnity and contribution actually recovered by Encoding.com.
(b) Exclusive Contractual Remedy and Limitations.
--------------------------------------------
Encoding.com and Alive each acknowledge that Damages, if any, would relate to
unresolved contingencies existing at the Effective Time, which if resolved at
the Effective Time would have led to a reduction in the total consideration
Encoding.com would have agreed to pay in connection with the Merger. Resort to
the Escrow Fund shall be the exclusive contractual remedy of Encoding.com for
any and all Damages if the Merger closes. The maximum liability of any former
holder of the Alive Common Stock for any breach of a representation, warranty or
covenant of Alive shall be limited to the Escrow Shares in which such holder has
an interest that are held pursuant to the Escrow Agreement; provided, however,
that nothing herein shall limit the liability: (i) of Alive for any breach of
representation, warranty or covenant if the Merger does not close, (ii) of Alive
or any officer, director, stockholder, or optionholder of Alive for such
person's or entity's fraud or intentional misrepresentation or (iii) of Alive or
any officer, director, stockholder, or optionholder for such person's or
entity's violations of applicable state or federal securities laws.
8.4 Damages Threshold. Notwithstanding the foregoing,
-----------------
Encoding.com may not receive any amount of the Escrow Shares from the Escrow
Fund unless and until a certificate signed by an officer of Encoding.com (an
"Officer's Certificate") identifying Damages in the aggregate amount in excess
---------------------
of $100,000 has been delivered to the Escrow Agent and such amount is determined
pursuant to this Section 8 to be payable, in which case Encoding.com shall
receive Escrow Shares equal in value to the full amount of such Damages without
deduction. In determining the amount of any Damages attributable to a breach,
any materiality standard contained in a representation, warranty or covenant of
Encoding.com shall be disregarded.
8.5 Escrow Period. Subject to the following requirements,
-------------
the Escrow Fund shall remain in existence until the Escrow Termination Date (the
"Escrow Period"). Upon the expiration of the Escrow Period, the Escrow Fund
-------------
shall terminate with respect to all Escrow Shares; provided, however, that the
-------- -------
number of Escrow Shares, which, in the reasonable judgment of Encoding.com,
subject to the objection of the Stockholders' Representative (as defined in
Section 8.8 below) and the subsequent arbitration of the claim in the manner
provided in the Escrow Agreement, are necessary to satisfy any unsatisfied
claims specified in any Officer's Certificate delivered to the Escrow Agent
prior to the expiration of such Escrow Period with
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<PAGE>
respect to facts and circumstances existing on or prior to the Escrow
Termination Date shall remain in the Escrow Fund (and the Escrow Fund shall
remain in existence) until such claims have been resolved. Within ten (10) days
of the Escrow Termination Date, the Escrow Agent shall promptly deliver to the
former shareholders of Alive all Escrow Shares in excess of those necessary to
satisfy any such pending unsatisfied claims. As soon as all such claims have
been resolved, the Escrow Agent shall deliver to the stockholders of Alive all
Escrow Shares and other property remaining in the Escrow Fund and not required
to satisfy such claims. Deliveries of Escrow Shares to the stockholders of Alive
pursuant to this Section 8.5 and the Escrow Agreement shall be made in
proportion to their respective original contributions to the Escrow Fund.
8.6 Distributions. Any shares of Encoding.com Common Stock
-------------
or other equity securities issued or distributed by Encoding.com (including
shares issued upon a stock split) ("New Shares") in respect of the Escrow Shares
----------
that have not been released from the Escrow Fund shall be added to the Escrow
Fund and become a part thereof. When and if cash dividends on Escrow Shares in
the Escrow Fund shall be declared and paid, they shall be paid to the beneficial
owners of the Escrow Shares as soon as practicable following their receipt by
the Escrow Agent. Such dividends will not become part of the Escrow Fund and
will not be available to satisfy Damages. The Alive stockholders will be treated
as the beneficial owners of the Escrow Sha res and as such will pay any taxes on
such dividends.
8.7 Method of Asserting Claims. All claims for
--------------------------
indemnification by the Encoding.com or any other Indemnified Person pursuant to
this Section 8 shall be made in accordance with the provisions of the Escrow
Agreement.
8.8 Representative of the Stockholders; Power of Attorney.
-----------------------------------------------------
(a) In the event that the Merger is approved by the
requisite number of Alive stockholders, effective upon such vote and pursuant to
the Letters of Transmittal submitted by each stockholder of Alive, and without
further act of any stockholder, John Gannon shall be appointed as agent and
attorney-in-fact (the "Stockholders' Representative") for each stockholder of
----------------------------
Alive (except such stockholders, if any, as shall have perfected their
dissenters' rights under Chapter 23B of the WBCA), for and on behalf of
stockholders of Alive, to give and receive notices and communications on behalf
of Alive stockholders, to enter into and perform the Escrow Agreement, to
authorize delivery to Encoding.com of Escrow Shares or other property from the
Escrow Fund in satisfaction of claims by Encoding.com or any other Indemnified
Person pursuant to this Section 8, to object to such deliveries, to agree to,
negotiate, enter into settlements and compromises of, and demand arbitration and
comply with orders of courts and awards of arbitrators with respect to such
claims, and to take all actions necessary or appropriate in the judgment of
Stockholders' Representative for the accomplishment of the foregoing. The
Stockholders' Representative shall act by vote or written action or consent of a
majority of the members of the Committee.
(b) The Shareholders' Representative shall not be liable
for any act done or omitted hereunder as Shareholders' Representative while
acting in good faith and in the exercise
-53-
<PAGE>
of reasonable judgment, and any act done or omitted pursuant to the advice of
counsel shall be conclusive evidence of such good faith. Shareholders of Alive
shall severally indemnify the Shareholders' Representative and hold him harmless
against any loss, liability or expense incurred without gross negligence or bad
faith on the part of the Shareholders' Representative and arising out of or in
connection with the acceptance or administration of his duties hereunder. No
bond shall be required of the Shareholders' Representative, and the
Shareholders' Representative shall receive no compensation for his or her
services.
(c) The Shareholders' Representative shall be given
reasonable access by Encoding.com to information about Alive and the reasonable
assistance of Alive's officers and employees for purposes of performing its
duties and exercising its rights hereunder, provided that the Shareholders'
Representative shall treat confidentially and not disclose any nonpublic
information from or about Alive to anyone (except on a need to know basis to
individuals who agree to treat such information confidentially).
8.9 Adjustment to Escrow. In the event that Encoding.com
--------------------
pays out any amounts to holders of Dissenting Shares with respect to such
shares, the Escrow Shares shall be automatically reduced by the number of Escrow
Shares allocable to such Dissenting Shares. Upon certification by Encoding.com
to the Escrow Agent of such event, the Escrow Shares and any New Shares with
respect thereto allocable to such Dissenting Shares shall be promptly returned
to Encoding.com; provided, that Encoding.com has notified the Shareholders'
Representative in writing no later than fifteen (15) days prior to the release
of any such shares.
8.10 Indemnity by Encoding.com. Subsequent to the
-------------------------
Effective Time, Encoding.com agrees to indemnify and hold harmless the holders
of the Alive Common Stock outstanding immediately prior to the Effective Time
(the "Alive Indemnitees") from and against any and all Damages which any of the
-----------------
Alive Indemnitees incur or reasonably anticipate incurring by reason of or in
connection with any claim, demand, action or cause of action alleging
misrepresentation, breach of, or default in connection with, any of the
representations, warranties, covenants or agreements of Encoding.com contained
herein including any exhibits and schedules attached hereto or in any
certificate delivered pursuant hereto, which breach becomes known to the Alive
Indemnitees and is asserted in writing to Encoding.com on or before the Escrow
Termination Date (the date of any such written assertion being an "Alive Claim
-----------
Date"), at which date this indemnification provision shall terminate, provided
- ----
however that no such compensation shall be payable to the Alive Indemnitees
unless and until the amount of all Damages to Alive Indemnitees exceeds One
Hundred Thousand Dollars ($100,000) in the aggregate, whereupon compensation
shall be payable for all such Damages without any deduction; provided, however,
in no event shall Encoding.com's maximum liability for all Damages hereunder
exceed Encoding Indemnification Limit (as defined below). The indemnification
set forth in this Section 8.10 shall be the exclusive contractual remedy of the
Alive Indemnitees for any and all Damages if the Merger closes; provided,
however, that nothing herein shall limit the liability of Encoding.com for
Damages: (i) of Encoding.com for any breach of representation, warranty or
covenant if the Merger does not close, (ii) of Encoding.com or any officer,
director, stockholder, or optionholder of Encoding.com for such person's or
entity's fraud or intentional misrepresentation or (iii) of Encoding.com for
violations of applicable state
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<PAGE>
or federal securities laws. In determining the amount of any Damages
attributable to a breach, any materiality standard contained in a
representation, warranty or covenant of Encoding.com shall be disregarded.
For purposes of this Section 8.10, the Encoding Indemnification Limit
shall be the amount equal to (i) 260,000 multiplied by the value of Encoding.com
Common Stock (as determined below) on the applicable Alive Claim Date minus (ii)
the amounts of all Damages previously paid to Alive Indemnitees pursuant to this
Section 8.10; provided, however, in no event shall the Encoding Indemnification
Limit exceed $5,200,000. For purposes of this Section 8.10, the value of
Encoding.com Common Stock shall be determined as follows:
(A) if Encoding.com's Common Stock is not traded on a
securities exchange or the Nasdaq Stock Market, the value of Encoding.com Common
Stock shall be determined in good faith jointly by the Board of Directors of
Encoding.com and the Stockholders' Representative; provided that if the Board of
Directors of Encoding.com and the Stockholders' Representative cannot agree on
such value within 15 days of the Alive Claim Date, then such shares shall be
valued at the "Appraised Fair Market Value" (as defined below). For purposes of
---------------------------
this Agreement, "Fair Market Value" means the price that an unrelated third
-----------------
party would pay if it were to acquire all outstanding shares of Encoding.com
Common Stock (on an as-converted basis) in an arm's-length transaction, assuming
that such shares were being sold in a manner designed to attract all possible
participants and without taking into consideration a control premium or minority
discount. The "Appraised Fair Market Value" shall be determined in accordance
---------------------------
with the following procedures: Encoding.com and the Stockholder's Representative
shall jointly select an investment banking firm of recognized national standing
(the "Appraiser"), which shall appraise the Fair Market Value and deliver its
---------
appraisal to Encoding.com and the Stockholder's Representative, within 30 days
of its engagement. If either party shall disagree with the Fair Market Value
determined by such appraiser, then such party shall have the right to appoint an
additional investment banking firm of recognized national standing (the "Second
------
Appraiser"). If such party does not engage a Second Appraiser within 30 days of
- ---------
the First Appraiser's delivery of its appraisal, the First Appraiser's appraisal
shall be the Appraised Fair Market Value. If a party engages a Second Appraiser,
the Second Appraiser will appraise the Fair Market Value, and deliver its
appraisal to Encoding.com and the Stockholders' Representative, within 30 days
of its engagement. If such difference between the two appraisals is less than
20% of the lower appraised value, then the Appraised Fair Market Value shall be
the average of the two appraisals. If the difference is greater than or equal to
20% of the lower appraised value, unless Encoding.com and the Stockholders'
Representative agree otherwise, the two appraisers shall engage a third
independent investment banking firm of recognized national standing (the "Third
-----
Appraiser"), which shall appraise the Fair Market Value within 30 days of its
- ---------
engagement. The Appraised Fair Market Value shall be the average of the two
appraised values which are closest in absolute dollars. All appraisals of Fair
Market Value shall be as of the Alive Claim Date. The expenses of the First
Appraiser shall be borne jointly by Encoding.com, on the one hand, and the
holders of the Escrow Shares in accordance with their proportionate interest
therein (as determined in the Escrow Agreement), on the other hand; the expenses
of the Second Appraiser, if any, shall be borne by the party requesting such
Second Appraiser; and the expenses of the Third Appraiser, if any, shall be
borne equally by
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<PAGE>
Encoding.com on the one hand and the holders of the Escrow Shares in accordance
with their proportionate interest therein on the other hand.
(B) if Encoding.com's Common Stock is traded on a securities
exchange or The Nasdaq Stock Market, the value of Encoding.com Common Stock
shall be deemed to be the average of the closing prices over a fifteen (15)
trading day period beginning on the Alive Claim Date.
SECTION NINE
9. General Provisions.
------------------
9.1 Survival of Warranties. The representations, warranties and
----------------------
agreements set forth in this Agreement or in any instrument delivered pursuant
to this Agreement shall survive the Effective Time of the Merger until the first
anniversary of the Closing Date.
9.2 Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by courier, overnight delivery service or confirmed facsimile, or
72 hours after being deposited in the regular mail as certified or registered
mail (airmail if sent internationally) with postage prepaid, if such notice is
addressed to the party to be notified at such party's address or facsimile
number as set forth below, or as subsequently modified by written notice,
(a) if to Encoding.com, to:
Encoding.com, Inc.
Times Square Building
414 Olive Way, Suite 300
Seattle, WA 98101
Attention: President
Facsimile No.: (206) 832-4001
Telephone No.: (206) 832-4000
with a copy to:
Venture Law Group
4750 Carillon Point
Kirkland, WA 98033
Attention: William Ericson
Facsimile No.: (425) 739-8750
Telephone No.: (425) 739-8700
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<PAGE>
(b) if to Alive, to:
Alive.com, Inc.
83 South King Street, Suite 300
Seattle, Washington 98104
Attention: David Weld
Facsimile No.: (206) 674-7702
Telephone No.: (206) 674-7700
with a copy to:
Heller Ehrman White & McAuliffe
6100 Columbia Center
701 Fifth Avenue
Seattle, WA 98101
Attention: Tom Hodge
Facsimile No.: (206) 447-0849
Telephone No.: (206) 447-0900
9.3 Interpretation. When a reference is made in this Agreement to
--------------
Exhibits or Schedules, such reference shall be to an Exhibit or Schedule to this
Agreement unless otherwise indicated. The words "include," "includes" and
------- --------
"including" when used herein shall be deemed in each case to be followed by the
---------
words "without limitation." The phrase "made available" in this Agreement shall
------------------ --------------
mean that the information referred to has been made available if requested by
the party to whom such information is to be made available. The phrases "the
---
date of this Agreement," "the date hereof," and terms of similar import, unless
- ---------------------- ---------------
the context otherwise requires, shall be deemed to refer to November 19, 1999.
The table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
9.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
9.5 Entire Agreement; Nonassignability; Parties in Interest. This
-------------------------------------------------------
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the Alive Disclosure Schedule and the Encoding.com
Disclosure Schedule (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, except for the Confidentiality Agreement, which shall
continue in full force and effect, and shall survive any termination of this
Agreement or the Closing, in accordance with its terms; (b) are not intended to
confer upon any other person any rights or remedies hereunder (other than the
Alive Indemnitees); and (c) shall not be assigned by operation of law or
otherwise except as otherwise specifically provided.
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<PAGE>
9.6 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith, in order to maintain the economic position enjoyed
by each party as close as possible to that under the provision rendered
unenforceable. In the event that the parties cannot reach a mutually agreeable
and enforceable replacement for such provision, then (i) such provision shall be
excluded from this Agreement, (ii) the balance of the Agreement shall be
interpreted as if such provision were so excluded and (iii) the balance of the
Agreement shall be enforceable in accordance with its terms.
9.7 Remedies Cumulative. Except as otherwise provided herein, any
-------------------
and all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby, or by
law or equity upon such party, and the exercise by a party of any one remedy
will not preclude the exercise of any other remedy.
9.8 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Washington, without giving effect to principles of conflicts of law. Each of the
parties to this Agreement consents to the exclusive jurisdiction and venue of
the state and federal courts sitting in King County, Washington.
9.9 Rules of Construction. The parties hereto agree that they have
---------------------
been represented by counsel during the negotiation, preparation and execution of
this Agreement and, therefore, waive the application of any law, regulation,
holding or rule of construction providing that ambiguities in an agreement or
other document will be construed against the party drafting such agreement or
document.
9.10 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended or waived only with the written consent of the parties or their
respective successors and assigns. Any amendment or waiver effected in
accordance with this Section 9.10 shall be binding upon the parties and their
respective successors and assigns.
[Signature page follows]
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<PAGE>
Alive and Encoding.com have executed this Agreement as of the date first
written above.
ALIVE
ALIVE.COM, INC.
/s/ David Weld
_____________________________________________
David Weld, President
83 South King Street, Suite 300
Seattle, Washington 98104
ENCODING.COM
ENCODING.COM, INC.
/s/ Martin Tobias
_____________________________________________
Martin Tobias, Chief Executive Officer and
Minister of Order and Reason
Times Square Building
414 Olive Way
Suite 300
Seattle, WA 98101
[Note: Schedules were omitted in compliance with Rule 601(b)(2).]
<PAGE>
EXHIBIT 3.1
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ENCODING.COM, INC.
The undersigned, Martin Tobias and John W. Robertson, hereby certify that:
1. They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of Encoding.com, Inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of the State of Delaware on March 26, 1998.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
ARTICLE I
The name of this corporation is Encoding.com, Inc. (the "Corporation").
-----------
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 9 East Loockerman Street, Dover, Delaware 19901, County of Kent. The name of
its registered agent at such address is National Corporate Research, Ltd.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
ARTICLE IV
(A) Classes of Stock. The Corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
------------ ---------------
The total number of shares which the Corporation is authorized to issue is One
Hundred Forty Two Million (142,000,000) shares, each with a par value of $0.001
per share. One Hundred Million (100,000,000) shares shall be Common Stock and
Forty Two Million (42,000,000) shares shall be Preferred Stock.
(B) Rights, Preferences and Restrictions of Preferred Stock. The Preferred
-------------------------------------------------------
Stock authorized by this Fifth Amended and Restated Certificate of Incorporation
may be issued from time to time in one or more series. Five Million (5,000,000)
shares shall be designated "Series A Preferred Stock"; Four Million (4,000,000)
------------------------
shares shall be designated "Series B Preferred Stock"
------------------------
<PAGE>
and Four Million (4,000,000) shares shall be designated "Series B-1 Preferred
--------------------
Stock"; Six Million (6,000,000) shares shall be designated "Series C Preferred
- ----- ------------------
Stock" and Six Million (6,000,000) shares shall be designated "Series C-1
- ----- ----------
Preferred Stock"; and Eight Million Five Hundred Thousand (8,500,000) shares
- ---------------
shall be designated "Series D Preferred Stock" and Eight Million Five Hundred
Thousand (8,500,000) shares shall be designated "Series D-1 Preferred Stock" The
--------------------------
rights, preferences, privileges and restrictions granted to and imposed on the
Series A, Series B, Series B-1, Series C, Series C-1, Series D and Series D-1
Preferred Stock are as set forth below in this Article IV(B). The Corporation's
board of directors (the "Board of Directors") is hereby authorized to fix or
------------------
alter the rights, preferences, privileges and restrictions granted to or imposed
upon additional series of Preferred Stock, and the number of shares constituting
any such series and the designation thereof, or of any of them. Subject to
compliance with applicable protective voting rights which have been or may be
granted to the Preferred Stock or series thereof in Certificates of Designations
or the Corporation's Certificate of Incorporation or otherwise ("Protective
----------
Provisions"), but notwithstanding any other rights of the Preferred Stock or any
- ----------
series thereof, the rights, privileges, preferences and restrictions of any such
additional series may be subordinate to, pari passu with (including, without
---- -----
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote or written consent),
or senior to, any of those of any present or future class or series of Preferred
or Common Stock. Subject to compliance with applicable Protective Provisions,
the Board of Directors is also authorized to increase or decrease the number of
shares of any series, prior or subsequent to the issue of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
1. Dividend Provisions. Subject to the rights of series of Preferred
-------------------
Stock which may from time to time come into existence in compliance with the
terms hereof, the holders of shares of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series C-
1, Series D or Series D-1 Preferred Stock shall be entitled to receive
dividends, out of any assets legally available therefor, prior and in preference
to any declaration or payment of any dividend (payable other than in Common
Stock or other securities and rights convertible into or entitling the holder
thereof to receive, directly or indirectly, additional shares of Common Stock of
the Corporation) on the Common Stock of the Corporation, at the rate of (i)
$0.07 per share per annum on each outstanding share of Series A Preferred Stock,
Series B and Series B-1 Preferred Stock, (ii) $0.15 per share per annum on each
outstanding share of Series C and Series C-1 Preferred Stock, payable quarterly
when, as and if declared by the Board of Directors and (iii) $0.52 per share per
annum on each outstanding share of Series D and Series D-1 Preferred Stock,
payable quarterly when, as and if declared by the Board of Directors. Such
dividends shall not be cumulative.
2. Liquidation.
-----------
(a) Preference. In the event of any liquidation, dissolution or
----------
winding up of the Corporation, either voluntary or involuntary (a
"Liquidation"), subject to the rights of series of Preferred Stock that may from
-----------
time to time come into existence in compliance with the
-2-
<PAGE>
terms hereof, the holders of the Series A, Series B, Series B-1, Series C,
Series C-1, Series D and Series D-1 Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Corporation to the holders of Common Stock by reason of their ownership thereof,
an amount per share equal to (i) $0.843 per share for each share of Series A
Preferred Stock then held by them, up to a total of $250,000 in the aggregate
for all holders of Series A Preferred Stock, (ii) $0.843 per share for each
share of Series B or Series B-1 Preferred Stock then held by them, (iii) $1.90
per share for each share of Series C or Series C-1 then held by them, (iv) $6.37
per share for each share of Series D or Series D-1, plus in each case declared
but unpaid dividends. If, upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Series A, Series B, Series B-1,
Series C, Series C-1, Series D and Series D-1 Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, subject to the rights of series of Preferred Stock
that may from time to time come into existence in compliance with the terms
hereof, the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Series A,
Series B, Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred
Stock in proportion to the preferential amount each such holder is otherwise
entitled to receive hereunder.
(b) Remaining Assets. Upon the completion of the distribution
----------------
required by Section 2(a) above and any other distribution that may be required
with respect to series of Preferred Stock that may from time to time come into
existence in compliance with the terms hereof, the remaining assets of the
Corporation available for distribution to stockholders shall be distributed
among the holders of the Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock and the Common Stock pro rata based on
the number of shares of Common Stock held by each (assuming conversion of all
such Series A, Series B, Series B-1, Series C, Series C-1, Series D and Series
D-1 Preferred Stock) until (i) with respect to the holders of Series A Preferred
Stock, such holders shall have received an aggregate of $500,000 (including
amounts paid pursuant to Section 2(a) above), (ii) with respect to the holders
of Series B and Series B-1 Preferred Stock, such holders shall have received an
aggregate of $1.686 per share (including amounts paid pursuant to Section 2(a)
above), (iii) with respect to the holders of Series C and Series C-1 Preferred
Stock, such holders shall have received an aggregate of $3.80 per share
(including amounts paid pursuant to Section 2(a) above), and (iv) with respect
to the holders of Series D and Series D-1 Preferred Stock, such holders shall
have received an aggregate of $12.74 per share (including amounts paid pursuant
to Section 2(a) above); thereafter, subject to the rights of series of Preferred
Stock that may from time to time come into existence in compliance with the
terms hereof, if assets remain in the Corporation, the holders of the Common
Stock of the Corporation shall receive all of the remaining assets of the
Corporation pro rata based on the number of shares of Common Stock held by each.
Notwithstanding the foregoing Sections (B)(2)(a) and (b) of this Article IV, if
a holder of Series A, Series B, Series B-1, Series C, Series C-1, Series D or
Series D-1 Preferred Stock would have received a greater amount in a Liquidation
had such holder converted such Series A, Series B, Series B-1, Series C, Series
C-1, Series D or Series D-1 Preferred Stock into Common Stock immediately prior
to such Liquidation pursuant to Section (B)(4)(a) of this Article IV, then such
holder shall be entitled to receive such greater amount.
-3-
<PAGE>
(c) Certain Acquisitions.
--------------------
(i) Deemed Liquidation. For purposes of this Section 2, a
------------------
Liquidation of the Corporation shall be deemed to occur if the Corporation shall
(i) sell, convey, or otherwise dispose of or encumber all or substantially all
of its property or business or (ii) merge into or consolidate with any other
corporation or business entity (other than a wholly-owned subsidiary
corporation) or (iii) effect any other transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Corporation is disposed of, provided that this Section 2(c)(i) shall not apply
to a merger effected exclusively for the purpose of changing the domicile of the
Corporation.
(ii) Valuation of Consideration. In the event of a
--------------------------
Liquidation, if the consideration received by the Corporation is other than
cash, its value will be deemed its fair market value as determined in accordance
with this clause (c)(ii). Any securities shall be valued as follows:
(A) Securities not subject to investment letter
restricting transfer or other similar restrictions on free marketability:
(1) If traded on a securities exchange or The
Nasdaq Stock Market, the value shall be deemed to be the average of the closing
prices of the securities on such exchange over the thirty-day period ending
three (3) days prior to the closing of the Liquidation;
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty-day period ending three (3) days prior to the
closing of the Liquidation; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as determined in good faith by the
Corporation and, provided at least 500,000 shares of Series B, Series C and
Series D Preferred Stock is outstanding, the holders of at least a majority of
the voting power of all then outstanding shares of Series B, Series C and Series
D Preferred Stock, voting together as a single class.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in Section 2(c)(ii)(A) to reflect the approximate fair
market value thereof, as determined in good faith by the Corporation and,
provided at least 500,000 shares of Series B, Series C and Series D Preferred
Stock is outstanding, the holders of at least a majority of the voting power of
all then outstanding shares of Series B, Series C and Series D Preferred Stock,
voting together as a single class.
(iii) Notice of Transaction. The Corporation shall give each
---------------------
holder of record of Series A Preferred Stock, Series B, Series B-1, Series C,
Series C-1, Series D and Series D-1 Preferred Stock written notice of such
impending transaction not later than ten
-4-
<PAGE>
(10) days prior to the stockholders' meeting called to approve such transaction,
or ten (10) days prior to the closing of such transaction, whichever is earlier,
and shall also notify such holders in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions of this Section 2,
and the Corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than ten
(10) days after the Corporation has given the first notice provided for herein
or sooner than ten (10) days after the Corporation has given notice of any
material changes provided for herein; provided, however, that such periods may
be shortened upon the written consent of the holders of Preferred Stock that are
entitled to such notice rights or similar notice rights and that represent at
least a majority of the voting power of all then outstanding shares of such
Preferred Stock.
(iv) Effect of Noncompliance. In the event the requirements
-----------------------
of this Section 2(c) are not complied with, the Corporation shall forthwith
either cause the closing of the transaction to be postponed until such
requirements have been complied with, or cancel such transaction, in which event
the rights, preferences and privileges of the holders of the Series A Preferred
Stock, Series B, Series B-1, Series C, Series C-1, Series D and Series D-1
Preferred Stock shall revert to and be the same as such rights, preferences and
privileges existing immediately prior to the date of the first notice referred
to in Section 2(c)(iii) hereof.
3. Redemption. The Preferred Stock is not redeemable.
----------
4. Conversion. The holders of the Series A, Series B, Series B-1,
----------
Series C, Series C-1, Series D and Series D-1 Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
-----------------
(a) Right to Convert. Subject to Section 4(c), each share of
----------------
Series A, Series B, Series B-1, Series C, Series C-1, Series D and Series D-1
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
Corporation or any transfer agent for such stock, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing (i) $0.843
in the case of the Series A Preferred Stock, (ii) $0.843 in the case of the
Series B and Series B-1 Preferred Stock, (iii) $1.90 in the case of the Series C
and Series C-1 Preferred Stock and (iv) $6.37 in the case of the Series D and
Series D-1 Preferred Stock by the Conversion Price applicable to such share,
determined as hereafter provided, in effect on the date the certificate is
surrendered for conversion. The initial Conversion Price per share shall be
$0.843 for shares of Series A Preferred Stock, $0.843 for shares of Series B
Preferred Stock, $1.90 for shares of Series C Preferred Stock and $6.37 for
shares of Series D Preferred Stock. The initial Conversion Price per share of
Series B-1, Series C-1 and Series D-1 Preferred Stock shall be determined in
accordance with Section 4(d)(i)(C) below. Such initial Conversion Price shall be
subject to adjustment as set forth in Section 4(d) below.
(b) Automatic Conversion. Each share of Series A, Series B,
--------------------
Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such
-5-
<PAGE>
share immediately upon the earlier of (i) except as provided below in Section
4(c), the Corporation's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), the public offering
--------------
price of which is not less than $10.00 per share (appropriately adjusted for any
stock split, dividend, combination or other recapitalization) and which results
in aggregate cash proceeds to the Corporation of $30,000,000 (net of
underwriting discounts and commissions) or (ii) the date specified by written
consent or agreement of the holders of at least two-thirds of the then
outstanding shares of Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock, voting together as a single class;
provided, however, the Series D and Series D-1 Preferred Stock shall only so
convert upon the written consent or agreement of the holders of at least two-
thirds of the then outstanding shares Series D and Series D-1 Preferred Stock.
(c) Mechanics of Conversion. Before any holder of Series A, Series B,
-----------------------
Series B-1, Series C, Series C-1, Series D or Series D-1 Preferred Stock shall
be entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for such series of Preferred Stock,
and shall give written notice to the Corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of such series of Preferred
Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
If the conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act the conversion may, at the option of
any holder tendering such Preferred Stock for conversion, be conditioned upon
the closing with the underwriters of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive Common Stock upon
conversion of such Preferred Stock shall not be deemed to have converted such
Preferred Stock until immediately prior to the closing of such sale of
securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
- -------------------------------------------
A, Series B, Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred
Stock shall be subject to adjustment from time to time as follows:
(i) Issuance of Additional Stock below Purchase Price. If the
-------------------------------------------------
Corporation shall issue, after the date upon which any shares of Series B,
Series C or Series D Preferred Stock were first issued (the "Purchase Date" with
-------------
respect to each series), any Additional Stock (as defined below) without
consideration or for a consideration per share less
-6-
<PAGE>
than the Conversion Price for such series in effect immediately prior to the
issuance of such Additional Stock, the Conversion Price for such series in
effect immediately prior to each such issuance shall automatically be adjusted
as set forth in this Section 4(d)(i), unless otherwise provided in this Section
4(d)(i).
(A) Adjustment Formula. Whenever the Conversion Price is
------------------
adjusted pursuant to this Section (4)(d)(i), the new Conversion Price shall be
determined by multiplying the Conversion Price then in effect by a fraction, (x)
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (the "Outstanding Common") plus the number of
------------------
shares of Common Stock that the aggregate consideration received by the
Corporation for such issuance would purchase at such Conversion Price; and (y)
the denominator of which shall be the number of shares of Outstanding Common
plus the number of shares of such Additional Stock. For purposes of the
foregoing calculation, the term "Outstanding Common" shall include shares of
Common Stock deemed issued pursuant to Section 4(d)(i)(F) below.
(B) Definition of "Additional Stock". For purposes of this
-------------------------------
Section 4(d)(i), "Additional Stock" shall mean any shares of Common Stock issued
----------------
(or deemed to have been issued pursuant to Section 4(d)(i)(F)) by the
Corporation after the Purchase Date) other than:
(1) Common Stock issued pursuant to a transaction
described in Section 4(d)(ii) hereof;
(2) Shares (including shares and options issued before
the date of this Agreement) of Common Stock issuable or issued to employees,
consultants or directors of the Corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the Board of Directors of the
Corporation;
(3) Capital stock, or options or warrants to purchase
capital stock, issued (i) in connection with an investment by a strategic
partner and (ii) to financial institutions, lenders or lessors in connection
with commercial credit arrangements, loans, equipment financings or similar
transactions;
(4) Shares of Common Stock or Preferred Stock issuable
upon exercise of options, notes, warrants or other rights outstanding as of the
date of this Restated Certificate;
(5) Capital stock or warrants or options to purchase
capital stock issued in connection with bona fide acquisitions, mergers or
similar transactions, the terms of which are approved by the Board of Directors
of the Corporation;
(6) Shares of Common Stock issued or issuable upon
conversion of the Series A, Series B, Series B-1, Series C, Series C-1, Series D
or Series D-1 Preferred Stock outstanding as of the date of this Restated
Certificate; and
-7-
<PAGE>
(7) Shares of Common Stock issued or issuable in a
public offering prior to or in connection with which all outstanding shares of
Series A, Series B, Series B-1, Series C, Series C-1, Series D or Series D-1
Preferred Stock will be converted to Common Stock.
(C) Conversion Price of Series B-1, Series C-1 and Series
-----------------------------------------------------
D-1 Preferred Stock. From and after such time as any share of Series B-1,
- -------------------
Series C-1 or Series D-1 Preferred Stock is issued and outstanding, except as
explicitly set forth in this Certificate of Incorporation, the Conversion Price
for the Series B-1 Preferred Stock shall be the Series B Conversion Price in
effect immediately prior to such issuance, the Conversion Price for the Series
C-1 Preferred Stock shall be the Series C Conversion Price in effect immediately
prior to such issuance and the Conversion Price for the Series D-1 Preferred
Stock shall be the Series D Conversion Price in effect immediately prior to such
issuance, and shall not thereafter be subject to adjustment pursuant to Section
4(d)(i)(A).
(D) No Fractional Adjustments. No adjustment of the
-------------------------
Conversion Price for the Series A, Series B, Series B-1, Series C, Series C-1,
Series D or Series D-1 Preferred Stock shall be made in an amount less than one
cent per share, provided that any adjustments which are not required to be made
by reason of this sentence shall be carried forward and shall be either taken
into account in any subsequent adjustment made prior to three years from the
date of the event giving rise to the adjustment being carried forward, or shall
be made at the end of three years from the date of the event giving rise to the
adjustment being carried forward.
(E) Determination of Consideration. In the case of the
------------------------------
issuance of Common Stock for cash, the consideration shall be deemed to be the
amount of cash paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by the Corporation for
any underwriting or otherwise in connection with the issuance and sale thereof.
In the case of the issuance of the Common Stock for a consideration in whole or
in part other than cash, the consideration other than cash shall be deemed to be
the fair value thereof as determined by the Board of Directors irrespective of
any accounting treatment.
(F) Deemed Issuances of Common Stock. In the case of the
--------------------------------
issuance (whether before, on or after the applicable Purchase Date) of options
to purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to purchase or
rights to subscribe for such convertible or exchangeable securities, the
following provisions shall apply for all purposes of this Section 4(d)(i):
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for
-8-
<PAGE>
a consideration equal to the consideration (determined in the manner provided in
Section 4(d)(i)(E)), if any, received by the Corporation upon the issuance of
such options or rights plus the minimum exercise price provided in such options
or rights (without taking into account potential antidilution adjustments) for
the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (assuming the satisfaction of any
conditions to convertibility or exchangeability, including, without limitation,
the passage of time, but without taking into account potential antidilution
adjustments) for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to the
consideration, if any, received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Corporation (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such securities or
the exercise of any related options or rights (the consideration in each case to
be determined in the manner provided in Section 4(d)(i)(E).
(3) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to the Corporation upon
exercise of such options or rights or upon conversion of or in exchange for such
convertible or exchangeable securities, including, but not limited to, a change
resulting from the antidilution provisions thereof, the Conversion Price of each
of the Series A, Series B, Series B-1, Series C, Series C-1, Series D and Series
D-1 Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities, shall be recomputed to reflect such change, but
no further adjustment shall be made for the actual issuance of Common Stock or
any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price of the Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities or options or rights related
to such securities, shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the exercise
of the options or rights related to such securities.
(5) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to Sections 4(d)(i)(F)(1) and
4(d)(i)(F)(2) shall be appropriately adjusted to reflect any change, termination
or expiration of the type described in either Section 4(d)(i)(F)(3) or
4(d)(i)(F)(4).
-9-
<PAGE>
(G) No Increased Conversion Price. Notwithstanding any
-----------------------------
other provisions of this Section (4)(d)(i), except to the limited extent
provided for in Sections 4(d)(i)(F)(3) and 4(d)(i)(F)(4), no adjustment of the
Conversion Price pursuant to this Section 4(d)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.
(ii) Stock Splits and Dividends. In the event the
--------------------------
Corporation should at any time or from time to time after the Purchase Date fix
a record date for the effectuation of a split or subdivision of the outstanding
shares of Common Stock or the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without payment of
------------------------
any consideration by such holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend distribution, split or subdivision if no record date
is fixed), the Conversion Price of each of the Series A, Series B, Series B-1,
Series C, Series C-1, Series D and Series D-1 Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be increased in proportion to such
increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents with the number of shares
issuable with respect to Common Stock Equivalents determined from time to time
in the manner provided for deemed issuances in Section 4(d)(i)(F).
(iii) Reverse Stock Splits. If the number of shares of
--------------------
Common Stock outstanding at any time after the Purchase Date is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion Price for each of the Series A,
Series B, Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred
Stock shall be appropriately increased so that the number of shares of Common
Stock issuable on conversion of each share of such series shall be decreased in
proportion to such decrease in outstanding shares.
(e) Other Distributions. In the event the Corporation shall
-------------------
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4(d)(ii), then, in
each such case for the purpose of this Section 4(e), the holders of Series A,
Series B, Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred
Stock shall be entitled to a proportionate share of any such distribution as
though they were the holders of the number of shares of Common Stock of the
Corporation into which their shares of Preferred Stock are convertible as of the
record date fixed for the determination of the holders of Common Stock of the
Corporation entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be
-10-
<PAGE>
made so that the holders of the Series A, Series B, Series B-1, Series C, Series
C-1, Series D and Series D-1 Preferred Stock shall thereafter be entitled to
receive upon conversion of such Preferred Stock the number of shares of stock or
other securities or property of the Corporation or otherwise, to which a holder
of Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of such Preferred Stock after the recapitalization to the end that
the provisions of this Section 4 (including adjustment of the Conversion Price
then in effect and the number of shares purchasable upon conversion of such
Preferred Stock) shall be applicable after that event and be as nearly
equivalent as practicable.
(g) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the conversion
of any share or shares of the Series A, Series B, Series B-1, Series C, Series
C-1, Series D or Series D-1 Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded to the nearest whole share. The number of
shares issuable upon such conversion shall be determined on the basis of the
total number of shares of Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock the holder is at the time converting
into Common Stock and the number of shares of Common Stock issuable upon such
aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock pursuant to this Section 4, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of such Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A, Series B, Series B-1, Series C, Series C-1,
Series D or Series D-1 Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (A) such adjustment and readjustment,
(B) the Conversion Price for such series of Preferred Stock at the time in
effect and (C) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of a
share of such series of Preferred Stock.
-11-
<PAGE>
(i) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series A, Series B, Series B-1, Series C, Series C-
1, Series D and Series D-1 Preferred Stock, at least ten (10) days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The
---------------------------------------------
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A, Series B, Series B-1, Series C, Series
C-1, Series D and Series D-1 Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of such series of Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of such
series of Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes, including, without limitation, engaging
in best efforts to obtain the requisite stockholder approval of any necessary
amendment to this Certificate of Incorporation.
(k) Notices. Any notice required by the provisions of this
-------
Section 4 to be given to the holders of shares of Series A, Series B, Series B-
1, Series C, Series C-1, Series D and Series D-1 Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his, her or its address appearing on the books of the
Corporation.
5. Voting Rights. The holder of each share of Series A, Series B,
-------------
Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred Stock shall
have the right to one vote for each share of Common Stock into which such
Preferred Stock could then be converted, and with respect to such vote, such
holder shall have full voting rights and powers equal to the voting rights and
powers of the holders of Common Stock, and shall be entitled, notwithstanding
any provision hereof or in the Bylaws, to notice of any stockholders' meeting in
accordance with the bylaws of the Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an as-
converted basis (after aggregating all shares into which shares of Series A,
Series B, Series B-1, Series C, Series C-1, Series D or Series D-1 Preferred
Stock held by each holder could be converted) shall be rounded to the nearest
whole number (with one-half being rounded upward).
-12-
<PAGE>
6. Protective Provisions.
---------------------
(a) Majority of Preferred Stock. Subject to the rights of
---------------------------
series of Preferred Stock which may from time to time come into existence in
compliance with the terms hereof, so long as any shares Preferred Stock are
outstanding (as adjusted for stock splits, stock dividends or
recapitalizations), the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least a majority of the then outstanding shares of Preferred Stock, voting
together as a class:
(i) effect, or permit to occur, a transaction described
in Section 2(c)(i) above;
(ii) alter or change the rights, preferences or privileges
of the shares of Series A, Series B, Series B-1, Series C, Series C-1, Series D
or Series D-1 Preferred Stock so as to affect adversely the shares of such
series;
(iii) increase or decrease (other than by conversion and
except as set forth in Section 8) the total number of authorized shares of
Series A, Series B, Series B-1, Series C, Series C-1, Series D or Series D-1
Preferred Stock;
(iv) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security, having a preference over, or being on a
parity with, the Series A, Series B, Series B-1, Series C, Series C-1, Series D
or Series D-1 Preferred Stock with respect to voting, dividends, conversion or
upon Liquidation;
(v) amend this Restated Certificate or the Bylaws of the
Corporation;
(vi) redeem, purchase or otherwise acquire (or pay into or
set funds aside for a sinking fund for such purpose) any share or shares of
Preferred Stock or Common Stock; provided, however, that this restriction shall
not apply to the repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons performing services for the Corporation
or any subsidiary pursuant to agreements under which the Corporation has the
option to repurchase such shares at cost upon the occurrence of certain events,
such as the termination of employment, or through the exercise of any right of
first refusal;
(vii) change the authorized number of directors of the
Corporation; or
(viii) declare or pay any dividend or distribution with
respect to shares of Common Stock or other equity securities junior to the
Series A, Series B or B-1, Series C or C-1, or Series D or D-1 Preferred Stock.
-13-
<PAGE>
(b) Supermajority of Preferred Stock. Subject to the rights of
--------------------------------
series of Preferred Stock which may from time to time come into existence in
compliance with the terms hereof, so long as any shares Preferred Stock are
outstanding (as adjusted for stock splits, stock dividends or
recapitalizations), the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least two thirds of the then outstanding shares of Preferred Stock, voting
together as a class, increase or decrease the total number of authorized shares
of Common Stock.
(c) Series B, Series C and Series D Preferred Stock. Subject
-----------------------------------------------
to the rights of series of Preferred Stock which may from time to time come into
existence in compliance with the terms hereof, so long as any shares of Series
B, Series B-1, Series C, Series C-1, Series D or Series D-1 Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series B, Series B-1, Series C,
Series C-1, Series D and Series D-1 Preferred Stock, voting together as a class:
(i) effect a transaction described in Section 2(c)(i)
above, unless each holder of Series B or Series B-1 Preferred Stock shall
receive at least $1.686 per share, each holder of Series C or Series C-1
Preferred Stock shall receive at least $3.80 per share, and each Series D or
Series D-1 Preferred Stock shall receive at least $12.74 per share (each as
adjusted for stock splits, stock dividends or recapitalizations) in connection
with such transaction;
(ii) alter or change the rights, preferences or privileges
of the shares of Series B, Series C or Series D Preferred Stock so as to affect
adversely and materially the shares of such series;
(iii) issue, or obligate itself to issue, any other series
of Preferred Stock at a price less than $0.843 per share with respect to the
Series B, $1.90 with respect to the Series C and $6.37 with respect to the
Series D (each as adjusted for stock splits, stock dividends or
recapitalizations); provided, however, that the Corporation shall not issue or
obligate itself to issue any other series of Preferred Stock at a price less
than $1.90 but greater than $0.843 per share (as adjusted for stock splits,
stock dividends or recapitalizations) without the approval of the holders of at
least a majority of the then outstanding shares of Series C, Series C-1, Series
D and Series D-1, voting together as a class; and provided, further, that
Corporation shall not issue or obligate itself to issue any other series of
Preferred Stock at a price less than $6.37 but greater than $1.90 per share (as
adjusted for stock splits, stock dividends or recapitalizations) without the
approval of the holders of at least a majority of the then outstanding shares of
Series D and Series D-1, voting as a separate class; or
(iv) redeem, purchase or otherwise acquire (or pay into or
set funds aside for a sinking fund for such purpose) any share or shares of
Preferred Stock or Common Stock; provided, however, that this restriction shall
not apply to the repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons performing services for the Corporation
or any subsidiary pursuant to agreements under which
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<PAGE>
the Corporation has the option to repurchase such shares at cost upon the
occurrence of certain events, such as the termination of employment, or through
the exercise of any right of first refusal.
(d) Series B Preferred Stock. Subject to the rights of series of
------------------------
Preferred Stock which may from time to time come into existence, so long as any
shares of Series B or B-1 Preferred Stock are outstanding, the Corporation shall
not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least two-thirds of the then outstanding
shares of Series B and B-1 Preferred Stock, voting together as a class:
(i) amend this Restated Certificate or the Bylaws of the
Corporation to change or modify this clause (d) or if such amendment would
alter, change or affect, directly or indirectly, adversely and materially the
shares of Series B Preferred Stock in a manner different from the Series A,
Series C, Series C-1, Series D or Series D-1 Preferred Stock;
(ii) increase or decrease (other than by conversion and
except as set forth in Section 8) the total number of authorized shares of
Series B or Series B-1 Preferred Stock; or
(iii) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security having a preference over, or being on a
parity with, the Series B Preferred Stock with respect to voting, dividends or
upon liquidation.
(e) Series C Preferred Stock. Subject to the rights of series of
------------------------
Preferred Stock which may from time to time come into existence in compliance
with the terms hereof, so long as any shares of Series C or Series C-1 Preferred
Stock are outstanding, the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least two-thirds of the then outstanding shares of Series C and Series C-1
Preferred Stock, voting together as a class:
(i) amend this Restated Certificate or the Bylaws of the
Corporation to change or modify this clause (e) or if such amendment would
alter, change or affect, directly or indirectly, adversely and materially the
shares of Series C or C-1 Preferred Stock in a manner different from the Series
A, Series B, Series B-1, Series D or Series D-1 Preferred Stock;
(ii) increase or decrease (other than by conversion and
except as set forth in Section 8) the total number of authorized shares of
Series C or Series C-1 Preferred Stock; or
(iii) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security having a preference over, or being on a
parity with, the Series C Preferred Stock with respect to voting, dividends,
conversion or upon Liquidation.
-15-
<PAGE>
(f) Series D Preferred Stock. Subject to the rights of series of
------------------------
Preferred Stock which may from time to time come into existence in compliance
with the terms hereof, so long as any shares of Series D or Series D -1
Preferred Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least two-thirds of the then outstanding shares of Series D and
Series D -1 Preferred Stock, voting together as a class:
(i) amend this Restated Certificate or the Bylaws of the
Corporation to change or modify this clause (f) or if such amendment would
alter, change or affect, directly or indirectly, adversely and materially the
shares of Series D or Series D -1 Preferred Stock in a manner different from the
Series A, Series B, Series B-1, Series C or Series C-1 Preferred Stock;
(ii) increase or decrease (other than by conversion and
except as set forth in Section 8) the total number of authorized shares of
Series D or Series D-1 Preferred Stock; or
(iii) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security having a preference over, or being on a
parity with, the Series D Preferred Stock with respect to voting, dividends,
conversion or upon Liquidation or otherwise.
7. Status of Converted Stock. In the event any shares of Preferred
-------------------------
Stock shall be converted pursuant to Section 4 hereof, the shares so converted
shall be canceled and shall not be issuable by the Corporation. The Certificate
of Incorporation of the Corporation shall be appropriately amended to effect the
corresponding reduction in the Corporation's authorized capital stock.
8. Special Mandatory Conversion.
----------------------------
(a) At any time following the Purchase Date, if (i) any holder of
shares of Series B, Series C or Series D Preferred Stock is offered the right to
purchase equity securities of the Corporation in accordance with Section 2.3 of
the Investors' Rights Agreement (the "Purchase Right") with respect to an equity
--------------
financing in excess of $250,000 of the Corporation at a price per share which is
less than the original issue price for the Series B, Series C or Series D
Preferred Stock (as adjusted for stock dividends, stock splits, subdivisions or
stock combinations) (an "Equity Financing") and (ii) such holder does not by
----------------
exercise of such holder's Purchase Right acquire at least its pro rata amount of
the total number of securities offered in such Equity Financing, then, effective
immediately prior to the consummation of such Equity Financing, all of such
holder's shares of Series B Preferred Stock, Series C or Series D Preferred
Stock, as applicable, shall automatically and without further action on the part
of such holder be converted into an equivalent number of shares of Series B-1
Preferred Stock, Series C-1 or Series D-1 Preferred Stock, as applicable;
provided, however, that no such conversion shall occur in connection with a
particular Equity Financing if, pursuant to the written request of the
Corporation, the Purchase Right with respect to such Equity Financing is waived
in accordance with the terms of such request; and provided, further, that no
such conversion shall occur in
-16-
<PAGE>
connection with a particular Equity Financing with respect to a particular
holder of Series B, Series C or Series D Preferred Stock if, pursuant to the
written request of the Corporation, (i) such holder agrees in writing to waive
such holder's Purchase Right with respect to such Equity Financing and (ii)
ninety percent (90%) of the holders of shares of Series B, Series C or Series D
Preferred Stock, as applicable, agrees in writing that such particular holder of
shares of Series B, Series C or Series D Preferred Stock, as applicable, may
waive such particular holder's Purchase Right with respect to such Equity
Financing. Upon conversion pursuant to this Section 8, the shares of Series B,
Series C or Series D Preferred Stock so converted shall be canceled and not
subject to reissuance.
(b) The holder of any shares of Series B, Series C or Series D
Preferred Stock converted pursuant to this Section 8 shall deliver to the
Corporation during regular business hours at the office of any transfer agent of
the Corporation for such series of Preferred Stock, or at such other place as
may be designated by the Corporation, the certificate or certificates
representing the shares so converted, duly endorsed or assigned in blank or to
the Corporation. As promptly thereafter as is practicable, the Corporation
shall issue and deliver to such holder, at the place designated by such holder,
a certificate or certificates for the number of full shares of the Series B-1
Preferred Stock, Series C-1 or Series D-1 Preferred Stock, as applicable, to
which such holder is entitled. The person in whose name the certificate for
such shares of Series B-1 Preferred Stock, Series C-1 or Series D-1 Preferred
Stock, as applicable, is to be issued shall be deemed to have become a
stockholder on the effective date of the conversion of the Series B Preferred
Stock, Series C or Series D Preferred Stock, as applicable, unless the transfer
books of the Corporation are closed on that date, in which case such person
shall be deemed to have become a stockholder of record on the next succeeding
date on which the transfer books are open.
(c) In the event that any shares of Series B-1, Series C-1 or
Series D-1 Preferred Stock are issued, concurrently with such issuance, the
Corporation shall use its best efforts to take all such action as may be
required, including amending its Certificate of Incorporation, (i) to cancel all
authorized shares of such series that remain unissued after such issuance, (ii)
to create and reserve with respect to each new series of Preferred Stock equal
in number to the number of shares of such series so canceled and designated
Series B-2, Series C-2 or Series D-2 Preferred Stock (to the extent the canceled
shares are shares of Series B-1 Preferred Stock, Series C-1 or Series D-1
Preferred Stock, as applicable), with the same designations, powers, preferences
and rights and be subject to the same qualifications, limitations and
restrictions identical as are then applicable to the Series B Preferred Stock
(with respect to the Series B-2 Preferred Stock), Series C Preferred Stock (with
respect to the Series C-2 Preferred Stock) or Series D Preferred Stock (with
respect to the Series D-2 Preferred Stock), except that the conversion price for
shares of Series B-2, Series C-2 or Series D-2 once initially issued shall be
the Conversion Price for Series B, Series C or Series D Preferred Stock, as
applicable, in effect immediately prior to such issuance and shall not after
such issuance be subject to adjustment under Section 4(d)(i)(A) hereof and (iii)
to amend the provisions of this Section 8 to provide that any subsequent special
mandatory conversion pursuant hereto will be into shares of Series B-2, Series
C-2 or Series D-2 Preferred Stock rather than Series B-1 Preferred Stock, Series
C-1 or Series D-1 Preferred Stock, as applicable. The Corporation shall take the
same
-17-
<PAGE>
actions with respect to the Series B-2, Series C-2 and Series D-2 Preferred
Stock and each series of Preferred Stock subsequently authorized pursuant to
this Section 8 upon initial issuance of shares of the last such series to be so
authorized.
(C) Common Stock.
------------
1. Dividend Rights. Subject to the prior rights of holders of all
---------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, 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. Upon the liquidation, dissolution or winding
------------------
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Article IV(B).
3. Redemption. The Common Stock is not redeemable.
----------
4. Voting Rights. The holder of each share of Common Stock shall
-------------
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
Subject to Sections 5, 6(a)(v), 6(c)(i), 6(c)(ii), 6(d)(i), 6(d)(ii),
6(e)(i) and 6(f)(i) of Article IV hereof, the Board of Directors of the
Corporation is expressly authorized to make, alter or repeal Bylaws of the
Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VII
(A) To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
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<PAGE>
(C) Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect of this Article VII
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision."
* * *
-19-
<PAGE>
The foregoing Fourth Amended and Restated Certificate of Incorporation has
been duly adopted by this corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Seattle, Washington, on December 12th, 1999.
/s/ Martin Tobias
_________________________________________
Martin Tobias, Chief Executive Officer
/s/ John W. Robertson
_________________________________________
John W. Robertson, Secretary
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<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ENCODING.COM, INC.
The undersigned hereby certifies that:
1. He is the duly elected and acting Secretary of ENCODING.COM, Inc., a
Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on March 26, 1998.
3. Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, this Certificate of Amendment of Fifth Amended and Restated
Certificate of Incorporation amends Article I of this corporation's Fifth
Amended and Restated Certificate of Incorporation to read in its entirety as
follows:
"FIRST: The name of the corporation is "Loudeye Technologies, Inc.."
4. The foregoing Certificate of Amendment has been duly adopted by this
corporation's Board of Directors and stockholders in accordance with the
applicable provisions of Sections 228 and 242 of the General Corporation Law of
the State of Delaware.
Executed at Seattle, Washington, December 17th, 1999.
/s/ John W. Robertson
___________________________________
John W. Robertson
Secretary
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (the "Agreement") is made as of November
---------
___, 1999 by and between Encoding.com, Inc., a Delaware corporation (the
"Company"), and ________ (the "Indemnitee").
------- ----------
RECITALS
--------
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers and key employees, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance. The Company and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting directors,
officers and key employees to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
Indemnitee does not regard the current protection available as adequate under
the present circumstances, and Indemnitee and agents of the Company may not be
willing to continue to serve as agents of the Company without additional
protection. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, and to indemnify its directors,
officers and key employees so as to provide them with the maximum protection
permitted by law.
AGREEMENT
---------
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
Company, or, with respect to any criminal action or proceeding, that Indemnitee
had reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. No Employment Rights. Nothing contained in this Agreement is intended
--------------------
to create in Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section 1(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in
-2-
<PAGE>
writing as soon as practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company and
shall be given in accordance with the provisions of Section 12(d) below. In
addition, Indemnitee shall give the Company such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than twenty (20) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within twenty (20) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
-3-
<PAGE>
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ counsel in any such proceeding at Indemnitee's expense; and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be deemed to be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he or she may have ceased
to serve in any such capacity at the time of any action, suit or other covered
proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise.
-4-
<PAGE>
For example, the Company and Indemnitee acknowledge that the Securities and
Exchange Commission (the "SEC") has taken the position that indemnification is
---
not permissible for liabilities arising under certain federal securities laws,
and federal legislation prohibits indemnification for certain ERISA violations.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from
----------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
-5-
<PAGE>
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) Claims under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
-------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
-----------------
shall include employee benefit plans; references to "fines" shall include any
-----
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
-------------------------------------
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
---
opposed to the best interests of the Company" as referred to in this Agreement.
- --------------------------------------------
11. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee
-6-
<PAGE>
with respect to such action, unless as a part of such action, the court of
competent jurisdiction determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses,
including attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action were made in bad faith or were
frivolous.
12. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) Notices. Any notice, demand or request required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or fax, or forty-eight (48) hours
after being deposited in the U.S. mail, as certified or registered mail, with
postage prepaid, and addressed to the party to be notified at such party's
address as set forth below or as subsequently modified by written notice.
(e) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(f) Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of
-7-
<PAGE>
Indemnitee, who shall execute all documents required and shall do all acts that
may be necessary to secure such rights and to enable the Company to effectively
bring suit to enforce such rights.
[Signature Page Follows]
-8-
<PAGE>
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
Encoding.com, Inc.
By: _________________________________________
Title: _________________________________________
Address: 3406 E. Union Street
Seattle, WA 98122
AGREED TO AND ACCEPTED:
[Indem Name]
_________________________________
(Signature)
Address: ((IndemniteeAddress1))
((IndemniteeAddress2))
-9-
<PAGE>
EXHIBIT 10.2
ENCODING.COM, INC.
1998 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1998 Stock Option Plan are
--------------------
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means Encoding.com, Inc., a Delaware corporation.
-------
(g) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means the absence
----------------------------------------------
of any interruption or termination of service as an Employee or Consultant.
Continuous Status as an Employee or Consultant shall not be considered
interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any
other leave of absence approved by the Administrator, provided that such leave
is for a period of not more than ninety (90) days, unless re-employment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
in the case of transfers between locations of the Company or between the
Company, its Subsidiaries or their respective successors. For purposes of this
Plan, a change in status from an Employee to a Consultant or from a Consultant
to an Employee will not constitute an interruption of Continuous Status as an
Employee or Consultant.
(i) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment determined based
<PAGE>
upon such minimum number of hours or periods worked as shall be determined by
the Administrator in its discretion, subject to any requirements of the Code.
The payment of a director's fee by the Company to a director shall not be
sufficient to constitute "employment" of such director by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation System ("Nasdaq"), its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq (but not on the
National Market thereof) or regularly quoted by a recognized securities dealer
but selling prices are not reported, its Fair Market Value shall be the mean
between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable option agreement.
(m) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable option
agreement.
(n) "Option" means a stock option granted pursuant to the Plan.
------
(o) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(p) "Optionee" means an Employee or Consultant who receives an Option.
--------
(q) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(r) "Plan" means this 1998 Stock Option Plan.
----
(s) "Reporting Person" means an officer, director, or greater than ten
----------------
percent (10%) shareholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
(t) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as the same may be amended from time to time, or any successor provision.
-2-
<PAGE>
(u) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(v) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(w) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 4,660,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should
expire or become unexercisable for any reason without having been exercised in
full, the unpurchased Shares that were subject thereto shall, unless the Plan
shall have been terminated, become available for future grant under the Plan.
In addition, any shares of Common Stock which are retained by the Company upon
exercise of an Option in order to satisfy the exercise price for such Option or
any withholding taxes due with respect to such exercise shall be treated as not
issued and shall continue to be available under the Plan.
4. Administration of the Plan
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a committee appointed by the Board.
(b) Plan Procedure After the Date, if any, Upon Which the Company
-------------------------------------------------------------
Becomes Subject to the Exchange Act.
- -----------------------------------
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3,
------------------------------
the Plan may be administered by different bodies with respect to directors, non-
director officers and Employees or Consultants who are not Reporting Persons.
(ii) Administration With Respect to Reporting Persons. With
------------------------------------------------
respect to grants of Options to Employees who are Reporting Persons, the Plan
shall be administered by (A) the Board if the Board may administer the Plan in
compliance with Rule 16b-3 with respect to a plan intended to qualify thereunder
as a discretionary plan, or (B) a committee designated by the Board to
administer the Plan, which committee shall be constituted in such a manner as to
permit the Plan to comply with Rule 16b-3 with respect to a plan intended to
qualify thereunder as a discretionary plan. Once appointed, such committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however caused,
and remove all members of the committee and thereafter directly administer the
Plan, all to the extent permitted by Rule 16b-3 with respect to a plan intended
to qualify thereunder as a discretionary plan. No person serving as a member of
an Administrator that has authority with respect to grants to Reporting Persons
shall be eligible to receive any grant under the Plan which would cause such
member to cease to be "disinterested" within the meaning of Rule 16b-3.
(iii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Options to Employees or Consultants who are
- ---------
not Reporting Persons, the Plan shall
-3-
<PAGE>
be administered by (A) the Board or (B) a committee designated by the Board,
which committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of incentive stock option plans, if
any, of state corporate and securities laws, of the Code and of any applicable
Stock Exchange (the "Applicable Laws"). Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however caused,
and remove all members of the Committee and thereafter directly administer the
Plan, all to the extent permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options may
from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any option granted hereunder;
(vii) to determine whether and under what circumstances an Option
may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(x) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options to participants who are foreign
nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
-4-
<PAGE>
5. Eligibility
-----------
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he or she is
otherwise eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares subject to an Incentive Stock Option shall be determined as
of the date of the grant of such Option.
(d) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with such Optionee's right or the Company's right
to terminate his or her employment or consulting relationship at any time, with
or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 18 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 14 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Option granted to
an Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.
8. Option Exercise Price and Consideration
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than one hundred ten
percent (110%) of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than one hundred percent (100%) of the Fair Market Value per
Share on the date of grant.
-5-
<PAGE>
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted to a person who, at the time of the grant of such
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than one hundred ten percent (110%) of the
Fair Market Value per Share on the date of the grant.
(B) granted to any person, the per Share exercise price shall
be no less than eighty-five percent (85%) of the Fair Market Value per Share on
the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (i) cash, (ii)
check, (iii) promissory note, (iv) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (v) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (vi) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any applicable
income or employment taxes, (vii) delivery of an irrevocable subscription
agreement for the Shares that irrevocably obligates the option holder to take
and pay for the Shares not more than twelve months after the date of delivery of
the subscription agreement, (8) any combination of the foregoing methods of
payment, or (9) such other consideration and method of payment for the issuance
of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the
-6-
<PAGE>
Option. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares that thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
----------------------------------------------------
Section 9(c), in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such other period of time not less than thirty (30) days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three (3) months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee; or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) Disability of Optionee. Notwithstanding the provisions of Section
----------------------
9(b) above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of his or her total and permanent disability
(within the meaning of Section 22(e)(3) of the Code), Optionee may, but only
within twelve (12) months from the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee was
not entitled to exercise the Option at the date of termination, or if Optionee
does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Status as an Employee or Consultant, or within
thirty (30) days following the termination of the Optionee's Continuous Status
as an Employee or Consultant, the Option may be exercised, at any time within
six (6) months following the date of death (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent the
Optionee was entitled to exercise the Option at the date of death or, if
earlier, the date of termination of the Continuous Status as an Employee or
Consultant. To the extent that Optionee was not entitled to exercise the Option
at the date of death or termination, as the case may be, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
(e) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(f) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
-7-
<PAGE>
10. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six (6)
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
All elections by an Optionee to have Shares withheld to satisfy
tax withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator;
(d) if the Optionee is a Reporting Person, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
11. Adjustments Upon Changes in Capitalization; Corporate Transactions
------------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or that have been returned to the Plan upon cancellation or expiration
of
-8-
<PAGE>
an Option, as well as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination, recapitalization or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Option will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided by
the Administrator. The Administrator may, in the exercise of its sole
discretion in such instances, declare that any Option shall terminate as of a
date fixed by the Administrator and give each Optionee the right to exercise his
or her Option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable.
(c) Acquisition, Merger or Change in Control
----------------------------------------
(i) In the event of a proposed sale of all or substantially all of
the assets of the Company, or the merger of the Company with or into another
corporation, or other change in control (a "Change in Control"), the
exercisability of each outstanding Option shall automatically be accelerated
completely so that one hundred percent (100%) of the number of shares of Common
Stock covered by such Option shall be fully vested upon the consummation of the
Change in Control; provided, however, that each outstanding Option shall
automatically be accelerated by only twenty-five percent (25%) of the number of
shares of Common Stock covered by such Option that are unvested at the
consummation of the Change in Control if and to the extent: (A) such Option is
either to be assumed by the successor corporation at the consummation of the
Change of Control or be replaced with a comparable option to purchase shares of
the capital stock of the successor corporation at the consummation of the Change
in Control, or (B) such Option is to be replaced by a comparable cash incentive
program of the successor corporation based on the value of the Option at the
time of the consummation of the Change in Control, or (C) the acceleration of
such Option is subject to other limitations imposed by the Administrator at the
time of grant.
(ii) With respect to executive officers, the exercisability of
each outstanding Option held by such executive officer shall be accelerated
completely so that one hundred percent (100%) of the number of shares of Common
Stock covered by such Option are fully vested if such executive officer is
terminated by the acquiring corporation within twelve (12) months after the
consummation of a Change in Control.
(iii) The Administrator shall have the authority, in the
Administrator's sole discretion, to provide for the automatic acceleration of
any outstanding Option upon the occurrence of a Change in Control, but only to
the extent that such acceleration does not interfere with any "pooling of
interests" accounting treatment used in connection with the Change in Control.
-9-
<PAGE>
12. Non-Transferability of Options. Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised or purchased
during the lifetime of the Optionee, only by the Optionee.
13. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
14. Amendment and Termination of the Plan
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 or with Section 422
of the Code (or any other applicable law or regulation, including the
requirements of any Stock Exchange), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by law.
16. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
17. Agreements. Options shall be evidenced by written agreements in such
----------
form as the Administrator shall approve from time to time.
18. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange upon which the Common Stock is listed. All Options
issued under the Plan shall become void in the event such approval is not
obtained.
-10-
<PAGE>
19. Information to Optionees. To the extent required by Applicable Laws,
------------------------
the Company shall provide financial statements at least annually to each
Optionee during the period such Optionee has one or more Options outstanding.
The Company shall not be required to provide such information if the issuance of
Options under the Plan is limited to key employees whose duties in connection
with the Company assure their access to equivalent information.
[End of 1998 Stock Option Plan]
-11-
<PAGE>
EXHIBIT 10.3
YESLER SOFTWARE, INC.
1998 STOCK INCENTIVE COMPENSATION PLAN
1. PURPOSES
1.1 The purpose of the Yesler Software, Inc. 1998 Stock Incentive
Compensation Plan (the "Plan") is to enhance the long-term shareholder value of
Yesler Software, Inc., a Washington corporation (the "Company"), by offering
opportunities to employees, persons to whom offers of employment have been
extended, directors, officers, consultants, agents, advisors and independent
contractors of the Company and its Subsidiaries (as defined in Section 2) to
participate in the Company's growth and success, and to encourage them to remain
in the service of the Company and its Subsidiaries and to acquire and maintain
stock ownership in the Company.
2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 Acquired Entities.
-----------------
"Acquired Entities" has the meaning given in Section 6.2.
2.2 Acquisition Transaction.
-----------------------
"Acquisition Transaction" has the meaning given in Section 6.2.
2.3 Award.
-----
"Award" means an award or grant made to a Participant pursuant to the Plan,
including, without limitation, awards or grants of Options, Stock Appreciation
Rights, Stock Awards, Other Stock-Based Awards or any combination of the
foregoing.
2.4 Board.
-----
"Board" means the Board of Directors of the Company.
2.5 Cause.
-----
"Cause" means dishonesty, fraud, misconduct, disclosure of confidential
information, conviction of, or a plea of guilty or no contest to, a felony under
the laws of the United States or any state thereof, habitual absence from work
for reasons other than illness, intentional conduct which causes significant
injury to the Company, habitual abuse of alcohol or a controlled substance, in
each case as determined by the Plan Administrator, and its determination shall
be conclusive and binding.
1
<PAGE>
2.6 Change in Control.
-----------------
"Change in Control" means (i) the consummation of a merger or consolidation
of the Company with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting power of the continuing
or surviving entity's securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not
shareholders of the Company immediately prior to such merger, consolidation or
other reorganization or (ii) the sale, transfer or other disposition of all or
substantially all of the Company's assets. A transaction shall not constitute a
Change in Control if its sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Company's securities
immediately before such transaction.
2.7 Code.
----
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.8 Common Stock.
------------
"Common Stock" means the common stock, par value $.01, of the Company.
2.9 Disability.
----------
"Disability" means a medically determinable mental or physical impairment
or condition of the Holder which is expected to result in death or which has
lasted or is expected to last for a continuous period of 12 months or more and
which causes the Holder to be unable, in the opinion of the Plan Administrator
on the basis of evidence acceptable to it, to perform his or her duties for the
Company and, in the case of a determination of Disability for purposes of
determining the exercise period for an Incentive Stock Option, to be engaged in
any substantial gainful activity. Upon making a determination of Disability, the
Plan Administrator shall, for purposes of the Plan, determine the date of the
Holder's termination of employment, service or contractual relationship.
2.10 Exchange Act.
------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.11 Fair Market Value.
-----------------
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the mean between the high and low selling prices for the Common Stock as
reported by the
2
<PAGE>
Nasdaq National Market for a single trading day or (b) if the Common Stock is
listed on the New York Stock Exchange or the American Stock Exchange, the mean
between the high and low selling prices for the Common Stock as such prices are
officially quoted in the composite tape of transactions on such exchange for a
single trading day. If there is no such reported price for the Common Stock for
the date in question, then such price on the last preceding date for which such
price exists shall be determinative of Fair Market Value.
2.12 Grant Date.
----------
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
2.13 Holder.
------
"Holder" means the Participant to whom an Award is granted or the personal
representative of a Holder who has died.
2.14 Incentive Stock Option.
----------------------
"Incentive Stock Option" means an Option to purchase Common Stock granted
under Section 7 with the intention that it qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
2.15 Involuntary Termination.
-----------------------
"Involuntary Termination" means termination of the Holder's service to the
Company (or the parent or subsidiary company employing such Holder) or the other
party to the transaction constituting a Change in Control by reason of (i) the
involuntary discharge of such Holder by the Company (or the parent or subsidiary
company employing such Holder) or the other party to the transaction
constituting a Change in Control for reasons other than Cause or (ii) the
voluntary resignation of the Holder following (A) a change in such Holder's
position with the Company (or its successor or the parent or subsidiary company
that employs such Holder) or the other party to the transaction constituting a
Change in Control that materially reduces such Holder's level of authority or
responsibility or (B) a reduction in such Holder's compensation (including base
salary, fringe benefits and participation in bonus or incentive programs based
on corporate performance) by more than 20%.
3
<PAGE>
2.16 Nonqualified Stock Option.
-------------------------
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.17 Option.
------
"Option" means the right to purchase Common Stock granted under Section 7.
2.18 Option Shares.
-------------
"Option Shares" means the shares of Common Stock issuable upon a Holder's
exercise of an Option granted under the Plan.
2.19 Other Stock-Based Award.
-----------------------
"Other Stock-Based Award" means an Award granted under Section 11.
2.20 Participant.
-----------
"Participant" means an individual who is a Holder of an Award or, as the
context may require, any employee, director (including directors who are not
employees), officer, consultant, agent, advisor or independent contractor of the
Company or a Subsidiary who has been designated by the Plan Administrator as
eligible to participate in the Plan.
2.21 Plan Administrator.
------------------
"Plan Administrator" means the Board or any committee designated to
administer the Plan under Section 3.1.
2.22 Qualifying Option or Qualifying Award.
-------------------------------------
"Qualifying Option" or "Qualifying Award" means an Option or an Award that
is held by a person who had been an employee, director, consultant or agent to
the Company for at least 180 days as of the effective date of a Change in
Control.
2.23 Qualifying Shares.
-----------------
"Qualifying Shares" means shares of Common Stock issued pursuant to a
Qualifying Award which are subject to the right of the Company to repurchase
some or all of such shares at the original purchase price (if any) upon
termination of the Holder's services to the Company.
4
<PAGE>
2.24 Restricted Stock.
----------------
"Restricted Stock" means shares of Common Stock granted under Section 10,
the rights of ownership of which are subject to restrictions prescribed by the
Plan Administrator.
2.25 Right of Repurchase.
-------------------
"Right of Repurchase" has the meaning given in Section 7.4.
2.26 Securities Act.
--------------
"Securities Act" means the Securities Act of 1933, as amended.
2.27 Stock Appreciation Right.
------------------------
"Stock Appreciation Right" means an Award granted under Section 9.
2.28 Stock Award.
-----------
"Stock Award" means an Award granted under Section 10.
2.29 Subsidiary.
----------
"Subsidiary," except as expressly provided otherwise, means any entity that
is directly or indirectly controlled by the Company or in which the Company has
a significant ownership interest, as determined by the Plan Administrator, and
any entity that may become a direct or indirect parent of the Company.
2.30 Unvested Portion.
----------------
"Unvested Portion" means the portion of a Qualifying Option or Qualifying
Shares that is/are unvested as of the effective date of a Change in Control.
2.31 Vested Portion.
--------------
"Vested Portion" means the portion of a Qualifying Award or Qualifying
Shares that is/are vested as of the effective date of a Change in Control.
3. ADMINISTRATION
3.1 Plan Administrator.
------------------
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of,
5
<PAGE>
the Board. Any such committee shall have the powers and authority vested in the
Board hereunder (including the power and authority to interpret any provision of
the Plan or of any Award). The Board, or any committee thereof appointed to
administer the Plan, is referred to herein as the "Plan Administrator." If and
so long as the Common Stock is registered under Section 12(b) or 12(g) of the
Exchange Act, the Board shall consider in selecting the Plan Administrator and
the membership of any committee acting as Plan Administrator for any persons
subject or likely to become subject to Section 16 under the Exchange Act the
provisions regarding (a) "outside directors" as contemplated by Section 162(m)
of the Code and (b) "Non-Employee Directors" as contemplated by Rule 16b-3 under
the Exchange Act. The Board or Plan Administrator may delegate the
responsibility for administering the Plan with respect to designated classes of
eligible Participants to one or more executive officers or different committees,
the members of which need not be members of the Board, subject to such
limitations as the Board deems appropriate. Committee members shall serve for
such term as the Board may determine, subject to removal by the Board at any
time.
3.2 Administration and Interpretation by the Plan Administrator.
-----------------------------------------------------------
Except for the terms and conditions explicitly set forth in the Plan, the
Plan Administrator shall have exclusive authority, in its absolute discretion,
to determine all matters relating to Awards under the Plan, including the
selection of individuals to be granted Awards, the type of Awards, the number of
shares of Common Stock subject to an Award, all terms, conditions, restrictions
and limitations, if any, of an Award and the terms of any instrument that
evidences the Award. The Plan Administrator shall also have exclusive authority
to interpret the Plan and may from time to time adopt, change and rescind rules
and regulations of general application for the Plan's administration. This
authority shall include the sole authority to correct any defect, supply any
omission or reconcile any inconsistency in this Plan and make all other
determinations necessary or advisable for the administration of the Plan and do
everything necessary or appropriate to administer the Plan. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
4. STOCK SUBJECT TO THE PLAN
4.1 Authorized Number of Shares.
---------------------------
Subject to adjustment from time to time as provided in Section 14.1, a
maximum of 1,498,350 shares of Common Stock shall be available for issuance
under the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares.
6
<PAGE>
4.2 Limitations.
-----------
(a) Subject to adjustment from time to time as provided in Section
14.1, not more than 300,000 shares of Common Stock may be made subject to Awards
under the Plan to any individual Participant in the aggregate in any one
calendar year, except that the Company may make additional one-time grants to
newly hired Participants of up to 500,000 shares per such Participant; such
limitation shall be applied in a manner consistent with the requirements of, and
only to the extent required for compliance with, the exclusion from the
limitation on deductibility of compensation under Section 162(m) of the Code.
(b) Subject to adjustment from time to time as provided in Section
14.1, not more than 50,000 shares of Common Stock may be made subject to Awards
to any non-employee director in the aggregate in any one calendar year.
4.3 Reuse of Shares.
---------------
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares) and any shares
repurchased by the Company from a Holder upon exercise of a right of repurchase
shall again be available for issuance in connection with future grants of Awards
under the Plan; provided, however, that any such shares shall be counted in
accordance with the requirements of Section 162(m) of the Code if and to the
extent applicable. Shares that are subject to tandem Awards shall be counted
only once. Also, upon a stock-for-stock exercise only the net number of shares
will be deemed to have been used under this Plan.
5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and key
employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
6. AWARDS
6.1 Form and Grant of Awards.
------------------------
The Plan Administrator shall have the authority, in its sole discretion, to
determine the type or types of Awards to be made under the Plan. Such Awards may
include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options, Stock Appreciation Rights, Stock Awards and Other Stock-Based Awards.
Awards may be granted singly, in combination or in tandem so that the settlement
or payment of one automatically reduces
7
<PAGE>
or cancels the other. Awards may also be made in combination or in tandem with,
in replacement of, as alternatives to, or as the payment form for, grants or
rights under any other employee or compensation plan of the Company.
6.2 Acquired Company Awards.
-----------------------
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old Award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (an
"Acquisition Transaction"). Such Awards shall not reduce the number of shares of
Common Stock available for issuance pursuant to this Plan. In the event that a
written agreement pursuant to which an Acquisition Transaction is completed is
approved by the Board and said agreement sets forth the terms and conditions of
the substitution for or assumption of outstanding awards of the Acquired Entity,
said terms and conditions shall be deemed to be the action of the Plan
Administrator without any further action by the Plan Administrator, except as
may be required for compliance with Rule 16b-3 under the Exchange Act, and the
persons holding such Awards shall be deemed to be Participants and Holders.
7. AWARDS OF OPTIONS
7.1 Grant of Options.
----------------
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 Option Exercise Price.
---------------------
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options.
7.3 Term of Options.
---------------
The term of each Option shall be as established by the Plan Administrator
or, if not so established, shall be 5 years from the Grant Date.
8
<PAGE>
7.4 Exercise of Options.
-------------------
The Plan Administrator shall establish and set forth in each
instrument that evidences an Option the time at which or the installments in
which the Option shall become exercisable, which provisions may be waived or
modified by the Plan Administrator at any time. If not so established in the
instrument evidencing the Option or otherwise set at the time of grant, the
Option will be immediately exercisable as of the Grant Date; provided, however,
that the Option Shares shall remain unvested and subject to repurchase by the
Company (the "Right of Repurchase") at the exercise price Holder paid for such
Option Shares (exclusive of any taxes paid upon acquisition of the shares); and
provided further, that the Option Shares will be subject to the following: (a)
Holder shall acquire a vested interest in, and the Company's Right of Repurchase
shall accordingly lapse with respect to, (i) 25% of the Option Shares one year
after the Grant Date and (ii) the balance of the Option Shares in a series of
twelve (12) successive equal quarterly installments for each additional quarter
thereafter, so that the Option Shares shall no longer be subject to the Right of
Repurchase on and after four (4) years after the Grant Date; (b) in no event
shall any additional Option Shares vest after termination of Holder's employment
by or service to the Company; and (c) the Plan Administrator may waive or modify
the foregoing schedule at any time.
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Plan Administrator, setting forth
the number of shares with respect to which the Option is being exercised and
accompanied by payment in full as described in Section 7.5. An Option may not be
exercised as to less than 100 shares at any one time (or the lesser number of
remaining shares covered by the Option).
7.5 Payment of Exercise Price.
-------------------------
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or check (unless, at the time of exercise, the Plan
Administrator determines not to accept a personal check), except that the Plan
Administrator, in its sole discretion, may, either at the time the Option is
granted or at any time before it is exercised and subject to such limitations as
the Plan Administrator may determine, authorize payment in cash and/or one or
more of the following alternative forms: (a) tendering (either actually or, if
and so long as the Common Stock is registered under Section 12(b) or 12(g) of
the Exchange Act, by attestation) Common Stock already owned by the Holder for
at least six months (or any shorter period necessary to avoid a charge to the
Company's earnings for financial reporting purposes) having a Fair Market Value
on the day prior to the exercise date equal to the aggregate Option exercise
price; (b) a promissory note delivered pursuant to
9
<PAGE>
Section 12; (c) if and so long as the Common Stock is registered under Section
12(b) or 12(g) of the Exchange Act, delivery of a properly executed exercise
notice, together with irrevocable instructions, to (i) a third party designated
by the Company to deliver promptly to the Company the aggregate amount of sale
or loan proceeds to pay the Option exercise price and any withholding tax
obligations that may arise in connection with the exercise and (ii) the Company
to deliver the certificates for such purchased shares directly to such third
party, all in accordance with the regulations of the Federal Reserve Board; or
(d) such other consideration as the Plan Administrator may permit.
7.6 Post-Termination Exercises.
--------------------------
The Plan Administrator may establish and set forth in each instrument that
evidences an Option whether the Option will continue to be exercisable, and the
terms and conditions of such exercise, if a Holder ceases to be employed by, or
to provide services to, the Company or its Subsidiaries, which provisions may be
waived or modified by the Plan Administrator at any time.
If not so established in the instrument evidencing the Option, the Option
will be exercisable according to the following terms and conditions, which may
be waived or modified by the Plan Administrator at any time.
In case of termination of the Holder's employment or services other than by
reason of death or Cause, the Option shall be exercisable, to the extent of the
number of shares purchasable by the Holder at the date of such termination, only
(a) within one year if the termination of the Holder's employment or services
are coincident with Disability or (b) within three months after the date the
Holder ceases to be an employee, director, officer, consultant, agent, advisor
or independent contractor of the Company or a Subsidiary if termination of the
Holder's employment or services is for any reason other than death or
Disability, but in no event later than the remaining term of the Option. Any
Option exercisable at the time of the Holder's death may be exercised, to the
extent of the number of shares purchasable by the Holder at the date of the
Holder's death, by the personal representative of the Holder's estate entitled
thereto at any time or from time to time within one year after the date of
death, but in no event later than the remaining term of the Option. In case of
termination of the Holder's employment or services for Cause, the Option shall
automatically terminate upon first discovery by the Company of any reason for
such termination and the Holder shall have no right to purchase any Shares
pursuant to such Option, unless the Plan Administrator determines otherwise. If
a Holder's employment or services with the Company are suspended pending an
investigation of whether the Holder shall be terminated for Cause, all the
Holder's rights under any Option likewise shall be suspended during the period
of investigation.
10
<PAGE>
A transfer of employment or services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
The effect of a Company-approved leave of absence or short-term break in service
on the terms and conditions of an Option shall be determined by the Plan
Administrator, in its sole discretion.
8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
8.1 Dollar Limitation.
-----------------
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the Participant holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options were granted.
8.2 10% Shareholders.
----------------
If a Participant owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 Eligible Employees.
------------------
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary
corporation" shall have the meanings attributed to those terms for purposes of
Section 422 of the Code.
8.4 Term.
----
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 Exercisability.
--------------
To qualify for Incentive Stock Option tax treatment, an Option designated
as an Incentive Stock Option must be exercised within three months after
termination of
11
<PAGE>
employment for reasons other than death, except that, in the case of termination
of employment due to total Disability, such Option must be exercised within one
year after such termination. Employment shall not be deemed to continue beyond
the first 90 days of a leave of absence unless the Participant's reemployment
rights are guaranteed by statute or contract.
8.6 Taxation of Incentive Stock Options.
-----------------------------------
In order to obtain certain tax benefits afforded to Incentive Stock Options
under Section 422 of the Code, the Participant must hold the shares issued upon
the exercise of an Incentive Stock Option for two years after the Grant Date of
the Incentive Stock Option and one year from the date of exercise. A Participant
may be subject to the alternative minimum tax at the time of exercise of an
Incentive Stock Option. The Participant shall give the Company prompt notice of
any disposition of shares acquired by the exercise of an Incentive Stock Option
prior to the expiration of such holding periods.
8.7 Promissory Notes.
----------------
The amount of any promissory note delivered pursuant to Section 12 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
8.8 Incorporation of Other Provisions.
---------------------------------
With respect to Incentive Stock Options, if this Plan does not contain any
provision required to be included herein under Section 422 of the Code, such
provision shall be deemed to be incorporated herein with the same force and
effect as if such provision had been set out in full herein; provided, however,
that to the extent any Option that is intended to qualify as an Incentive Stock
Option cannot so qualify, the Option, to that extent, shall be deemed to be a
Nonqualified Stock Option for all purposes of this Plan.
9. STOCK APPRECIATION RIGHTS
9.1 Grant of Stock Appreciation Rights.
----------------------------------
The Plan Administrator may grant a Stock Appreciation Right separately or
in tandem with a related Option.
12
<PAGE>
9.2 Tandem Stock Appreciation Rights.
--------------------------------
A Stock Appreciation Right granted in tandem with a related Option will
give the Holder the right to surrender to the Company all or a portion of the
related Option and to receive an appreciation distribution (in shares of Common
Stock or cash or any combination of shares and cash, as the Plan Administrator,
in its sole discretion, shall determine at any time) in an amount equal to the
excess of the Fair Market Value for the date the Stock Appreciation Right is
exercised over the exercise price per share of the right, which shall be the
same as the exercise price of the related Option. A tandem Stock Appreciation
Right will have the same other terms and provisions as the related Option. Upon
and to the extent a tandem Stock Appreciation Right is exercised, the related
Option will terminate.
9.3 Stand-Alone Stock Appreciation Rights.
-------------------------------------
A Stock Appreciation Right granted separately and not in tandem with an
Option will give the Holder the right to receive an appreciation distribution in
an amount equal to the excess of the Fair Market Value for the date the Stock
Appreciation Right is exercised over the exercise price per share of the right.
A stand-alone Stock Appreciation Right will have such terms as the Plan
Administrator may determine, except that the term of the right, if not otherwise
established by the Plan Administrator, shall be 10 years from the Grant Date.
9.4 Exercise of Stock Appreciation Rights.
-------------------------------------
Unless otherwise provided by the Plan Administrator in the instrument that
evidences the Stock Appreciation Right, the provisions of Section 7.6 relating
to the termination of a Holder's employment or services shall apply equally, to
the extent applicable, to the Holder of a Stock Appreciation Right.
10. STOCK AWARDS
10.1 Grant of Stock Awards.
---------------------
The Plan Administrator is authorized to make Awards of Common Stock or of
rights to receive shares of Common Stock to Participants on such terms and
conditions and subject to such restrictions, if any (which may be based on
continuous service with the Company or the achievement of performance goals
related to (i) sales, gross margin, operating profits or profits, (ii) growth in
sales, gross margin operating profit or profit, (iii) return ratios related to
sales, gross margin operating profit or profit, (iv) cash flow, (v) asset
management (including inventory management), or (vi) total shareholder return,
where such goals may be stated in absolute terms or relative to comparison
companies), as the Plan Administrator shall determine, in its sole discretion,
which terms, conditions
13
<PAGE>
and restrictions shall be set forth in the instrument evidencing the Award. The
terms, conditions and restrictions that the Plan Administrator shall have the
power to determine shall include, without limitation, the manner in which shares
subject to Stock Awards are held during the periods they are subject to
restrictions and the circumstances under which forfeiture of Restricted Stock
shall occur by reason of termination of the Holder's services or upon the
occurrence of other events.
10.2 Issuance of Shares.
------------------
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect to a Stock Award, or upon the Holder's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall deliver, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, a stock certificate for the
appropriate number of shares of Common Stock covered by the Award.
10.3 Waiver of Restrictions.
----------------------
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Restricted Stock under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate.
11. OTHER STOCK-BASED AWARDS
The Plan Administrator may grant other Awards under the Plan pursuant to
which shares of Common Stock (which may, but need not, be shares of Restricted
Stock pursuant to Section 10) are or may in the future be acquired, or Awards
denominated in stock units, including ones valued using measures other than
market value. Such Other Stock-Based Awards may be granted alone or in addition
to or in tandem with any Award of any type granted under the Plan and must be
consistent with the Plan's purpose.
12. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist a Holder (including a Holder who is an officer or director of the
Company) in acquiring shares of Common Stock pursuant to an Award granted under
the Plan, the Plan Administrator, in its sole discretion, may authorize, either
at the Grant Date or at any time before the acquisition of Common Stock pursuant
to the Award, (a) the extension of a loan to the Holder by the Company, (b) the
payment by the Holder of the purchase price, if any, of the Common Stock in
installments, or (c) the guarantee by the Company of a loan obtained by the
grantee from a third party. The terms of any loans, installment payments or loan
guarantees, including the interest rate and terms of and security for repayment,
will be subject to the Plan Administrator's discretion; provided,
14
<PAGE>
however, that repayment of any Company loan to the Holder shall be secured by
delivery of a full-recourse promissory note for the loan amount executed by the
Holder, together with any other form of security determined by the Plan
Administrator. The maximum credit available is the purchase price, if any, of
the Common Stock acquired, plus the maximum federal and state income and
employment tax liability that may be incurred in connection with the
acquisition.
13. ASSIGNABILITY
Except as otherwise specified or approved by the Plan Administrator at the
time of grant of an Award or any time prior to its exercise, no Option, Stock
Appreciation Right or Other Stock-Based Award granted under the Plan may be
assigned, pledged or transferred by the Holder other than by will or by the laws
of descent and distribution, and during the Holder's lifetime, such Awards may
be exercised only by the Holder. Notwithstanding the foregoing, and to the
extent permitted by Section 422 of the Code, the Plan Administrator, in its sole
discretion, may permit such assignment, transfer and exercisability and may
permit a Holder of such Awards to designate a beneficiary who may exercise the
Award or receive compensation under the Award after the Holder's death;
provided, however, that (i) any Award so assigned or transferred shall be
subject to all the same terms and conditions contained in the instrument
evidencing the Award, (ii) the original Holder shall remain subject to
withholding taxes upon exercise, (iii) any subsequent transfer of an Award shall
be prohibited and (iv) the events of termination of employment or contractual
relationship set forth in subsection 7.6 shall continue to apply with respect to
the original transferor-Holder.
14. ADJUSTMENTS
14.1 Adjustment of Shares.
--------------------
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Plan
Administrator, in its sole discretion, shall make such equitable adjustments as
it shall deem appropriate in the circumstances in (i) the maximum number and
class of securities subject to the Plan as set forth in Section 4.1, (ii) the
maximum number and class of securities that may be made subject to Awards to any
individual Participant as set forth in Section 4.2, and (iii) the number and
class of securities that are subject to any outstanding
15
<PAGE>
Award and the per share price of such securities, without any change in the
aggregate price to be paid therefor. The determination by the Plan Administrator
as to the terms of any of the foregoing adjustments shall be conclusive and
binding.
14.2 Dissolution, Liquidation or Change in Control Transactions.
----------------------------------------------------------
(a) In the event of the proposed dissolution or liquidation of the
Company, the Company shall notify each Holder at least 15 days prior to such
proposed action. To the extent not previously exercised, all Awards will
terminate immediately prior to the consummation of such proposed action.
(b) For any and all Awards granted prior to March 18, 1999, upon a
Change in Control such Awards shall immediately vest in full. For any and all
Awards granted on or after March 18, 1999, the following provisions in this
Section 14.2 regarding acceleration shall apply. Unless the applicable agreement
representing an Option provides otherwise, or unless the Plan Administrator
determines otherwise in its sole and absolute discretion in connection with any
Change in Control, a Qualifying Option which is not exercisable in full shall
become exercisable in connection with a Change in Control which becomes
effective before the Holder's service to the Company terminates as follows:
(i) If the Qualifying Option remains outstanding following the
Change in Control, is assumed by the surviving entity or its parent, or the
surviving entity or its parent substitutes options with substantially the same
terms for such Qualifying Option, the vesting and exercisability of the
Qualifying Option shall be accelerated to the extent of 50% of the Unvested
Portion thereof, and the remaining 50% of the Unvested Portion of such
Qualifying Option shall vest in accordance with the vesting schedule set forth
in the applicable Option agreement.
(ii) If the Qualifying Option remains outstanding following the
Change in Control, is assumed by the surviving entity or its parent, or the
surviving entity or its parent substitutes options with substantially the same
terms for such Qualifying Option and if the Holder thereof is subject to an
Involuntary Termination within 180 days following such Change in Control, then
all Options held by such Holder (or options issued in substitution thereof)
shall become exercisable in full, whether or not the vesting requirements set
forth in the Option agreement have been satisfied, for a period of 90 days
commencing on the effective date of such Holder's Involuntary Termination.
(iii) If a Qualifying Option does not remain outstanding, and
either such Qualifying Option is not assumed by the surviving entity or its
parent, or the surviving entity or its parent does not substitute options with
substantially the same terms for such Qualifying Option, such Qualifying Option
shall become exercisable in full,
16
<PAGE>
whether or not the vesting requirements set forth in the Option agreement have
been satisfied, for a period prior to the effective date of such Change in
Control of a duration specified by the Plan Administrator, and thereafter the
Option shall terminate.
(c) Unless the applicable agreement representing an Award provides
otherwise, or unless the Plan Administrator determines otherwise in its sole and
absolute discretion in connection with any Change in Control, the vesting of
Qualifying Shares shall be accelerated, and the Company's repurchase right with
respect to such shares shall lapse, in connection with a Change in Control which
becomes effective before such Holder's service to the Company terminates as
follows:
(i) If Qualifying Options were outstanding at the effective
time of the Change in Control and they are partially accelerated pursuant to
Subsection (b)(i) above or if there were no Qualifying Options outstanding at
the effective time of the Change in Control, the vesting of all Qualifying
Shares shall be accelerated to the extent of 50% of the Unvested Portion
thereof, and the remaining 50% of the Unvested Portion of such Qualifying Shares
shall vest in accordance with the vesting schedule set forth in the applicable
Award agreement.
(ii) If the preceding clause (i) applied and if a Holder of
Qualifying Shares is subject to an Involuntary Termination within 180 days
following the same Change in Control, then all Qualifying Shares held by such
Holder (or shares issued in substitution thereof) shall become vested in full,
whether or not the vesting requirements set forth in the applicable Award
agreement have been satisfied.
(iii) If Qualifying Options were outstanding at the effective
time of the Change in Control and they are accelerated in full pursuant to
Subsection (b)(iii) above or otherwise, the vesting of all Qualifying Shares
shall be accelerated in full, and the Company's repurchase right with respect to
all such shares shall lapse in full, whether or not the vesting requirements set
forth in the applicable Award agreement have been satisfied.
(d) Notwithstanding Subsections (b) and (c) above, if the Company and
the other party to the transaction constituting a Change in Control agree that
such transaction is to be treated as a "pooling of interests" for financial
reporting purposes, and if the Company's independent public accountants and such
other party's independent public accountants separately determine in good faith
that the transaction constituting a Change in Control would qualify for
treatment as a "pooling of interests" but for the acceleration of vesting
provided for in Subsections (b) and (c) above, then the acceleration of
exercisability or the lapse of the Company's right to repurchase shall not occur
to the extent that the Company's independent public accountants and such other
party's independent public accountants separately determine in good faith that
such
17
<PAGE>
acceleration would preclude the use of "pooling of interests" accounting for
such transaction.
(e) The following is an example of the operation of Subsection (b)(i)
above and is illustrative of the operation of clause (c)(i): The Company is
subject to a Change in Control before the Holder's service to the Company
terminates. At the time of such Change in Control, such Holder has an Option to
purchase 1,200 Option Shares which has been outstanding for one year and is 25%
vested at such time. The applicable Option agreement provides that the balance
of such Option vests in equal quarterly installments of 75 Option Shares per
quarter. If such Holder's Option is assumed by the surviving corporation or its
parent, then under subclause (b)(i) above, such Holder may exercise the Option
to purchase up to 750 Option Shares (which is obtained by adding 300 Option
Shares, representing 100% of the Vested Portion of such Option, to 450 Option
Shares, representing 50% of the Unvested Portion of such Option). The remaining
50% of the Unvested Portion of such Option (for 450 Option Shares) will continue
to vest in accordance with the vesting schedule in the applicable Option
agreement and accordingly, during each of the next six quarterly anniversaries
of such Option after the Change in Control, no additional Option Shares will
vest. On the eleventh quarterly anniversary after the Date of Grant, and each
quarterly anniversary thereafter, an additional 75 Option Shares will vest.
14.3 Further Adjustment of Awards.
----------------------------
Subject to the preceding Section 14.2, the Plan Administrator shall have
the discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or Change in Control of the Company, as defined by
the Plan Administrator, to take such further action as it determines to be
necessary or advisable, and fair and equitable to Participants, with respect to
Awards. Such authorized action may include (but shall not be limited to)
establishing, amending or waiving the type, terms, conditions or duration of, or
restrictions on, Awards so as to provide for earlier, later, extended or
additional time for exercise, payment or settlement or lifting restrictions,
differing methods for calculating payments or settlements, alternate forms and
amounts of payments and settlements and other modifications, and the Plan
Administrator may take such actions with respect to all Participants, to certain
categories of Participants or only to individual Participants. The Plan
Administrator may take such actions before or after granting Awards to which the
action relates and before or after any public announcement with respect to such
sale, merger, consolidation, reorganization, liquidation or Change in Control
that is the reason for such action. Without limiting the generality of the
foregoing, if the Company is a party to a merger or consolidation, outstanding
Awards shall be subject to the agreement of merger or consolidation. Such
agreement, without the Holder's consent, may provide for:
18
<PAGE>
(a) the continuation of such outstanding Award by the Company (if the
Company is the surviving corporation);
(b) the assumption of the Plan and some or all outstanding Awards by
the surviving corporation or its parent;
(c) the substitution by the surviving corporation or its parent of
Awards with substantially the same terms for such outstanding Awards; or
(d) the cancellation of such outstanding Awards with or without
payment of any consideration.
14.4 Limitations.
-----------
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
14.5 Fractional Shares.
-----------------
In the event of any adjustment in the number of shares covered by any
Option, any fractional shares resulting from such adjustment shall be
disregarded and each such Option shall cover only the number of full shares
resulting from such adjustment.
15. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant, exercise, payment or settlement of any Award. In such instances, the Plan
Administrator may, in its discretion and subject to the Plan and applicable law,
permit the Holder to satisfy withholding obligations, in whole or in part, by
paying cash, by electing to have the Company withhold shares of Common Stock or
by transferring shares of Common Stock to the Company, in such amounts as are
equivalent to the Fair Market Value of the withholding obligation. The Company
shall have the right to withhold from any Award or any shares of Common Stock
issuable pursuant to an Award or from any cash amounts otherwise due or to
become due from the Company to the Participant an amount equal to such taxes.
The Company may also deduct from any Award any other amounts due from the
Participant to the Company or a Subsidiary.
19
<PAGE>
16. AMENDMENT AND TERMINATION OF PLAN
16.1 Amendment of Plan.
-----------------
The Plan may be amended by the shareholders of the Company. The Board may
also amend the Plan in such respects as it shall deem advisable including,
without limitation, such modifications or amendments as are necessary to
maintain compliance with applicable statutes, rules or regulations; however, to
the extent required for compliance with Section 422 of the Code or any
applicable law or regulation, shareholder approval will be required for any
amendment that will increase the aggregate number of shares as to which
Incentive Stock Options may be granted. Amendments made to the Plan which would
constitute "modifications" to Incentive Stock Options outstanding on the date of
such Amendments shall not be applicable to such outstanding Incentive Stock
Options but shall have prospective effect only. The Board may condition the
effectiveness of any amendment on the receipt of shareholder approval at such
time and in such manner as the Board may consider necessary for the Company to
comply with or to avail the Company, the Holders or both of the benefits of any
securities, tax, market listing or other administrative or regulatory
requirement which the Board determines to be desirable. Whenever shareholder
approval is sought, and unless required otherwise by applicable law or exchange
requirements, the proposed action shall require the affirmative vote of holders
of a majority of the shares present, entitled to vote and voting on the matter
without including abstentions or broker non-votes in the denominator.
16.2 Termination of Plan.
-------------------
The Company's shareholders or the Board may suspend or terminate the Plan
at any time. The Plan will have no fixed expiration date; provided, however,
that no Incentive Stock Options may be granted more than 10 years after the
earlier of the Plan's adoption by the Board or approval by the shareholders.
16.3 Consent of Holder.
-----------------
The amendment or termination of the Plan shall not, without the consent of
the Holder of any Award under the Plan, alter or impair any rights or
obligations under any Award previously granted under the Plan.
17. GENERAL
17.1 Award Agreements.
----------------
Awards granted under the Plan shall be evidenced by a written agreement
which shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and which are not inconsistent with the
Plan.
20
<PAGE>
17.2 Continued Employment or Services; Rights In Awards.
--------------------------------------------------
None of the Plan, participation in the Plan as a Participant or any action
of the Plan Administrator taken under the Plan shall be construed as giving any
Participant or employee of the Company any right to be retained in the employ of
the Company or limit the Company's right to terminate the employment or services
of the Participant.
17.3 Registration; Certificates For Shares.
-------------------------------------
The Company shall be under no obligation to any Participant to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
17.4 No Rights As A Shareholder.
--------------------------
No Option, Stock Appreciation Right or Other Stock-Based Award shall
entitle the Holder to any cash dividend, voting or other right of a shareholder
unless and until the date of issuance under the Plan of the shares that are the
subject of such Award, free of all applicable restrictions.
17.5 Compliance With Laws And Regulations.
------------------------------------
It is the Company's intention that, if and so long as any of the Company's
equity securities are registered pursuant to Section 12(b) or 12(g) of the
Exchange Act, the Plan shall comply in all respects with Rule 16b-3 (as amended
from time to time) under the Exchange Act, or any successor rule or regulatory
requirement, and if any Plan provision is later found not to be in compliance
with such Rule 16b-3, the provision shall be deemed null and void, and in all
events the Plan shall be construed in favor of its meeting the requirements of
Rule 16b-3. Notwithstanding anything in the Plan to the contrary, the Board, in
its sole discretion, may bifurcate the Plan so as to restrict, limit or
condition the use of any provision of the Plan to Participants who are officers
or directors subject to
21
<PAGE>
Section 16 of the Exchange Act without so restricting, limiting or conditioning
the Plan with respect to other Participants. Additionally, in interpreting and
applying the provisions of the Plan, any Option granted as an Incentive Stock
Option pursuant to the Plan shall, to the extent permitted by law, be construed
as an "incentive stock option" within the meaning of Section 422 of the Code.
17.6 No Trust or Fund.
----------------
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Participant, and no
Participant shall have any rights that are greater than those of a general
unsecured creditor of the Company.
17.7 Severability.
------------
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
18. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the Board,
so long as it is approved by the Company's shareholders at any time within 12
months of such adoption.
Original Plan adopted by the Board on June 30, 1998 and approved by the
Company's shareholders on August 18, 1998.
22
<PAGE>
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
----------------------------------------
<TABLE>
<CAPTION>
Date of Date of
Adoption/ Shareholder
Amendment/ Approval
Adjustment Section Effect of Amendment (if applicable)
---------- ------- ------------------- ---------------
<S> <C> <C> <C>
Adoption by Board on -- -- August 18, 1998
June 30, 1998
Plan amended and Primarily 14.2 Modified acceleration N/A
restated by Board provision in connection
on March 18, 1999 with Change in Control;
other minor changes
</TABLE>
23
<PAGE>
EXHIBIT 10.7
ENCODING.COM, INC.
STOCK SUBSCRIPTION AGREEMENT
----------------------------
This Stock Subscription Agreement (the "Agreement") is made as of March 26,
---------
1998, by and between Encoding.com, Inc., a Delaware corporation (the "Company"),
-------
and Martin Tobias ("Subscriber").
----------
1. Subscription for Stock. Subject to the terms and conditions of this
----------------------
Agreement, on the date hereof the Company will issue to Subscriber, and
Subscriber agrees to purchase from the Company, 5,038,862 shares of the
Company's Common Stock and 4,490,000 shares of the Company's Series A Preferred
Stock (collectively, the "Shares") in exchange for Subscriber's membership
------
interests in Encoding.com, LLC, a Washington Limited liability company (the
"Consideration"). The term "Shares" refers to the Shares and all securities
------------- ------
received in replacement of or in connection with the Shares pursuant to stock
dividends or splits, all securities received in replacement of the Shares in a
recapitalization, merger, reorganization, exchange or the like, and all new,
substituted or additional securities or other properties to which Subscriber is
entitled by reason of Subscriber's ownership of the Shares.
2. Subscription. The Subscription of the Shares under this Agreement
------------
shall occur at the principal office of the Company simultaneously with the
execution of this Agreement by the parties or on such other date as the Company
and Subscriber shall agree (the "Subscription Date"). On the Subscription Date,
-----------------
the Company will deliver to Subscriber a certificate representing the Shares
Subscribed for by Subscriber (which shall be issued in Subscriber's name) in
exchange for the Consideration.
3. Limitations on Transfer. In addition to any other limitation on
-----------------------
transfer created by applicable securities laws, Subscriber shall not assign,
encumber or dispose of any interest in the Shares except in compliance with the
provisions below and applicable securities laws.
(a) Restrictions Binding on Transferees. All transferees of Shares or
-----------------------------------
any interest therein will receive and hold such Shares or interest subject to
the provisions of this Agreement. Any sale or transfer of the Shares shall be
void unless the provisions of this Agreement are satisfied.
(b) Market Standoff Agreement. In connection with the initial public
-------------------------
offering of the Company's securities and upon request of the Company or the
underwriters managing such offering of the Company's securities, Subscriber
agrees not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any securities of the Company (other than
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters and to execute an
agreement reflecting the foregoing as may be requested by the underwriters at
the time of the Company's initial public offering.
<PAGE>
4. Investment and Taxation Representations. In connection with the
---------------------------------------
subscription of the Shares, Subscriber represents to the Company the following:
(a) Subscriber is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Shares. Subscriber
is subscribing for Shares for investment for his or her own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act.
(b) Subscriber understands that the Shares have not been registered
under the Securities Act by reason of a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Subscriber's
investment intent as expressed herein.
(c) Subscriber understands that the Shares are "restricted securities"
under applicable U.S. federal and state securities laws and that, pursuant to
these laws, Subscriber must hold the Shares indefinitely unless they are
registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Subscriber acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Subscriber further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of the Subscriber's
control, and which the Company is under no obligation and may not be able to
satisfy.
(d) Subscriber understands that Subscriber may suffer adverse tax
consequences as a result of Subscriber's subscription for or disposition of the
Shares. Subscriber represents that Subscriber has consulted any tax consultants
Subscriber deems advisable in connection with the subscription for or
disposition of the Shares and that Subscriber is not relying on the Company for
any tax advice.
5. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. The certificate or certificates representing the Shares
-------
shall bear the following legends (as well as any legends required by applicable
state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH
-2-
<PAGE>
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY
OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
(iii) Any legend required to be placed thereon by state
securities laws.
(b) Stop-Transfer Notices. Subscriber agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any Subscriber
or other transferee to whom such Shares shall have been so transferred.
(d) Removal of Legend. When the expiration or termination of the
-----------------
market standoff provisions of Section 3(b) (and of any agreement entered
pursuant to Section 3(b)) has occurred, the Shares then held by Subscriber will
no longer be subject to the legend referred to in Section 5(a)(ii). After such
time, and upon Subscriber's request, a new certificate or certificates
representing the Shares not repurchased shall be issued without the legend
referred to in Section 5(a)(ii), and delivered to Subscriber.
6. No Employment Rights. Nothing in this Agreement shall affect in any
--------------------
manner whatsoever the right or power of the Company, or a parent or subsidiary
of the Company, to terminate Subscriber's employment or consulting relationship,
for any reason, with or without cause.
7. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Washington, without giving effect to principles of conflicts of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this
-3-
<PAGE>
Agreement, nor any waiver of any rights under this Agreement, shall be effective
unless in writing signed by the parties to this Agreement. The failure by either
party to enforce any rights under this Agreement shall not be construed as a
waiver of any rights of such party.
(c) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(d) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(e) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient when delivered personally or sent
by telegram or fax or 48 hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the party
to be notified at such party's address or fax number as set forth below or as
subsequently modified by written notice.
(f) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) Successors and Assigns. The rights and benefits of this Agreement
----------------------
shall inure to the benefit of, and be enforceable by the Company's successors
and assigns. The rights and obligations of Subscriber under this Agreement may
only be assigned with the prior written consent of the Company.
[Signature page follows]
-4-
<PAGE>
The parties have executed this Agreement as of the date first set forth
above.
ENCODING.COM, INC.
/s/ Martin Tobias
By:___________________________________
Minister of Order & Reason
Title:________________________________
Address:
1725 Westlake Ave. N.
Suite 102
Seattle, WA 98109
SUBSCRIBER:
MARTIN TOBIAS
/s/ Martin Tobias
______________________________________
(Signature)
Address:
c/o Encoding.com, Inc.
1725 Westlake Ave. N.
Suite 102
Seattle, WA 98109
I, Alex Tobias, spouse of Martin Tobias, have read and hereby approve the
foregoing Agreement. In consideration of the Company's granting my spouse the
right to purchase the Shares as set forth in the Agreement, I hereby agree to be
irrevocably bound by the Agreement and further agree that any community property
or similar interest that I may have in the Shares shall be similarly bound by
the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to
any amendment or exercise of any rights under the Agreement.
/s/ Alex Tobias
______________________________________
Spouse of Martin Tobias
-5-
<PAGE>
RECEIPT
-------
I, Martin Tobias, hereby acknowledge receipt of Certificate No. COM-1 for
5,038,862 shares of Common Stock and Certificate No. PA-1 for 4,490,000 shares
of Series A Preferred Stock of the Company.
Dated: 3/26/99
________________
MARTIN TOBIAS
/s/ Martin Tobias
________________________________
<PAGE>
EXHIBIT 10.8
ENCODING.COM, INC.
STOCK SUBSCRIPTION AGREEMENT
----------------------------
This Stock Subscription Agreement (the "Agreement") is made as of March 26,
---------
1998, by and between Encoding.com, Inc., a Delaware corporation (the "Company"),
-------
and Alex Tobias ("Subscriber").
----------
1. Subscription for Stock. Subject to the terms and conditions of this
----------------------
Agreement, on the date hereof the Company will issue to Subscriber, and
Subscriber agrees to purchase from the Company, 249,138 shares of the Company's
Common Stock and 222,000 shares of the Company's Series A Preferred Stock
(collectively, the "Shares") in exchange for Subscriber's membership interests
------
in Encoding.com, LLC, a Washington Limited liability company (the
"Consideration"). The term "Shares" refers to the Shares and all securities
------------- ------
received in replacement of or in connection with the Shares pursuant to stock
dividends or splits, all securities received in replacement of the Shares in a
recapitalization, merger, reorganization, exchange or the like, and all new,
substituted or additional securities or other properties to which Subscriber is
entitled by reason of Subscriber's ownership of the Shares.
2. Subscription. The Subscription of the Shares under this Agreement
------------
shall occur at the principal office of the Company simultaneously with the
execution of this Agreement by the parties or on such other date as the Company
and Subscriber shall agree (the "Subscription Date"). On the Subscription Date,
-----------------
the Company will deliver to Subscriber a certificate representing the Shares
Subscribed for by Subscriber (which shall be issued in Subscriber's name) in
exchange for the Consideration.
3. Limitations on Transfer. In addition to any other limitation on
-----------------------
transfer created by applicable securities laws, Subscriber shall not assign,
encumber or dispose of any interest in the Shares except in compliance with the
provisions below and applicable securities laws.
(a) Restrictions Binding on Transferees. All transferees of Shares or
-----------------------------------
any interest therein will receive and hold such Shares or interest subject to
the provisions of this Agreement. Any sale or transfer of the Shares shall be
void unless the provisions of this Agreement are satisfied.
(b) Market Standoff Agreement. In connection with the initial public
-------------------------
offering of the Company's securities and upon request of the Company or the
underwriters managing such offering of the Company's securities, Subscriber
agrees not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any securities of the Company (other than
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters and to execute an
agreement reflecting the foregoing as may be requested by the underwriters at
the time of the Company's initial public offering.
<PAGE>
4. Investment and Taxation Representations. In connection with the
---------------------------------------
subscription of the Shares, Subscriber represents to the Company the following:
(a) Subscriber is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Shares. Subscriber
is subscribing for Shares for investment for his or her own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act.
(b) Subscriber understands that the Shares have not been registered
under the Securities Act by reason of a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Subscriber's
investment intent as expressed herein.
(c) Subscriber understands that the Shares are "restricted securities"
under applicable U.S. federal and state securities laws and that, pursuant to
these laws, Subscriber must hold the Shares indefinitely unless they are
registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Subscriber acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Subscriber further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of the Subscriber's
control, and which the Company is under no obligation and may not be able to
satisfy.
(d) Subscriber understands that Subscriber may suffer adverse tax
consequences as a result of Subscriber's subscription for or disposition of the
Shares. Subscriber represents that Subscriber has consulted any tax consultants
Subscriber deems advisable in connection with the subscription for or
disposition of the Shares and that Subscriber is not relying on the Company for
any tax advice.
5. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. The certificate or certificates representing the Shares
-------
shall bear the following legends (as well as any legends required by applicable
state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND
NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR
DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE
COMPANY THAT SUCH
-2-
<PAGE>
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES
ACT OF 1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF
AN AGREEMENT BETWEEN THE COMPANY AND THE
STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
(iii) Any legend required to be placed thereon by state
securities laws.
(b) Stop-Transfer Notices. Subscriber agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any Subscriber
or other transferee to whom such Shares shall have been so transferred.
(d) Removal of Legend. When the expiration or termination of the
-----------------
market standoff provisions of Section 3(b) (and of any agreement entered
pursuant to Section 3(b)) has occurred, the Shares then held by Subscriber will
no longer be subject to the legend referred to in Section 5(a)(ii). After such
time, and upon Subscriber's request, a new certificate or certificates
representing the Shares not repurchased shall be issued without the legend
referred to in Section 5(a)(ii), and delivered to Subscriber.
6. No Employment Rights. Nothing in this Agreement shall affect in any
--------------------
manner whatsoever the right or power of the Company, or a parent or subsidiary
of the Company, to terminate Subscriber's employment or consulting relationship,
for any reason, with or without cause.
7. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Washington, without giving effect to principles of conflicts of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this
-3-
<PAGE>
Agreement, nor any waiver of any rights under this Agreement, shall be effective
unless in writing signed by the parties to this Agreement. The failure by either
party to enforce any rights under this Agreement shall not be construed as a
waiver of any rights of such party.
(c) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(d) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(e) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient when delivered personally or sent
by telegram or fax or 48 hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the party
to be notified at such party's address or fax number as set forth below or as
subsequently modified by written notice.
(f) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) Successors and Assigns. The rights and benefits of this Agreement
----------------------
shall inure to the benefit of, and be enforceable by the Company's successors
and assigns. The rights and obligations of Subscriber under this Agreement may
only be assigned with the prior written consent of the Company.
[Signature page follows]
-4-
<PAGE>
The parties have executed this Agreement as of the date first set forth
above.
ENCODING.COM, INC.
/s/ Martin Tobias
By:_______________________________________
Minister of Order & Reason
Title:____________________________________
Address:
1725 Westlake Ave. N.
Suite 102
Seattle, WA 98109
SUBSCRIBER:
ALEX TOBIAS
/s/ Alex Tobias
__________________________________________
(Signature)
Address:
c/o Encoding.com, Inc.
1725 Westlake Ave. N.
Suite 102
Seattle, WA 98109
I, Martin Tobias, spouse of Alex Tobias, have read and hereby approve the
foregoing Agreement. In consideration of the Company's granting my spouse the
right to purchase the Shares as set forth in the Agreement, I hereby agree to be
irrevocably bound by the Agreement and further agree that any community property
or similar interest that I may have in the Shares shall be similarly bound by
the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to
any amendment or exercise of any rights under the Agreement.
/s/ Martin Tobias
__________________________________________
Spouse of Alex Tobias
-5-
<PAGE>
RECEIPT
-------
I, Alex Tobias, hereby acknowledge receipt of Certificate No. COM-2 for
249,138 shares of Common Stock and Certificate No. PA-2 for 222 shares of Series
A Preferred Stock of the Company.
3/26/98
Dated: ________________
ALEX TOBIAS
/s/ Alex Tobias
_________________________________________
<PAGE>
EXHIBIT 10.9
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE
OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
CONVERTIBLE PROMISSORY NOTE
---------------------------
$454,117.06 June 5, 1998
Seattle, Washington
For value received, Encoding.com, Inc., a Delaware corporation (the
"Company"), promises to pay to Martin Tobias (the "Holder"), the principal sum
- -------- ------
of Four Hundred Fifty Four Thousand One Hundred Seventeen Dollars and Six Cents
($454,117.06). Interest shall accrue from the date of this Note on the unpaid
principal amount at a rate equal to five and one-half percent (5.5 %) per annum,
compounded annually. This Note is subject to the following terms and
conditions:
1. Maturity. Unless converted as provided in Section 2, this Note will
--------
automatically mature and be due and payable on December 31, 1998 (the "Maturity
--------
Date"). Subject to Section 2 below, interest shall accrue on this Note.
- ----
Notwithstanding the foregoing, the entire unpaid principal sum of this Note,
together with accrued and unpaid interest thereon, shall become immediately due
and payable upon the insolvency of the Company, the commission of any act of
bankruptcy by the Company, the execution by the Company of a general assignment
for the benefit of creditors, the filing by or against the Company of a petition
in bankruptcy or any petition for relief under the federal bankruptcy act or the
continuation of such petition without dismissal for a period of ninety (90) days
or more, or the appointment of a receiver or trustee to take possession of the
property or assets of the Company.
2. Conversion.
----------
(a) Investment by the Holder. Some or all of the entire principal
------------------------
amount of and (at the Company's option) accrued interest on this Note shall be
converted into shares of the Company's equity securities (the "Equity
------
Securities") issued and sold at the close of the Company's next equity financing
- ----------
in a single transaction or a series of related transactions yielding gross
proceeds to the Company of at least $1,000,000 in the aggregate (the "Next
----
Equity Financing"). The number of shares of Equity Securities to be issued upon
- ----------------
such conversion shall be equal to the quotient obtained by dividing (i) the
entire principal amount of this Note plus (if applicable) accrued interest by
(ii) the price per share of the Equity Securities, rounded to the nearest whole
share, and the issuance of
<PAGE>
such shares upon such conversion shall be upon the terms and subject to the
conditions applicable to the Next Equity Financing. If the Company elects to
convert accrued interest into Equity Securities, this election shall apply
equally to all of the Notes.
(b) Mechanics and Effect of Conversion. No fractional shares of the
----------------------------------
Company's capital stock will be issued upon conversion of this Note. In lieu of
any fractional share to which the Holder would otherwise be entitled, the
Company will pay to the Holder in cash the amount of the unconverted principal
and interest balance of this Note that would otherwise be converted into such
fractional share. Upon conversion of this Note pursuant to this Section 2, the
Holder shall surrender this Note, duly endorsed, at the principal offices of the
Company or any transfer agent of the Company. At its expense, the Company will,
as soon as practicable thereafter, issue and deliver to such Holder, at such
principal office, a certificate or certificates for the number of shares to
which such Holder is entitled upon such conversion, together with an other
securities and property to which the Holder is entitled upon such conversion
under the terms of this Note, including a check payable to the Holder for any
cash amounts payable as described herein. Upon conversion of this Note, the
Company will be forever released from all of its obligations and liabilities
under this Note with regard to that portion of the principal amount and accrued
interest being converted including without limitation the obligation to pay such
portion of the principal amount and accrued interest.
3. Payment. All payments shall be made in lawful money of the United
-------
States of America at such place as the Holder hereof may from time to time
designate in writing to the Company. Payment shall be credited first to the
accrued interest then due and payable and the remainder applied to principal.
Prepayment of this Note may be made at any time without penalty.
4. Transfer; Successors and Assigns. The terms and conditions of this Note
--------------------------------
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Notwithstanding the foregoing, the Holder may not
assign, pledge, or otherwise transfer this Note without the prior written
consent of the Company, except for transfers to affiliates. Subject to the
preceding sentence, this Note may be transferred only upon surrender of the
original Note for registration of transfer, duly endorsed, or accompanied by a
duly executed written instrument of transfer in form satisfactory to the Holder.
Thereupon, a new note for the same principal amount and interest will be issued
to, and registered in the name of, the transferee. Interest and principal are
payable only to the registered holder of this Note.
5. Governing Law. This Note and all acts and transactions pursuant hereto
-------------
and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of
Washington, without giving effect to principles of conflicts of law.
6. Notices. Any notice required or permitted by this Note shall be in
-------
writing and shall be deemed sufficient upon delivery, when delivered
-2-
<PAGE>
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or forty-eight (48) hours after being deposited in the U.S.
mail, as certified or registered mail, with postage prepaid, addressed to the
party to be notified at such party's address as set forth below or as
subsequently modified by written notice.
7. Amendments and Waivers. Any term of this Note may be amended only with
----------------------
the written consent of the Company and the Holder. Any amendment or waiver
effected in accordance with this Section 7 shall be binding upon the Company,
the Holder and each transferee of the Note.
8. Stockholders, Officers and Directors Not Liable. In no event shall any
-----------------------------------------------
stockholder, officer or director of the Company be liable for any amounts due or
payable pursuant to this Note.
COMPANY:
ENCODING.COM, INC.
/s/ Martin Tobias
By:______________________________
Martin Tobias
Name:____________________________
(print)
Minister of Order & Reason
Title:___________________________
Address: 1725 Westlake Ave. North
Suite 102
Seattle, Washington 98109
AGREED TO AND ACCEPTED:
MARTIN TOBIAS
/s/ Martin Tobias
By:________________________________
Martin Tobias
Name:______________________________
(print)
Minister of Order & Reason
Title:_____________________________
3601 East Union
Address:___________________________
Seattle, WA 98122
___________________________________
-3-
<PAGE>
EXHIBIT 10.10
ENCODING.COM, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
JUNE 5, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Preferred Stock................................... 1
1.1 Sale and Issuance of Series B Preferred Stock................... 1
1.2 Closing; Delivery............................................... 1
2. Representations and Warranties of the Company.......................... 2
2.1 Organization, Good Standing and Qualification................... 2
2.2 Capitalization.................................................. 2
2.3 Subsidiaries.................................................... 3
2.4 Authorization................................................... 3
2.5 Valid Issuance of Securities.................................... 3
2.6 Governmental Consents........................................... 3
2.7 Litigation...................................................... 4
2.8 Intellectual Property........................................... 4
2.9 Compliance with Other Instruments............................... 5
2.10 Agreements; Action.............................................. 5
2.11 Due Diligence................................................... 6
2.12 No Conflict of Interest......................................... 6
2.13 Rights of Registration and Voting Rights........................ 6
2.14 Title to Property and Assets.................................... 6
2.15 Changes......................................................... 7
2.16 Employee Benefit Plans.......................................... 7
2.17 Tax Returns and Payments........................................ 8
2.18 Insurance....................................................... 8
2.19 Labor Agreements and Actions.................................... 8
2.20 Confidential Information and Invention Assignment Agreements.... 8
2.21 Permits......................................................... 8
2.23 Corporate Documents............................................. 8
2.24 Liabilities..................................................... 8
3. Representations and Warranties of the Purchasers....................... 9
3.1 Authorization................................................... 9
3.2 Purchase Entirely for Own Account............................... 9
3.3 Disclosure of Information....................................... 9
3.4 Restricted Securities........................................... 9
3.5 No Public Market................................................ 10
3.6 Legends......................................................... 10
3.7 Accredited Investor............................................. 10
4. Conditions of the Purchasers' Obligations at Closing................... 10
4.1 Representations and Warranties.................................. 10
4.2 Performance..................................................... 10
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
4.3 Compliance Certificate............................................ 11
4.4 Qualifications.................................................... 11
4.5 Opinion of Company Counsel........................................ 11
4.6 Board of Directors................................................ 11
4.7 Investors' Rights Agreement....................................... 11
4.8 Restated Certificate.............................................. 11
4.9 Confidential Information and Invention Assignment Agreement....... 11
4.10 Voting Agreement.................................................. 11
4.11 Co-Sale Agreement................................................. 11
4.12 Proceedings and Documents......................................... 11
5. Conditions of the Company's Obligations at Closing....................... 11
5.1 Representations and Warranties.................................... 12
5.2 Performance....................................................... 12
5.3 Qualifications.................................................... 12
6. Miscellaneous............................................................ 12
6.1 Survival of Warranties............................................ 12
6.2 Transfer; Successors and Assigns.................................. 12
6.3 Governing Law..................................................... 12
6.4 Counterparts...................................................... 12
6.5 Titles and Subtitles.............................................. 12
6.6 Notices........................................................... 12
6.7 Finder's Fee...................................................... 13
6.8 Fees and Expenses................................................. 13
6.9 Attorney's Fees................................................... 13
6.10 Amendments and Waivers............................................ 13
6.11 Severability...................................................... 13
6.12 Delays or Omissions............................................... 13
6.13 Entire Agreement.................................................. 14
6.14 Confidentiality................................................... 14
6.15 Exculpation Among Purchasers...................................... 14
6.16 Waiver of Conflicts............................................... 14
</TABLE>
-ii-
<PAGE>
ENCODING.COM, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
This Series B Preferred Stock Purchase Agreement (the "Agreement") is made
---------
as of the 5th day of June, 1998 by and between Encoding.com, Inc., a Delaware
corporation (the "Company"), and the investors listed on Exhibit A attached
------- ---------
hereto (each a "Purchaser" and together the "Purchasers").
--------- ----------
The parties hereby agree as follows:
1. Purchase and Sale of Preferred Stock.
------------------------------------
1.1 Sale and Issuance of Series B Preferred Stock.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of State
of the State of Delaware on or before the Closing (as defined below) the Amended
and Restated Certificate of Incorporation in the form attached hereto as Exhibit
-------
B (the "Restated Certificate").
- - --------------------
(b) Subject to the terms and conditions of this Agreement, each
Purchaser agrees to purchase at the Closing and the Company agrees to sell and
issue to each Purchaser at the Closing that number of shares of Series B
Preferred Stock set forth opposite each such Purchaser's name on Exhibit A
---------
attached hereto at a purchase price of $0.843 per share. The shares of Series B
Preferred Stock issued to the Purchaser pursuant to this Agreement shall be
hereinafter referred to as the "Stock."
-----
1.2 Closing; Delivery.
-----------------
(a) The purchase and sale of the Stock shall take place at the
offices of Venture Law Group, 4750 Carillon Point, Kirkland, Washington, at
10:00 a.m., on June 5, 1998, or at such other time and place as the Company and
the Purchasers mutually agree upon, orally or in writing (which time and place
are designated as the "Closing").
-------
(b) At the Closing, the Company shall deliver to each Purchaser a
certificate representing the Stock being purchased thereby against payment of
the purchase price therefor by check payable to the Company, by wire transfer to
the Company's bank account or by cancellation of indebtedenss, or any
combination thereof.
(c) If the full number of the authorized shares of Series B
Preferred Stock of the Company is not sold at the Closing, the Company shall
have the right, at any time prior to August 21, 1998, to sell the remaining
authorized but unissued shares of Series B Preferred Stock to one or more
additional purchasers as determined by the Company, or to any Purchaser
hereunder who wishes to acquire additional shares of Series B Preferred Stock at
the price and on the terms set forth herein, provided that any such additional
purchaser shall be required to execute an Addendum Agreement substantially in
the form attached hereto as Exhibit G. The parties hereto agree that any
additional purchaser so acquiring shares of Series B
<PAGE>
Preferred Stock shall be considered a "Purchaser" for purposes of this Agreement
and an "Investor" for purposes of each of the Investors' Rights Agreement of
event date herewith by and among the Company and the Investors listed on Exhibit
-------
A thereto (the "Investors' Rights Agreement"),the Right of First Refusal and Co-
- - ---------------------------
Sale Agreement of event date herewith by and among the Company and the Investors
listed on Exhibit A thereto and the Voting Agreement of event date herewith by
---------
and among the Company and the Investors listed on Exhibit A thereto and any
---------
Series B Preferred Stock so acquired by such additional purchaser shall be
considered "Stock" for purposes of this Agreement and all other agreements
contemplated hereby and shall be considered "Registrable Securities" for all
purposes, and each such additional purchaser shall be considered a "Holder" for
all purposes, of the Investors' Rights Agreement.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Purchaser that, except as set forth on a
Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be
---------
deemed to be representations and warranties as if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company is
---------------------------------------------
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure so to
qualify would have a material adverse effect on its business or properties.
2.2 Capitalization. The authorized capital of the Company
--------------
consists, or will consist, immediately prior to the Closing, of:
(a) Nine million (13,000,000) shares of Preferred Stock, of
which Five Million (5,000,000) shares have been designated Series A Preferred
Stock, Four Million Nine Hundred Eighty Nine Thousand Seven Hundred and Seventy-
Eight (4,989,778) shares of which are issued and outstanding immediately prior
to the Closing, of which Four Million (4,000,000) shares have been designated
Series B Preferred Stock, none of which are issued and outstanding immediately
prior to the Closing, and of which Four Million (4,000,000) shares have been
designated Series B-1 Preferred Stock, none of which are issued and outstanding
immediately prior to the Closing. The rights, privileges and preferences of the
Preferred Stock are as stated in the Restated Certificate. All of the
outstanding shares of Preferred Stock have been duly authorized, fully paid and
are nonassessable and have been issued in compliance with all applicable federal
and state securities laws.
(b) Eighteen Million (18,000,000) shares of Common Stock,
Five Million Two Hundred Eighty Eight Thousand (5,288,000) shares of which are
issued and outstanding immediately prior to the Closing. All of the outstanding
shares of Common Stock have been duly authorized, fully paid and are
nonassessable and have been issued in compliance with all applicable federal and
state securities laws.
(c) The Company has reserved 3,360,000 shares of Common Stock
for issuance to officers, directors, employees and consultants of the Company
pursuant to its 1998 Stock Option Plan duly adopted by the Board of Directors
and approved by the Company
-2-
<PAGE>
stockholders (the "Stock Plan"). Of such reserved shares of Common Stock,
----------
options to purchase 400,000 shares have been granted and are currently
outstanding and 2,960,000 shares of Common Stock remain available for issuance
to officers, directors, employees and consultants pursuant to the Stock Plan.
(d) Except for outstanding options issued pursuant to the
Stock Plan, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal or similar rights)
or agreements, orally or in writing, for the purchase or acquisition from the
Company of any shares of its capital stock.
2.3 Subsidiaries. The Company does not currently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity.
2.4 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Investors' Rights Agreement, in
the form attached hereto as Exhibit D, the Voting Agreement, in the form
---------
attached hereto as Exhibit F and the Co-Sale Agreement in the form attached
---------
hereto as Exhibit H (collectively with this Agreement, the "Agreements"), the
--------- ----------
performance of all obligations of the Company hereunder and thereunder and the
authorization, issuance and delivery of the Stock and the Common Stock issuable
upon conversion of the Stock (together, the "Securities") has been taken or will
----------
be taken prior to the Closing, and the Agreements, when executed and delivered
by the Company, shall constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with their terms except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting
enforcement of creditors' rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, or (ii) to the extent the indemnification provisions contained in the
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 Valid Issuance of Securities. The Stock that is being issued to
----------------------------
the Purchasers hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable and free of restrictions on transfer other
than restrictions on transfer under this Agreement, the Investors' Rights
Agreement and applicable state and federal securities laws. Based in part upon
the representations of the Purchasers in this Agreement and subject to the
provisions of Section 2.6 below, the Stock will be issued in compliance with all
applicable federal and state securities laws. The Common Stock issuable upon
conversion of the Stock has been duly and validly reserved for issuance, and
upon issuance in accordance with the terms of the Restated Certificate, shall be
duly and validly issued, fully paid and nonassessable and free of restrictions
on transfer other than restrictions on transfer under this Agreement, the
Investors' Rights Agreement and applicable federal and state securities laws and
will be issued in compliance with all applicable federal and state securities
laws.
2.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local
-3-
<PAGE>
governmental authority on the part of the Company is required in connection with
the consummation of the transactions contemplated by this Agreement, applicable
state securities laws and Regulation D of the Securities Act of 1933, as amended
(the "Securities Act").
--------------
2.7 Litigation. There is no action, suit, proceeding or
----------
investigation (collectively, a "Suit") pending or, to the Company's knowledge,
----
currently threatened against the Company or any of its subsidiaries that
questions the validity of the Agreements or the right of the Company to enter
into them, or to consummate the transactions contemplated hereby or thereby, or
that might result, either individually or in the aggregate, in any material
adverse changes in the assets, condition or affairs of the Company, financially
or otherwise, or any change in the current equity ownership of the Company, nor
is the Company aware that there is any basis for the foregoing. For the purposes
of this Section 2.7, "Suit" shall include but not be limited to any action,
----
suit, proceeding or investigation pending or, to the Company's knowledge,
currently threatened against the Company involving the prior employment of any
of the Company's current employees, such employees use in connection with the
Company's business of any information or techniques proprietary to any of such
employees' former employers, such employees' obligations under any agreements
with prior employers, or negotiations by the Company with potential investors in
the Company or its proposed business. Neither the Company nor any of its
subsidiaries is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company or any of its subsidiaries currently pending or which the Company or any
of its subsidiaries intends to initiate.
2.8 Intellectual Property. To its knowledge, the Company owns or
---------------------
possesses sufficient legal rights to all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, licenses, information and proprietary
rights and processes necessary for its business without any conflict with, or
infringement of, the rights of others. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business, would violate any of the patents, trademarks, service marks,
tradenames, copyrights, trade secrets or other proprietary rights or processes
of any other person or entity. The Company is not aware that any of its
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interest of the Company
or that would conflict with the Company's business. Neither the execution or
delivery of this Agreement, nor the carrying on of the Company's business by the
employees of the Company, nor the conduct of the Company's business as proposed,
will, to the Company's knowledge, conflict with or result in a breach of the
terms, conditions, or provisions of, or constitute a default under, any
contract, covenant or instrument under which any such employee is now obligated.
The Company does not believe it is or will be necessary to use any inventions of
any of its employees (or persons it currently intends to hire) made prior to
their employment by the Company.
-4-
<PAGE>
2.9 Compliance with Other Instruments.
---------------------------------
(a) The Company is not in violation or default of any provisions
of its Restated Certificate or Bylaws or of any instrument, judgment, order,
writ, decree or contract to which it is a party or by which it is bound or, to
its knowledge, of any provision of federal or state statute, rule or regulation
applicable to the Company. The execution, delivery and performance of the
Agreements and the consummation of the transactions contemplated hereby or
thereby will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event which results in the creation of any lien, charge or
encumbrance upon any assets of the Company.
(b) To its knowledge, the Company has avoided every condition, and
has not performed any act, the occurrence of which would result in the Company's
loss of any right granted under any license, distribution agreement or other
agreement.
2.10 Agreements; Action.
------------------
(a) There are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates,
or any affiliate thereof.
(b) Except for agreements explicitly contemplated by the
Agreements, there are no agreements, understandings, instruments, contracts or
proposed transactions to which the Company or any of its subsidiaries is a party
or by which it is bound that involve (i) obligations (contingent or otherwise)
of, or payments to, the Company or any of its subsidiaries in excess of,
$50,000, (ii) the license of any patent, copyright, trade secret or other
proprietary right to or from the Company or any of its subsidiaries, or (iii)
the grant of rights to manufacture, produce, assemble, license, market, or sell
its products to any other person or affect the Company's exclusive right to
develop, manufacture, assemble, distribute, market or sell its products.
(c) Neither the Company nor any of its subsidiaries has (i)
declared or paid any dividends, or authorized or made any distribution upon or
with respect to any class or series of its capital stock, (ii) incurred any
indebtedness for money borrowed or incurred any other liabilities individually
in excess of $50,000 or in excess of $200,000 in the aggregate, (iii) made any
loans or advances to any person, other than ordinary advances for travel
expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or
rights, other than the sale of its inventory in the ordinary course of business.
(d) The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the merger of the Company with or into any such corporation or
corporations, (ii) with any representative of any corporation, partnership,
association or other business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the assets of the
Company or a transaction or series of related transactions in which more than
fifty percent (50%) of the voting
-5-
<PAGE>
power of the Company would be disposed of, or (iii) regarding any other form of
liquidation, dissolution or winding up of the Company.
2.11 Due Diligence. The Company has fully provided the Purchasers
-------------
with all the information that the Purchasers have requested for deciding whether
to acquire the Stock including certain of the Company's projections describing
its proposed business (collectively, the "Business Plan"). To the Company's
-------------
knowledge (after reasonable investigation), no representation or warranty of the
Company contained in this Agreement and the exhibits attached hereto, any
certificate furnished or to be furnished to Purchasers at the Closing contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made. To the
extent the Business Plan was prepared by management of the Company, the Business
Plan and the financial and other projections contained in the Business Plan were
prepared in good faith; however, the Company does not warrant that it will
achieve such projections.
2.12 No Conflict of Interest. The Company is not indebted, directly
-----------------------
or indirectly, to any of its officers or directors or to their respective
spouses or children, in any amount whatsoever other than in connection with
expenses or advances of expenses incurred in the ordinary course of business or
relocation expenses of employees. To the Company's knowledge, none of the
Company's officers or directors, or any members of their immediate families,
are, directly or indirectly, indebted to the Company (other than in connection
with purchases of the Company's stock) or have any direct or indirect ownership
interest in any firm or corporation with which the Company is affiliated or with
which the Company has a business relationship, or any firm or corporation which
competes with the Company except that officers, directors and/or stockholders of
the Company may own stock in (but not exceeding two percent of the outstanding
capital stock of) any publicly traded companies that may compete with the
Company. To the Company's knowledge, none of the Company's officers or directors
or any members of their immediate families are, directly or indirectly,
interested in any material contract with the Company. The Company is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
2.13 Rights of Registration and Voting Rights. Except as contemplated
----------------------------------------
in the Investors' Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggyback rights, to anyperson or
entity. To the Company's knowledge, except as contemplated in the Voting
Agreement, no stockholders of the Company have entered into any agreements with
respect to the voting of capital shares of the Company.
2.14 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
-6-
<PAGE>
2.15 Changes. Since March 31, 1998, there has not been:
-------
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company;
(b) any waiver or compromise by the Company of a valuable right
or of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of the Company;
(d) any material change to a material contract or agreement by
which the Company or any of its assets is bound or subject;
(e) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(f) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(g) any resignation or termination of employment of any officer
or key employee of the Company; and the Company, is not aware of any impending
resignation or termination of employment of any such officer or key employee;
(h) any mortgage, pledge, transfer of a security interest in, or
lien, created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(i) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(j) any declaration, setting aside or payment or other
distribution in respect to any of the Company's capital stock, or any direct or
indirect redemption, purchase, or other acquisition of any of such stock by the
Company;
(k) to the Company's knowledge, any other event or condition of
any character that might materially and adversely affect the business,
properties, prospects or financial condition of the Company; or
(l) any arrangement or commitment by the Company to do any of the
things described in this Section 2.15.
2.16 Employee Benefit Plans. The Company does not have any Employee
----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
-7-
<PAGE>
2.17 Tax Returns and Payments. The Company has filed all tax returns
------------------------
and reports as required by law. These returns and reports are true and correct
in all material respects. The Company has paid all taxes and other assessments
due.
2.18 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed.
2.19 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitmentor arrangement with any
labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company, nor is the Company aware of any
labor organization activity involving its employees. The employment of each
officer and employee of the Company is terminable at the will of the Company. To
its knowledge, the Company has complied in all material respects with all
applicable state and federal equal employment opportunity laws and with other
laws related to employment.
2.20 Confidential Information and Invention Assignment Agreements.
------------------------------------------------------------
Each employee, consultant and officer of the Company has executed an agreement
with the Company regarding confidentiality and proprietary information
substantially in the form or forms delivered to the counsel for the Purchasers.
The Company is not aware that any of its employees or consultants is in
violation thereof, and the Company will use its best efforts to prevent any such
violation.
2.21 Permits. The Company and each of its subsidiaries has all
-------
franchises, permits, licenses and any similar authority necessary for the
conduct of its business, the lack of which could materially and adversely affect
the business, properties, prospects, or financial condition of the Company and
it believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as presently planned to be conducted.
The Company is not in default in any material respect under any of such
franchises, permits, licenses or other similar authority.
2.23 Corporate Documents. The Restated Certificate and Bylaws of the
-------------------
Company are in the form made available to counsel for the Purchasers. The copy
of the minute books of the Company made available to the Purchasers' counsel
contains minutes of all meetings of directors and stockholders and all actions
by written consent without a meeting by the directors and stockholders since the
date of incorporation and reflects all actions by the directors (and any
committee of directors) and stockholders with respect to all transactions
referred to in such minutes accurately in all material respects.
2.24 Liabilities. Except for those liabilities set forth on Schedule
-----------
2.24 to the Schedule of Exceptions and except as otherwise disclosed hereunder,
the Company has no debts,
-8-
<PAGE>
commitments, obligations and other liabilities of any nature whatsoever
individually in excess of $25,000 and in the aggregate in excess of $50,000.
3. Representations and Warranties of the Purchasers. Each Purchaser
------------------------------------------------
hereby represents and warrants to the Company that:
3.1 Authorization. Such Purchaser has full power and authority to
-------------
enter into this Agreement. The Agreements, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and any other laws of general application affecting enforcement of
creditors' rights generally, and as limited by laws relating to the availability
of a specific performance, injunctive relief, or other equitable remedies, or
(b) to the extent the indemnification provisions contained in the Investors'
Rights Agreement may be limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Purchaser in reliance upon the Purchaser's representation to the Company,
which by the Purchaser's execution of this Agreement, the Purchaser hereby
confirms, that the Securities to be acquired by the Purchaser will be acquired
for investment for the Purchaser's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that the
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Purchaser
further represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities. The Purchaser has not been formed for the specific purpose of
acquiring the Securities.
3.3 Disclosure of Information. The Purchaser has had an opportunity
-------------------------
to discuss the Company's business, management, financial affairs and the terms
and conditions of the offering of the Stock with the Company's management and
has had an opportunity to review the Company's facilities. The Purchaser
understands that such discussions, as well as the Business Plan and any other
written information delivered by the Company to the Purchaser, were intended to
describe the aspects of the Company's business which it believes to be material.
The foregoing, however, does not limit or modify the representations and
warranties of the Company, as modified by the Schedule of Exceptions attached as
Exhibit C in Section 2 of this Agreement or the right of the Purchasers to rely
- ---------
thereon.
3.4 Restricted Securities. The Purchaser understands that the
---------------------
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Purchaser's representations as
expressed herein. The Purchaser understands that the Securities are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, the Purchaser must hold the Securities indefinitely
unless they are registered with the Securities and
-9-
<PAGE>
Exchange Commission and qualified by state authorities, or an exemption from
such registration and qualification requirements is available. the Purchaser
acknowledges that the Company has no obligation to register or qualify the
Securities for resale except as set forth in the Investors' Rights Agreement.
The Purchaser further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding period
for the Securities, and on requirements relating to the Company which are
outside of the Purchaser's control, and which the Company is under no obligation
and may not be able to satisfy.
3.5 No Public Market. The Purchaser understands that no public
----------------
market now exists for any of the securities issued by the Company, and that the
Company has made no assurances that a public market will ever exist for the
Securities.
3.6 Legends. The Purchaser understands that the Securities and any
-------
securities issued in respect of or exchange for the Securities, may bear one or
all of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
3.7 Accredited Investor. The Purchaser is an accredited investor as
-------------------
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
4. Conditions of the Purchasers' Obligation at Closing. The obligations
---------------------------------------------------
of each Purchaser to the Company under this Agreement are subject Purchasers'
Obligations at to the fulfillment, on or before the Closing, of each of the
following conditions, Closing unless otherwise waived:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be Warranties true and
correct in all material respects on and as of the Closing with the same effect
as though such representations and warranties had been made on and as of the
date of the Closing.
4.2 Performance. The Company shall have performed and complied with
-----------
all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
-10-
<PAGE>
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Qualifications. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
4.5 Opinion of Company Counsel. The Purchasers shall have received
--------------------------
from Venture Law Group, counsel for the Company, an opinion, dated as of the
Closing, in substantially the form of Exhibit E.
---------
4.6 Board of Directors. As of the Closing, the Board shall be
------------------
comprised of Martin Tobias, Andrew Anker, Johan Liedgren, Charles Waite and
Craig McCallum.
4.7 Investors' Rights Agreement. The Company, each Purchaser, Martin
---------------------------
Tobias and Alex Tobias shall have executed and delivered the Investors' Rights
Agreement in substantially the form attached as Exhibit D.
---------
4.8 Restated Certificate. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing
Date, which shall continue to be in full force and effect as of the Closing
Date.
4.9 Confidential Information and Invention Assignment Agreement. The
-----------------------------------------------------------
Company and each of its employees shall have entered into the Company's standard
form Confidential Information and Invention Assignment Agreement, in
substantially the form provided to the Purchasers.
4.10 Voting Agreement. The Company, the Purchasers, Martin Tobias and
----------------
Alex Tobias shall have executed and delivered the Voting Agreement in
substantially the form attached as Exhibit F.
---------
4.11 Co-Sale Agreement. The Company, each Purchaser, Martin Tobias and
-----------------
Alex Tobias shall have executed and delivered the Co-Sale Agreement in
substantially the form attached as Exhibit H.
---------
4.12 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Purchaser's counsel, which shall have received all such counterpart original and
certified or other copies of such documents as it may reasonably request.
5. Conditions of the Company's Obligations at Closing. The obligations
--------------------------------------------------
of the Company to each Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
-11-
<PAGE>
5.1 Representations and Warranties. The representations and
------------------------------
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the Closing.
5.2 Performance. All covenants, agreements and conditions
-----------
contained in this Agreement to be performed by the Purchasers on or prior to the
Closing shall have been performed or complied with in all material respects.
5.3 Qualification. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
6. Miscellaneous.
-------------
6.1 Survival of Warranties. Unless otherwise set forth in this
----------------------
Agreement, the warranties, representations and covenants of the Company and the
Purchasers contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing for a period of one (1)
year following the Closing.
6.2 Transfer; Successors and Assigns. The terms and conditions of
--------------------------------
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
shares of Stock sold hereunder and any Common Stock issued upon conversion
thereof). Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.
6.3 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Washington, without giving effect to principles of conflicts of law.
6.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient upon delivery, when delivered
personally or by overnight courier or sent by telegram or fax, or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed to the party to be notified at
-12-
<PAGE>
such party's address as set forth on the signature page or Exhibit A hereto, or
---------
as subsequently modified by written notice, and (a) if to the Company, with a
copy to William W. Ericson, Venture Law Group, 4750 Carillon Point, Kirkland,
Washington 98033, fax: (425) 739-8750, or (b) if to the Purchasers, with a copy
to Van Valkenberg Furber Law Group, 1325 Fourth Avenue, Suite 1200, Seattle, WA
98101; Attention Bradley B. Furber.
6.7 Finder's Fee. Each party represents that it neither is nor
------------
will be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which each Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
6.8 Fees and Expenses. The Company shall pay the reasonable fees
-----------------
and expenses of Van Valkenberg Furber Law Group P.L.L.C., the counsel for the
Purchasers, incurred with respect to this Agreement, the documents referred to
herein and the transactions contemplated hereby and thereby, provided such fees
and expenses do not exceed $10,000 and provided the Company is provided an
itemized invoice with respect to such fees and expenses.
6.9 Attorney's Fees. If any action at law or in equity (including
---------------
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
6.10 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of at least a majority
of the Common Stock issued or issuable upon conversion of the Stock that has not
previously been sold to the public. Any amendment or waiver effected in
accordance with this Section 6.10 shall be binding upon the Purchasers and each
transferee of the Stock (or the Common Stock issuable upon conversion thereof),
each future holder of all such securities, and the Company.
6.11 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
6.12 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party under this Agreement, upon any breach or
default of any other party under this Agreement, shall impair any such right,
power or remedy of such non-breaching
-13-
<PAGE>
or non-defaulting party nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any party, shall be cumulative
and not alternative.
6.13 Entire Agreement. This Agreement, and the documents referred
----------------
to herein constitute the entire agreement between the parties hereto pertaining
to the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
6.14 Confidentiality. Each party hereto agrees that, except with
---------------
the prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, the performance of its obligations hereunder or the
ownership of Stock purchased hereunder, except that the parties hereto shall be
entitled to the limited right to disclose, where appropriate for commercially
reasonable purposes and where not detrimental to the Company, general facts
relating to the existence of the transactions contemplated hereby and the
parties involved. The provisions of this Section 6.14 shall be in addition to,
and not in substitution for, the provisions of any separate nondisclosure
agreement executed by the parties hereto with respect to the transactions
contemplated hereby.
6.15 Exculpation Among Purchasers. Each Purchaser acknowledges
----------------------------
that it is not relying upon any person, firm or corporation, other than the
Company and its officers and directors, in making its investment or decision to
invest in the Company. Each Purchaser agrees that no Purchaser nor the
respective controlling persons, officers, directors, partners, agents, or
employees of any Purchaser shall be liable to any other Purchaser for any action
heretofore or hereafter taken or omitted to be taken by any of them in
connection with the purchase of the Securities.
6.16 Waiver of Conflicts. Each party to this Agreement
-------------------
acknowledges that Venture Law Group, counsel for the Company, has in the past
performed and may continue to perform legal services for certain of the
Purchasers in matters unrelated to the transactions described in this Agreement,
including the representation of such Purchasers in venture capital financings
and other matters. Accordingly, each party to this Agreement hereby (a)
acknowledges that they have had an opportunity to ask for information relevant
to this disclosure; and (b) gives its informed consent to Venture Law Group's
representation of certain of the Purchasers in such unrelated matters and to
Venture Law Group's representation of the Company in connection with this
Agreement and the transactions contemplated hereby.
-14-
<PAGE>
[Signature page follows]
-15-
<PAGE>
The parties have executed this Series B Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
ENCODING.COM, INC.
/s/ Martin Tobias
____________________________________________
Martin Tobias, President
Address: 1725 Westlake Ave. N.
Suite 102
Seattle, WA 98109
Fax: (206) 285-1128
[SIGNATURE PAGE TO ENCODING.COM, INC. PURCHASE AGREEMENT]
<PAGE>
PURCHASER:
OLYMPIC VENTURE PARTNERS IV, L.P.
By: OVMC IV, L.L.C.
Its General Partner
/s/ Charles P. Waite, Jr.
By:_________________________________
General Partner
Address: 2420 Carillon Point
Kirkland, WA 98033
OVP IV ENTREPRENEURS FUND, L.P.
By: OVMC IV, L.L.C.
Its General Partner
/s/ Charles P. Waite, Jr.
By:_________________________________
General Partner
Address: 2420 Carillon Point
Kirkland, WA 98033
[SIGNATURE PAGE TO ENCODING.COM, INC. PURCHASE AGREEMENT]
<PAGE>
EXHIBIT 10.11
ENCODING.COM, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
April 30, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Preferred Stock....................................... 1
1.1 Sale and Issuance of Series C Preferred Stock....................... 1
1.2 Closing; Delivery................................................... 1
2. Representations and Warranties of the Company.............................. 2
2.1 Organization, Good Standing and Qualification....................... 2
2.2 Capitalization...................................................... 2
2.3 Subsidiaries........................................................ 3
2.4 Authorization....................................................... 3
2.5 Valid Issuance of Securities........................................ 3
2.6 Governmental Consents............................................... 4
2.7 Litigation.......................................................... 4
2.8 Intellectual Property............................................... 4
2.9 Compliance with Other Instruments................................... 5
2.10 Agreements; Action.................................................. 5
2.11 Due Diligence....................................................... 6
2.12 No Conflict of Interest............................................. 6
2.13 Rights of Registration and Voting Rights............................ 6
2.14 Title to Property and Assets........................................ 6
2.15 Financial Statements................................................ 7
2.16 Changes............................................................. 7
2.17 Employee Benefit Plans.............................................. 8
2.18 Tax Returns and Payments............................................ 8
2.19 Insurance........................................................... 8
2.20 Labor Agreements and Actions........................................ 8
2.21 Confidential Information and Invention Assignment Agreements........ 8
2.22 Permits............................................................. 9
2.23 Corporate Documents................................................. 9
2.24 Liabilities......................................................... 9
3. Representations and Warranties of the Purchasers........................... 9
3.1 Authorization....................................................... 9
3.2 Purchase Entirely for Own Account................................... 9
3.3 Disclosure of Information........................................... 10
3.4 Restricted Securities............................................... 10
3.5 No Public Market.................................................... 10
3.6 Legends............................................................. 10
3.7 Accredited Investor................................................. 11
4. Conditions of the Purchasers' Obligations at Closing....................... 11
4.1 Representations and Warranties...................................... 11
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
4.2 Performance.......................................................... 11
4.3 Compliance Certificate............................................... 11
4.4 Qualifications....................................................... 11
4.5 Opinion of Company Counsel........................................... 11
4.6 Board of Directors................................................... 11
4.7 Investors' Rights Agreement.......................................... 11
4.8 Restated Certificate................................................. 11
4.9 Voting Agreement..................................................... 11
4.10 Co-Sale Agreement.................................................... 12
4.11 Proceedings and Documents............................................ 12
5. Conditions of the Company's Obligations at Closing.......................... 12
5.1 Representations and Warranties....................................... 12
5.2 Performance.......................................................... 12
5.3 Qualifications....................................................... 12
6. Miscellaneous............................................................... 12
6.1 Survival of Warranties............................................... 12
6.2 Transfer; Successors and Assigns..................................... 12
6.3 Governing Law........................................................ 12
6.4 Counterparts......................................................... 13
6.5 Titles and Subtitles................................................. 13
6.6 Notices.............................................................. 13
6.7 Finder's Fee......................................................... 13
6.8 Fees and Expenses.................................................... 13
6.9 Attorney's Fees...................................................... 13
6.10 Amendments and Waivers............................................... 13
6.11 Severability......................................................... 14
6.12 Delays or Omissions.................................................. 14
6.13 Entire Agreement..................................................... 14
6.14 Confidentiality...................................................... 14
6.15 Exculpation Among Purchasers......................................... 15
6.16 Waiver of Conflicts.................................................. 15
</TABLE>
-ii-
<PAGE>
ENCODING.COM, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
This Series C Preferred Stock Purchase Agreement (the "Agreement") is made
---------
as of the 30th day of April, 1999 by and between Encoding.com, Inc., a Delaware
corporation (the "Company"), and the investors listed on Exhibit A attached
------- ---------
hereto (each a "Purchaser" and together the "Purchasers").
--------- ----------
The parties hereby agree as follows:
1. Purchase and Sale of Preferred Stock.
------------------------------------
1.1 Sale and Issuance of Series C Preferred Stock .
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of State
of the State of Delaware on or before the Closing (as defined below) the Second
Amended and Restated Certificate of Incorporation in the form attached hereto as
Exhibit B (the "Restated Certificate").
- --------- --------------------
(b) Subject to the terms and conditions of this Agreement, each
Purchaser agrees to purchase at the Closing and the Company agrees to sell and
issue to each Purchaser at the Closing that number of shares of Series C
Preferred Stock set forth opposite each such Purchaser's name on Exhibit A
---------
attached hereto at a purchase price of $1.90 per share. The shares of Series C
Preferred Stock issued to the Purchaser pursuant to this Agreement shall be
hereinafter referred to as the "Stock."
-----
1.2 Closing; Delivery.
-----------------
(a) The purchase and sale of the Stock shall take place at the
offices of Venture Law Group, 4750 Carillon Point, Kirkland, Washington, at
10:00 a.m., on April 30, 1999, or at such other time and place as the Company
and the Purchasers mutually agree upon, orally or in writing (which time and
place are designated as the "Closing").
-------
(b) At the Closing, the Company shall deliver to each Purchaser
a certificate representing the Stock being purchased thereby against payment of
the purchase price therefor by check payable to the Company, by wire transfer to
the Company's bank account or by cancellation of indebtedness, or any
combination thereof.
(c) If the full number of the authorized shares of Series C
Preferred Stock of the Company is not sold at the Closing, the Company shall
have the right, at any time prior to June 30, 1999, to sell the remaining
authorized but unissued shares of Series C Preferred Stock to one or more
additional purchasers as determined by the Company, or to any Purchaser
hereunder who wishes to acquire additional shares of Series C Preferred Stock at
the price and on the terms set forth herein, provided that any such additional
purchaser shall be required to execute an Addendum Agreement substantially in
the form attached hereto as Exhibit G. The parties hereto agree that any
---------
additional purchaser so acquiring shares of Series C Preferred Stock
<PAGE>
shall be considered a "Purchaser" for purposes of this Agreement and an
"Investor" for purposes of each of the Amended and Restated Investors' Rights
Agreement of event date herewith by and among the Company and the Investors
listed on Exhibit A thereto (the "Investors' Rights Agreement"), the Amended and
--------- ---------------------------
Restated Right of First Refusal and Co-Sale Agreement of even date herewith by
and among the Company and the Investors listed on Exhibit A thereto (the "Co-
--------- ---
Sale Agreement") and the Amended and Restated Voting Agreement of event date
- --------------
herewith by and among the Company and the Investors listed on Exhibit A thereto
---------
(the "Voting Agreement") and any Series C Preferred Stock so acquired by such
----------------
additional purchaser shall be considered "Stock" for purposes of this Agreement
and all other agreements contemplated hereby and shall be considered
"Registrable Securities" for all purposes, and each such additional purchaser
shall be considered a "Holder" for all purposes, of the Investors' Rights
Agreement.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Purchaser that, except as set forth on a
Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be
---------
deemed to be representations and warranties as if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business. The Company is duly qualified to transact business and
is in good standing in each jurisdiction in which the failure so to qualify
would have a material adverse effect on its business or properties.
2.2 Capitalization. The authorized capital of the Company consists,
--------------
or will consist, immediately prior to the Closing, of:
(a) 25,000,000 shares of Preferred Stock: of which 5,000,000
shares have been designated Series A Preferred Stock, 4,983,787 shares of which
are issued and outstanding immediately prior to the Closing; of which 4,000,000
shares have been designated Series B Preferred Stock, 3,259,194 shares of which
are issued and outstanding immediately prior to the Closing; of which 4,000,000
shares have been designated Series B-1 Preferred Stock, none of which are issued
and outstanding immediately prior to the Closing; of which 6,000,000 shares have
been designated Series C Preferred Stock, none of which are issued and
outstanding immediately prior to Closing; and of which 6,000,000 shares have
been designated Series C-1 Preferred Stock, none of which are issued and
outstanding immediately prior to Closing. The rights, privileges and preferences
of the Preferred Stock are as stated in the Restated Certificate. All of the
outstanding shares of Preferred Stock have been duly authorized, fully paid and
are nonassessable and have been issued in compliance with all applicable federal
and state securities laws.
(b) Twenty-Four Million (24,000,000) shares of Common Stock,
Five Million Two Hundred Eighty-Eight Thousand (5,288,000) shares of which are
issued and outstanding immediately prior to the Closing. All of the outstanding
shares of Common Stock have been duly authorized, fully paid and are
nonassessable and have been issued in compliance with all applicable federal and
state securities laws.
-2-
<PAGE>
(c) The Company has reserved 3,360,000 shares of Common Stock
for issuance to officers, directors, employees and consultants of the Company
pursuant to its 1998 Stock Option Plan duly adopted by the Board of Directors
and approved by the Company stockholders (the "Stock Plan"). Of such reserved
----------
shares of Common Stock, options to purchase 1,746,500 shares have been granted
and are currently outstanding and 1,613,500 shares of Common Stock remain
available for issuance to officers, directors, employees and consultants
pursuant to the Stock Plan.
(d) Except for outstanding options issued pursuant to the Stock
Plan, there are no outstanding options, warrants, rights (including conversion
or preemptive rights and rights of first refusal or similar rights) or
agreements, orally or in writing, for the purchase or acquisition from the
Company of any shares of its capital stock.
2.3 Subsidiaries. The Company does not currently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity.
2.4 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Investors' Rights Agreement, in
the form attached hereto as Exhibit D, the Voting Agreement, in the form
---------
attached hereto as Exhibit F, and the Co-Sale Agreement in the form attached
---------
hereto as Exhibit H (collectively with this Agreement, the "Agreements"), the
--------- ----------
performance of all obligations of the Company hereunder and thereunder and the
authorization, issuance and delivery of the Stock and the Common Stock issuable
upon conversion of the Stock (together, the "Securities") has been taken or will
----------
be taken prior to the Closing, and the Agreements, when executed and delivered
by the Company, shall constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with their terms except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting
enforcement of creditors' rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, or (ii) to the extent the indemnification provisions contained in the
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 Valid Issuance of Securities. The Stock that is being issued to
----------------------------
the Purchasers hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable and free of restrictions on transfer other
than restrictions on transfer under this Agreement, the Investors' Rights
Agreement and applicable state and federal securities laws. Based in part upon
the representations of the Purchasers in this Agreement and subject to the
provisions of Section 2.6 below, the Stock will be issued in compliance with all
applicable federal and state securities laws. The Common Stock issuable upon
conversion of the Stock has been duly and validly reserved for issuance, and
upon issuance in accordance with the terms of the Restated Certificate, shall be
duly and validly issued, fully paid and nonassessable and free of restrictions
on transfer other than restrictions on transfer under this Agreement, the
Investors' Rights Agreement and applicable federal and state securities laws and
will be issued in compliance with all applicable federal and state securities
laws.
-3-
<PAGE>
2.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, applicable state securities laws and Regulation
D of the Securities Act of 1933, as amended (the "Securities Act").
--------------
2.7 Litigation. There is no action, suit, proceeding or
----------
investigation (collectively, a "Suit") pending or, to the Company's knowledge,
----
currently threatened against the Company or any of its subsidiaries that
questions the validity of the Agreements or the right of the Company to enter
into them, or to consummate the transactions contemplated hereby or thereby, or
that might result, either individually or in the aggregate, in any material
adverse changes in the assets, condition or affairs of the Company, financially
or otherwise, or any change in the current equity ownership of the Company, nor
is the Company aware that there is any basis for the foregoing. For the
purposes of this Section 2.7, "Suit" shall include but not be limited to any
----
action, suit, proceeding or investigation pending or, to the Company's
knowledge, currently threatened against the Company involving the prior
employment of any of the Company's current employees, such employees use in
connection with the Company's business of any information or techniques
proprietary to any of such employees' former employers, such employees'
obligations under any agreements with prior employers, or negotiations by the
Company with potential investors in the Company or its proposed business.
Neither the Company nor any of its subsidiaries is a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company or any of its subsidiaries currently pending or
which the Company or any of its subsidiaries intends to initiate.
2.8 Intellectual Property. To its knowledge, the Company owns or
---------------------
possesses sufficient legal rights to all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, licenses, information and proprietary
rights and processes necessary for its business without any conflict with, or
infringement of, the rights of others. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business, would violate any of the patents, trademarks, service marks,
tradenames, copyrights, trade secrets or other proprietary rights or processes
of any other person or entity. The Company is not aware that any of its
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interest of the Company
or that would conflict with the Company's business. Neither the execution or
delivery of this Agreement, nor the carrying on of the Company's business by the
employees of the Company, nor the conduct of the Company's business as proposed,
will, to the Company's knowledge, conflict with or result in a breach of the
terms, conditions, or provisions of, or constitute a default under, any
contract, covenant or instrument under which any such employee is now obligated.
The Company does not believe it is or will be necessary to use any inventions of
any of its employees (or persons it currently intends to hire) made prior to
their employment by the Company.
-4-
<PAGE>
2.9 Compliance with Other Instruments.
---------------------------------
(a) The Company is not in violation or default of any provisions
of its Restated Certificate or Bylaws or of any instrument, judgment, order,
writ, decree or contract to which it is a party or by which it is bound or, to
its knowledge, of any provision of federal or state statute, rule or regulation
applicable to the Company. The execution, delivery and performance of the
Agreements and the consummation of the transactions contemplated hereby or
thereby will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event which results in the creation of any lien, charge or
encumbrance upon any assets of the Company.
(b) To its knowledge, the Company has avoided every condition,
and has not performed any act, the occurrence of which would result in the
Company's loss of any right granted under any license, distribution agreement or
other agreement.
2.10 Agreements; Action.
------------------
(a) There are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates,
or any affiliate thereof.
(b) Except for agreements explicitly contemplated by the
Agreements, there are no agreements, understandings, instruments, contracts or
proposed transactions to which the Company or any of its subsidiaries is a party
or by which it is bound that involve (i) obligations (contingent or otherwise)
of, or payments to, the Company or any of its subsidiaries in excess of,
$50,000, (ii) the license of any patent, copyright, trade secret or other
proprietary right to or from the Company or any of its subsidiaries, or (iii)
the grant of rights to manufacture, produce, assemble, license, market, or sell
its products to any other person or affect the Company's exclusive right to
develop, manufacture, assemble, distribute, market or sell its products.
(c) Neither the Company nor any of its subsidiaries has (i)
declared or paid any dividends, or authorized or made any distribution upon or
with respect to any class or series of its capital stock, (ii) incurred any
indebtedness for money borrowed or incurred any other liabilities individually
in excess of $50,000 or in excess of $200,000 in the aggregate, (iii) made any
loans or advances to any person, other than ordinary advances for travel
expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or
rights, other than the sale of its inventory in the ordinary course of business.
(d) The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the merger of the Company with or into any such corporation or
corporations, (ii) with any representative of any corporation, partnership,
association or other business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the assets of the
Company or a transaction or series of related transactions in which more than
fifty percent (50%) of the voting
-5-
<PAGE>
power of the Company would be disposed of, or (iii) regarding any other form of
liquidation, dissolution or winding up of the Company.
2.11 Due Diligence. The Company has fully provided the Purchasers
-------------
with all the information that the Purchasers have requested for deciding whether
to acquire the Stock including certain of the Company's projections describing
its proposed business (collectively, the "Business Plan"). To the Company's
-------------
knowledge (after reasonable investigation), no representation or warranty of the
Company contained in this Agreement and the exhibits attached hereto, any
certificate furnished or to be furnished to Purchasers at the Closing contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made. To the
extent the Business Plan was prepared by management of the Company, the Business
Plan and the financial and other projections contained in the Business Plan were
prepared in good faith; however, the Company does not warrant that it will
achieve such projections.
2.12 No Conflict of Interest. The Company is not indebted, directly
-----------------------
or indirectly, to any of its officers or directors or to their respective
spouses or children, in any amount whatsoever other than in connection with
expenses or advances of expenses incurred in the ordinary course of business or
relocation expenses of employees. To the Company's knowledge, none of the
Company's officers or directors, or any members of their immediate families,
are, directly or indirectly, indebted to the Company (other than in connection
with purchases of the Company's stock) or have any direct or indirect ownership
interest in any firm or corporation with which the Company is affiliated or with
which the Company has a business relationship, or any firm or corporation which
competes with the Company except that officers, directors and/or stockholders of
the Company may own stock in (but not exceeding two percent of the outstanding
capital stock of) any publicly traded companies that may compete with the
Company. To the Company's knowledge, none of the Company's officers or
directors or any members of their immediate families are, directly or
indirectly, interested in any material contract with the Company. The Company
is not a guarantor or indemnitor of any indebtedness of any other person, firm
or corporation.
2.13 Rights of Registration and Voting Rights. Except as
----------------------------------------
contemplated in the Investors' Rights Agreement, the Company has not granted or
agreed to grant any registration rights, including piggyback rights, to any
person or entity. To the Company's knowledge, except as contemplated in the
Voting Agreement, no stockholders of the Company have entered into any
agreements with respect to the voting of capital shares of the Company.
2.14 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
-6-
<PAGE>
2.15 Financial Statements. The Company has made available to each
--------------------
Purchaser its unaudited financial statements (including balance sheet, income
statement and statement of cash flows) as of December 31, 1998 and for the
fiscal year ended December 31, 1998 (collectively, the "Financial Statements").
--------------------
The Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods indicated, except that the unaudited Financial Statements may not
contain all footnotes required by generally accepted accounting principles. The
Financial Statements fairly present the financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein,
subject to normal year-end audit adjustments. Except as set forth in the
Financial Statements, the Company has no material liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to December 31, 1998 and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not required
under generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate are not
material to the financial condition or operating results of the Company.
2.16 Changes. Since December 31, 1998, there has not been:
-------
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company;
(b) any waiver or compromise by the Company of a valuable right
or of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of the Company;
(d) any material change to a material contract or agreement by
which the Company or any of its assets is bound or subject;
(e) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(f) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(g) any resignation or termination of employment of any officer
or key employee of the Company; and the Company, is not aware of any impending
resignation or termination of employment of any such officer or key employee;
(h) any mortgage, pledge, transfer of a security interest in, or
lien, created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
-7-
<PAGE>
(i) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(j) any declaration, setting aside or payment or other
distribution in respect to any of the Company's capital stock, or any direct or
indirect redemption, purchase, or other acquisition of any of such stock by the
Company;
(k) to the Company's knowledge, any other event or condition of
any character that might materially and adversely affect the business,
properties, prospects or financial condition of the Company; or
(l) any arrangement or commitment by the Company to do any of
the things described in this Section 2.16.
2.17 Employee Benefit Plans. The Company does not have any Employee
----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
2.18 Tax Returns and Payments. The Company has filed all tax returns
------------------------
and reports as required by law. These returns and reports are true and correct
in all material respects. The Company has paid all taxes and other assessments
due.
2.19 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed.
2.20 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company, nor is the Company aware of any
labor organization activity involving its employees. The employment of each
officer and employee of the Company is terminable at the will of the Company.
To its knowledge, the Company has complied in all material respects with all
applicable state and federal equal employment opportunity laws and with other
laws related to employment.
2.21 Confidential Information and Invention Assignment Agreements.
------------------------------------------------------------
Each employee, consultant and officer of the Company has executed an agreement
with the Company regarding confidentiality and proprietary information
substantially in the form or forms made available to the counsel for the
Purchasers. The Company is not aware that any of its employees or consultants
is in violation thereof, and the Company will use its best efforts to prevent
any such violation.
-8-
<PAGE>
2.22 Permits. The Company and each of its subsidiaries has all
-------
franchises, permits, licenses and any similar authority necessary for the
conduct of its business, the lack of which could materially and adversely affect
the business, properties, prospects, or financial condition of the Company and
it believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as presently planned to be conducted.
The Company is not in default in any material respect under any of such
franchises, permits, licenses or other similar authority.
2.23 Corporate Documents. The Restated Certificate and Bylaws of the
-------------------
Company are in the form made available to counsel for the Purchasers. The copy
of the minute books of the Company made available to the Purchasers' counsel
contains minutes of all meetings of directors and stockholders and all actions
by written consent without a meeting by the directors and stockholders since the
date of incorporation and reflects all actions by the directors (and any
committee of directors) and stockholders with respect to all transactions
referred to in such minutes accurately in all material respects.
2.24 Liabilities. Except for those liabilities set forth on
-----------
Schedule 2.24 to the Schedule of Exceptions and except as otherwise disclosed
hereunder, the Company has no debts, commitments, obligations and other
liabilities of any nature whatsoever individually in excess of $25,000 and in
the aggregate in excess of $50,000.
3. Representations and Warranties of the Purchasers. Each Purchaser
------------------------------------------------
hereby represents and warrants to the Company that:
3.1 Authorization. Such Purchaser has full power and authority to
-------------
enter into this Agreement. The Agreements, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and any other laws of general application affecting enforcement of
creditors' rights generally, and as limited by laws relating to the availability
of a specific performance, injunctive relief, or other equitable remedies, or
(b) to the extent the indemnification provisions contained in the Investors'
Rights Agreement may be limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Purchaser in reliance upon the Purchaser's representation to the Company,
which by the Purchaser's execution of this Agreement, the Purchaser hereby
confirms, that the Securities to be acquired by the Purchaser will be acquired
for investment for the Purchaser's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that the
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Purchaser
further represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities. The Purchaser has not been formed for the specific purpose of
acquiring the Securities.
-9-
<PAGE>
3.3 Disclosure of Information. The Purchaser has had an opportunity
-------------------------
to discuss the Company's business, management, financial affairs and the terms
and conditions of the offering of the Stock with the Company's management and
has had an opportunity to review the Company's facilities. The Purchaser
understands that such discussions, as well as the Business Plan and any other
written information delivered by the Company to the Purchaser, were intended to
describe the aspects of the Company's business which it believes to be material.
The foregoing, however, does not limit or modify the representations and
warranties of the Company, as modified by the Schedule of Exceptions attached as
Exhibit C in Section 2 of this Agreement or the right of the Purchasers to rely
- ---------
thereon.
3.4 Restricted Securities. The Purchaser understands that the
---------------------
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Purchaser's representations as
expressed herein. The Purchaser understands that the Securities are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, the Purchaser must hold the Securities indefinitely
unless they are registered with the Securities and Exchange Commission and
qualified by state authorities, or an exemption from such registration and
qualification requirements is available. the Purchaser acknowledges that the
Company has no obligation to register or qualify the Securities for resale
except as set forth in the Investors' Rights Agreement. The Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Securities,
and on requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
3.5 No Public Market. The Purchaser understands that no public
----------------
market now exists for any of the securities issued by the Company, and that the
Company has made no assurances that a public market will ever exist for the
Securities.
3.6 Legends. The Purchaser understands that the Securities and any
-------
securities issued in respect of or exchange for the Securities, may bear one or
all of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
-10-
<PAGE>
3.7 Accredited Investor. The Purchaser is an accredited investor as
-------------------
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
4. Conditions of the Purchasers' Obligations at Closing. The obligations
----------------------------------------------------
of each Purchaser to the Company under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
4.2 Performance. The Company shall have performed and complied with
-----------
all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
4.5 Opinion of Company Counsel. The Purchasers shall have received
--------------------------
from Venture Law Group, counsel for the Company, an opinion, dated as of the
Closing, in substantially the form of Exhibit E.
---------
4.6 Board of Directors. As of the Closing, the Board shall be
------------------
comprised of Martin Tobias, Andrew Anker, Johan Liedgren, Charles Waite and
Craig McCallum.
4.7 Investors' Rights Agreement. The Company, each Purchaser,
---------------------------
Martin Tobias, Alex Tobias and the requisite majority of the holders of the
Company's Series B Preferred Stock shall have executed and delivered the
Investors' Rights Agreement in substantially the form attached as Exhibit D.
---------
4.8 Restated Certificate. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing
Date, which shall continue to be in full force and effect as of the Closing
Date.
4.9 Voting Agreement. The Company, the Purchasers, Martin Tobias,
----------------
Alex Tobias and the requisite majority of the holders of the Company's Series B
Preferred Stock shall have executed and delivered the Voting Agreement in
substantially the form attached as Exhibit F.
---------
-11-
<PAGE>
4.10 Co-Sale Agreement. The Company, each Purchaser, Martin Tobias,
-----------------
Alex Tobias and the requisite majority of the holders of the Company's Series B
Preferred Stock shall have executed and delivered the Co-Sale Agreement in
substantially the form attached as Exhibit H.
---------
4.11 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Purchaser's counsel, which shall have received all such
counterpart original and certified or other copies of such documents as it may
reasonably request.
5. Conditions of the Company's Obligations at Closing. The obligations
--------------------------------------------------
of the Company to each Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the Closing.
5.2 Performance. All covenants, agreements and conditions contained
-----------
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
6. Miscellaneous.
-------------
6.1 Survival of Warranties. Unless otherwise set forth in this
----------------------
Agreement, the warranties, representations and covenants of the Company and the
Purchasers contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing for a period of one (1)
year following the Closing.
6.2 Transfer; Successors and Assigns. The terms and conditions of
--------------------------------
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
shares of Stock sold hereunder and any Common Stock issued upon conversion
thereof). Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.
6.3 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and
-12-
<PAGE>
interpreted in accordance with the laws of the State of Washington, without
giving effect to principles of conflicts of law.
6.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient upon delivery, when delivered
personally or by overnight courier or sent by telegram or fax, or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed to the party to be notified at such
party's address as set forth on the signature page or Exhibit A hereto, or as
---------
subsequently modified by written notice, and (a) if to the Company, with a copy
to William W. Ericson, Venture Law Group, 4750 Carillon Point, Kirkland,
Washington 98033, fax: (425) 739-8750, or (b) if to the Purchasers, with a copy
to Bradley B. Furber, Van Valkenberg Furber Law Group P.L.L.C., 1325 Fourth
Avenue, Suite 1200, Seattle, WA 98101, fax: (206) 464-2857.
6.7 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which each Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
6.8 Fees and Expenses. The Company shall pay the reasonable fees
-----------------
and expenses of Van Valkenberg Furber Law Group P.L.L.C., the counsel for the
Purchasers, incurred with respect to this Agreement, the documents referred to
herein and the transactions contemplated hereby and thereby, provided such fees
and expenses do not exceed $10,000 and provided the Company is provided an
itemized invoice with respect to such fees and expenses.
6.9 Attorney's Fees. If any action at law or in equity (including
---------------
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
6.10 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of
-13-
<PAGE>
the Company and the holders of at least a majority of the Common Stock issued or
issuable upon conversion of the Stock that has not previously been sold to the
public. Any amendment or waiver effected in accordance with this Section 6.10
shall be binding upon the Purchasers and each transferee of the Stock (or the
Common Stock issuable upon conversion thereof), each future holder of all such
securities, and the Company.
6.11 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
6.12 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any party under this Agreement, upon any
breach or default of any other party under this Agreement, shall impair any such
right, power or remedy of such non-breaching or non-defaulting party nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.
6.13 Entire Agreement. This Agreement, and the documents referred to
----------------
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
6.14 Confidentiality. Each party hereto agrees that, except with the
---------------
prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, the performance of its obligations hereunder or the
ownership of Stock purchased hereunder, except that the parties hereto shall be
entitled to the limited right to disclose, where appropriate for commercially
reasonable purposes and where not detrimental to the Company, general facts
relating to the existence of the transactions contemplated hereby and the
parties involved. The provisions of this Section 6.14 shall be in addition to,
and not in substitution for, the provisions of any separate nondisclosure
agreement executed by the parties hereto with respect to the transactions
contemplated hereby.
-14-
<PAGE>
6.15 Exculpation Among Purchasers. Each Purchaser acknowledges that
----------------------------
it is not relying upon any person, firm or corporation, other than the Company
and its officers and directors, in making its investment or decision to invest
in the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents, or employees of any
Purchaser shall be liable to any other Purchaser for any action heretofore or
hereafter taken or omitted to be taken by any of them in connection with the
purchase of the Securities.
6.16 Waiver of Conflicts. Each party to this Agreement acknowledges
-------------------
that Venture Law Group, counsel for the Company, has in the past performed and
may continue to perform legal services for certain of the Purchasers in matters
unrelated to the transactions described in this Agreement, including the
representation of such Purchasers in venture capital financings and other
matters. Accordingly, each party to this Agreement hereby (a) acknowledges that
they have had an opportunity to ask for information relevant to this disclosure;
and (b) gives its informed consent to Venture Law Group's representation of
certain of the Purchasers in such unrelated matters and to Venture Law Group's
representation of the Company in connection with this Agreement and the
transactions contemplated hereby.
[Signature page follows]
-15-
<PAGE>
The parties have executed this Series C Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
ENCODING.COM, INC.
/s/ Martin Tobias
_______________________________________
Martin Tobias, Minister of Order and
Reason
Address: 3406 E. Union Avenue
Seattle, WA 98122
Fax: (206) 329-3276
PURCHASER:
_______________________
By:____________________________________
Name:__________________________________
Title:_________________________________
(if applicable)
[SIGNATURE PAGE TO ENCODING.COM, INC.
SERIES C PURCHASE AGREEMENT]
<PAGE>
EXHIBIT 10.12
ENCODING.COM, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
August 6, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Preferred Stock.................................................. 1
1.1 Sale and Issuance of Series C Preferred Stock................................... 1
1.2 Closing; Delivery............................................................... 2
2. Representations and Warranties of the Company......................................... 2
2.1 Organization, Good Standing and Qualification................................... 2
2.2 Capitalization.................................................................. 2
2.3 Subsidiaries.................................................................... 3
2.4 Authorization................................................................... 3
2.5 Valid Issuance of Securities.................................................... 4
2.6 Governmental Consents........................................................... 4
2.7 Litigation...................................................................... 4
2.8 Intellectual Property........................................................... 5
2.9 Compliance with Other Instruments............................................... 5
2.10 Agreements; Action.............................................................. 5
2.11 Due Diligence................................................................... 6
2.12 No Conflict of Interest......................................................... 6
2.13 Rights of Registration and Voting Rights........................................ 7
2.14 Title to Property and Assets.................................................... 7
2.15 Financial Statements............................................................ 7
2.16 Changes......................................................................... 8
2.17 Employee Benefit Plans.......................................................... 8
2.18 Tax Returns and Payments........................................................ 9
2.19 Insurance....................................................................... 9
2.20 Labor Agreements and Actions.................................................... 9
2.21 Confidential Information and Invention Assignment Agreements.................... 9
2.22 Permits......................................................................... 9
2.23 Corporate Documents............................................................. 9
2.24 Liabilities..................................................................... 10
2.25 Qualified Small Business Stock.................................................. 10
3. Representations and Warranties of the Purchasers...................................... 10
3.1 Authorization................................................................... 10
3.2 Purchase Entirely for Own Account............................................... 10
3.3 Disclosure of Information....................................................... 10
3.4 Restricted Securities........................................................... 11
3.5 No Public Market................................................................ 11
3.6 Legends......................................................................... 11
3.7 Accredited Investor............................................................. 12
3.8 Foreign Investors............................................................... 12
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4. Conditions of the Purchasers' Obligations at Closing.................................... 12
4.1 Representations and Warranties.................................................... 12
4.2 Performance....................................................................... 12
4.3 Compliance Certificate............................................................ 12
4.4 Qualifications.................................................................... 12
4.5 Opinion of Company Counsel........................................................ 12
4.6 Board of Directors................................................................ 12
4.7 Investors' Rights Agreement....................................................... 13
4.8 Restated Certificate.............................................................. 13
4.9 Voting Agreement.................................................................. 13
4.10 Co-Sale Agreement................................................................. 13
4.11 Proceedings and Documents......................................................... 13
5. Conditions of the Company's Obligations at Closing...................................... 13
5.1 Representations and Warranties.................................................... 13
5.2 Performance....................................................................... 13
5.3 Qualifications.................................................................... 13
6. Miscellaneous........................................................................... 14
6.1 Survival of Warranties............................................................ 14
6.2 Transfer; Successors and Assigns.................................................. 14
6.3 Governing Law..................................................................... 14
6.4 Counterparts...................................................................... 14
6.5 Titles and Subtitles.............................................................. 14
6.6 Notices........................................................................... 14
6.7 Finder's Fee...................................................................... 14
6.8 Fees and Expenses................................................................. 15
6.9 Attorney's Fees................................................................... 15
6.10 Amendments and Waivers............................................................ 15
6.11 Severability...................................................................... 15
6.12 Delays or Omissions............................................................... 15
6.13 Entire Agreement.................................................................. 16
6.14 Confidentiality................................................................... 16
6.15 Exculpation Among Purchasers...................................................... 16
6.16 Waiver of Conflicts............................................................... 16
</TABLE>
<PAGE>
ENCODING.COM, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
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This Series C Preferred Stock Purchase Agreement (the "Agreement") is made
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as of the 6/th/ day of August, 1999 by and between Encoding.com, Inc., a
Delaware corporation (the "Company"), and the investors listed on Exhibit A
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attached hereto (each a "Purchaser" and together the "Purchasers").
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Recitals
A. The Company previously sold a net total of 1,861,897 shares (after
giving effect to certain rescinded purchases) of Series C Preferred Stock, par
value $0.001 per share (the "Series C Preferred Stock") pursuant to a Series C
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Stock Purchase Agreement (the "Original Purchase Agreement") dated as of April
30, 1999 by and among the Company and the individuals and entities set forth on
Exhibit A thereto (the "Original Purchasers").
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B. Pursuant to Section 1.2(c) of the Original Purchase Agreement, the
Company had until June 30, 1999 to sell the remaining authorized shares of
Series C Preferred Stock.
C. The Company and a majority of the Original Purchasers (excluding such
Original Purchasers who rescinded their purchase) have agreed to amend such
Section 1.2(c) in order to allow the Company and the Purchasers to enter into
this Agreement.
Agreement
The parties hereby agree as follows:
1. Purchase and Sale of Preferred Stock.
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1.1 Sale and Issuance of Series C Preferred Stock .
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(a) The Company shall adopt and file with the Secretary of State
of the State of Delaware on or before the Closing (as defined below) the Third
Amended and Restated Certificate of Incorporation in the form attached hereto as
Exhibit B (the "Restated Certificate").
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(b) Subject to the terms and conditions of this Agreement, each
Purchaser agrees to purchase at the Closing and the Company agrees to sell and
issue to each Purchaser at the Closing that number of shares of Series C
Preferred Stock set forth opposite each such Purchaser's name on Exhibit A
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attached hereto at a purchase price of $1.90 per share. The shares of Series C
Preferred Stock issued to the Purchaser pursuant to this Agreement shall be
hereinafter referred to as the "Stock."
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1.2 Closing; Delivery.
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(a) The purchase and sale of the Stock shall take place at the
offices of Venture Law Group, 4750 Carillon Point, Kirkland, Washington, at
10:00 a.m., on August 6, 1999, or at such other time and place as the Company
and the Purchasers mutually agree upon, orally or in writing (which time and
place are designated as the "Closing").
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(b) At the Closing, the Company shall deliver to each Purchaser
a certificate representing the Stock being purchased thereby against payment of
the purchase price therefor by check payable to the Company, by wire transfer to
the Company's bank account or by cancellation of indebtedness, or any
combination thereof.
(c) If the full number of the authorized shares of Series C
Preferred Stock of the Company is not sold at the Closing, the Company shall
have the right, at any time prior to August 24, 1999, to sell an additional
135,000 shares of Series C Preferred Stock to one additional purchasers as
determined by the Company at the price and on the terms set forth herein,
provided that any such additional purchaser shall be required to execute an
Addendum Agreement substantially in the form attached hereto as Exhibit G. The
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parties hereto agree that any additional purchaser so acquiring shares of Series
C Preferred Stock shall be considered a "Purchaser" for purposes of this
Agreement and an "Investor" for purposes of each of the Amended and Restated
Investors' Rights Agreement of event date herewith by and among the Company and
the Investors listed on Exhibit A thereto (the "Investors' Rights Agreement"),
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the Amended and Restated Right of First Refusal and Co-Sale Agreement of even
date herewith by and among the Company and the Investors listed on Exhibit A
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thereto (the "Co-Sale Agreement") and the Amended and Restated Voting Agreement
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of event date herewith by and among the Company and the Investors listed on
Exhibit A thereto (the "Voting Agreement") and any Series C Preferred Stock so
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acquired by such additional purchaser shall be considered "Stock" for purposes
of this Agreement and all other agreements contemplated hereby and shall be
considered "Registrable Securities" for all purposes, and each such additional
purchaser shall be considered a "Holder" for all purposes, of the Investors'
Rights Agreement.
2. Representations and Warranties of the Company. The Company hereby
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represents and warrants to each Purchaser that, except as set forth on a
Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be
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deemed to be representations and warranties as if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company is a
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corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business, prospects or financial condition. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure so to qualify would have a material adverse effect on its
business or properties.
2.2 Capitalization. The authorized capital of the Company consists,
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or will consist, immediately prior to the Closing, of:
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(a) 25,000,000 shares of Preferred Stock: of which 5,000,000
shares have been designated Series A Preferred Stock, 4,983,787 shares of which
are issued and outstanding immediately prior to the Closing; of which 4,000,000
shares have been designated Series B Preferred Stock, 3,259,194 shares of which
are issued and outstanding immediately prior to the Closing; of which 4,000,000
shares have been designated Series B-1 Preferred Stock, none of which are issued
and outstanding immediately prior to the Closing; of which 6,000,000 shares have
been designated Series C Preferred Stock, 1,861,897 shares of which are issued
and outstanding immediately prior to Closing; and of which 6,000,000 shares have
been designated Series C-1 Preferred Stock, none of which are issued and
outstanding immediately prior to Closing. The rights, privileges and preferences
of the Preferred Stock are as stated in the Restated Certificate. All of the
outstanding shares of Preferred Stock have been duly authorized, fully paid and
are nonassessable and have been issued in compliance with all applicable federal
and state securities laws.
(b) Twenty-Four Million (24,000,000) shares of Common Stock, Five
Million Seven Hundred Forty-Four Thousand Two Hundred and Fifty (5,744,250)
shares of which are issued and outstanding immediately prior to the Closing.
All of the outstanding shares of Common Stock have been duly authorized, fully
paid and are nonassessable and have been issued in compliance with all
applicable federal and state securities laws.
(c) The Company has reserved 3,360,000 shares of Common Stock for
issuance to officers, directors, employees and consultants of the Company
pursuant to its 1998 Stock Option Plan duly adopted by the Board of Directors
and approved by the Company stockholders (the "Stock Plan"). Of such reserved
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shares of Common Stock, options to purchase 2,093,312 shares have been granted
and are currently outstanding, 456,250 shares of Common Stock have been issued
upon exercise of options granted thereunder and 810,438 shares of Common Stock
remain available for issuance to officers, directors, employees and consultants
pursuant to the Stock Plan.
(d) Except for (i) outstanding options issued pursuant to the
Stock Plan and (ii) outstanding warrants to purchase 41,053 shares of Series C
Preferred Stock, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal or similar rights)
or agreements, orally or in writing, for the purchase or acquisition from the
Company of any shares of its capital stock.
2.3 Subsidiaries. The Company does not currently own or control,
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directly or indirectly, any interest in any other Person (as defined in Section
2.10).
2.4 Authorization. All corporate action on the part of the Company,
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its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Amended and Restated Investors'
Rights Agreement, in the form attached hereto as Exhibit D, the Amended and
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Restated Voting Agreement, in the form attached hereto as Exhibit F, and the
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Amended and Restated Right of First Refusal and Co-Sale Agreement in the form
attached hereto as Exhibit G, (collectively with this Agreement, the
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"Agreements"), the performance of all obligations of the Company hereunder and
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thereunder and the authorization,
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issuance and delivery of the Stock and the Common Stock issuable upon conversion
of the Stock (together, the "Securities") has been taken or will be taken prior
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to the Closing, and the Agreements, when executed and delivered by the Company,
shall constitute valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting
enforcement of creditors' rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, or (ii) to the extent the indemnification provisions contained in the
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 Valid Issuance of Securities. The Stock that is being issued to
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the Purchasers hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable and free of restrictions on transfer other
than restrictions on transfer under this Agreement, the Investors' Rights
Agreement and applicable state and federal securities laws. Based in part upon
the representations of the Purchasers in this Agreement and subject to the
provisions of Section 2.6 below, the Stock will be issued in compliance with all
applicable federal and state securities laws. The Common Stock issuable upon
conversion of the Stock has been duly and validly reserved for issuance, and
upon issuance in accordance with the terms of the Restated Certificate, shall be
duly and validly issued, fully paid and nonassessable and free of restrictions
on transfer other than restrictions on transfer under this Agreement, the
Investors' Rights Agreement and applicable federal and state securities laws and
will be issued in compliance with all applicable federal and state securities
laws.
2.6 Governmental Consents. No consent, approval, order or
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authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, applicable state securities laws and Regulation
D of the Securities Act of 1933, as amended (the "Securities Act").
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2.7 Litigation. There is no action, suit, proceeding or
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investigation (collectively, a "Suit") pending or, to the Company's knowledge,
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currently threatened against the Company or any of its subsidiaries that
questions the validity or enforceability of the Agreements or the right of the
Company to enter into them, or to consummate the transactions contemplated
hereby or thereby, or that might result, either individually or in the
aggregate, in any material adverse changes in the assets, condition or affairs
of the Company, financially or otherwise, or any change in the current equity
ownership of the Company, nor is the Company aware that there is any basis for
the foregoing. For the purposes of this Section 2.7, "Suit" shall include but
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not be limited to any action, suit, proceeding or investigation pending or, to
the Company's knowledge, currently threatened against the Company involving the
prior employment of any of the Company's current employees, such employees use
in connection with the Company's business of any information or techniques
proprietary to any of such employees' former employers, such employees'
obligations under any agreements with prior employers, or negotiations by the
Company with potential investors in the Company or its proposed business.
Neither the Company nor any of its subsidiaries is a party or subject to the
provisions of any
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order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company or any of its subsidiaries currently pending or which the Company or any
of its subsidiaries intends to initiate.
2.8 Intellectual Property. To its knowledge, the Company owns or
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possesses sufficient legal rights to all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, licenses, information and proprietary
rights and processes necessary for its business without any conflict with, or
infringement of, the rights of others. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business, would violate any of the patents, trademarks, service marks,
tradenames, copyrights, trade secrets or other proprietary rights or processes
of any other person or entity. The Company is not aware that any of its
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interest of the Company
or that would conflict with the Company's business. Neither the execution or
delivery of the Agreements, nor the carrying on of the Company's business by the
employees of the Company, nor the conduct of the Company's business as proposed,
will, to the Company's knowledge, conflict with or result in a breach of the
terms, conditions, or provisions of, or constitute a default under, any
contract, covenant or instrument under which any such employee is now obligated.
The Company does not believe it is or will be necessary to use any inventions of
any of its employees (or persons it currently intends to hire) made prior to
their employment by the Company.
2.9 Compliance with Other Instruments.
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(a) The Company is not in violation or default of any provisions
of its Restated Certificate or Bylaws or of any instrument, judgment, order,
writ, decree or contract to which it is a party or by which it is bound or, to
its knowledge, of any provision of federal or state statute, rule or regulation
applicable to the Company. The execution, delivery and performance of the
Agreements and the consummation of the transactions contemplated hereby or
thereby will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event which results in the creation of any lien, charge or
encumbrance upon any assets of the Company.
(b) To its knowledge, the Company has avoided every condition,
and has not performed any act, the occurrence of which would result in the
Company's loss of any right granted under any license, distribution agreement or
other agreement.
2.10 Agreements; Action.
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(a) There are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates,
or any affiliate thereof.
(b) Except for agreements explicitly contemplated by the
Agreements, there are no agreements, understandings, instruments, contracts or
proposed transactions to
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which the Company is a party or by which it is bound that involve (i)
obligations (contingent or otherwise) of, or payments to, the Company in excess
of, $50,000, (ii) the license of any patent, copyright, trade secret or other
proprietary right to or from the Company or any of its affiliates, or (iii) the
grant of rights to manufacture, produce, assemble, license, market, or sell its
products to any other person or affect the Company's exclusive right to develop,
manufacture, assemble, distribute, market or sell its products.
(c) Neither the Company nor any of its subsidiaries has (i)
declared or paid any dividends, or authorized or made any distribution upon or
with respect to any class or series of its capital stock, (ii) incurred any
indebtedness for money borrowed or incurred any other liabilities individually
in excess of $50,000 or in excess of $200,000 in the aggregate, (iii) made any
loans or advances to any person, other than ordinary advances for travel
expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or
rights, other than the sale of its inventory in the ordinary course of business.
(d) The Company has not engaged in the past one (1) year in any
discussion (i) with any representative of any corporation, corporations,
partnership, association or other business entity or any individual
(collectively, "Person") regarding the merger of the Company with or into any
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such Person, (ii) with any representative of any Person regarding the sale,
conveyance or disposition of all or substantially all of the assets of the
Company or a transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Company would be disposed of, or
(iii) regarding any other form of liquidation, sale, dissolution or winding up
of the Company.
2.11 Due Diligence. The Company has fully provided the Purchasers
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with all the information that the Purchasers have requested for deciding whether
to acquire the Stock including certain of the Company's projections describing
its proposed business (collectively, the "Business Plan"). To the Company's
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knowledge (after reasonable investigation), no representation or warranty of the
Company contained in this Agreement and the exhibits attached hereto, any
certificate furnished or to be furnished to Purchasers at the Closing contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made. To the
extent the Business Plan was prepared by management of the Company, the Business
Plan and the financial and other projections contained in the Business Plan were
prepared in good faith; however, the Company does not warrant that it will
achieve such projections.
2.12 No Conflict of Interest. The Company is not indebted, directly
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or indirectly, to any of its officers or directors or to their respective
spouses or children, in any amount whatsoever other than in connection with
expenses or advances of expenses incurred in the ordinary course of business or
relocation expenses of employees. To the Company's knowledge, none of the
Company's officers or directors, or any members of their immediate families,
are, directly or indirectly, indebted to the Company (other than in connection
with purchases of the Company's stock) or have any direct or indirect ownership
interest in any Person with which the Company is affiliated or with which the
Company has a business
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relationship, or any Person which competes with the Company except that
officers, directors and/or stockholders of the Company may own stock in (but not
exceeding two percent of the outstanding capital stock of) any publicly traded
companies that may compete with the Company. To the Company's knowledge, none of
the Company's officers or directors or any members of their immediate families
are, directly or indirectly, interested in any material contract with the
Company. The Company is not a guarantor or indemnitor of any indebtedness of any
other Person. The Schedule of Exceptions lists all material transactions with
the Company's affiliates.
2.13 Rights of Registration and Voting Rights. Except as
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contemplated in the Investors' Rights Agreement, the Company has not granted or
agreed to grant any registration rights, including piggyback rights, to any
person or entity. To the Company's knowledge, except as contemplated in the
Voting Agreement, no stockholders of the Company have entered into any
agreements among themselves with respect to the voting of capital shares of the
Company.
2.14 Title to Property and Assets. The Company owns its property and
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assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
2.15 Financial Statements. The Company has made available to each
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Purchaser its audited financial statements (including balance sheet, income
statement and statement of cash flows) as of December 31, 1998 and for the
fiscal year ended December 31, 1998 and its unaudited financial statements
(including balance sheet, income statement and statement of cash flows) as of
June 30, 1999 and for the six-month period ended June 30, 1999 (collectively,
the "Financial Statements"). The Financial Statements have been prepared in
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accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated, except that the unaudited Financial
Statements may not contain all footnotes required by generally accepted
accounting principles. The Financial Statements fairly present the financial
condition and operating results of the Company as of the dates, and for the
periods, indicated therein, subject to normal year-end audit adjustments.
Except as set forth in the Financial Statements, the Company has no material
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to June 30, 1999 and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
the Financial Statements, which, in both cases, individually or in the aggregate
are not material to the financial condition or operating results of the Company.
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2.16 Changes. Since December 31, 1998, there has not been:
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(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company;
(b) any waiver or compromise by the Company of a valuable right
or of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of the Company;
(d) any material change to a material contract or agreement by
which the Company or any of its assets is bound or subject;
(e) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(f) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(g) any resignation or termination of employment of any officer
or key employee of the Company; and the Company, is not aware of any impending
resignation or termination of employment of any such officer or key employee;
(h) any mortgage, pledge, transfer or grant of a security
interest in, or lien, created by the Company, with respect to any of its
material properties or assets, except liens for taxes not yet due or payable;
(i) any loans or guarantees made by the Company to or for the
benefit of its employees, officers, stockholders or directors, or any members of
their immediate families, other than travel advances and other advances made in
the ordinary course of its business;
(j) any declaration, setting aside or payment or other
distribution in respect to any of the Company's capital stock, or any direct or
indirect redemption, purchase, or other acquisition of any of such stock by the
Company;
(k) to the Company's knowledge, any other event or condition of
any character that might materially and adversely affect the business,
properties, prospects or financial condition of the Company; or
(l) any arrangement or commitment by the Company to do any of
the things described in this Section 2.16.
2.17 Employee Benefit Plans. The Company does not have any Employee
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Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
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2.18 Tax Returns and Payments. The Company has filed all tax returns
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and reports as required by law. These returns and reports are true and correct
in all material respects. The Company has paid all taxes and other assessments
due. The Company has no notice of any proposed tax deficiency which may be
asserted which would materially and adversely affect the business, properties,
prospects or financial condition of the Company.
2.19 Insurance. The Company has in full force and effect fire and
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casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed.
2.20 Labor Agreements and Actions. The Company is not bound by or
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subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company, nor is the Company aware of any
labor organization activity involving its employees. The employment of each
officer and employee of the Company is terminable at the will of the Company.
To its knowledge, the Company has complied in all material respects with all
applicable state and federal equal employment opportunity laws and with other
laws related to employment.
2.21 Confidential Information and Invention Assignment Agreements.
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Each employee, consultant and officer of the Company has executed an agreement
with the Company regarding confidentiality and proprietary information
substantially in the form or forms made available to the counsel for the
Purchasers. The Company is not aware that any of its employees or consultants
is in violation thereof, and the Company will use its best efforts to prevent
any such violation.
2.22 Permits. The Company and each of its subsidiaries has all
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franchises, permits, licenses and any similar authority necessary for the
conduct of its business, the lack of which could materially and adversely affect
the business, properties, prospects, or financial condition of the Company and
it believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as presently planned to be conducted.
The Company is not in default in any material respect under any of such
franchises, permits, licenses or other similar authority.
2.23 Corporate Documents. The Restated Certificate and Bylaws of the
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Company are in the form made available to counsel for the Purchasers. The copy
of the minute books of the Company made available to the Purchasers' counsel
contains minutes of all meetings of directors and stockholders and all actions
by written consent without a meeting by the directors and stockholders since the
date of incorporation and reflects all actions by the directors (and any
committee of directors) and stockholders with respect to all transactions
referred to in such minutes accurately in all material respects.
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2.24 Liabilities. Except for those liabilities set forth on
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Schedule 2.24 to the Schedule of Exceptions and except as otherwise disclosed
hereunder, the Company has no debts, commitments, obligations and other
liabilities of any nature whatsoever individually in excess of $25,000 and in
the aggregate in excess of $50,000.
2.25 Qualified Small Business Stock. The Stock qualifies as
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"Qualified Small Business Stock" as defined in Section 1202(c) of the Internal
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Revenue Code of 1986, as amended as of the date hereof.
2.26 Year 2000. The Company's products are designed to be used prior
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to, during and after calendar year 2000 A.D., and all of the Company's products
which are material to the Company's business will record, store, process and
calculate any information dependent on or relating to such dates in the same
manner and with the same functionality, data integrity and performance as the
products record, store, process and calculate and present calendar dates on or
before December 31, 1999, or calculate any information dependent on or relating
to such dates (collectively, "Year 2000 Compliant"). To the best of the
-------------------
Company's knowledge, all of the Company's internal computer systems, including,
without limitation, its accounting systems, are Year 2000 Compliant.
3. Representations and Warranties of the Purchasers. Each Purchaser
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hereby, severally and not jointly and severally, represents and warrants to the
Company that:
3.1 Authorization. Such Purchaser has full power and authority to
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enter into this Agreement. The Agreements to which such Purchaser is a party,
when executed and delivered by the Purchaser, will constitute valid and legally
binding obligations of the Purchaser, enforceable in accordance with their
terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and any other laws of general
application affecting enforcement of creditors' rights generally, and as limited
by laws relating to the availability of a specific performance, injunctive
relief, or other equitable remedies, or (b) to the extent the indemnification
provisions contained in the Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
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the Purchaser in reliance upon the Purchaser's representation to the Company,
which by the Purchaser's execution of this Agreement, the Purchaser hereby
confirms, that the Securities to be acquired by the Purchaser will be acquired
for investment for the Purchaser's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that the
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Purchaser
further represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities. The Purchaser has not been formed for the specific purpose of
acquiring the Securities.
3.3 Disclosure of Information. The Purchaser has had an opportunity
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to discuss the Company's business, management, financial affairs and the terms
and conditions of
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the offering of the Stock with the Company's management and has had an
opportunity to review the Company's facilities. The Purchaser understands that
such discussions, as well as the Business Plan and any other written information
delivered by the Company to the Purchaser, were intended to describe the aspects
of the Company's business which it believes to be material. The foregoing,
however, does not limit or modify the representations and warranties of the
Company, as modified by the Schedule of Exceptions attached as Exhibit C in
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Section 2 of this Agreement or the right of the Purchasers to rely thereon.
3.4 Restricted Securities. The Purchaser understands that the
---------------------
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Purchaser's representations as
expressed herein. The Purchaser understands that the Securities are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, the Purchaser must hold the Securities indefinitely
unless they are registered with the Securities and Exchange Commission and
qualified by state authorities, or an exemption from such registration and
qualification requirements is available. the Purchaser acknowledges that the
Company has no obligation to register or qualify the Securities for resale
except as set forth in the Investors' Rights Agreement. The Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Securities,
and on requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
3.5 No Public Market. The Purchaser understands that no public
----------------
market now exists for any of the securities issued by the Company, and that the
Company has made no assurances that a public market will ever exist for the
Securities.
3.6 Legends. The Purchaser understands that the Securities and any
-------
securities issued in respect of or exchange for the Securities, may bear one or
all of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
-11-
<PAGE>
3.7 Accredited Investor. The Purchaser is an accredited investor as
-------------------
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
3.8 Foreign Investors. If the Purchaser is not a United States
-----------------
person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986,
as amended), such Purchaser hereby represents that, to the best of its
knowledge, it has satisfied itself as to the full observance of the laws of its
jurisdiction in connection with any invitation to subscribe for the Stock or any
use of this Agreement, including (i) the legal requirements within its
jurisdiction for the purchase of the Stock, (ii) any foreign exchange
restrictions applicable to such purchase, (iii) any governmental or other
consents that may need to be obtained, and (iv) the income tax and other tax
consequences, if any, that may be relevant to the purchase, holding, redemption,
sale, or transfer of the Stock. To the best of its knowledge, such Purchaser's
subscription and payment for the Stock will not violate any applicable
securities or other laws of the Purchaser's jurisdiction.
4. Conditions of the Purchasers' Obligations at Closing'. The obligations
----------------------------------------------------
of each Purchaser to the Company under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
4.2 Performance. The Company shall have performed and complied with
-----------
all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
4.5 Opinion of Company Counsel. The Purchasers shall have received
--------------------------
from Venture Law Group, counsel for the Company, an opinion, dated as of the
Closing, in substantially the form of Exhibit E.
---------
4.6 Board of Directors. Immediately following the Closing, the Board
------------------
shall be comprised of Martin Tobias, Andrew Anker, Johan Liedgren, Charles Waite
and Stuart J. Ellman.
-12-
<PAGE>
4.7 Investors' Rights Agreement'. The Company, each Purchaser,
---------------------------
Martin Tobias, Alex Tobias and the requisite majority of the holders of the
Company's outstanding Series B and Series C Preferred Stock shall have executed
and delivered the Amended and Restated Investors' Rights Agreement in
substantially the form attached as Exhibit D.
---------
4.8 Restated Certificate. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing
Date, which shall continue to be in full force and effect as of the Closing
Date.
4.9 Voting Agreement. The Company, the Purchasers, Martin Tobias,
----------------
Alex Tobias and the requisite majority of the holders of the Company's
outstanding Series B and Series C Preferred Stock shall have executed and
delivered the Amended and Restated Voting Agreement in substantially the form
attached as Exhibit F.
---------
4.10 Co-Sale Agreement. The Company, each Purchaser, Martin Tobias,
-----------------
Alex Tobias and the requisite majority of the holders of the Company's
outstanding Series B and Series C Preferred Stock shall have executed and
delivered the Amended and Restated Co-Sale Agreement in substantially the form
attached as Exhibit G.
---------
4.11 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Purchaser's counsel, which shall have received all such
counterpart original and certified or other copies of such documents as it may
reasonably request.
5. Conditions of the Company's Obligations at Closing'. The obligations
--------------------------------------------------
of the Company to each Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the Closing.
5.2 Performance. All covenants, agreements and conditions contained
-----------
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
-13-
<PAGE>
6. Miscellaneous.
-------------
6.1 Survival of Warranties. Unless otherwise set forth in this
----------------------
Agreement, the warranties, representations and covenants of the Company and the
Purchasers contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing for a period of one (1)
year following the Closing.
6.2 Transfer; Successors and Assigns. The terms and conditions of
--------------------------------
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
shares of Stock sold hereunder and any Common Stock issued upon conversion
thereof). Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement. Notwithstanding
the foregoing, any Purchaser may transfer its rights set forth in this Agreement
if the transferee is an affiliate, constituent partner or member of such
Purchaser or an entity controlling, controlled by or under common control with
such Purchaser.
6.3 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Washington, without giving effect to principles of conflicts of law.
6.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient upon delivery, when delivered
personally or by overnight courier or sent by telegram or fax, or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed to the party to be notified at such
party's address as set forth on the signature page or Exhibit A hereto, or as
---------
subsequently modified by written notice, and (a) if to the Company, with a copy
to William W. Ericson, Venture Law Group, 4750 Carillon Point, Kirkland,
Washington 98033, fax: (425) 739-8750, or (b) if to the Purchasers, with a copy
to Ilan S. Nissan, Esq., O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza,
New York, NY 10112, fax: (212) 408-2420.
6.7 Finder's Fee'. Each party represents that it neither is nor will
------------
be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Purchaser or any of its officers, employees,
or
-14-
<PAGE>
representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
6.8 Fees and Expenses. The Company shall pay the reasonable fees and
-----------------
expenses of O'Sullivan Graev & Karabell, LLP, the counsel for the Purchasers,
incurred with respect to this Agreement, the documents referred to herein and
the transactions contemplated hereby and thereby, to the extent such fees and
expenses are equal or less than $15,000 and provided the Company is provided an
itemized invoice with respect to such fees and expenses.
6.9 Attorney's Fees'. If any action at law or in equity (including
---------------
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
6.10 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least a majority of the Common Stock issued or issuable upon conversion of
the Stock sold hereunder that has not previously been sold to the public. Any
amendment or waiver effected in accordance with this Section 6.10 shall be
binding upon the Purchasers and each transferee of the Stock (or the Common
Stock issuable upon conversion thereof), each future holder of all such
securities, and the Company.
6.11 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
6.12 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any party under this Agreement, upon any
breach or default of any other party under this Agreement, shall impair any such
right, power or remedy of such non-breaching or non-defaulting party nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.
-15-
<PAGE>
6.13 Entire Agreement. This Agreement, and the documents referred to
----------------
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
6.14 Confidentiality. Each party hereto agrees that, except with the
---------------
prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, the performance of its obligations hereunder or the
ownership of Stock purchased hereunder, except that the parties hereto shall be
entitled to the limited right to disclose, where appropriate for commercially
reasonable purposes and where not detrimental to the Company, general facts
relating to the existence of the transactions contemplated hereby and the
parties involved. The provisions of this Section 6.14 shall be in addition to,
and not in substitution for, the provisions of any separate nondisclosure
agreement executed by the parties hereto with respect to the transactions
contemplated hereby. Confidential Information does not include information,
knowledge or data which is required to be disclosed by applicable law or proper
legal, governmental or other competent authority (provided that the Company
shall be notified sufficiently in advance of such requirement so that it may
seek a protective order (or equivalent) with respect to such disclosure, which
each party shall fully comply with).
6.15 Exculpation Among Purchasers. Each Purchaser acknowledges that
----------------------------
it is not relying upon any Person, other than the Company and its officers and
directors, in making its investment or decision to invest in the Company. Each
Purchaser agrees that no Purchaser nor the respective controlling persons,
officers, directors, partners, agents, or employees of any Purchaser shall be
liable to any other Purchaser for any action heretofore or hereafter taken or
omitted to be taken by any of them in connection with the purchase of the Stock.
6.16 Waiver of Conflicts. Each party to this Agreement acknowledges
-------------------
that Venture Law Group, counsel for the Company, has in the past performed and
may continue to perform legal services for certain of the Purchasers in matters
unrelated to the transactions described in this Agreement, including the
representation of such Purchasers in venture capital financings and other
matters. Accordingly, each party to this Agreement hereby (a) acknowledges that
they have had an opportunity to ask for information relevant to this disclosure;
and (b) gives its informed consent to Venture Law Group's representation of
certain of the Purchasers in such unrelated matters and to Venture Law Group's
representation of the Company in connection with this Agreement and the
transactions contemplated hereby.
[Signature page follows]
-16-
<PAGE>
The parties have executed this Series C Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
ENCODING.COM, INC.
/s/ Martin Tobias
____________________________________________
Martin Tobias, Chief Executive Officer and
Minister of Order and Reason
Address: 3406 E. Union Avenue
Seattle, WA 98122
Fax: (206) 329-3276
PURCHASER:
_______________________
By:_________________________________________
Name:_______________________________________
Title:______________________________________
(if applicable)
<PAGE>
EXHIBIT 10.13
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE
OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
________________________________________________________________________________
Warrant No. WC-1 Number of Shares: Up to 41,053
Date of Issuance: June 22, 1999 (subject to adjustment)
ENCODING.COM, INC.
Series C Preferred Stock Purchase Warrant
-----------------------------------------
Encoding.com, Inc. (the "Company"), for value received, hereby certifies
-------
that Dominion Capital Management, L.L.C., or its registered assigns (the
"Registered Holder"), is entitled, subject to the terms set forth below, to
-----------------
purchase from the Company, at any time after the date hereof and on or before
the Expiration Date (as defined in Section 5 below), up to 41,053 shares of
Series C Preferred Stock of the Company (the "Preferred Stock"), at a per share
---------------
purchase price of $1.90. The shares purchasable upon exercise of this Warrant
and the purchase price per share, as adjusted from time to time pursuant to the
provisions of this Warrant, are hereinafter referred to as the "Warrant Stock"
-------------
and the "Purchase Price," respectively.
--------------
1. Exercise.
--------
(a) Manner of Exercise. This Warrant may be exercised by the
------------------
Registered Holder, in whole or in part, by surrendering this Warrant, with the
purchase form appended hereto as Exhibit A duly executed by such Registered
---------
Holder or by such Registered Holder's duly authorized attorney, at the principal
office of the Company, or at such other office or agency as the Company may
designate, accompanied by payment in full of the Purchase Price payable in
respect of the number of shares of Warrant Stock purchased upon such exercise.
The Purchase Price may be paid by cash, check, wire transfer or by the surrender
of promissory notes or other instruments representing indebtedness of the
Company to the Registered Holder.
(b) Effective Time of Exercise. Each exercise of this Warrant shall
--------------------------
be deemed to have been effected immediately prior to the close of business on
the day on which this Warrant shall have been surrendered to the Company as
provided in Section 1(a) above. At such time, the person or persons in whose
name or names any certificates for Warrant Stock shall be issuable upon such
exercise as provided in Section 1(d) below shall be deemed to have become the
holder or holders of record of the Warrant Stock represented by such
certificates.
<PAGE>
(c) Net Issue Exercise.
------------------
(i) In lieu of exercising this Warrant in the manner provided
above in Section 1(a), the Registered Holder may elect to receive shares equal
to the value of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the principal office of the Company together with
notice of such election in which event the Company shall issue to such Holder a
number of shares of Warrant Stock computed using the following formula:
X = Y (A - B)
---------
A
Where X = The number of shares of Warrant Stock to be issued to the
Registered Holder.
Y = The number of shares of Warrant Stock purchasable under this
Warrant (at the date of such calculation).
A = The fair market value of one share of Warrant Stock (at the date
of such calculation).
B = The Purchase Price (as adjusted to the date of such calculation).
(ii) For purposes of this Section 1(c), the fair market value of
Warrant Stock on the date of calculation shall mean with respect to each share
of Warrant Stock:
(A) if the exercise is in connection with an initial public
offering of the Company's Common Stock, and if the Company's Registration
Statement relating to such public offering has been declared effective by the
Securities and Exchange Commission, then the fair market value per share shall
be the product of (x) the initial "Price to Public" specified in the final
prospectus with respect to the offering and (y) the number of shares of Common
Stock into which each share of Warrant Stock is convertible at the date of
calculation;
(B) if this Warrant is exercised after, and not in
connection with, the Company's initial public offering, and if the Company's
Common Stock is traded on a securities exchange or The Nasdaq Stock Market or
actively traded over-the-counter:
(1) if the Company's Common Stock is traded on a
securities exchange or The Nasdaq Stock Market, the fair market value shall be
deemed to be the product of (x) the average of the closing prices over a thirty
(30) day period ending three days before date of calculation and (y) the number
of shares of Common Stock into which each share of Warrant Stock is convertible
on such date; or
(2) if the Company's Common Stock is actively traded
over-the-counter, the fair market value shall be deemed to be the product of (x)
the average of the closing bid or sales price (whichever is applicable) over the
thirty (30) day period ending three days before the date of calculation and (y)
the number of shares of Common Stock into which each share of Warrant Stock is
convertible on such date; or
-2-
<PAGE>
(C) if neither (A) nor (B) is applicable, the fair market
value of Warrant Stock shall be at the highest price per share which the Company
could obtain on the date of calculation from a willing buyer (not a current
employee or director) for shares of Warrant Stock sold by the Company, from
authorized but unissued shares, as determined in good faith by the Board of
Directors, unless the Company is at such time subject to an acquisition as
described in Section 5(b) below, in which case the fair market value of Warrant
Stock shall be deemed to be the value received by the holders of such stock
pursuant to such acquisition.
(d) Delivery to Holder. As soon as practicable after the exercise of
------------------
this Warrant in whole or in part, and in any event within ten (10) days
thereafter, the Company at its expense will cause to be issued in the name of,
and delivered to, the Registered Holder, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of shares of
Warrant Stock to which such Registered Holder shall be entitled, and
(ii) in case such exercise is in part only, a new warrant or
warrants (dated the date hereof) of like tenor, calling in the aggregate on the
face or faces thereof for the number of shares of Warrant Stock equal (without
giving effect to any adjustment therein) to the number of such shares called for
on the face of this Warrant minus the number of such shares purchased by the
Registered Holder upon such exercise as provided in Section 1(b) or 1(d) above.
2. Adjustments.
-----------
(a) Redemption or Conversion of Preferred Stock. If all of the
-------------------------------------------
Preferred Stock is redeemed or converted into shares of Common Stock, then this
Warrant shall automatically become exercisable for that number of shares of
Common Stock equal to the number of shares of Common Stock that would have been
received if this Warrant had been exercised in full and the shares of Preferred
Stock received thereupon had been simultaneously converted into shares of Common
Stock immediately prior to such event, and the Exercise Price shall be
automatically adjusted to equal the amount obtained by dividing (i) the
aggregate Purchase Price of the shares of Preferred Stock for which this Warrant
was exercisable immediately prior to such redemption or conversion, by (ii) the
number of shares of Common Stock for which this Warrant is exercisable
immediately after such redemption or conversion.
(b) Stock Splits and Dividends. If outstanding shares of the
--------------------------
Company's Preferred Stock shall be subdivided into a greater number of shares or
a dividend in Preferred Stock shall be paid in respect of Preferred Stock, the
Purchase Price in effect immediately prior to such subdivision or at the record
date of such dividend shall simultaneously with the effectiveness of such
subdivision or immediately after the record date of such dividend be
proportionately reduced. If outstanding shares of Preferred Stock shall be
combined into a smaller number of shares, the Purchase Price in effect
immediately prior to such combination shall, simultaneously with the
effectiveness of such combination, be proportionately increased. When any
adjustment is required to be made in the Purchase Price, the number of shares of
Warrant Stock purchasable upon the exercise of this Warrant shall be changed to
the number
-3-
<PAGE>
determined by dividing (i) an amount equal to the number of shares issuable upon
the exercise of this Warrant immediately prior to such adjustment, multiplied by
the Purchase Price in effect immediately prior to such adjustment, by (ii) the
Purchase Price in effect immediately after such adjustment.
(c) Reclassification, Etc. In case there occurs any reclassification,
---------------------
merger or change of the outstanding securities of the Company or of any
reorganization of the Company (or any other corporation the stock or securities
of which are at the time receivable upon the exercise of this Warrant) or any
similar corporate reorganization on or after the date hereof, then and in each
such case the Registered Holder, upon the exercise hereof at any time after the
consummation of such reclassification, change, or reorganization shall be
entitled to receive, in lieu of the stock or other securities and property
receivable upon the exercise hereof prior to such consummation, the stock or
other securities or property to which such Holder would have been entitled upon
such consummation if such Holder had exercised this Warrant immediately prior
thereto, all subject to further adjustment pursuant to the provisions of this
Section 2.
(d) Adjustment Certificate. When any adjustment is required to be
----------------------
made in the Warrant Stock or the Purchase Price pursuant to this Section 2, the
Company shall promptly mail to the Registered Holder a certificate setting forth
(i) a brief statement of the facts requiring such adjustment, (ii) the Purchase
Price after such adjustment and (iii) kind and amount of stock or other
securities or property into which this Warrant shall be exercisable after such
adjustment.
(e) Acknowledgement. In order to avoid doubt, it is acknowledged that
---------------
the holder of this Warrant shall be entitled to the benefit of all adjustments
in the number of shares of Common Stock of the Company issuable upon conversion
of the Preferred Stock of the Company which occur prior to the exercise of this
Warrant, including without limitation, any increase in the number of shares of
Common Stock issuable upon conversion as a result of a dilutive issuance of
capital stock.
3. Transfers.
---------
(a) Unregistered Security. Each holder of this Warrant acknowledges
---------------------
that this Warrant, the Warrant Stock and the Common Stock of the Company have
not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and agrees not to sell, pledge, distribute, offer for sale,
- ---------------
transfer or otherwise dispose of this Warrant, any Warrant Stock issued upon its
exercise or any Common Stock issued upon conversion of the Warrant Stock in the
absence of (i) an effective registration statement under the Act as to this
Warrant, such Warrant Stock or such Common Stock and registration or
qualification of this Warrant, such Warrant Stock or such Common Stock under any
applicable U.S. federal or state securities law then in effect, or (ii) an
opinion of counsel, satisfactory to the Company, that such registration and
qualification are not required. Each certificate or other instrument for
Warrant Stock issued upon the exercise of this Warrant shall bear a legend
substantially to the foregoing effect.
(b) Transferability. Subject to the provisions of Section 3(a)
---------------
hereof, this Warrant and all rights hereunder are transferable, in whole or in
part, upon surrender of the
-4-
<PAGE>
Warrant with a properly executed assignment (in the form of Exhibit B hereto) at
---------
the principal office of the Company provided, however, that this Warrant may not
-------- -------
be transferred in part unless the transferee acquires the right to purchase at
least 50,000 shares (as adjusted pursuant to Section 2) of Warrant Stock
hereunder.
(c) Warrant Register. The Company will maintain a register containing
----------------
the names and addresses of the Registered Holders of this Warrant. Until any
transfer of this Warrant is made in the warrant register, the Company may treat
the Registered Holder of this Warrant as the absolute owner hereof for all
purposes; provided, however, that if this Warrant is properly assigned in blank,
-------- -------
the Company may (but shall not be required to) treat the bearer hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary. Any Registered Holder may change such Registered Holder's address as
shown on the warrant register by written notice to the Company requesting such
change.
4. No Impairment. The Company will not, by amendment of its charter or
-------------
through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will (subject to Section 13 below) at
all times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of this Warrant against impairment.
5. Termination. This Warrant (and the right to purchase securities upon
-----------
exercise hereof) shall terminate upon the earliest to occur of the following
(the "Expiration Date"): (a) June 22, 2008 or (b) the fourth anniversary of the
---------------
closing of the Company's initial public offering of Common Stock.
6. Notices of Certain Transactions. In case:
-------------------------------
(a) the Company shall take a record of the holders of its Preferred
Stock (or other stock or securities at the time deliverable upon the exercise of
this Warrant) for the purpose of entitling or enabling them to receive any
dividend or other distribution, or to receive any right to subscribe for or
purchase any shares of stock of any class or any other securities, or to receive
any other right, to subscribe for or purchase any shares of stock of any class
or any other securities, or to receive any other right, or
(b) of any capital reorganization of the Company, any reclassification
of the capital stock of the Company, any consolidation or merger of the Company,
any consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the surviving
entity), or any transfer of all or substantially all of the assets of the
Company, or
(c) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or
(d) of any redemption of the Preferred Stock or mandatory conversion
of the Preferred Stock into Common Stock of the Company,
-5-
<PAGE>
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation,
winding-up, redemption or conversion is to take place, and the time, if any is
to be fixed, as of which the holders of record of Preferred Stock (or such other
stock or securities at the time deliverable upon such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation,
winding-up, redemption or conversion) are to be determined. Such notice shall
be mailed at least ten (10) days prior to the record date or effective date for
the event specified in such notice.
7. Reservation of Stock. The Company will at all times reserve and keep
--------------------
available, solely for the issuance and delivery upon the exercise of this
Warrant, such shares of Warrant Stock and other stock, securities and property,
as from time to time shall be issuable upon the exercise of this Warrant.
8. Exchange of Warrants. Upon the surrender by the Registered Holder of
--------------------
any Warrant or Warrants, properly endorsed, to the Company at the principal
office of the Company, the Company will, subject to the provisions of Section 3
hereof, issue and deliver to or upon the order of such Holder, at the Company's
expense, a new Warrant or Warrants of like tenor, in the name of such Registered
Holder or as such Registered Holder (upon payment by such Registered Holder of
any applicable transfer taxes) may direct, calling in the aggregate on the face
or faces thereof for the number of shares of Preferred Stock called for on the
face or faces of the Warrant or Warrants so surrendered.
9. Replacement of Warrants. Upon receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
10. Mailing of Notices. Any notice required or permitted pursuant to this
------------------
Warrant shall be in writing and shall be deemed sufficient upon receipt, when
delivered personally or sent by courier, overnight delivery service or confirmed
facsimile, or forty-eight (48) hours after being deposited in the regular mail,
as certified or registered mail (airmail if sent internationally), with postage
prepaid, addressed (a) if to the Registered Holder, to the address of the
Registered Holder most recently furnished in writing to the Company and (b) if
to the Company, to the address set forth below or subsequently modified by
written notice to the Registered Holder.
11. No Rights as Stockholder. Until the exercise of this Warrant, the
------------------------
Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
-6-
<PAGE>
12. No Fractional Shares. No fractional shares of Preferred Stock will be
--------------------
issued in connection with any exercise hereunder. In lieu of any fractional
shares which would otherwise be issuable, the Company shall pay cash equal to
the product of such fraction multiplied by the fair market value of one share of
Preferred Stock on the date of exercise, as determined in good faith by the
Company's Board of Directors.
13. Amendment or Waiver. Any term of this Warrant may be amended or waived
-------------------
only by an instrument in writing signed by the party against which enforcement
of the amendment or waiver is sought.
14. Market Stand-Off Agreement.
--------------------------
(a) Registered Holder hereby agrees that, during the period of duration
(up to, but not exceeding, 180 days) specified by the Company and an underwriter
of Common Stock or other securities of the Company, following the effective date
of a registration statement of the Company filed under the Securities Act, it
shall not, to the extent requested by the Company and such underwriter, directly
or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose of (other than to donees who agree to be similarly bound) any
securities of the Company held by it at any time during such period except
Common Stock included in such registration.
(b) In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the securities of Registered Holder
until the end of such period, and Registered Holder agrees that, if so
requested, Registered Holder will execute an agreement in the form provided by
the underwriter containing terms which are essentially consistent with the
provisions of this Section 14.
15. Headings. The headings in this Warrant are for purposes of reference
--------
only and shall not limit or otherwise affect the meaning of any provision of
this Warrant.
16. Registration Rights. The Company will include the Warrant Shares as
-------------------
Registrable Securities for purposes of registration rights and right of first
offer of the Company's Amended and Restated Investors Rights Agreement dated as
of April 30, 1999, by amending such agreement, provided that such amendment is
subject to shareholder approval.
-7-
<PAGE>
17. Governing Law. This Warrant shall be governed, construed and
-------------
interpreted in accordance with the laws of the State of Washington, without
giving effect to principles of conflicts of law.
ENCODING.COM, INC.
/s/ Martin Tobias
By:________________________________________
CEO
Its:_______________________________________
Address: 3406 E. Union St.
Seattle, WA 98122
Fax Number: (425) 702-5970
Agreed and Accepted:
/s/ Emily Welther, Dominion Capital Management
By:________________________________________________
VP Finance
Its:_______________________________________________
-8-
<PAGE>
EXHIBIT A
---------
PURCHASE FORM
-------------
To: Encoding.com, Inc. Dated: _________
The undersigned, pursuant to the provisions set forth in the attached
Warrant No. WC-1, hereby irrevocably elects to purchase _______ shares of the
Preferred Stock covered by such Warrant and herewith makes payment of
$_________, representing the full purchase price for such shares at the price
per share provided for in such Warrant.
Signature:________________________
Address:__________________________
-9-
<PAGE>
EXHIBIT B
---------
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, _________________________________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant with respect to the number of shares of Series C Preferred Stock covered
thereby set forth below, unto:
Name of Assignee Address/Fax Number No. of Shares
---------------- ------------------ -------------
Dated:_________________ Signature:____________________________
____________________________
Witness: ____________________________
-10-
<PAGE>
EXHIBIT 10.14
ENCODING.COM, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
December 14, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Preferred Stock................................. 1
1.1 Sale and Issuance of Series D Preferred Stock.................. 1
1.2 Closing; Delivery.............................................. 1
2. Representations and Warranties of the Company........................ 2
2.1 Organization, Good Standing and Qualification.................. 2
2.2 Capitalization................................................. 2
2.3 Subsidiaries................................................... 3
2.4 Authorization.................................................. 3
2.5 Valid Issuance of Securities................................... 3
2.6 Governmental Consents.......................................... 4
2.7 Litigation..................................................... 4
2.8 Intellectual Property.......................................... 4
2.9 Compliance with Other Instruments.............................. 5
2.10 Agreements; Action............................................. 5
2.11 Due Diligence.................................................. 6
2.12 No Conflict of Interest........................................ 6
2.13 Rights of Registration and Voting Rights....................... 7
2.14 Title to Property and Assets................................... 7
2.15 Financial Statements........................................... 7
2.16 Changes........................................................ 7
2.17 Employee Benefit Plans......................................... 8
2.18 Tax Returns and Payments....................................... 8
2.19 Insurance...................................................... 8
2.20 Labor Agreements and Actions................................... 8
2.21 Confidential Information and Invention Assignment Agreements... 9
2.22 Permits........................................................ 9
2.23 Corporate Documents............................................ 9
2.24 Liabilities.................................................... 9
2.25 Year 2000...................................................... 9
2.26 Small Business Concern......................................... 10
3. Representations and Warranties of the Purchasers..................... 10
3.1 Authorization.................................................. 10
3.2 Purchase Entirely for Own Account.............................. 10
3.3 Disclosure of Information...................................... 10
3.4 Restricted Securities.......................................... 10
3.5 No Public Market............................................... 11
3.6 Legends........................................................ 11
3.7 Accredited Investor or Sophisticated Investor.................. 11
3.8 Foreign Investors.............................................. 11
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4. Conditions of the Purchasers' Obligations at Closing................. 12
4.1 Representations and Warranties................................. 12
4.2 Performance.................................................... 12
4.3 Compliance Certificate......................................... 12
4.4 Qualifications................................................. 12
4.5 Opinion of Company Counsel..................................... 12
4.6 Board of Directors............................................. 12
4.7 Investors' Rights Agreement.................................... 12
4.8 Restated Certificate........................................... 12
4.9 Voting Agreement............................................... 12
4.10 Co-Sale Agreement.............................................. 13
4.11 Proceedings and Documents...................................... 13
4.12 SBA Forms...................................................... 13
4.13 Payment of Fees and Expenses................................... 13
5. Conditions of the Company's Obligations at Closing................... 13
5.1 Representations and Warranties................................. 13
5.2 Performance.................................................... 13
5.3 Qualifications................................................. 13
6. Miscellaneous........................................................ 13
6.1 Survival of Warranties......................................... 13
6.2 Transfer; Successors and Assigns............................... 14
6.3 Governing Law.................................................. 14
6.4 Counterparts................................................... 14
6.5 Titles and Subtitles........................................... 14
6.6 Notices........................................................ 14
6.7 Finder's Fee................................................... 14
6.8 Fees and Expenses.............................................. 15
6.9 Attorney's Fees................................................ 15
6.10 Amendments and Waivers......................................... 15
6.11 Severability................................................... 15
6.12 Delays or Omissions............................................ 15
6.13 Entire Agreement............................................... 15
6.14 Confidentiality................................................ 16
6.15 Exculpation Among Purchasers................................... 16
</TABLE>
<PAGE>
ENCODING.COM, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
This Series D Preferred Stock Purchase Agreement (the "Agreement") is made
---------
as of the 14th day of December, 1999 by and between Encoding.com, Inc., a
Delaware corporation (the "Company"), and the investors listed on Exhibit A
------- ---------
attached hereto (each a "Purchaser" and together the "Purchasers").
--------- ----------
Agreement
The parties hereby agree as follows:
1. Purchase and Sale of Preferred Stock.
------------------------------------
1.1 Sale and Issuance of Series D Preferred Stock.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of State
of the State of Delaware on or before the Closing (as defined below) the Fifth
Amended and Restated Certificate of Incorporation in the form attached hereto as
Exhibit B (the "Restated Certificate").
- --------- --------------------
(b) Subject to the terms and conditions of this Agreement, each
Purchaser agrees to purchase at the Closing and the Company agrees to sell and
issue to each Purchaser at the Closing that number of shares of Series D
Preferred Stock set forth opposite each such Purchaser's name on Exhibit A
---------
attached hereto at a purchase price of $6.37 per share. The shares of Series D
Preferred Stock issued to the Purchaser pursuant to this Agreement shall be
hereinafter referred to as the "Stock."
-----
1.2 Closing; Delivery.
-----------------
(a) The purchase and sale of the Stock shall take place at the
offices of Venture Law Group, 4750 Carillon Point, Kirkland, Washington, at
10:00 a.m., on December ___, 1999, or at such other time and place as the
Company and the Purchasers mutually agree upon, orally or in writing (which time
and place are designated as the "Closing").
-------
(b) At the Closing, the Company shall deliver to each Purchaser a
certificate representing the Stock being purchased thereby against payment of
the purchase price therefor by check payable to the Company, by wire transfer to
the Company's bank account or by cancellation of indebtedness, or any
combination thereof.
(c) If the full number of the authorized shares of Series D
Preferred Stock of the Company is not sold at the Closing, the Company shall
have the right, at any time prior to December 31, 1999, to sell additional
shares of Series D Preferred Stock to one or more additional purchasers as
determined by the Company, such additional purchasers to be reasonably
acceptable to a majority in interest of the Purchasers, at the price and on the
terms set forth herein, provided that any such additional purchaser shall be
required to execute an
-1-
<PAGE>
Addendum Agreement substantially in the form attached hereto as Exhibit H.
---------
The parties hereto agree that any additional purchaser so acquiring shares of
Series D Preferred Stock shall be considered a "Purchaser" for purposes of this
Agreement and an "Investor" for purposes of each of the Amended and Restated
Investors' Rights Agreement of event date herewith by and among the Company and
the Investors listed on Exhibit A thereto (the "Investors' Rights Agreement"),
--------- ---------------------------
the Amended and Restated Right of First Refusal and Co-Sale Agreement of even
date herewith by and among the Company and the Investors listed on Exhibit A
---------
thereto (the "Co-Sale Agreement") and the Amended and Restated Voting Agreement
-----------------
of event date herewith by and among the Company and the Investors listed on
Exhibit A thereto (the "Voting Agreement") and any Series D Preferred Stock so
- --------- ----------------
acquired by such additional purchaser shall be considered "Stock" for purposes
of this Agreement and all other agreements contemplated hereby and shall be
considered "Registrable Securities" for all purposes, and each such additional
purchaser shall be considered a "Holder" for all purposes, of the Investors'
Rights Agreement. After December 31, 1999, the Company agrees not to sell any
additional shares of Series D Preferred Stock without the consent of a majority
of the Series D Preferred Stock held by the Purchasers.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Purchaser that, except as set forth on a
Schedule of Exceptions attached hereto as Exhibit C:
---------
2.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as presently conducted or proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure so to qualify would have a material adverse
effect on its business, properties or financial condition.
2.2 Capitalization. The authorized capital of the Company consists,
--------------
or will consist, immediately prior to the Closing, of:
(a) 41,000,000 shares of Preferred Stock: of which 5,000,000
shares have been designated Series A Preferred Stock, 4,983,787 shares of which
are issued and outstanding immediately prior to the Closing; of which 4,000,000
shares have been designated Series B Preferred Stock, 3,259,194 shares of which
are issued and outstanding immediately prior to the Closing; of which 4,000,000
shares have been designated Series B-1 Preferred Stock, none of which are issued
and outstanding immediately prior to the Closing; of which 6,000,000 shares have
been designated Series C Preferred Stock, 5,309,266 shares of which are issued
and outstanding immediately prior to Closing; of which 6,000,000 shares have
been designated Series C-1 Preferred Stock, none of which are issued and
outstanding immediately prior to Closing; of which 8,000,000 shares have been
designated Series D Preferred Stock, none of which are issued and outstanding
immediately prior to Closing; and of which 8,000,000 shares have been designated
Series D-1 Preferred Stock, none of which are issued and outstanding immediately
prior to Closing. The rights, privileges and preferences of the Preferred Stock
are as stated in the Restated Certificate. All of the outstanding shares of
Preferred Stock have been
-2-
<PAGE>
duly authorized, fully paid and are nonassessable and have been issued in
compliance with all applicable federal and state securities laws.
(b) 100,000,000 shares of Common Stock, 6,095,062 shares of which are
issued and outstanding immediately prior to the Closing. All of the
outstanding shares of Common Stock have been duly authorized, fully paid and are
nonassessable and have been issued in compliance with all applicable federal and
state securities laws.
(c) The Company has reserved 4,660,000 shares of Common Stock for
issuance to officers, directors, employees and consultants of the Company
pursuant to its 1998 Stock Option Plan duly adopted by the Board of Directors
and approved by the Company stockholders (the "Stock Plan"). Of such reserved
----------
shares of Common Stock, options to purchase 3,845,775 shares have been granted
and are currently outstanding, 787,062 shares of Common Stock have been issued
upon exercise of options granted thereunder and 27,163 shares of Common Stock
remain available for issuance to officers, directors, employees and consultants
pursuant to the Stock Plan.
(d) Except for (i) outstanding options issued pursuant to the Stock
Plan and (ii) outstanding warrants to purchase 41,053 shares of Series C
Preferred Stock, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal or similar rights)
or agreements, orally or in writing, for the purchase or acquisition from the
Company of any shares of its capital stock.
2.3 Subsidiaries. The Company does not currently own or control,
------------
directly or indirectly, any interest in any other Person (as defined in Section
2.10).
2.4 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Amended and Restated Investors'
Rights Agreement, in the form attached hereto as Exhibit D, the Amended and
---------
Restated Voting Agreement, in the form attached hereto as Exhibit F, and the
---------
Amended and Restated Right of First Refusal and Co-Sale Agreement in the form
attached hereto as Exhibit G, (collectively with this Agreement, the
---------
"Agreements"), the performance of all obligations of the Company hereunder and
----------
thereunder and the authorization, issuance and delivery of the Stock and the
Common Stock issuable upon conversion of the Stock (together, the "Securities")
----------
has been taken or will be taken prior to the Closing, and the Agreements, when
executed and delivered by the Company, shall constitute valid and legally
binding obligations of the Company, enforceable against the Company in
accordance with their terms except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of
general application affecting enforcement of creditors' rights generally, as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies, or (ii) to the extent the indemnification
provisions contained in the Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
2.5 Valid Issuance of Securities. The Stock that is being issued to the
----------------------------
Purchasers hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable
-3-
<PAGE>
and free of restrictions on transfer other than restrictions on transfer under
this Agreement, the Investors' Rights Agreement and applicable state and federal
securities laws. Based in part upon the representations of the Purchasers in
this Agreement and subject to filings with respect to applicable state
securities laws and Regulation D of the Securities Act of 1933, as amended (the
"Securities Act"), if any, the Stock will be issued in compliance with all
--------------
applicable federal and state securities laws. The Common Stock issuable upon
conversion of the Stock has been duly and validly reserved for issuance, and
upon issuance in accordance with the terms of the Restated Certificate, shall be
duly and validly issued, fully paid and nonassessable and free of restrictions
on transfer other than restrictions on transfer under this Agreement, the
Investors' Rights Agreement and applicable federal and state securities laws and
will be issued in compliance with all applicable federal and state securities
laws. The Company agrees to reserve additional shares of Common Stock necessary
for issuance upon conversion of the Stock to take account for any stock splits,
dividends, combinations or other recapitalizations.
2.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except filings with respect to applicable state
securities laws and Regulation D of the Securities Act, if any.
2.7 Litigation. There is no action, suit, proceeding or
----------
investigation (collectively, a "Suit") pending or, to the Company's knowledge,
----
currently threatened against the Company that questions the validity or
enforceability of the Agreements or the right of the Company to enter into them,
or to consummate the transactions contemplated hereby or thereby, or that might
result, either individually or in the aggregate, in any material adverse changes
in the assets, condition or affairs of the Company, financially or otherwise, or
any change in the current equity ownership of the Company, nor is the Company
aware that there is any basis for the foregoing. For the purposes of this
Section 2.7, "Suit" shall include but not be limited to any action, suit,
----
proceeding or investigation pending or, to the Company's knowledge, currently
threatened against the Company involving the prior employment of any of the
Company's current employees, such employees use in connection with the Company's
business of any information or techniques proprietary to any of such employees'
former employers, such employees' obligations under any agreements with prior
employers, or negotiations by the Company with potential investors in the
Company or its proposed business. The Company is not a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or which the Company intends to
initiate.
2.8 Intellectual Property. To its knowledge, the Company owns or
---------------------
possesses sufficient legal rights to all patents, trademarks, service marks,
tradenames, domain names, copyrights, trade secrets, licenses, information and
proprietary rights and processes necessary for its business without any conflict
with, or infringement of, the rights of others. The Company has not received
any communications alleging that the Company has violated or infringed or, by
conducting its business, would violate or infringe any of the patents,
trademarks, service marks, tradenames, copyrights, trade secrets or other
proprietary rights or processes of any other person
-4-
<PAGE>
or entity. The Company is not aware that any of its employees is obligated under
any contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such employee's best
efforts to promote the interest of the Company or that would conflict with the
Company's business. Neither the execution or delivery of the Agreements, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any such employee is now obligated. The Company does not believe it is or will
be necessary to use any designs, trademarks, discoveries, formulae, processes,
manufacturing techniques, trade secrets, inventions, improvements, ideas,
business plans or strategies, or copyrightable works of any of its employees (or
persons it currently intends to hire) made prior to their employment by the
Company.
2.9 Compliance with Other Instruments.
---------------------------------
(a) The Company is not in violation or default of any provisions
of its Restated Certificate or Bylaws or of any instrument, judgment, order,
writ, decree or contract to which it is a party or by which it is bound or, to
its knowledge, of any provision of federal or state statute, rule or regulation
applicable to the Company. The execution, delivery and performance of the
Agreements and the consummation of the transactions contemplated hereby or
thereby will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event which results in the creation of any lien, charge or
encumbrance upon any assets of the Company.
(b) To its knowledge, the Company has avoided every condition,
and has not performed any act, the occurrence of which would result in the
Company's loss of any right granted under any license, distribution agreement or
other agreement.
2.10 Agreements; Action.
------------------
(a) There are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates,
or any affiliate thereof.
(b) Except for agreements explicitly contemplated by the
Agreements, there are no agreements, understandings, instruments, contracts or
proposed transactions to which the Company is a party or by which it is bound
that involve (i) obligations (contingent or otherwise) of, or payments to, the
Company in excess of, $50,000, (ii) the license of any patent, copyright, trade
secret or other proprietary right to or from the Company or any of its
affiliates, or (iii) the grant of rights to manufacture, produce, assemble,
license, market, or sell its products to any other person or affect the
Company's exclusive right to develop, manufacture, assemble, distribute, market
or sell its products.
(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock,
-5-
<PAGE>
(ii) incurred any indebtedness for money borrowed or incurred any other
liabilities individually in excess of $50,000 or in excess of $200,000 in the
aggregate, (iii) made any loans or advances to any person, other than ordinary
advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of
any of its assets or rights, other than the sale of its inventory in the
ordinary course of business.
(d) The Company has not engaged in the past one (1) year in any
discussion (i) with any representative of any corporation, partnership,
association or other business entity or any individual (collectively, "Person")
------
regarding the merger of the Company with or into any such Person where the
Company was not the surviving entity, (ii) with any representative of any Person
regarding the sale, conveyance or disposition of all or substantially all of the
assets of the Company or a transaction or series of related transactions in
which more than fifty percent (50%) of the voting power of the Company would be
disposed of, or (iii) regarding any other form of liquidation, sale, dissolution
or winding up of the Company.
2.11 Due Diligence. The Company has fully provided the Purchasers
-------------
with all the information that the Purchasers have requested for deciding whether
to acquire the Stock including certain of the Company's projections describing
its proposed business (collectively, the "Business Plan"). To the Company's
-------------
knowledge (after reasonable investigation), no representation or warranty of the
Company contained in this Agreement and the exhibits attached hereto, any
certificate furnished or to be furnished to Purchasers at the Closing contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made. To the
extent the Business Plan was prepared by management of the Company, the Business
Plan and the financial and other projections contained in the Business Plan were
prepared in good faith; however, the Company does not warrant that it will
achieve such projections.
2.12 No Conflict of Interest. The Company is not indebted, directly
-----------------------
or indirectly, to any of its officers or directors or to their respective
spouses or children, in any amount whatsoever other than in connection with
expenses or advances of expenses incurred in the ordinary course of business or
relocation expenses of employees. To the Company's knowledge, none of the
Company's officers or directors, or any members of their immediate families,
are, directly or indirectly, indebted to the Company (other than in connection
with purchases of the Company's stock) or have any direct or indirect ownership
interest in any Person with which the Company is affiliated or with which the
Company has a business relationship, or any Person which competes with the
Company except that officers, directors and/or stockholders of the Company may
own stock in (but not exceeding two percent of the outstanding capital stock of)
any publicly traded companies that may compete with the Company. To the
Company's knowledge, none of the Company's officers or directors or any members
of their immediate families are, directly or indirectly, interested in any
material contract with the Company. The Company is not a guarantor or
indemnitor of any indebtedness of any other Person. The Schedule of Exceptions
lists all material transactions with the Company's affiliates.
-6-
<PAGE>
2.13 Rights of Registration and Voting Rights. Except as
----------------------------------------
contemplated in the Investors' Rights Agreement, the Company has not granted or
agreed to grant any registration rights, including piggyback rights, to any
person or entity. To the Company's knowledge, except as contemplated in the
Voting Agreement, no stockholders of the Company have entered into any
agreements among themselves with respect to the voting of capital shares of the
Company.
2.14 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
2.15 Financial Statements. The Company has made available to each
--------------------
Purchaser its audited financial statements (including balance sheet, income
statement and statement of cash flows) as of December 31, 1998 and for the
fiscal year ended December 31, 1998 and its unaudited financial statements
(including balance sheet, income statement and statement of cash flows) as of
September 30, 1999 and for the nine-month period ended September 30, 1999
(collectively, the "Financial Statements"). The Financial Statements have been
--------------------
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated, except that the unaudited
Financial Statements may not contain all footnotes required by generally
accepted accounting principles. The Financial Statements fairly present the
financial condition and operating results of the Company as of the dates, and
for the periods, indicated therein, subject to normal year-end audit
adjustments. Except as set forth in the Financial Statements, the Company has
no material liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to September 30, 1999 and
(ii) obligations under contracts and commitments incurred in the ordinary course
of business and not required under generally accepted accounting principles to
be reflected in the Financial Statements, which, in both cases, individually or
in the aggregate are not material to the financial condition or operating
results of the Company.
2.16 Changes. Since December 31, 1998, there has not been:
-------
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company;
(b) any waiver or compromise by the Company of a valuable right
or of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of the Company;
-7-
<PAGE>
(d) any material change to a material contract or agreement by
which the Company or any of its assets is bound or subject;
(e) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(f) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(g) any resignation or termination of employment of any officer
or key employee of the Company; and the Company, is not aware of any impending
resignation or termination of employment of any such officer or key employee;
(h) any mortgage, pledge, transfer or grant of a security
interest in, or lien, created by the Company, with respect to any of its
material properties or assets, except liens for taxes not yet due or payable;
(i) any loans or guarantees made by the Company to or for the
benefit of its employees, officers, stockholders or directors, or any members of
their immediate families, other than travel advances and other advances made in
the ordinary course of its business;
(j) any declaration, setting aside or payment or other
distribution in respect to any of the Company's capital stock, or any direct or
indirect redemption, purchase, or other acquisition of any of such stock by the
Company;
(k) to the Company's knowledge, any other event or condition of
any character that might materially and adversely affect the business,
properties, prospects or financial condition of the Company; or
(l) any arrangement or commitment by the Company to do any of the
things described in this Section 2.16.
2.17 Employee Benefit Plans. The Company does not have any
----------------------
Employee Benefit Plan as defined in the Employee Retirement Income Security Act
of 1974.
2.18 Tax Returns and Payments. The Company has filed all tax returns
------------------------
and reports as required by law. These returns and reports are true and correct
in all material respects. The Company has paid all taxes and other assessments
due. The Company has no notice of any proposed tax deficiency which may be
asserted which would materially and adversely affect the business, properties,
prospects or financial condition of the Company.
2.19 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed.
2.20 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral,
-8-
<PAGE>
express or implied, contract, commitment or arrangement with any labor union,
and no labor union has requested or, to the knowledge of the Company, has sought
to represent any of the employees, representatives or agents of the Company.
There is no strike or other labor dispute involving the Company pending, or to
the knowledge of the Company threatened, which could have a material adverse
effect on the assets, properties, financial condition, operating results, or
business of the Company, nor is the Company aware of any labor organization
activity involving its employees. The employment of each officer and employee of
the Company is terminable at the will of the Company. To its knowledge, the
Company has complied in all material respects with all applicable state and
federal equal employment opportunity laws and with other laws related to
employment.
2.21 Confidential Information and Invention Assignment Agreements.
------------------------------------------------------------
Each employee, consultant and officer of the Company has executed an agreement
with the Company regarding confidentiality, assignment of inventions and
proprietary information substantially in the form or forms made available to the
counsel for the Purchasers. The Company is not aware that any of its employees
or consultants is in violation thereof, and the Company will use its best
efforts to prevent any such violation.
2.22 Permits. The Company has all franchises, permits, licenses and
-------
any similar authority necessary for the conduct of its business, the lack of
which could materially and adversely affect the business, properties, prospects,
or financial condition of the Company and it believes it can obtain, without
undue burden or expense, any similar authority for the conduct of its business
as presently planned to be conducted. The Company is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority.
2.23 Corporate Documents. The Restated Certificate and Bylaws of the
-------------------
Company are in the form made available to counsel for the Purchasers. The copy
of the minute books of the Company made available to the Purchasers' counsel
contains minutes of all meetings of directors and stockholders and all actions
by written consent without a meeting by the directors and stockholders since the
date of incorporation and reflects all actions by the directors (and any
committee of directors) and stockholders with respect to all transactions
referred to in such minutes accurately in all material respects.
2.24 Liabilities. Except for those liabilities set forth on Schedule
-----------
2.24 to the Schedule of Exceptions and except as otherwise disclosed hereunder,
the Company has no debts, commitments, obligations and other liabilities of any
nature whatsoever individually in excess of $25,000 and in the aggregate in
excess of $50,000.
2.25 Year 2000. The Company's products are designed to be used prior
---------
to, during and after calendar year 2000 A.D., and all of the Company's products
which are material to the Company's business will record, store, process and
calculate any information dependent on or relating to such dates in the same
manner and with the same functionality, data integrity and performance as the
products record, store, process and calculate and present calendar dates on or
before December 31, 1999, or calculate any information dependent on or relating
to such dates (collectively, "Year 2000 Compliant"). To the best of the
-------------------
Company's knowledge, all of the
-9-
<PAGE>
Company's internal computer systems, including, without limitation, its
accounting systems, are Year 2000 Compliant.
2.26 Small Business Concern. The information delivered by the
----------------------
Company on Small Business Administration Forms 480, 6523 and 1031 in connection
herewith is accurate and complete. The Company acknowledges that Wasserstein
Adelson Ventures, L.P. ("WAV"), one of the Purchasers, is a Federal licensee
---
under the Small Business Investment Act of 1958, as amended (the "Small Business
--------------
Act").
- ---
3. Representations and Warranties of the Purchasers. Each Purchaser
------------------------------------------------
hereby, severally and not jointly and severally, represents and warrants to the
Company that:
3.1 Authorization. Such Purchaser has full power and authority to
-------------
enter into this Agreement. The Agreements to which such Purchaser is a party,
when executed and delivered by the Purchaser, will constitute valid and legally
binding obligations of the Purchaser, enforceable in accordance with their
terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and any other laws of general
application affecting enforcement of creditors' rights generally, and as limited
by laws relating to the availability of a specific performance, injunctive
relief, or other equitable remedies, or (b) to the extent the indemnification
provisions contained in the Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Purchaser in reliance upon the Purchaser's representation to the Company,
which by the Purchaser's execution of this Agreement, the Purchaser hereby
confirms, that the Securities to be acquired by the Purchaser will be acquired
for investment for the Purchaser's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that the
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Purchaser
further represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities. The Purchaser has not been formed for the specific purpose of
acquiring the Securities.
3.3 Disclosure of Information. The Purchaser has had an opportunity
-------------------------
to discuss the Company's business, management, financial affairs and the terms
and conditions of the offering of the Stock with the Company's management and
has had an opportunity to review the Company's facilities. The Purchaser
understands that such discussions, as well as the Business Plan and any other
written information delivered by the Company to the Purchaser, were intended to
describe the aspects of the Company's business which it believes to be material.
The foregoing, however, does not limit or modify the representations and
warranties of the Company, as modified by the Schedule of Exceptions attached as
Exhibit C in Section 2 of this Agreement or the right of the Purchasers to rely
- ---------
thereon.
3.4 Restricted Securities. The Purchaser understands that the
---------------------
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption
-10-
<PAGE>
from the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the Purchaser's representations as expressed herein. The Purchaser understands
that the Securities are "restricted securities" under applicable U.S. federal
and state securities laws and that, pursuant to these laws, the Purchaser must
hold the Securities indefinitely unless they are registered with the Securities
and Exchange Commission and qualified by state authorities, or an exemption from
such registration and qualification requirements is available. the Purchaser
acknowledges that the Company has no obligation to register or qualify the
Securities for resale except as set forth in the Investors' Rights Agreement.
The Purchaser further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding period
for the Securities, and on requirements relating to the Company which are
outside of the Purchaser's control, and which the Company is under no obligation
and may not be able to satisfy.
3.5 No Public Market. The Purchaser understands that no public
----------------
market now exists for any of the securities issued by the Company, and that the
Company has made no assurances that a public market will ever exist for the
Securities.
3.6 Legends. The Purchaser understands that the Securities and any
-------
securities issued in respect of or exchange for the Securities, may bear one or
all of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
3.7 Accredited Investor or Sophisticated Investor. The Purchaser
---------------------------------------------
either (i) is an accredited investor as defined in Rule 501(a) of Regulation D
promulgated under the Securities Act or (ii) has such knowledge and experience
in financial and business matters that such Purchaser is capable of evaluating
the merits and risk of investment in the Company.
3.8 Foreign Investors. If the Purchaser is not a United States
-----------------
person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986,
as amended), such Purchaser hereby represents that, to the best of its
knowledge, it has satisfied itself as to the full observance of the laws of its
jurisdiction in connection with any invitation to subscribe for the Stock or any
use of this Agreement, including (i) the legal requirements within its
jurisdiction for the purchase of the Stock, (ii) any foreign exchange
restrictions applicable to such purchase,
-11-
<PAGE>
(iii) any governmental or other consents that may need to be obtained, and (iv)
the income tax and other tax consequences, if any, that may be relevant to the
purchase, holding, redemption, sale, or transfer of the Stock. To the best of
its knowledge, such Purchaser's subscription and payment for the Stock will not
violate any applicable securities or other laws of the Purchaser's jurisdiction.
4. Conditions of the Purchasers' Obligations at Closing. The obligations
----------------------------------------------------
of each Purchaser to the Company under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
4.2 Performance. The Company shall have performed and complied with
-----------
all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 Compliance Certificate. The President or Chief Executive Officer
----------------------
of the Company shall deliver to the Purchasers at the Closing a certificate
certifying that the conditions specified in Sections 4.1 and 4.2 have been
fulfilled.
4.4 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
4.5 Opinion of Company Counsel. The Purchasers shall have received
--------------------------
from Venture Law Group, counsel for the Company, an opinion, dated as of the
Closing, in substantially the form of Exhibit E.
---------
4.6 Board of Directors. Immediately following the Closing, the Board
------------------
shall be comprised of Martin Tobias, Johan Liedgren, Charles Waite and Stuart J.
Ellman.
4.7 Investors' Rights Agreement. The Company, the Purchasers,
---------------------------
Martin Tobias, Alex Tobias and the requisite majority of the holders of the
Company's outstanding Series B and Series C Preferred Stock shall have executed
and delivered the Amended and Restated Investors' Rights Agreement in
substantially the form attached as Exhibit D.
---------
4.8 Restated Certificate. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing
Date, which shall continue to be in full force and effect as of the Closing
Date.
4.9 Voting Agreement. The Company, the Purchasers, Martin Tobias,
----------------
Alex Tobias and the requisite majority of the holders of the Company's
outstanding Series B and
-12-
<PAGE>
Series C Preferred Stock shall have executed and delivered the Amended and
Restated Voting Agreement in substantially the form attached as Exhibit F.
---------
4.10 Co-Sale Agreement. The Company, the Purchasers, Martin Tobias,
-----------------
Alex Tobias and the requisite majority of the holders of the Company's
outstanding Series B and Series C Preferred Stock shall have executed and
delivered the Amended and Restated Co-Sale Agreement in substantially the form
attached as Exhibit G.
---------
4.11 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Purchaser's counsel, which shall have received all such
counterpart original and certified or other copies of such documents as it may
reasonably request.
4.12 SBA Forms. The Company shall have completed, executed and
---------
delivered to WAV a Size Status Declaration on SBA Form 480, an Assurance of
Compliance on SBA Form 652 and the letter agreement between the Company and WAV
regarding the Small Business Act, and shall have completed and delivered to WAV
Parts A and B of a Portfolio Financing Report on SBA Form 1031.
4.13 Payment of Fees and Expenses. The Company shall have complied
----------------------------
with its obligations pursuant to Section 6.8.
5. Conditions of the Company's Obligations at Closing. The obligations
--------------------------------------------------
of the Company to each Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the Closing.
5.2 Performance. All covenants, agreements and conditions contained
-----------
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
6. Miscellaneous.
-------------
6.1 Survival of Warranties. Unless otherwise set forth in this
----------------------
Agreement, the warranties, representations and covenants of the Company and the
Purchasers contained in or
-13-
<PAGE>
made pursuant to this Agreement shall survive the execution and delivery of this
Agreement and the Closing until one (1) year following the Closing.
6.2 Transfer; Successors and Assigns. The terms and conditions of
--------------------------------
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
shares of Stock sold hereunder and any Common Stock issued upon conversion
thereof). Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement. Notwithstanding
the foregoing, any Purchaser may transfer its rights set forth in this Agreement
if the transferee is an affiliate, constituent partner or member of such
Purchaser or an entity controlling, controlled by or under common control with
such Purchaser.
6.3 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Washington, without giving effect to principles of conflicts of law.
6.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient upon delivery, when delivered
personally or by overnight courier or sent by telegram or fax, or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed to the party to be notified at such
party's address as set forth on the signature page or Exhibit A hereto, or as
---------
subsequently modified by written notice, and if to the Company, with a copy to
William W. Ericson, Venture Law Group, 4750 Carillon Point, Kirkland, Washington
98033, fax: (425) 739-8750.
6.7 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
-14-
<PAGE>
6.8 Fees and Expenses. The Company shall pay the reasonable fees and
-----------------
expenses of Wasserstein Adelson Ventures, L.P., including the reasonable fees
and expenses of counsel for Wasserstein Adelson Ventures, L.P., incurred with
respect to this Agreement, the documents referred to herein and the transactions
contemplated hereby and thereby, to the extent such fees and expenses are equal
or less than $40,000 and provided the Company is provided an itemized invoice
with respect to such fees and expenses.
6.9 Attorney's Fees. If any action at law or in equity (including
---------------
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
6.10 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least a majority of the Common Stock issued or issuable upon conversion of
the Stock sold hereunder that has not previously been sold to the public. Any
amendment or waiver effected in accordance with this Section 6.10 shall be
binding upon the Purchasers and each transferee of the Stock (or the Common
Stock issuable upon conversion thereof), each future holder of all such
securities, and the Company.
6.11 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
6.12 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any party under this Agreement, upon any
breach or default of any other party under this Agreement, shall impair any such
right, power or remedy of such non-breaching or non-defaulting party nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.
6.13 Entire Agreement. This Agreement, and the documents referred to
----------------
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
-15-
<PAGE>
6.14 Confidentiality. Each party hereto agrees that, except with the
---------------
prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, the performance of its obligations hereunder or the
ownership of Stock purchased hereunder, except that the parties hereto shall be
entitled to the limited right to disclose, where appropriate for commercially
reasonable purposes and where not detrimental to the Company, general facts
relating to the existence of the transactions contemplated hereby and the
parties involved. The provisions of this Section 6.14 shall be in addition to,
and not in substitution for, the provisions of any separate nondisclosure
agreement executed by the parties hereto with respect to the transactions
contemplated hereby. Confidential Information does not include information,
knowledge or data (i) which is required to be disclosed by applicable law or
proper legal, governmental or other competent authority (provided that the
Company shall be notified sufficiently in advance of such requirement so that it
may seek a protective order (or equivalent) with respect to such disclosure,
which each party shall fully comply with), (ii) which was known to the receiving
party, without restriction, at the time of disclosure, as demonstrated by files
in existence at the time of disclosure, (iii) which was in the public domain at
the time it was disclosed or has entered the public domain through no fault of
the receiving party or (iv) becomes known to the receiving party, without
restriction, from a source other than the disclosing party without breach of
this Agreement by the receiving party and otherwise not in violation of the
disclosing party's rights. Notwithstanding the foregoing, if the Company and a
particular Purchaser have entered into a confidentiality/nondisclosure
agreement, the terms of such agreement shall apply in lieu of the foregoing
Section 6.14.
6.15 Exculpation Among Purchasers. Each Purchaser acknowledges that
----------------------------
it is not relying upon any Person, other than the Company and its officers and
directors, in making its investment or decision to invest in the Company. Each
Purchaser agrees that no Purchaser nor the respective controlling persons,
officers, directors, partners, agents, or employees of any Purchaser shall be
liable to any other Purchaser for any action heretofore or hereafter taken or
omitted to be taken by any of them in connection with the purchase of the Stock.
[Signature page follows]
-16-
<PAGE>
The parties have executed this Series D Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
ENCODING.COM, INC.
/s/ Martin Tobias
__________________________________________
Martin Tobias, Chief Executive Officer and
Minister of Order and Reason
Address: Times Square Building
414 Olive Way
Suite 300
Seattle, WA 98101
Fax: (206) 832-4001
PURCHASER:
_______________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
(if applicable)
[SIGNATURE PAGE TO ENCODING.COM, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT]
-17-
<PAGE>
EXHIBIT 10.15
ENCODING.COM, INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
DECEMBER 14, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Registration Rights......................................... 2
1.1 Definitions........................................... 2
1.2 Request for Registration.............................. 3
1.3 Company Registration.................................. 4
1.4 Form S-3 Registration................................. 5
1.5 Obligations of the Company............................ 6
1.6 Furnish Information................................... 7
1.7 Expenses of Registration.............................. 7
1.8 Underwriting Requirements............................. 8
1.9 Delay of Registration................................. 9
1.10 Indemnification....................................... 9
1.11 Reports Under Securities Exchange Act of 1934......... 11
1.12 Assignment of Registration Rights..................... 12
1.13 Limitations on Subsequent Registration Rights......... 12
1.14 Market Stand-Off Agreement............................ 12
1.15 Termination of Registration Rights.................... 13
2. Covenants of the Company.................................... 13
2.1 Delivery of Financial Statements...................... 13
2.2 Inspection............................................ 14
2.3 Right of First Offer.................................. 14
2.4 Regulatory Matters.................................... 16
2.5 Termination of Covenants.............................. 17
3. Miscellaneous............................................... 17
3.1 Successors and Assigns................................ 17
3.2 Amendments and Waivers................................ 17
3.3 Notices............................................... 18
3.4 Severability.......................................... 18
3.5 Governing Law......................................... 18
3.6 Counterparts.......................................... 18
3.7 Titles and Subtitles.................................. 18
3.8 Aggregation of Stock.................................. 18
3.9 References to Securities Act and Exchange Act......... 18
3.10 Amendment and Restatement of Alive Rights Agreement... 19
3.11 Additional Investors.................................. 19
</TABLE>
-i-
<PAGE>
ENCODING.COM, INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
------------------------------------------------
This Amended and Restated Investors' Rights Agreement (the "Agreement") is
---------
made as of the 14th day of December, 1999, by and among Encoding.com, Inc., a
Delaware corporation (the "Company"), the purchasers of the Company's Series D
-------
Preferred Stock listed on Exhibit A hereto (each of which is herein referred to
---------
as an "Investor"), the holders of the Company's Series B Preferred Stock listed
--------
on Exhibit B hereto (the "Series B Holders"), the holders of the Company's
--------- ----------------
Series C Preferred Stock listed on Exhibit C hereto (the "Series C Holders"),
--------- ----------------
and Martin Tobias and Alex Tobias (each of whom is herein referred to as a
"Founder"), and the Alive Holders (as defined below) set forth on Exhibit D.
------- ---------
RECITALS
--------
A. The Company, the Series B Holders, the Series C Holders and the
Founders entered an Amended and Restated Investors Rights Agreement on August 6,
1999 (the "Restated Rights Agreement") to provide the rights set forth therein
-------------------------
to the Series B Holders and the Series C Holders.
B. The Company and the Investors are entering into a Series D Preferred
Stock Purchase Agreement (the "Purchase Agreement") of even date herewith
------------------
pursuant to which the Company desires to sell to the Investors and the Investors
desire to purchase from the Company shares of the Company's Series D Preferred
Stock. A condition to the Investors' obligations under the Purchase Agreement
is that the Company, the Founders, the Series B Holders, the Series C Holders
and the Investors enter into this Agreement in order to provide the Investors
with (i) certain rights to register shares of the Company's Common Stock
issuable upon conversion of the Series D Preferred Stock held by the Investors,
(ii) certain rights to receive or inspect information pertaining to the Company,
and (iii) a right of first offer with respect to certain issuances by the
Company of its securities.
C. The Company, the Series B Holders, the Series C Holders and the
Founders each desire to induce the Investors to purchase shares of Series D
Preferred Stock pursuant to the Purchase Agreement by agreeing to the terms and
conditions set forth herein and desire to terminate the Restated Rights
Agreement in its entirety.
D. On November 19, 1999, the Company entered into an Agreement and Plan
of Reorganization with Alive.com, Inc. (the "Merger Agreement") pursuant to
----------------
which the Company will acquire all of the outstanding capital stock of
Alive.com, Inc. in exchange for shares of the Company's Common Stock (the
"Merger"). Pursuant to the Merger Agreement, the Company agreed to provide those
------
certain stockholders of Alive.com, Inc. party to the Alive.com Amended and
Restated Investors Rights Agreement (the "Alive Rights Agreement") dated March
----------------------
17, 1999 (the "Alive Holders") rights under this Agreement as set forth herein
-------------
in place of their rights under the Alive Rights Agreement. The Merger is
expected to close on or about December 14,
-1-
<PAGE>
1999 and in connection therewith the Alive Holders shall be entitled to execute
this Agreement and have all rights and obligations set forth herein and shall by
execution of this Agreement amend and restate the Alive Rights Agreement in its
entirety to be this Agreement pursuant to Section 7.4 of the Alive Rights
Agreement.
AGREEMENT
---------
The parties hereby agree as follows:
1. Registration Rights. The Company and the Investors covenant and agree
-------------------
as follows:
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The terms "register," "registered," and "registration" refer
-------- ---------- ------------
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering of effectiveness of such
--------------
registration statement or document;
(b) The term "Registrable Securities" means (i) the shares of
----------------------
Common Stock issuable or issued upon conversion of the Series B, Series B-1,
Series C, Series C-1, Series D and Series D-1 Preferred Stock, (ii) the shares
of Common Stock issued to the Founders and the shares of Common Stock issuable
or issued upon conversion of the Series A Preferred Stock issued to the Founders
(collectively, the "Founders' Stock") and (iii) the shares of Common Stock held
---------------
by the Alive Holders set forth on Exhibit D (the "Merger Shares"); provided,
--------- ------------- --------
however, that for the purposes of Sections 1.2, 1.4 and 1.13 the Founders' Stock
- -------
shall not be deemed Registrable Securities and the Founders shall not be deemed
Holders, and (iii) any other shares of Common Stock of the Company issued as (or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, the shares listed in (i), and (ii); provided,
--------
however, that the foregoing definition shall exclude in all cases any
- -------
Registrable Securities sold by a person in a transaction in which his or her
rights under this Agreement are not assigned. Notwithstanding the foregoing,
Common Stock or other securities shall only be treated as Registrable Securities
if and so long as they have not been (A) sold to or through a broker or dealer
or underwriter in a public distribution or a public securities transaction, or
(B) sold in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof so that all
transfer restrictions, and restrictive legends with respect thereto, if any, are
removed upon the consummation of such sale;
(c) The number of shares of "Registrable Securities then
---------------------------
outstanding" shall be determined by the number of shares of Common Stock
- -----------
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
-2-
<PAGE>
(d) The term "Holder" means any person owning or having the right to
------
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.12 of this Agreement;
(e) The term "Form S-3" means such form under the Securities Act as
--------
in effect on the date hereof or any successor form under the Securities Act;
(f) The term "SEC" means the Securities and Exchange Commission; and
---
(g) The term "Qualified IPO" means a firm commitment underwritten
-------------
public offering by the Company of shares of its Common Stock pursuant to a
registration statement under the Securities Act, the public offering price of
which is not less than $10.00 per share (appropriately adjusted for any stock
split, dividend, combination or other recapitalization) and which results in
aggregate cash proceeds to the Company of at least $30,000,000 (net of
underwriting discounts and commissions).
1.2 Request for Registration.
------------------------
(a) If the Company shall receive at any time after the earlier
of (i) June 3, 2005, or (ii) twelve (12) months after the effective date of a
Qualified IPO (other than a registration statement relating either to the sale
of securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or an SEC Rule 145 transaction), a written request from
the Holders of a majority of the Registrable Securities then outstanding that
the Company file a registration statement under the Securities Act covering a
registration whereby the anticipated aggregate offering price, net of
underwriting discounts and commissions, would exceed $10,000,000, then the
Company shall, within ten (10) days of the receipt thereof, give written notice
of such request to all Holders and shall, subject to the limitations of
subsection 1.2(b), use its best efforts to effect as soon as practicable, and in
any event within 60 days of the receipt of such request, the registration under
the Securities Act of all Registrable Securities which the Holders request to be
registered within twenty (20) days of the mailing of such notice by the Company
in accordance with Section 3.3.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
- --------------------
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to this Section 1.2 and the Company
shall include such information in the written notice referred to in subsection
1.2(a). The underwriter will be selected by a majority in interest of the
Initiating Holders and shall be reasonably acceptable to the Company. In such
event, the right of any Holder to include his Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.5(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision
-3-
<PAGE>
of this Section 1.2, if the underwriter advises the Initiating Holders in
writing that marketing factors require a limitation of the number of shares to
be underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
-------- -------
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
(c) Notwithstanding the foregoing, if the Company shall furnish
to Holders requesting a registration statement pursuant to this Section 1.2, a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, in light of current
developments concerning the Company, it would be seriously detrimental to the
Company and its stockholders for such registration statement to be filed and it
is therefore essential to defer the filing of such registration statement, the
Company shall have the right to defer such filing for a period of not more than
90 days after receipt of the request of the Initiating Holders; provided,
--------
however, that the Company may not utilize this right more than once in any
- -------
twelve-month period.
(d) In addition, the Company shall not be obligated to effect,
or to take any action to effect, any registration pursuant to this Section 1.2:
(i) After the Company has effected two (2) registrations
pursuant to this Section 1.2 and such registrations have been declared or
ordered effective;
(ii) During the period starting with the date sixty (60)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty (180) days after the effective date of, a
registration subject to Section 1.3 hereof; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or
(iii) If the Initiating Holders propose to dispose of shares
of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.4 below.
1.3 Company Registration. If (but without any obligation to do so)
--------------------
the Company proposes to register (including for this purpose a registration
effected by the Company for stockholders other than the Holders) any of its
stock under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan or a transaction
covered by Rule 145 under the Securities Act, a registration in which the only
stock being registered is Common Stock issuable upon conversion of debt
securities which are also being registered, or any registration on any form
which does not include substantially the same information as would be required
to be included in a registration statement covering the sale of the Registrable
Securities), the Company shall, at such time, promptly give each Holder written
notice of such
-4-
<PAGE>
registration. Upon the written request of each Holder given within twenty (20)
days after mailing of such notice by the Company in accordance with Section 3.3,
the Company shall, subject to the provisions of Section 1.8, cause to be
registered under the Securities Act all of the Registrable Securities that each
such Holder has requested to be registered.
1.4 Form S-3 Registration. In case the Company shall receive from
---------------------
any Holder or Holders of not less than twenty-five percent (25%) of the
Registrable Securities then outstanding a written request or requests that the
Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within 15 days after receipt of such written notice from the Company; provided,
--------
however, that the Company shall not be obligated to effect any such
- -------
registration, qualification or compliance, pursuant to this Section 1.4: (i) if
Form S-3 is not available for such offering by the Holders; (ii) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $500,000; (iii) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, in light of current developments concerning the Company, it would
be seriously detrimental to the Company and its stockholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than 90 days after receipt of the request of the Holder or
Holders under this Section 1.4; provided, however, that the Company shall not
-------- -------
utilize this right more than once in any twelve month period; (iv) if the
Company has, within the twelve (12) month period preceding the date of such
request, already effected two registrations on Form S-3 for the Holders pursuant
to this Section 1.4; (v) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or compliance;
or (vi) during the period ending one hundred eighty (180) days after the
effective date of a registration statement subject to Section 1.3.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 1.4 shall not be counted as demands for registration or registrations
effected pursuant to Sections 1.2 or 1.3, respectively. Except as otherwise
provided herein, there
-5-
<PAGE>
shall be no limit on the number of times the Holders may request registration of
Registrable Securities under this Section 1.4.
1.5 Obligations of the Company. Whenever required under this Section
--------------------------
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to one hundred twenty (120) days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for up to one hundred twenty
(120) days.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
- --------
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act 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 the circumstances then
existing, such obligation to continue for one hundred twenty (120) days.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
-6-
<PAGE>
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Use its best efforts to furnish, at the request of any
Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a letter dated such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
1.6 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities. The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement
if, as a result of the application of the preceding sentence, the number of
shares or the anticipated aggregate offering price of the Registrable Securities
to be included in the registration does not equal or exceed the number of shares
or the anticipated aggregate offering price required to originally trigger the
Company's obligation to initiate such registration as specified in subsection
1.2(a) or subsection 1.4(b)(ii), whichever is applicable.
1.7 Expenses of Registration.
------------------------
(a) Demand Registration. All expenses other than underwriting
-------------------
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Section 1.2, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company, and the reasonable fees and
disbursements, not to exceed $10,000, of one counsel for the selling Holders
selected by them with the approval of the Company, which approval shall not be
unreasonably withheld, shall be borne by the Company; provided, however, that
-------- -------
the Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to Section 1.2 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered (in which case all participating Holders
shall bear such expenses), unless the Holders of a majority of the Registrable
Securities agree to forfeit their right to one demand registration pursuant to
Section 1.2; provided further, however, that if at the
----------------
-7-
<PAGE>
time of such withdrawal, the Holders have learned of a material adverse change
in the condition, business, or prospects of the Company from that known to the
Holders at the time of their request and have withdrawn the request with
reasonable promptness following disclosure by the Company of such material
adverse change, then the Holders shall not be required to pay any of such
expenses and shall retain their rights pursuant to Section 1.2.
(b) Company Registration. All expenses other than underwriting
--------------------
discounts and commissions incurred in connection with registrations, filings or
qualifications of Registrable Securities pursuant to Section 1.3 for each Holder
(which right may be assigned as provided in Section 1.12), including (without
limitation) all registration, filing, and qualification fees, printers' and
accounting fees, fees and disbursements of counsel for the Company and the
reasonable fees and disbursements, not to exceed $10,000, of one counsel for the
selling Holder or Holders selected by them with the approval of the Company,
which approval shall not be unreasonably withheld, shall be borne by the
Company.
(c) Registration on Form S-3. All expenses incurred in
------------------------
connection with a registration requested pursuant to Section 1.4, including
(without limitation) all registration, filing, qualification, printers' and
accounting fees and the reasonable fees and disbursements, not to exceed
$10,000, of one counsel for the selling Holder or Holders selected by them with
the approval of the Company, which approval shall not be unreasonably withheld,
and counsel for the Company, and any underwriters' discounts or commissions
associated with Registrable Securities, shall be borne by the Company.
1.8 Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholders to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling stockholders according to
the total amount of securities entitled to be included therein owned by each
selling stockholder or in such other proportions as shall mutually be agreed to
by such selling stockholders) but in no event shall (i) any shares being sold by
a stockholder exercising a demand registration right similar to that granted in
Section 1.2 be excluded from such offering except as provided in Section 1.2,
(ii) the amount of securities of the selling Holders included in the offering be
reduced below thirty percent (30%) of the total amount of securities included in
such offering, unless such offering is the initial public offering of the
Company's securities, in which case, except as provided in clause (i), the
selling stockholders may be excluded if the underwriters make the determination
described above and no other stockholder's securities are included or (iii) any
securities held by a
-8-
<PAGE>
Founder be included if any securities held by any selling Holder are excluded.
For purposes of the preceding parenthetical concerning apportionment, for any
selling stockholder which is a holder of Registrable Securities and which is a
partnership or corporation, the partners, retired partners and stockholders of
such holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling stockholder," and any pro-rata reduction with
-------------------
respect to such "selling stockholder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "selling stockholder," as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), against any losses, claims,
------------
damages, or liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
---------
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) 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, or (iii) any violation
or alleged violation by the Company of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law; and the Company will pay to
each such Holder, underwriter or controlling person, as incurred, any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
-------- -------
that the indemnity agreement contained in this subsection 1.10(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable to any Holder, underwriter or controlling person for any such loss,
claim, damage, liability, or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration, or approved for inclusion in such registration statement, by any
such Holder, underwriter or controlling person.
-9-
<PAGE>
(b) To the extent permitted by law, each selling Holder will indemnify
severally and not jointly and hold harmless the Company, each of its directors,
each of its officers who has signed the registration statement, each person, if
any, who controls the Company within the meaning of the Securities Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Securities Act, the Exchange Act
or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 1.10(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
-------- -------
agreement contained in this subsection 1.10(b) shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided, that in no event shall any indemnity
--------
under this subsection 1.10(b) exceed the net proceeds from the offering received
by such Holder, except in the case of willful fraud by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
1.10 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.10, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
-------- -------
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand
-10-
<PAGE>
and of the indemnified party on the other in connection with the statements or
omissions that resulted in such loss, liability, claim, damage or expense as
well as any other relevant equitable considerations; provided, that in no event
--------
shall any contribution by a Holder under this Subsection 1.10(d) exceed the net
proceeds from the offering received by such Holder, except in the case of
willful fraud by such Holder. The relative fault of the indemnifying party and
of the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
---------------------------------------------
making available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public so long as the
Company remains subject to the periodic reporting requirements under Sections 13
or 15(d) of the Exchange Act;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the Exchange Act, as is necessary to enable
the Holders to utilize Form S-3 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the first registration statement filed by the Company for the offering
of its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), or that it
-11-
<PAGE>
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to (i) a transferee
or assignee of at least 100,000 shares of such securities or (ii) any affiliate,
constituent partner or member of such Holder or an entity controlling,
controlled by or under common control with such Holder, in each case provided
--------
the Company is, within a reasonable time after such transfer, furnished with
written notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being assigned;
and provided, further, that such assignment shall be effective only if
-------- -------
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Securities Act. For the
purposes of determining the number of shares of Registrable Securities held by a
transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants and siblings of such partners or
spouses who acquire Registrable Securities by gift, will or intestate
succession) shall be aggregated together and with the partnership.
1.13 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of a majority of all of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company which would allow such holder or prospective holder (a) to
include such securities in any registration filed under Section 1.2 hereof,
unless under the terms of such agreement, such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion of his securities will not reduce the amount of the Registrable
Securities of the Holders which is included or (b) to make a demand registration
which could result in such registration statement being declared effective prior
to the earlier of either of the dates set forth in subsection 1.2(a) or within
one hundred eighty (180) days of the effective date of any registration effected
pursuant to Section 1.2.
1.14 "Market Stand-Off" Agreement. Each Holder hereby agrees that,
----------------------------
during the period of duration (up to, but not exceeding, 180 days; provided,
however with respect to the first registered offering following the initial
public offering, such period shall be no more than 90 days) specified by the
Company and an underwriter of Common Stock or other securities of the Company,
following the effective date of a registration statement of the Company filed
under the Securities Act, it shall not, to the extent requested by the Company
and such underwriter, directly or indirectly sell, offer to sell, contract to
sell (including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other than to donees who agree to
be similarly bound) any securities of the Company held by it at any time during
such period except Common Stock included in such registration; provided,
--------
however, that:
- -------
-12-
<PAGE>
(a) such agreement shall be applicable only to (i) the initial
public offering and (ii) the first such registered offering following the
initial public offering, provided the such registered offering is completed
before the first year anniversary of the date of the final prospectus
distributed pursuant to the first such registration statement of the Company
which covers Common Stock (or other securities) to be sold on its behalf to the
public in an underwritten offering; and
(b) all officers and directors of the Company, all one-percent
securityholders, and all other persons with registration rights (whether or not
pursuant to this Agreement) enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period, and each Holder agrees
that, if so requested, such Holder will execute an agreement in the form
provided by the underwriter containing terms which are essentially consistent
with the provisions of this Section 1.14.
Notwithstanding the foregoing, the obligations described in this
Section 1.14 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to an SEC Rule 145 transaction
on Form S-4 or similar forms which may be promulgated in the future.
1.15 Termination of Registration Rights. No Holder shall be entitled
----------------------------------
to exercise any right provided for in this Section 1 after the earlier of (i)
four (4) years following the consummation of a Qualified IPO or (ii) such time
as Rule 144 or another similar exemption under the Securities Act is available
for the sale of all of such Holder's shares during a three (3)-month period
without registration. Following a Qualified IPO, the Company will pay for
reasonable and customary expenses of the Company's counsel incurred in
processing the sale and transfer of a Holder's Registrable Securities in
transactions under Rule 144 of the Securities Act.
2. Covenants of the Company.
------------------------
2.1 Delivery of Financial Statements. The Company shall deliver to
--------------------------------
each Holder of at least 375,000 shares of Registrable Securities (other than a
Holder reasonably deemed by the Company to be a competitor of the Company):
(a) as soon as practicable, but in any event within ninety (90)
days after the end of each fiscal year of the Company, an income statement for
such fiscal year, a balance sheet of the Company and statement of stockholder's
equity as of the end of such year, and a statement of cash flows for such year,
such year-end financial reports to be in reasonable detail, prepared in
accordance with generally accepted accounting principles ("GAAP"), and audited
----
and certified by an independent public accounting firm of nationally recognized
standing selected by the Company;
-13-
<PAGE>
(b) as soon as practicable, but in any event within thirty (30)
days after the end of each of the first three (3) quarters of each fiscal year
of the Company, an unaudited profit or loss statement, a statement of cash flows
for such fiscal quarter and an unaudited balance sheet as of the end of such
fiscal quarter;
(c) within thirty (30) days of the end of each month, an
unaudited income statement and a statement of cash flows and balance sheet for
and as of the end of such month, in reasonable detail;
(d) as soon as practicable, but in any event thirty (30) days
prior to the end of each fiscal year, a budget and annual business plan for the
next fiscal year, prepared on a monthly basis, and, as soon as prepared, any
other budgets or revised budgets prepared by the Company; and
(e) with respect to the financial statements called for in
subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief
Financial Officer or President of the Company and certifying that such
financials were prepared in accordance with GAAP consistently applied with prior
practice for earlier periods (with the exception of footnotes that may be
required by GAAP) and fairly present the financial condition of the Company and
its results of operation for the period specified, subject to year-end audit
adjustment, provided that the foregoing shall not restrict the right of the
Company to change its accounting principles consistent with GAAP, if the Board
of Directors determines that it is in the best interest of the Company to do so.
2.2 Inspection. The Company shall permit each Holder of at least
----------
375,000 shares of Registrable Securities (except for a Holder reasonably deemed
by the Board of Directors of the Company to be a competitor of the Company,
provided that an investment fund owning securities of another company does not
in and of itself make such investment fund a competitor), at such Holder's
expense, to visit and inspect the Company's properties, to examine its books of
account and records and to discuss the Company's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by such
Holder; provided, however, that the Company shall not be obligated pursuant to
--------- -------
this Section 2.2 to provide access to any information which it reasonably
considers to be a trade secret or similar confidential information, unless such
Holder executes a confidentiality agreement in such form as approved by the
Company.
2.3 Right of First Offer. Subject to the terms and conditions
--------------------
specified in this Section 2.3, the Company hereby grants to each Major Investor
(as hereinafter defined) a right of first offer with respect to future sales by
the Company of its Shares (as hereinafter defined). For purposes of this
Section 2.3, a "Major Investor" shall mean any person who holds at least 500,000
--------------
(i) shares of Series B, Series B-1, Series C, Series C-1, Series D, Series D-1
Preferred Stock (or the Common Stock issued upon conversion thereof) issued
pursuant to the Purchase Agreement or (ii) Merger Shares. For purposes of this
Section 2.3, Major Investor includes any general partners and affiliates of a
Major Investor. A Major Investor who chooses to exercise the
-14-
<PAGE>
right of first offer may designate as purchasers under such right itself or its
partners or affiliates in such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class of its
capital stock ("Shares"), the Company shall first make an offering of such
------
Shares to each Major Investor in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail
("Notice") to the Major Investors stating (i) its bona fide intention to offer
------
such Shares, (ii) the number of such Shares to be offered, and (iii) the price
and terms, if any, upon which it proposes to offer such Shares.
(b) Within 15 calendar days after delivery of the Notice, the
Major Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Major Investor bears to the total number of shares
of Common Stock then outstanding (assuming full conversion and exercise of all
convertible or exercisable securities). The Company shall promptly, in writing,
inform each Major Investor that purchases all the shares available to it (each,
a "Fully-Exercising Investor") of any other Major Investor's failure to do
-------------------------
likewise. During the ten (10)-day period commencing after receipt of such
information, each Fully-Exercising Investor shall be entitled to obtain that
portion of the Shares for which Major Investors were entitled to subscribe but
which were not subscribed for by the Major Investors that is equal to the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Fully-Exercising Investor bears to the total
number of shares of Common Stock then outstanding (assuming full conversion and
exercise of all convertible or exercisable securities).
(c) The Company may, during the 45-day period following the
expiration of the period provided in subsection 2.3(b) hereof, offer the
remaining unsubscribed portion of the Shares to any person or persons at a price
not less than, and upon terms no more favorable to the offeree than those
specified in the Notice. If the Company does not enter into an agreement for the
sale of the Shares within such period, or if such agreement is not consummated
within 60 days of the execution thereof, the right provided hereunder shall be
deemed to be revived and such Shares shall not be offered unless first reoffered
to the Major Investors in accordance herewith.
(d) The right of first offer in this paragraph 2.3 shall not be
applicable (i) to the issuance or sale (including shares and options issued
before the date of this Agreement) of Common Stock issuable or issued to
employees, consultants or directors of the Company directly or pursuant to a
stock option plan or restricted stock plan approved by the Board of Directors of
the Company for the primary purpose of soliciting or retaining their services,
(ii) to or after consummation of a public offering prior to or in connection
with which all outstanding
-15-
<PAGE>
shares of Series A, Series B, Series B-1, Series C, Series C-1, Series D or
Series D-1 Preferred Stock will be converted into Common Stock, (iii) to the
issuance of securities upon exercise of options, notes, warrants or other
rights, (iv) to the issuance of securities in connection with a bona fide
business acquisitions, mergers or similar transactions, the terms of which are
approved by the Board of Directors of the Company, (v) to the issuance of
securities to a strategic partner in connection with an investment or to
financial institutions, lenders or lessors in connection with commercial credit
arrangements, loans, equipment financings or similar transactions, (vi) to the
issuance or sale of the Series D Preferred Stock, (vii) to the issuance of
securities that, with unanimous approval of the Board of Directors of the
Company, are not offered to any existing stockholder of the Company, (viii) to
the issuance of securities to an academic or research institution in connection
with the license of technology or research and development services or shares
issued to a strategic partner in connection with a license agreement, joint
marketing agreement, technology development agreement or similar strategic
relationship, or (ix) to stock splits, stock dividends or like transactions.
(e) Notwithstanding the foregoing, the right of first offer in
this Section 2.3 shall terminate (solely with respect to any single issuance of
Shares), with respect to any Major Investor who fails to purchase all of such
Major Investor's pro rata amount of Shares allocated to such Major Investor
pursuant to this Section 2.3.
2.4 Regulatory Matters
-------------------
(a) Cooperation of Other Investors. Each Holder agrees to
------------------------------
cooperate with the Company in all reasonable respects in complying with the
terms and provisions of the letter agreement between the Company and Wasserstein
Adelson Ventures, L.P. ("WAV"), a copy of which is attached hereto as Exhibit E,
---------
regarding small business matters (the "Small Business Sideletter"), including
-------------------------
without limitation, voting to approve amending the Company's Certificate of
Incorporation, the Company's bylaws or this Agreement in a manner reasonably
acceptable to the Holders and WAV or any Regulated Holder (as defined in the
Small Business Sideletter) entitled to make such request pursuant to the Small
Business Sideletter in order to remedy a Regulatory Problem (as defined in the
Small Business Sideletter). Anything contained in this Section 2.4 to the
contrary notwithstanding, neither the Company nor any Holder shall be required
under this Section 2.4 to take any action that would adversely affect in any
material respect such Holder's rights under this Agreement or as an investor of
the Company.
(b) Covenant Not to Amend. The Company and each Holder agree
---------------------
not to amend or waive any provision of the Company's Certificate of
Incorporation, the Company's bylaws or this Agreement if such amendment or
waiver would cause any Regulated Holder to have a Regulatory Problem (as defined
in the Small Business Sideletter). WAV agrees to notify the Company and each
Holder as to whether or not it would have a Regulatory Problem promptly after it
has notice of such amendment or waiver, and, in the event WAV fails to notify
the Company and each Holder within a reasonable amount of time thereafter, then,
the obligations contained in this Section 2.4(b) shall terminate with respect to
such amendment or waiver.
-16-
<PAGE>
2.5 Termination of Covenants. The covenants set forth in Sections
------------------------
2.1 through 2.4 shall terminate as to each Holder and be of no further force or
effect upon the earlier of (i) immediately prior to the consummation of a
Qualified IPO, (ii) when the Company first becomes subject to the periodic
reporting requirements of Sections 13 or 15(d) of the Exchange Act, or (iii)
when the Company shall (a) merge into or consolidate with any other corporation
or business entity (other than a wholly-owned subsidiary corporation) or (b)
effect any other transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Company is disposed of,
provided that this subsection (iii) shall not apply to a merger effected
exclusively for the purpose of changing the domicile of the Company.
3. Miscellaneous.
-------------
3.1 Successors and Assigns. Except as otherwise provided in this
----------------------
Agreement, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective permitted successors and assigns of the
parties, their affiliates, constituent partners or members of such entities or
an entity controlling, controlled by or under common control with such entities
(including transferees of any of the Merger Shares, the Founders Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or any
Common Stock issued upon conversion thereof, as applicable). Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. Upon the issuance of Series B-
1, Series C-1 or Series D-1 Preferred Stock, the holders thereof shall be a
party to this Agreement and shall be subject to all of the benefits and
obligations hereof applicable to the holders of Series B, Series C or Series D
Preferred Stock, as the case may be.
3.2 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended, waived, discharged or terminated only with the written consent of the
Company and the holders of a majority of the Registrable Securities then
outstanding, not including the Founders' Stock; provided that (i) if such
amendment, waiver, discharge or termination has the effect of affecting the
Founders' Stock (a) in a manner different than securities issued to the Holders
and (b) in a manner adverse to the interests of the holders of the Founders'
Stock, then such amendment, waiver, discharge or termination shall require the
consent of the holder or holders of a majority of the Founders' Stock, (ii) if
such amendment, waiver, discharge or termination has the effect of affecting the
Series B Preferred Stock (a) in a manner different than securities issued to the
holders of the Series C and Series D Stock and (b) in a manner adverse to the
interests of the holders of the Series B Preferred stock, then such amendment,
waiver, discharge or termination shall require the consent of the holder or
holders of a majority of the Series B Preferred Stock, (iii) if such amendment,
waiver, discharge or termination has the effect of affecting the Series C
Preferred Stock (a) in a manner different than securities issued to the holders
of the Series B and Series D Preferred Stock and (b) in a manner adverse to the
interests of the holders of the Series C Preferred stock, then such amendment,
waiver, discharge or termination shall require the consent of the holder or
holders of a majority of the Series C Preferred Stock, (iv) if such amendment,
waiver, discharge or termination has the effect of affecting the Series D
Preferred Stock (a) in a manner different than securities issued to the
-17-
<PAGE>
holders of the Series B and Series C Preferred Stock and (b) in a manner adverse
to the interests of the holders of the Series D Preferred Stock, then such
amendment, waiver, discharge or termination shall require the consent of the
holder or holders of a majority of the Series D Preferred Stock and (v) if such
amendment, waiver, discharge or termination has the effect of affecting the
Merger Shares (a) in a manner different than securities issued to the holders of
the Series B, Series C and Series D Preferred Stock and (b) in a manner adverse
to the interests of the holders of the Merger Shares, then such amendment,
waiver, discharge or termination shall require the consent of the holder or
holders of a majority of the Merger Shares. Any amendment, waiver, discharge or
termination effected in accordance with this paragraph shall be binding upon
each holder of any Registrable Securities then outstanding, each future holder
of all such Registrable Securities, and the Company.
3.3 Notices. Unless otherwise provided, any notice required or
-------
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier or sent by
telegram or fax, or forty-eight (48) hours after being deposited in the U.S.
mail, as certified or registered mail, with postage prepaid, and addressed to
the party to be notified at such party's address or fax number as set forth on
the signature page on Exhibit A hereto or as subsequently modified by written
---------
notice.
3.4 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
3.5 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of Washington, without giving effect to principles of
conflicts of laws.
3.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.7 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.8 Aggregation of Stock. All shares of the Preferred Stock held or
--------------------
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
3.9 References to Securities Act and Exchange Act. All references
---------------------------------------------
herein to forms, sections or provisions of the Securities Act and the Exchange
Act shall be deemed to include references to any successor forms, sections or
provisions which may be adopted after the date hereof.
-18-
<PAGE>
3.10 Amendment and Restatement of Alive Rights Agreement. By
---------------------------------------------------
execution of this Agreement by the Company (as successor to Alive.com, Inc.) and
by the Holders of a majority of the Registrable Securities under the Alive
Rights Agreement, the Alive Rights Agreement is hereby amended and restated in
its entirety as set forth herein with the result that the Alive Holders shall
receive the rights and obligations set forth herein in lieu of all rights and
obligations set forth therein.
3.11 Additional Investors. In the event the Company sells additional
--------------------
shares of Series D Preferred Stock after the date hereof pursuant to the and in
accordance with the Purchase Agreement or in the event an Alive Holder executes
a signature page hereto, each party to this Agreement hereby consents to the
Company, in its sole discretion and without any requirement of providing notice
to or obtaining any additional consent of any other existing Holders, adding the
additional investors and the additional shares of Series D Preferred Stock to
this Agreement and the Alive Holder and the shares of Encoding.com Common Stock
held by such Alive Holder, and, with respect to such additional shares, the
additional investor shall have all the rights and obligations of an Investor and
of a Holder of Registrable Securities hereunder.
[Signature page follows.]
-19-
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
ENCODING.COM, INC.
/s/ David Bullis
_________________________________
David Bullis, President
Address: 414 Olive Way, Suite 300
Seattle, WA 98101
Fax: (206) 832-4001
FOUNDERS:
/s/ Martin Tobias
_________________________________
Martin Tobias
Address: 3406 E. Union Avenue
Seattle, WA 98122
Fax: (206) 329-3276
/s/ Alex Tobias
_________________________________
Alex Tobias
Address: 3406 E. Union Avenue
Seattle, WA 98122
Fax: (206) 329-3276
[SIGNATURE PAGE TO ENCODING.COM, INC.
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
SERIES B HOLDERS, SERIES C HOLDERS, SERIES D
PURCHASERS AND ALIVE HOLDERS:
____________________________________
____________________________________
By:_________________________________
Name:_______________________________
Title:______________________________
(if applicable)
____________________________________
By:_________________________________
Name:_______________________________
Title:______________________________
(if applicable)
[SIGNATURE PAGE TO ENCODING.COM, INC.
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
INTEL CORPORATION
By:_________________________________
Print Name:_________________________
Title:______________________________
[SIGNATURE PAGE TO ENCODING.COM, INC.
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
EXHIBIT 10.16
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE HEREUNDER
HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"). THEY MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT WITH RESPECT TO SUCH WARRANT OR SECURITIES UNDER THE
ACT, OR DELIVERY OF AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SALE OF THE SECURITIES THAT ARE THE SUBJECT OF THIS WARRANT
HAS NOT BEEN QUALIFIED WITH THE STATE OF WASHINGTON OR ANY OTHER
STATE AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR
RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SUCH
SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 21.20.320 OF
THE REVISED CODE OF WASHINGTON OR SUCH PROVISIONS OF THE
CORPORATIONS CODE OF ANY OTHER SUCH STATE. THE RIGHTS OF THE
HOLDER OF THIS WARRANT ARE EXPRESSLY CONDITIONED UPON SUCH
QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
Warrant CSW-1 December 17, 1999
ENCODING.COM, INC.
COMMON STOCK PURCHASE WARRANT
1. Issuance; Number of Shares; Purchase Price. Subject to the terms and
------------------------------------------
conditions hereinafter set forth, Valley Media, Inc., a Delaware corporation
(the "Purchaser"), is entitled to purchase from Encoding.com, Inc., a Delaware
---------
corporation (the "Company"), at any time after the date hereof up to 650,000
-------
shares of fully paid and non-assessable Common Stock of the Company (the
"Warrant Common Stock") at a purchase price of $10.00 per share (as adjusted
--------------------
pursuant to the terms hereinafter set forth) upon surrender of this Warrant at
the principal office of the Company and, at the election of the holder hereof,
upon either (a) payment of the aggregate purchase price for the number of shares
for which this Warrant is to be exercised at said office in cash or by check, or
(b) tender of a notice as provided in the net issue exercise provisions of
Section 6(b) hereof. The purchase price of one share of Warrant Common Stock
(or such securities as may be substituted for one share of Common Stock pursuant
to the provisions hereinafter set forth) payable from time to time upon the
exercise of this Warrant (whether such price be the price specified above or an
adjusted price determined as hereinafter set forth) shall be referred to herein
as the "Warrant Price." Any shares of Common Stock
-------------
<PAGE>
issuable upon exercise of this Warrant (or such securities as may be substituted
for one share of Common Stock pursuant to the provisions hereinafter set forth)
shall be referred to herein as the "Warrant Shares."
--------------
2. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities issuable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) Adjustment for Dividends in Stock or Other Securities or Property.
-----------------------------------------------------------------
In case at any time or from time to time on or after the date hereof the holders
of the Common Stock of the Company (or any shares of stock or other securities
at the time issuable upon the exercise of this Warrant) shall have received or,
on or after the record date fixed for the determination of eligible
stockholders, shall have become entitled to receive, without payment therefor,
other or additional stock or other securities or property (other than cash) of
the Company by way of dividend, then and in each case, the holder of this
Warrant shall, upon the exercise hereof, be entitled to receive, in addition to
the number of shares of Common Stock receivable thereupon, and without payment
of any additional consideration therefor, the amount of such other or additional
stock or other securities or property (other than cash) of the Company which
such holder would hold on the date of such exercise had it been the holder of
record of such Common Stock on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such exercise, retained
such shares and/or all other additional stock available by it as aforesaid
during such period, giving effect to all adjustments called for during such
period by paragraphs (b) and (c) of this Section 2.
(b) Adjustment for Reclassification, Reorganization or Merger. In
---------------------------------------------------------
case of any reclassification or change of the outstanding securities of the
Company or of any reorganization of the Company (or any other corporation the
stock or securities of which are at the time receivable upon the exercise of
this Warrant) or any similar corporate reorganization on or after the date
hereof, then and in each such case the holder of this Warrant, upon the exercise
hereof at any time after the consummation of such reclassification, change or
reorganization, shall be entitled to receive, in lieu of the stock or other
securities and property receivable upon the exercise hereof prior to such
consummation, the stock or other securities or property to which such holder
would have been entitled upon such consummation if such holder had exercised
this Warrant immediately prior thereto, all subject to further adjustment as
provided in paragraphs (a) and (c) of this Section 2, and in each such case, the
terms of this Section 2 shall be applicable to the shares of stock or other
securities properly receivable upon the exercise of this Warrant after such
consummation.
(c) Stock Splits and Reverse Stock Splits. If at any time on or after
-------------------------------------
the date hereof the Company shall subdivide its outstanding shares of Common
Stock into a greater number of shares, the Warrant Price in effect immediately
prior to such subdivision shall thereby be proportionately reduced and the
number of shares receivable upon exercise of the Warrant shall thereby be
proportionately increased; and, conversely, if at any time on or after the date
hereof the outstanding number of shares of Common Stock shall be combined into a
smaller number of shares, the Warrant Price in effect immediately prior to such
combination shall
-2-
<PAGE>
thereby be proportionately increased and the number of shares receivable upon
exercise of this Warrant shall thereby be proportionately decreased.
3. No Fractional Shares. No fractional shares of Common Stock will be
--------------------
issued in connection with any exercise hereunder. In lieu of any fractional
shares which would otherwise be issuable, the Company shall pay cash equal to
the product of such fraction multiplied by the fair market value of one share of
Common Stock on the date of exercise, as determined pursuant to Section 6(b)(ii)
below.
4. No Stockholder Rights. This Warrant shall not entitle its holder to
---------------------
any of the rights of a stockholder of the Company.
5. Reservation of Stock. The Company covenants that during the period
--------------------
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of this Warrant. The Company agrees that its
issuance of this Warrant shall constitute full authority to its officers who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for shares of Common Stock upon the exercise of this
Warrant.
6. Exercise of Warrant.
-------------------
(a) Method of Exercise. This Warrant may be exercised by the holder
------------------
hereof, in whole or in part and from time to time, by the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A) at the
---------
principal office of the Company, accompanied by payment to the Company, in cash
or by check, of an amount equal to the then applicable Warrant Price multiplied
by the number of Warrant Shares then being purchased. This Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
date of its surrender for exercise as provided above, and the person entitled to
receive the shares of Common Stock issuable upon such exercise shall be treated
for all purposes as the holder of such shares of record as of the close of
business on such date. As promptly as practicable on or after such date and in
any event within five (5) business days thereafter, the Company at its expense
shall issue and deliver to the person or persons entitled to receive the same a
certificate or certificates for the number of full shares of Common Stock
issuable upon such exercise, together with cash in lieu of any fraction of a
share as provided above, and, unless this Warrant has been fully exercised or
has expired, a new Warrant representing the portion of the shares of Common
Stock, if any, with respect to which this Warrant shall not have been exercised,
shall also be issued to the holder hereof. The shares of Common Stock issuable
upon exercise hereof shall, upon their issuance, be fully paid and
nonassessable.
(b) Net Issue Exercise.
------------------
(i) In lieu of exercising this Warrant in the manner provided in
Section 6(a) above, the holder may elect to receive shares equal to the value of
this Warrant (or the portion thereof being canceled) by surrender of this
Warrant at the principal office of the Company together with notice of such
election (in the form attached hereto as Exhibit A-1) in
-3-
<PAGE>
which event the Company shall issue to holder a number of shares of Common Stock
computed using the following formula:
X = Y (A - B)
A
Where X = The number of shares of Common Stock to be issued to
holder.
Y = The number of shares of Common Stock that may be acquired
on the exercise of this Warrant (at the date of such
calculation).
A = The fair market value of the Common Stock (at the date of
such calculation).
B = The Warrant Price (as adjusted to the date of such
calculation).
(ii) For purposes of this Section 6(b), fair market value of the
Common Stock shall mean the average of the closing bid and asked prices of the
Common Stock quoted in the over-the-counter market summary or the closing price
quoted by the Nasdaq National Market or any exchange on which the Common Stock
is listed, whichever is applicable, as published in the Western Edition of The
Wall Street Journal for the business day prior to the date of determination of
fair market value. If the Common Stock is not traded over-the-counter, on the
Nasdaq National Market or on an exchange, the fair market value shall be the
price per share as determined in good faith by the Company's Board of Directors.
7. Certificate of Adjustment. Whenever the Warrant Price or number or
-------------------------
type of securities issuable upon exercise of this Warrant is adjusted as herein
provided, the Company shall promptly deliver to the record holder of this
Warrant a certificate of an officer of the Company setting forth the nature of
such adjustment and a brief statement of the facts requiring such adjustment.
8. Replacement of Warrant. On receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft or destruction of any Warrant,
on delivery of an indemnity agreement or security reasonably satisfactory in
form and amount to the Company or, in the case of any such mutilation, on
surrender and cancellation of such Warrant, the Company at its expense will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Termination. This Warrant (and the right to purchase securities upon
-----------
exercise hereof) shall terminate upon the close of business on December 17,
2000.
10. Notices of Record Date, Etc. In the event of:
---------------------------
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase, sell or otherwise acquire or
-4-
<PAGE>
dispose of any shares of stock of any class or any other securities or property,
or to receive any other right;
(b) any reclassification of the capital stock of the Company, capital
reorganization of the Company, consolidation or merger involving the Company, or
sale or conveyance of all or substantially all of its assets; or
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company.
then in each such event the Company will provide or cause to be provided to the
Holder a written notice thereof. Such notice shall be provided at least thirty
(30) and no more than ninety (90) days prior to the date specified in such
notice on which any such action is to be taken. The Company shall deliver to
Purchaser a copy of the preliminary prospectus with respect to the initial
public offering of its Common Stock promptly after it becomes available.
11. Transfers.
---------
(a) Each holder of this Warrant acknowledges that this Warrant and
the Warrant Shares have not been registered under the Securities Act, and agrees
not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose
of this Warrant or any Warrant Shares issued upon its exercise in the absence of
(i) an effective registration statement under the Act as to this Warrant or such
Warrant Shares and registration or qualification of this Warrant or such Warrant
Shares under any applicable Blue Sky or state securities law then in effect, or
(ii) an opinion of counsel, satisfactory to the Company, that such registration
and qualification are not required. Each certificate or other instrument for
Warrant Shares issued upon the exercise of this Warrant shall bear a legend
substantially to the foregoing effect.
(b) Subject to the provisions of Section 11(a) hereof, this Warrant
and all rights hereunder are transferable, in whole or in part, upon surrender
of the Warrant with a properly executed assignment (in the form of Exhibit B
hereto) at the principal office of the Company provided, however, that this
Warrant may not be transferred in part unless the transferee acquires the right
to purchase at least 100,000 shares (as adjusted pursuant to Section 2)
hereunder.
(c) Until any transfer of this Warrant is made in the warrant
register, the Company may treat the Purchaser as the absolute owner hereof for
all purposes; provided, however, that if and when this Warrant is properly
assigned in blank, the Company may (but shall not be required to) treat the
bearer hereof as the absolute owner hereof for all purposes, notwithstanding any
notice to the contrary.
(d) The Company will maintain a register containing the names and
addresses of the registered holder of this Warrant. The registered holder may
change such registered holder's address as shown on the warrant register by
written notice to the Company requesting such change.
-5-
<PAGE>
12. No Impairment. The Company will not, by amendment of its Certificate
-------------
of Incorporation or through any reclassification, capital reorganization,
consolidation, merger, sale or conveyance of assets, dissolution, liquidation,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the holder hereto.
13. Successors and Assigns. This Warrant shall be binding upon the
----------------------
Company's successors and assigns and shall inure to the benefit of the Holder's
successors and assigns.
14. Market Stand-Off Agreement. Holder hereby agrees that, during the
--------------------------
period of duration (up to, but not exceeding, 180 days; provided, however with
respect to the first registered offering following the initial public offering,
such period shall be no more than 90 days) specified by the Company and an
underwriter of Common Stock or other securities of the Company, following the
effective date of a registration statement of the Company filed under the
Securities Act, it shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Company held by it at any time during such period
except Common Stock included in such registration; provided, however, that:
-------- -------
(a) such agreement shall be applicable only to (i) the initial public
offering and (ii) the first such registered offering following the initial
public offering during the one-year period following the date of the final
prospectus distributed pursuant to the first such registration statement of the
Company which covers Common Stock (or other securities) to be sold on its behalf
to the public in an underwritten offering; and
(b) all officers and directors of the Company and all one-percent
securityholders (whether or not pursuant to this Agreement) enter into similar
agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Warrant Shares until the end of
such period, and Holder agrees that, if so requested, Holder will execute an
agreement in the form provided by the underwriter containing terms which are
essentially consistent with the provisions of this Section 14.
Notwithstanding the foregoing, the obligations described in this
Section 14 shall not apply to a registration relating solely to employee benefit
plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the
future, or a registration relating solely to an SEC Rule 145 transaction on Form
S-4 or similar forms which may be promulgated in the future.
15. Miscellaneous. This Warrant shall be governed by the laws of the
-------------
state of Washington without regard to its conflicts of laws provisions. The
headings in this Warrant are for purposes of convenience and reference only, and
shall not be deemed to constitute a part hereof. Neither this Warrant nor any
term hereof may be changed, waived, discharged or
-6-
<PAGE>
terminated orally but only by an instrument in writing signed by the Company and
the registered holder hereof. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first class registered
or certified mail, postage prepaid, to the address furnished to the Company in
writing by the last holder of this Warrant who shall have furnished an address
to the Company in writing. If any provision of this Warrant shall be held to be
unenforceable by a court of competent jurisdiction, that provision shall be
limited or eliminated to the minimum extent necessary so this Warrant shall
otherwise remain in full force and effect and enforceable.
-7-
<PAGE>
ISSUED this 17/th/ day of December 1999.
ENCODING.COM, INC.
/s/ David C. Bullis
__________________________
Dave Bullis, President
AGREED AND ACKNOWLEDGED
VALLEY MEDIA, INC.
By: /s/ Sachin Adarkar
_____________________
Title: General Counsel
__________________
Date: December 17, 1999
___________________
[SIGNATURE PAGE TO COMMON STOCK
PURCHASE WARRANT]
<PAGE>
Exhibit A
NOTICE OF EXERCISE
To: Encoding.com, Inc.
Times Square Building
414 Olive Way, Suite 300
Seattle, WA 9810
Attn: Chief Financial Officer
1. The undersigned hereby elects to purchase _________ shares of Common
Stock of Encoding.com, Inc. pursuant to Section 6(a) of the attached Warrant,
and tenders herewith payment of the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below
Name: ________________________________
Address: _____________________________
_____________________________
_____________________________
______________________________________
(Signature)
___________________________
(Date)
<PAGE>
Exhibit A-1
NOTICE OF EXERCISE
To: Encoding.com, Inc.
Times Square Building
414 Olive Way, Suite 300
Seattle, WA 9810
Attn: Chief Financial Officer
1. The undersigned hereby elects to purchase _________ shares of Common
Stock of Encoding.com, Inc. (the "Elected Shares") pursuant to Section 6(b) of
the attached Warrant.
2. Please issue a certificate or certificates representing the Elected
Shares less such number of shares as has an aggregate value equal to the
purchase price of the Elected Shares (as calculated pursuant to Section 6(b) of
the attached Warrant) in the name of the undersigned or in such other name or
names as are specified below
Name: ___________________________
Address: ________________________
________________________
________________________
_________________________________
(Signature)
_____________________________
(Date)
<PAGE>
Exhibit B
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, _________________________________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant with respect to the number of shares of Common Stock covered thereby set
forth below, unto:
Name of Assignee Address No. of Shares
---------------- ------- -------------
Dated: ________________________ Signature: ____________________________
____________________________
Witness: ____________________________
<PAGE>
EXHIBIT 10.17
OFFICE LEASE AGREEMENT
THE TIMES SQUARE BUILDING
THIS LEASE is made this 10/th/ day of August, 1999, between TIMES SQUARE
BUILDING LLC, a Washington limited liability company ("Landlord") and
ENCODING.COM, INC, a Delaware Corporation ("Tenant").
1. LEASE DATA AND EXHIBITS: As parties hereto, Landlord and Tenant agree
-----------------------
that the following terms as used herein shall have the meanings provided in this
Section 1, unless otherwise specifically modified by provisions of this Lease:
(a) BUILDING: The Building known as the TIMES SQUARE BUILDING,
--------
situated on the Land in Seattle, Washington.
(b) PREMISES: The Premises consists of the areas on the 3/rd/, 4/th/
--------
and Lower Mezzanine floor(s) of the Building, known as Suite No.
---------------
400, which is cross-hatched on the floor plan(s) attached
hereto as Exhibit A, including additional Improvements (if any)
set forth on Exhibit B. For the purposes of this Lease the
agreed net rentable area of the Premises is 21,125* square feet.
*(3/rd/ floor = 9,231 square feet, 4/th/ floor = 9,231 square
feet, Lower Mezzanine = 2,663 square feet)
(c) LAND: The Land upon which the Building is situated as more
----
particularly described in Exhibit C.
(d) OFFICE COMPLEX: That portion of the Building leased or available
--------------
for lease for office uses, together with common and public areas
and facilities provided for the general use and convenience of
Tenant and other tenants and occupants of the Building. The
agreed net rentable area of the Office Complex is 49,541 square
feet.
(e) TENANT'S PERCENTAGE: As used in this Lease, Landlord and Tenant
-------------------
agree that Tenant's Percentage of the Office Complex is 42.64%.
(f) TERM: This Lease shall be for a term ending on October 31, 2004,
----
and commencing on the following dates: for the third and fourth
floor premises on August, 1999, for the Lower Mezzanine premises
on October 1, 1999, or upon substantial completion of Landlord's
standard work for the lower mezzanine floor space, which ever
occurs later; unless sooner terminated as provided herein.
(g) BASE RENT: The following amounts for the following periods,
---------
payable on or before the first day of each calendar month:
For the third floor Premises:
Applicable Period Monthly Base Rent Amount
----------------- ------------------------
08/_ /99 - 09/30/99 $ 0.00
10/01/99 - 10/31/00 $17,308.00
11/01/00 - 10/31/01 $17,693.00
11/01/01 - 10/31/02 $18,078.00
11/01/02 - 10/31/03 $18,456.00
11/01/03 - 10/31/04 $18,847.00
For the fourth floor Premises:
Applicable Period Monthly Base Rent Amount
----------------- ------------------------
09/1/99 - 10/31/99 $ 0.00
11/1/99 - 10/31/00 $17,308.00
11/1/00 - 10/31/01 $17,693.00
11/1/01 - 10/31/02 $18,078.00
11/1/02 - 10/31/03 $18,456.00
11/1/03 - 10/31/04 $18,847.00
1
<PAGE>
For the Lower Mezzanine Premises:
Applicable Period Monthly Base Rent Amount
----------------- ------------------------
10/01/99 - 10/31/99 $ 0.00
11/01/99 - 10/31/04 $3,329.00
(h) BASE YEAR: The Base Year is calendar year 1999.
---------
(i) PREPAID RENT DEPOSIT: Tenant has deposited with Landlord on the
--------------------
date hereof $37,945.00 to be applied to Base Rent due hereunder.
(j) SECURITY DEPOSIT: An Irrevocable Letter of Credit (or the cash
----------------
proceeds thereof) in form and substance acceptable to Landlord in
the amount of $250,000.00, until October 31, 2000, at which time
it may be reduced to $225,000.00, until October 31, 2001, at
which time it may be reduced to $ 175,000.00. Until October 31,
2002, at which time it may be reduced to $150,000.00 until
October 31, 2003, at which time it may reduce to $100,000.00 for
the duration of the Lease term. The Letter of Credit shall be
substantially in the form of Exhibit J - Letter of Credit
attached hereto. The Security Deposit shall include a cash
component to the extent required by Section 1 of Exhibit E.
(k) NORMAL BUSINESS HOURS: From 8:00 a.m. to 6:00 p.m. on weekdays
---------------------
and from 8:00 a.m. to 12:00 noon on Saturdays (excluding legal
holidays).
(l) NOTICES AND PAYMENTS ADDRESSES:
------------------------------
Landlord: Times Square Building LLC
C/O The Vance Corporation
1809 Seventh Avenue, Suite 300
Seattle, WA 98101-1313
Tenant:
Prior to September 1, 1999:
Encoding.com
3406 East Union
Seattle, WA 98122
Attn: Jon Gerhardt, Minister of the Great
Migration
After Commencement Date:
Encoding.com
Times Square Building
414 Olive Way, Suite 400
Seattle, WA 98101-1122
(m) EXHIBITS: The following exhibits or riders are made a part of
--------
this Lease:
Exhibit A - Floor Plan of Premises
Exhibit B - 1 Additional Landlord Improvements (if any)
B - 2 Tenant Improvement Requirement
B - 3 Final Agreed Plans
B - 4 Tenant's Allowance
Exhibit C - Legal Description of the Land
Exhibit D - Rules and Regulations
Exhibit E - Non-Standard Section
2
<PAGE>
Exhibit F - Operating Cost Exclusion
Exhibit G - Contractors Indemnification Agreement
Exhibit H - Expansion Area
Exhibit I - Satellite Antenna Agreement
Exhibit J - Letter of Credit
2. PREMISES: For the Term specified in Section 1(f), Landlord does
--------
hereby lease the Premises to Tenant, and Tenant does hereby lease the Premises
from Landlord, upon and subject to the terms and conditions herein set forth.
3. RENT: Tenant shall pay Landlord the monthly Base Rent stated in
----
Section 1(g) hereof and Additional Rent as provided in Section 10 and any other
additional payments due under this Lease without deduction or offset, in advance
(unless otherwise expressly provided) on or before the day specified in Section
1(g), or such other date as is provided in this Lease, to Landlord at the
address noted in Section 1(l) hereof, or to such other party or at such other
place as Landlord may hereafter from time to time designate in writing. Rent for
any partial month at the beginning or ending of the Term shall be prorated. Base
Rent, Additional Rent and all other sums payable by Tenant under this Lease are
sometimes collectively called "Rent."
All payments of Rent not receive by Landlord on or before each respective
due date shall bear interest at an annual rate (the "Default Rate") equal to
eighteen percent (18%), from the date the Rent is due until paid; provided that
if the maximum annual rate of interest permitted by applicable law shall be less
than the rate of interest provided for herein, then all past due payments shall
bear interest at the maximum rate permitted by applicable law from due date
until paid. Tenant acknowledges the late payment by Tenant to Landlord of Rent
will cause Landlord to incur costs not contemplated by this Lease, the exact
amount of such costs being extremely difficult and economically impractical to
ascertain. Therefore, if any payment of Rent due from Tenant is not received by
Landlord within five (5) days after the due date, Tenant shall pay to Landlord
(in addition to the interest above provided) a late charge of One Hundred
Dollars ($100.00) or ten percent (10%) of the overdue Rent, whichever shall be
greater. The parties agree that this late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of late
payment by Tenant and is in addition to any interest charges on past due Rent.
Acceptance of any late charge shall not constitute a waiver of Tenant's default
with respect to the overdue amount nor prevent Landlord from exercising any of
the other rights and remedies available to Landlord. The provisions of this
paragraph in no way relieve Tenant of the obligation to pay Rent on or before
the due dates.
4. POSSESSION. If for any reason whatsoever Landlord does not deliver
----------
possession of the Premises to Tenant at the commencement of the Term of this
Lease, rent shall be abated until the date possession of the Premises is
tendered to Tenant by Landlord, provided that in all other respects this Lease
shall remain in full force and effect, and the Lease Term shall not be extended
thereby. In no event shall Landlord be liable for damages caused by failure to
deliver possession of the Premises. If possession of any portion of the Premises
has not been tendered to Tenant by the date which is six (6) months after the
calendar commencement date of the Term stated in Section 1(f) for that portion
of the Premises. Tenant shall have the option to terminate this Lease by
providing notice of termination to Landlord within ten (10) days following the
expiration of the six (6) month period.
5. SECURITY DEPOSIT: As partial consideration for the execution of this
----------------
Lease, Tenant has paid to Landlord the sum specified in Section 1(j) hereof, the
receipt of which is hereby acknowledged. Landlord may commingle the deposit with
its general funds and Tenant shall not be entitled to interest on the deposit.
If Tenant shall default with respect to any covenant, condition, or obligation
contained in this Lease, including but not limited to the payment of Rent,
Landlord may apply all or any part of such deposit to the payment of any sum in
default or any other sum which Landlord may be required to spend or incur by
reason of Tenant's default, and in such event, Tenant shall upon demand deposit
with Landlord the amount so applied. If Tenant shall have fully complied with
all material obligations, covenants and conditions of this Lease, such sum shall
be repaid to Tenant within thirty (30) days after the end of the Term, as it may
be extended. If Landlord sells, assigns or otherwise transfers its interest in
3
<PAGE>
this Lease, Landlord may transfer the deposit to the new landlord. Upon such
transfer and to the extent the new landlord assumes the obligations of Landlord
under this Lease, the original Landlord shall be relieved from all liability
assumed by the new Landlord and all liability for return of the deposit and
Tenant shall look solely to the new landlord for performance of the assumed
liability and for return of the deposit.
6. USE OF THE PREMISES: The Premises are to be used only for general
-------------------
office purposes (including electronic data storage, electronic archiving and
electronic warehousing in the Premises, and storage of shipping materials and
physical product in the Lower Mezzanine) and for no other business or purpose
without the prior written consent of Landlord, which consent may be withheld if
Landlord, in its sole discretion, determines that any proposed use is
inconsistent with or detrimental to the maintenance and operation of the
Building as a first-class office building. No act shall be done in or about the
Premises by Tenant, its employees, agents invitees, or contractors that is
unlawful. Tenant shall not commit any act that will increase the then existing
rate of insurance on the Building without Landlord's consent. Tenant shall
promptly pay upon demand the amount of the increase in insurance rates caused by
such act or acts done by Tenant. Tenant shall not commit or allow to be
committed any waste upon the Premises, or any nuisance or other act which
disturbs the quiet enjoyment of any other tenant in the Building. Tenant shall
not, without the written consent of Landlord, use any apparatus, machinery or
device in or about the Premises which will cause any substantial noise,
vibration or fumes. If any of Tenant's office machines or equipment should
disturb the quiet enjoyment of any other tenant in the Building, then Tenant
shall provide adequate insulation, or take other action as may be necessary to
eliminate the disturbance. Tenant shall comply with all laws and regulations
relating to its use or occupancy of the Premises.
7. CARE OF THE PREMISES: Tenant's taking possession of the Premises
--------------------
constitutes Tenant's acknowledgment that the Premises were then in good
condition. Tenant shall take good care of the Premises and shall keep the
Premises and all items installed therein by Tenant neat and clean. Tenant shall
make no additions, improvements, alterations, repairs or decorations to the
Premises without the prior written consent of Landlord. Any such additions,
improvements, alterations, repairs or decorations which are made without the
prior written consent of Landlord, shall be removed by Tenant at its cost within
ten (10) days after Landlord requests the removal. Otherwise, all additions,
improvements, alterations, decorations and repairs made by Tenant shall remain
on the Premises and shall become the property of Landlord upon the expiration or
sooner termination of this Lease. All damage or injury done to the Premises or
the Building by Tenants or by any persons who may be in or upon the Premises or
the Building with the consent of Tenant, shall be paid for by Tenant.
8. LANDLORD MAINTENANCE. Landlord shall maintain or cause to be
--------------------
maintained in reasonably good order and condition the common and public areas of
the Building, the central heating, ventilation and air conditioning (if the
Premises are air conditioned) system, water and mechanical and electrical
distribution systems, and the structural components of the Building. All normal
repairs reasonably necessary to maintain the Premises in a tenantable condition
shall be done by or under the direction of Landlord and at Landlord's expense,
except as otherwise provided herein. Landlord, in the exercise of its reasonable
judgement, shall be the sole judge of what repairs are necessary. Landlord shall
-
not be obligated to repair or replace any fixtures or equipment installed by
Tenant. If any such maintenance or repair is required because of the act or
omission of Tenant or any person claiming through Tenant or any of their
respective officers, servants, agents, employees, contractors, licensees,
guests, visitors or invitees, all costs and expenses incurred by Landlord shall
be paid by Tenant on demand.
9. SERVICES AND UTILITIES PROVIDED BY LANDLORD: So long as Tenant is not
-------------------------------------------
in default of any of its obligations under this Lease, Landlord will furnish
Tenant the following services and utilities:
(a) Electricity for normal lighting and low-power usage office
machines. Excess electricity (i.e., usage in excess of 4 watts
per square foot per month) as reasonably determined by Landlord,
shall be at Tenant's expense.
(b) Elevator service.
4
<PAGE>
(c) Water for drinking and restroom purposes at the points of supply
provided by Landlord.
(d) Window washing and janitorial service, exclusive of any special
requirements resulting from items installed by Tenant.
(e) Heating, ventilation and air conditioning required in Landlord's
judgment for normal business operations during Normal Business
Hours.
Landlord does not warrant that any of the foregoing utilities or services
will be free from interruption, but Landlord will use best efforts and continued
diligence to restore the interrupted utilities and services as soon as possible.
Except as specifically set forth herein, no such interruption shall be deemed an
eviction of Tenant or excuse Tenant's performance of any of its obligations
under this Lease, or render Landlord liable for damages.
10. ADDITIONAL RENT:
---------------
(a) In addition to the Base Rent provided in Section 1(g) hereof, Tenant
shall pay to Landlord as Additional Rent Tenant's share of Excess
Expenses for each Expense Year during the term of this Lease as
provided in this Section. Within 90 days after the commencement of
each Expense Year (or such longer period of time as Landlord
reasonably requires for preparation of the statement), Landlord shall
give Tenant notice of Landlord's estimate of the amount payable under
this Section for the Expense Year. On the first day of each month
during the Expense Year, Tenant shall be liable to pay to Landlord
one-twelfth (1/12) of such estimated amount. Until, if such notice is
given, Tenant shall continue to pay on the basis of the prior year's
estimate. On receipt of the notice, the estimated amount shall be
divided into twelve (12) equal monthly installments; and on the first
day of the month following such notice, Tenant shall pay an amount
equal to one monthly installment multiplied by the number of months
from January of such Expense Year to the month of payment, less any
payments already made for those months, plus the monthly installment
due on the date of such payment, and on the first day of each
succeeding month in such Expense Year, shall pay to Landlord an amount
equal to one monthly installment. Within 120 days after the end of
each Expense Year in which Tenant is obligated to pay Excess Expenses
(or such longer period of time as Landlord reasonably requires for
preparation of the statement), Landlord shall furnish Tenant with a
statement ("Landlord's Expense Statement") setting forth in reasonable
detail the actual Expenses for such Expense Year, and Tenant's share
of Excess Expenses. If Tenant's Share of the actual Excess Expenses
for such Expense Year exceeds the estimated Excess Expenses paid by
Tenant for such Expense Year, Tenant shall pay to Landlord the
difference within fifteen (15) days after receipt of Landlord's
Expense Statement; and if the total amount paid by Tenant for any such
Expenses for such Expense Year exceeds Tenant's Share of actual Excess
-
Expenses for such Expense Year, such excess shall be credited against
the next installment of estimated Excess Expenses or other Rent due
from Tenant to Landlord hereunder or if the Lease Term has expired,
shall be paid to Tenant concurrently with delivery of Landlord's
Statement. If any part of the first or the last years of the Lease
Term shall include part of an Expense Year, Tenant's obligations under
this Section shall be apportioned so that Tenant shall pay only for
such parts of such Expense Years as are included in the Lease Term.
(b) "Tenant's Share" means Tenant's Percentage of the Office Complex as
specified in Section 1(e) above.
(c) "Expenses" means that portion of all costs of management, operation,
maintenance and administration of the Premises, the Building and the
Land which have been equitably allocated by Landlord to the Office
Complex, including without limitation the following: wages and
salaries of employees; janitorial, cleaning, maintenance, and other
services; electricity, water, waste disposal and other utilities;
heating, ventilating and air conditioning; materials and supplies;
painting, repairs and other maintenance and reserves for long-term
maintenance; office furniture, fixtures, equipment and space;
insurance; all real and personal
5
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property taxes, assessments, and charges levied upon or with respect
to the Land, the Building or Landlord's interest in the same;
management fees; and depreciation on personal property. Expenses shall
not include depreciation on the Building; costs of tenants'
improvements; real estate brokers' commissions; or capital items
except that Expenses shall include the cost of any capital
improvements made after completion of the Building as a labor-saving
device or to effect other economies in the operation or maintenance of
the Building or made after the date of this Lease that are required
under any governmental law or regulation, such costs to be amortized
over the useful life of such improvement (as determined under
Landlord's normal accounting procedure), together with interest at a
rate per annum equal to two percent (2%) plus the rate of interest
publicly announced from time to time by Seattle-First National Bank,
Head Office Branch, Seattle, Washington, as its "prime interest rate"
or such higher rate as may be paid by Landlord on funds borrowed for
the purpose of constructing such capital improvements; or the other
items listed on Exhibit F attached hereto.
(d) "Excess Expenses" with respect to any Expense Year shall mean the
amount, if any, by which Expenses for such Expense Year exceed the
actual Expenses for the Base Year.
(e) "Expense Year" means each twelve (12) consecutive month period
commencing January 1 of each year.
(f) Tenant shall have the right, at Tenant's sole cost and expense (no
more than once per calendar year), to have Landlord's books and
records audited by a certified public accountant under the direction
of Landlord and Tenant who is selected by Tenant and acceptable to
Landlord, upon not less than ten (10) business days' prior written
notice to Landlord, during Landlord's normal business hours and at
Landlord's principal place of business or such other place as
designated by Landlord, to verify the accuracy of Landlord's statement
relating to Tenant's proportionate share of Expenses. If any audit
discloses that Tenant overpaid it's share of Expenses or underpaid
it's share of expenses, Landlord or Tenant shall make an appropriate
payment to the other for the excess or deficit.
11. TAXES PAYABLE BY TENANT: Tenant shall pay, before the same become
-----------------------
delinquent, all taxes assessed or levied against Tenant's furniture, fixtures,
equipment and other property in the Premises. Tenant shall pay to Landlord, as
Additional Rent, within ten (10) days after notice of the amount thereof, any
tax upon rent payable under this Lease or any tax or fee in any form (except net
income tax) payable by Landlord due to or measured by receipts or income of
Landlord derived from this Lease.
12. INDEMNIFICATION. Tenant shall defend, indemnify and hold harmless
---------------
Landlord against and from any and all claims, causes, losses, damages and
expenses (including attorneys' fees and court costs) which arise out of or
result from any injury to or death of any person or any damage to or destruction
of any property sustained by Tenant or by any other person which: (a) occurs on
the Premises; or (b) is caused by the negligence, willful misconduct or breach
of this Lease by Tenant, its employees, agents or contractors. Nothing herein
shall be construed as requiring Tenant to defend, hold harmless, or indemnify
Landlord against or from any claim, loss, damage or expense to the extent it is
caused by Landlord's sole negligence, willful misconduct or breach of this
Lease.
If and to the extent the provisions of RCW 4.24.115 apply to an act or
omission which results in an indemnification claim hereunder, and if the claim,
cause, loss, damage or expense incurred by Landlord is caused by or results from
the concurrent negligence of Tenant, its agents or employees and of Landlord,
its agents or employees, Tenant's indemnification obligation shall apply only to
the extent of the negligence of Tenant, its agents or employees.
To the extent necessary to permit Landlord to enforce Tenant's
indemnification obligations, Tenant assumes potential liability for claims
brought by its employees against Landlord and for that purpose Tenant
specifically waives any immunity against indemnification claims asserted by
Landlord which is provided under the Workers Compensation Act, RCW Title 51.
TENANT ACKNOWLEDGES THAT THIS WAIVER IS SPECIFICALLY ENTERED
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INTO PURSUANT TO THE PROVISIONS OF RCW 4.24.115 AND WAS THE SUBJECT OF MUTUAL
NEGOTIATION.
/s/ MH /s/ DCB
________________ _______________
Landlord's Initials Tenant's Initials
13. LIABILITY INSURANCE: Tenant at its sole cost and expense shall obtain
-------------------
and maintain in full force and effect during the Lease Term commercial general
liability insurance insuring against any and all claims for injury to or death
of persons and loss of or damage to property occurring in, on or about the
Premises, the Building or the Land, in form and amounts satisfactory to
Landlord, but in any case with a single combined liability limit of not less
than $5,000,000. All such insurance shall be written by companies satisfactory
to Landlord, shall name Landlord as an insured party, and shall contain a
provision requiring thirty (30) days' written notice to Landlord before
cancellation or change in coverage, scope or amount of insurance. Prior to
taking possession of the Premises, Tenant shall furnish Landlord with the
certificate of such policy, and renewal certificates shall be furnished to
Landlord prior to the expiration of any expiring policy. Such policy shall name
Landlord as an insured, shall contain cross-liability provisions, and shall
specifically include the liability assumed under this Lease by Tenant (provided
that the amount of such insurance shall not be construed to limit the liability
of Tenant hereunder).
14. LIENS AND INSOLVENCY: Tenant shall keep its leasehold interest under
--------------------
this Lease, the Premises, the Building and Land free from any liens arising out
of any work performed, materials ordered or obligations incurred by Tenant.
Tenant shall indemnify and hold Landlord harmless from any liability for losses
or damages resulting directly or indirectly from any such liens or lien claims
and from any work performed on or about the Premises by Tenant, its agents,
employees, contractors or subcontractors. If any such lien or lien claim is
filed against the Premises, the Building, the Land or Tenant's leasehold
interest, Tenant shall cause the same to be discharged within thirty (30) days
after the date of filing. If Tenant becomes insolvent, voluntarily or
involuntarily bankrupt, or if a receiver, or assignee or other liquidating
officer is appointed for the business of Tenant, then Landlord may terminate
Tenant's rights of possession under this Lease at Landlord's option.
15. DAMAGE OR DESTRUCTION: In the event the Premises shall be partially
---------------------
or totally destroyed or damaged by fire, earthquake or other casualty, the same
shall be repaired as soon as possible provided and to the extent Landlord has
adequate insurance available for the repair (unless Landlord shall elect not to
rebuild as hereafter provided). In the event the Premises are destroyed or
damaged by fire, earthquake, or other casualty to such an extent as to render
the same untenantable in whole or in substantial part, Landlord may, at its
option, proceed to repair the Premises. Landlord shall have not more than ninety
(90) days after the date of such damage or destruction to notify Tenant in
writing of Landlord's intention to repair. If Landlord elects to repair, it
shall prosecute the work without unnecessary delay; and, during such period, the
Base Rent and the Additional Rent under Section 9 shall be abated in the same
ratio that the portion of the Premises which is untenantable for the time being
bears to all of the Premises. If Landlord shall fail to give the above-described
notice, Tenant shall have the right to terminate this Lease by written notice to
Landlord.
In the event the Building shall be damaged or destroyed by fire, earthquake
or other casualty (even though the Premises shall not be damaged) to such an
extent that, in the opinion of Landlord, it shall not be practicable to rebuild
or repair, then it shall be optional with Landlord to terminate this Lease by
written notice to Tenant within ninety (90) days after such destruction or
damage.
16. ASSIGNMENT AND SUBLETTING:
-------------------------
(a) Consent Required. Neither this Lease nor any right hereunder
----------------
nor the Premises may be assigned, transferred, encumbered or sublet in whole or
in part by Tenant, expressly or by operation of law or otherwise, without
Landlord's prior written consent, which may be withheld at Landlord's sole
discretion; provided, however, Landlord will not unreasonably withhold or delay
its consent (unless Landlord elects to terminate the Lease, as set forth below)
if Tenant's proposed assignee or subtenant ("Assignee") meets the following
conditions:
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(i) the use and occupancy of Premises by the Assignee will be
consistent with the operation and maintenance of the Building as a first-class
office building;
(ii) the proposed assignment or sublease will not result in a
default by Landlord under any financing secured by the Building and will not
otherwise be in conflict with any other Building lease; and
(iii) the Assignee (and its guarantors, if any) shall have a
tangible net worth, determined in accordance with generally accepted accounting
principles, at least equal to the tangible net worth of the Tenant as of the
date of this Lease, which the parties acknowledge and confirm is not less than $
3,800,000.00.
If Tenant is a corporation, any merger, consolidation,
liquidation, or change in the ownership of or the power to vote the majority of
its outstanding voting stock, shall constitute an assignment whether as a result
of a single transaction or a series of transactions. If Tenant is a general
partnership, the death, withdrawal or expulsion of a partner or partners owning,
or transfer of interests representing, in the aggregate more than twenty-five
percent (25%) of partnership profits or capital shall constitute an assignment,
whether as the result of a single transaction or a series of transactions. If
Tenant is a limited partnership the death, withdrawal or expulsion of any
general partner shall constitute an assignment. If Tenant consists of more than
one person, any transfer from one individual to another individual shall
constitute an assignment. Notwithstanding anything to the contrary contained in
this Section 16 (except Sections 16(a)(i) - (iii) which shall continue to apply,
provided that in such a case the threshold in Sections 16(a)(iii) shall be
reduced to $2,000,000) and provided Tenant is not in default in its obligations
under this Lease, Tenant, after giving notice to Landlord, may assign this Lease
or sublet the Premises, or any portion thereof, without Landlord's consent but
after prior written notice to Landlord, to any entity which acquires all of the
stock or assets of Tenant, as a going concern with respect to the business being
conducted in the Premises, and assumes all obligations of Tenant hereunder
(hereinafter, a "Permitted Transfer"). In addition, a sale or transfer of
capital stock of Tenant shall be deemed a Permitted Transfer if (i) such sale or
transfer occurs in connection with any bona fide financing or capitalization of
Tenant, or (ii) Tenant becomes a publicly traded corporation. Landlord shall
have no right to terminate the Lease or recapture all or a portion of the
Premises in connection with, and shall have no right to any sums or other
economic consideration resulting from, any Permitted Transfer.
(b) Assumption of Liability. As a condition to Landlord's approval,
-----------------------
any prospective assignee or sublessee otherwise approved by Landlord shall
assume all obligations of Tenant under this Lease and shall be jointly and
severally liable with Tenant for the payment of Rent and the performance of all
terms, conditions, covenants and agreements contained in this Lease; provided
that, in regard to Rent Liability, any approved sublessee shall be liable only
for rent in the amount set forth in the sublease. Tenant shall provide Landlord
with copies of all assignments, subleases and assumption documents.
(c) Conditional Consent. Any consent by Landlord to any assignment
-------------------
or subletting may be subject to such terms and conditions as Landlord shall
determine and all such terms and conditions shall be binding upon any person
holding by, under or through Tenant.
(d) Notice of Proposed Assignment of Sublease. If Tenant wishes to
-----------------------------------------
assign this Lease or sublet the Premises or any part thereof, Tenant shall first
give written notice to Landlord of its intention to do so ("Tenant's Notice")
which notice shall contain the name of the proposed assignee or subtenant
(collectively "Transferee"), the nature of the proposed Transferee's business to
be carried on in the Premises, the terms and provisions of the proposed
assignment or sublease, and such financial and other information with respect to
the proposed Transferee and transfer as Landlord may reasonably require.
(e) Landlord's Options. Except for a Permitted Transfer, at any time
------------------
within twenty (20) days after Landlord's receipt of Tenant's Notice and all
relevant information, Landlord may by written notice ("Landlord's Notice") to
Tenant elect to:
(i) Recapture either the affected space or the entire Premises
by terminating this Lease either as to the portion of the Premises covered by
the proposed sublease or assignment or the entire Premises, at Landlord's
option, effective upon a date specified in Landlord's Notice which date shall
not be earlier than thirty (30) days nor later than sixty (60)
8
<PAGE>
days after Landlord's Notice, with a proportionate reduction of all rights and
obligations hereunder that are based on the square footage of the remaining
Premises:
(ii) Consent to the proposed sublease or assignment; or
(iii) Disapprove the proposed sublease or assignment.
In the event Landlord's Notice states that Landlord elects to exercise the
recapture option described above. Tenant shall have the option to withdraw
Tenant's Notice of proposed transfer and not to proceed with the proposed
sublease or assignment.
(f) Rent Differential. If the monthly Base Rent payable under the
-----------------
assignment or sublease agreement is more than the Base Rent being paid by Tenant
to Landlord, Tenant shall pay to Landlord fifty percent (50%) of the difference
between the Base Rent payable under said assignment or sublease and the Base
Rent then being paid under this Lease. Customary brokerage fees, attorney's
fees, tenant improvement costs (as reasonably approved by Landlord) and any
reasonable direct expenses paid by Tenant in preparing the space for the
proposed assignee or sublessee, may be deducted from Base Rent before
calculation of the Landlord's share of the rent differential.
(g) Assignment Documentation. No assignment shall be binding on
------------------------
Landlord unless Tenant and the Transferee shall deliver to Landlord a
counterpart of the assignment and an instrument in recordable form that contains
a covenant of assumption by the Transferee satisfactory in form and substance to
Landlord and consistent with the requirements of this Section 16. The failure or
refusal of the Transferee to execute an instrument of assumption shall not
release or discharge the Transferee from its obligations set forth above.
(h) Tenant shall deliver a non-refundable fee of $500 to Landlord
with each request for Landlord's consent relating to a proposed assignment or
sublease (other than Permitted Transfers), and whether or not Landlord consents
to the proposed assignment or sublease, Tenant shall reimburse Landlord on
demand for any and all costs (not covered by the $500 fee) that may be incurred
by Landlord in connection with any proposed assignment or sublease including,
without limitation, the cost of investigating the acceptability of the proposed
Transferee, legal costs incurred in connection with each proposed assignment or
sublease, and twenty percent (20%) of such actual costs to cover Landlord's
overhead expenses.
17. QUIET ENJOYMENT: Landlord agrees that Tenant, upon full and prompt
---------------
performance of all of its obligations under this Lease including without
limitation payment of all sums due hereunder as and when due, shall have quiet
and peaceful possession of the Premises during the Lease term without
disturbance by Landlord or any party claiming under Landlord, subject to the
other terms and provisions of this Lease.
18. SIGNS: Tenant shall not place upon or install on windows, wall, or
-----
exterior doors of the Premises or any part of the Premises visible from the
exterior of the Premises any signs, symbols, canopies, awnings, window coverings
or other advertising or decorative material without obtaining the prior written
consent of Landlord. If Tenant violates any of the provisions of this Section,
Landlord shall have the right to immediately remove the item installed by Tenant
at Tenant's sole cost and expense and without liability.
19. ACCESS: Tenant will permit Landlord and its agents to enter into and
------
upon the Premises at all reasonable times for the purposes of inspecting,
cleaning, repairing, altering or improving the Premises or the Building.
Landlord acknowledges that portions of the Premises may be subject to special
security systems to protect confidentiality and the integrity of Tenant's
business operations. Landlord shall provide Tenant with advance notice of its
need to enter such areas except in cases of emergencies. Nothing contained in
this Section shall be deemed to impose any obligation upon Landlord not
expressly stated elsewhere in this Lease. Tenant and its employees shall have
24-hour, 7-day per week access to the Premises, except as otherwise provided
herein. Tenant acknowledges that access during non-normal business hours shall
be via a restricted access system which requires a deposit by Tenant for card
keys. When reasonably necessary, Landlord may temporarily close entrances,
doors, corridors, elevators or other facilities without liability to Tenant by
reason of such closure and without such action by Landlord being construed as an
eviction of Tenant or as relieving Tenant from the duty of observing and
performing any of the provisions of this Lease, provided that during all such
9
<PAGE>
periods (other than during fire or life safety emergencies) Tenant, its
employees and invitees shall have reasonable access to the Premises. Landlord
shall have the right to enter the Premises for the purpose of showing the
Premises to prospective tenants within the period of 180 days prior to the
expiration or sooner termination of the Lease Term. Landlord shall not be liable
for the consequences of admitting by pass key or refusing to admit to the
Premises any person claiming the right of admittance. Landlord shall maintain an
elevator key or key card system to allow Tenant and its employees to limit non-
authorized access to those floors which Tenant wholly leases.
20. TRADE FIXTURES: Tenant may install in the Premises such equipment as
--------------
is customarily used in the type of business conducted by Tenant on the Premises.
Upon the expiration or sooner termination of this Lease, Tenant shall, at its
expense, remove from the Premises all such equipment and all other property of
Tenant and shall repair any damage to the Premises and the Building occasioned
by such removal. Any property left in the Premises after the expiration or
sooner termination of this Lease shall be deemed to have been abandoned by
Tenant and shall become the property of Landlord to dispose of as Landlord deems
expedient without accounting to Tenant therefor.
21. CONDEMNATION: If all of the Premises, or such portions of the Building
------------
as may be required for the reasonable use of the Premises, are taken by eminent
domain, this Lease shall automatically terminate as of the date Tenant is
required to vacate the Premises and all Rent shall be paid to that date. In case
of a taking of a part of the Premises, or a portion of the Building not required
for the reasonable use of the Premises, then this Lease shall continue in full
force and effect, except as otherwise provided below, and where a portion of the
Premises is taken, the Base Rent and Additional Rent under Section 9 shall be
equitably reduced based on the proportion by which the floor area of the
Premises is reduced, such reduction to be effective as of the date possession of
such portion is delivered to the condemning authority. If any part of the
Building or Land is taken (whether or not the Premises are affected) and, in the
opinion of Landlord, it is not economically feasible to continue this Lease in
effect, Landlord may terminate this Lease effective as of the date of such
taking and all Base Rent and Additional Rent under Section 10 hereof shall be
paid to that date. Landlord reserves all rights to damages to the Premises for
any taking by eminent domain, and Tenant hereby assigns to Landlord any right
Tenant may have to such damages or award, and Tenant shall make no claim against
Landlord for damages for termination of the leasehold interest or interference
with Tenant's business. Tenant shall have the right, however, to claim and
recover from the condemning authority compensation for any costs or loss which
Tenant may incur for Tenant's moving expenses and for the interruption of or
damage to Tenant's business, provided, that such damages may be claimed only if
they are awarded separately in the eminent domain proceeding and not as part of
the damages recoverable by Landlord.
22. DEFAULTS AND REMEDIES: Time is of the essence hereof, and in the event
---------------------
Tenant shall violate or breach or fail to keep or perform any covenant,
agreement, term or condition of this Lease or the rules and regulations
applicable to the Building, and if such default or violation shall continue or
shall not be remedied within five (5) days (or, if no default in Rent is
involved, within ten (10) days) after notice in writing thereof is given by
Landlord to Tenant, specifying the matter claimed to be in default, Landlord at
its option may immediately (or at any time thereafter) declare Tenant's rights
under this Lease terminated, and reenter the Premises using such force as may be
necessary, and repossess the Premises, and remove all persons and property from
the Premises. Notwithstanding any such termination or reentry, the liability of
Tenant for the full Rent provided for herein shall not be extinguished for the
balance of the Lease Term, and Tenant shall make good to Landlord any deficiency
arising from a reletting of the Premises at a lesser Rent, plus the costs and
expenses of renovating, altering and reletting the Premises, including without
limitation brokerage commissions, marketing costs, and Landlord's staff time.
Tenant shall pay any such deficiency each month as the amount thereof is
ascertained by Landlord. Landlord shall also have the option, exercisable at any
time, to recover from Tenant an amount equal to the Rent and other sums payable
under this Lease for the remainder of the Lease Term less replacement tenant
rents, discounted at the rate of 6% per year to present worth.
If Tenant fails to make any payment or perform any of its obligations under
this Lease, Landlord may, without notice to or demand upon Tenant and without
waiving or releasing Tenant from any obligations under this Lease, make such
payment or perform such obligation of Tenant in such manner and to such extent
as Landlord deems desirable. All sums paid by
10
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Landlord and all necessary costs and expenses in connection with the performance
of any such obligation by Landlord, together with interest at the Default Rate,
compounded monthly, from the date Landlord makes such expenditure, shall be
deemed additional rent hereunder and shall be payable to Landlord on demand.
23. SURRENDER OF PREMISES: Upon expiration or earlier termination of this
---------------------
Lease, Tenant shall surrender the Premises in good, neat, clean and sanitary
condition, ordinary wear and tear and damage by casualty excepted.
24. HOLDOVER:
--------
(a) In the event Tenant lawfully holds over after the expiration of
the Lease Term with the written consent of the Landlord, such
tenancy shall be a month-to-month lease terminable as provided by
law. During such tenancy, Tenant agrees to pay Landlord all Rent
and other charges as provided herein, and to be bound by all the
terms, covenants and condition of this Lease, except any
covenants granting Tenant a right of first refusal, an option to
extend the term of the Lease, or an option or right to lease
additional space.
(b) If Tenant, without Landlord's written consent, remains in
possession of the Premises after the expiration or termination of
this Lease, Tenant shall pay the greater of:
i) Two hundred percent (200%) of the Rent which Tenant was
obligated to pay for the month immediately preceding the
month in which this Lease expires or terminates for each
complete or partial month of any such holdover; or
ii) The total rent which other tenants have agreed to pay under
fully executed leases for the Premises during the period of
such holdover, if Landlord has leased all or part of the
Premises to other tenants effective upon the expiration or
termination of this Lease.
In the event of any unauthorized holding over, Tenant shall also indemnify
and hold Landlord harmless from and against all liability, losses, claims,
causes of action, damages, costs and expenses (including without limitation
attorneys' fees) resulting from Tenant's failure to surrender the Premises,
including without limitation claims made by succeeding tenants resulting from
Tenant's failure to surrender the Premises.
25. SUBORDINATION: Without the necessity of any additional document being
-------------
executed by Tenant, this Lease shall be subject and subordinate at all times to
the lien of any mortgage or deed of trust which may now exist or hereafter be
executed in any amount for which all or any portion of the Land or the Building
or all or any part of Landlord's interest in the Land or the Building is
specified as security, and to all renewals, modifications, extensions,
substitutions, replacements and/or consolidations thereof, provided that if
Tenant is not in default, Tenant's rights under this Lease are not disturbed or
terminated In the event that any such mortgage or deed of trust is foreclosed or
conveyance in lieu of foreclosure is made for any reason, Tenant shall attorn to
and become the tenant of the purchaser at such foreclosure sale or the grantee
or transferee designated in any deed in lieu of foreclosure at the request of
such purchaser, grantee or transferee. If required by the holder of the lien of
such mortgage or deed of trust, Tenant shall execute and deliver a subordination
and attornment agreement required by such holder who provides Tenant with its
standard form non-disturbance agreement. If Tenant fails to execute and deliver
such agreement within fifteen (15) business days after Landlord's request, in
addition to the other remedies provided for in this Lease, Tenant shall pay
Landlord a late charge of $100.00 per day. The parties agree that this late
charge represents a fair and reasonable estimate of the costs that Landlord will
incur by reason of late delivery by Tenant.
26. ESTOPPELS: At the written request of Landlord, Tenant shall execute,
---------
acknowledge and deliver to Landlord or its designee a statement in writing
certifying that this Lease is unmodified and in full force and effect (or if
there have been modifications, that the same is in full force and effect as
modified and stating the modifications), whether any party is in default or
breach of this Lease or, with the giving of notice or lapse of time, or both,
would be in
11
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default or breach of this Lease, and the dates to which the Base Rent and other
charges have been paid in advance, if any. It is agreed that any such
certificate may be relied on by a prospective purchaser or a mortgagee of all or
any part of Landlord's interest in the Building, or the Land. If Tenant shall
fail to respond within ten (10) days after receipt of a written request by
Landlord, Tenant shall be deemed to have admitted the accuracy of any
information set forth in the statement delivered to Tenant. If Tenant fails to
execute and deliver such statement within fifteen (15) business days after
Landlord's request, in addition to the other remedies provided for in this
Lease, Tenant shall pay Landlord a late charge of $100.00 per day. The parties
agree that this late charge represents a fair and reasonable estimate of the
costs that Landlord will incur by reason of late delivery by Tenant.
27. NOTICES: Any notice, demand, request, consent, approval or other
-------
communication under this Lease shall be in writing and shall be personally
delivered or sent by United States registered or certified mail, return receipt
requested, addressed to Landlord and Tenant at the addresses provided in Section
1(l) or to such other place as either party may from time to time designate by
notice to the other. All such notices and communications shall be effective on
the earlier of the date of actual receipt or, if mailed, five (5) business days
after deposit in the mail in accordance with this section.
28. WAIVER OF SUBROGATION: Landlord and Tenant shall each procure an
---------------------
appropriate clause in, or an endorsement to, any policy of fire and special
peril insurance covering the Premises, and the Building, and the personal
property, fixtures and equipment located in or on the Premises, in which the
insurance companies waive subrogation or consent to a waiver of right of
recovery, and each party agrees that it shall not make any claim against or seek
to recover from the other for any loss of or damage to its property resulting
from fire or other hazards covered by such insurance, notwithstanding any other
provisions of this Lease to the contrary; provided, however, that the release,
discharge, exoneration and covenant not to sue herein contained shall be limited
by the terms and provisions of the waiver of subrogation clauses or endorsements
consenting to a waiver of right of recovery, and shall be co-extensive
therewith. If either party is unable to obtain such a clause or endorsement, it
shall promptly notify the other party.
29. HAZARDOUS SUBSTANCES:
--------------------
(a) Tenant shall not cause or permit any Hazardous Substances, as
defined below, to be brought upon, kept or used in or about the
Premises, the Building, or the Land by Tenant, its agents,
employees, contractors or invitees, unless such Hazardous
Substances are necessary for Tenant's business (and such business
is a Permitted Use) and will be used, kept, and stored in a
manner that complies with this Lease and all laws, regulations
and ordinances regulating any such Hazardous Substances, provided
that Tenant first obtains the written consent of Landlord and
provided further that Tenant indemnifies Landlord from and
against any and all liability with respect to such Hazardous
Substances as more particularly described below. If Tenant
breaches the covenants and obligations set forth herein or, if
the presence of Hazardous Substances on, in or about the Premises
or any part of the Building or Land or any other property caused
or permitted by Tenant, its agents, employees, contractors or
invitees, results in contamination of the Premises or any part of
the Building or Land or any other property or, if contamination
of the Premises or any part of the Building or Land or any other
property by Hazardous Substances otherwise occurs for which
Tenant is legally liable to Landlord, then Tenant shall indemnify
and hold Landlord harmless from and against any and all claims,
judgments, damages, penalties, fines, costs, liabilities and
losses (including, without limitation, diminution in the value of
the Premises, the Building or Land, damages for the loss or
restriction on use of rentable or usable space or of any amenity
of the Premises or any part of the Building or Land, and sums
paid in settlement of claims, attorneys' fees, consultant fees
and expert fees) which arise during or after the Lease Term as a
result of such contamination. This indemnification by Tenant of
Landlord includes without limitation any and all costs incurred
in connection with any investigation of site conditions and any
cleanup,
12
<PAGE>
remedial, removal or restoration work required by any federal,
state or local governmental agency or political subdivision
because of the presence of such Hazardous Substances in, or about
the Premises, the Building or Land or the soil or ground water on
or under the Building or the surface of the Land. The provisions
of this section shall survive the termination of this Lease.
(b) For purposes of this section, the term "Hazardous Substances"
means any hazardous, toxic, dangerous or harmful substances,
materials, wastes, pollutants or contaminants, including, but not
limited to those substances, materials and wastes listed in the
United States Department of Transportation Hazardous Materials
Table (49 C.F.R. 172.101) or by the Environmental Protection
Agency as hazardous substances (40 C.F.R. Part 302) and
amendments thereto, or such substances, materials and wastes
which are or become regulated under any applicable local, state
or federal law (and any and all amendments thereto) including
without limitation (i) the Resource Conservation and Recovery
Act, 42 U.S.C. (S) 6901 et seq.; (ii) the Comprehensive
------
Environmental Response, Compensation, and Liability Act, 42
U.S.C. (S) 9601, et seq.; (iii) the Hazardous Materials
------
Transportation Act, 49 U.S.C. (S) 1801 et seq.; (iv) the Federal
------
Water Pollution Control Act, 33 U.S.C. (S) 1257 et seq.; (v) the
------
Clean Air Act, 42 U.S.C. (S) 7401 et seq.; (vi) the Toxic
------
Substances Control Act, 15 U.S.C. (S) 2601 et seq.; (vii) the
------
Federal Insecticide, Fungicide, Rodenticide Act, 7 U.S.C. (S) 136
et seq.; and (viii) the Washington Hazardous Substance and Model
------
Toxics Control Acts, Chapters 70.105 and 70.105C RCW. The term
specifically includes petroleum, asbestos, polychlorinated
biphenyls, and any other substance or matter defined as a toxic
or hazardous substance or material or pollutant or contaminant
under any other federal, state or local laws, ordinances or
regulations or under any reported decision of a state or federal
court, or any substance or matter imposing liability for cleanup
costs or expenses on any person or entity under any statutory or
common law theory. The term shall also be interpreted to include
but not be limited to any substance which after release into the
environment and upon exposure, ingestion, inhalation or
assimilation, either directly from the environment or directly by
ingestion through food chains, will or may reasonably be
anticipated to cause death, disease, behavior abnormalities,
cancer and/or genetic abnormalities, and oil and petroleum based
derivatives. The term shall not include materials used in the
ordinary course of normal office operations and otherwise used
and disposed of in accordance with applicable laws and
regulations.
30. RULES AND REGULATIONS: Tenant shall use the Premises and the common
---------------------
areas in the Building and the Land in accordance with such rules and regulations
not inconsistent with this Lease as may from time to time be made by Landlord
for the general safety, comfort and convenience of Landlord and tenants of the
Building, and Tenant shall cause its employees, agents, invitees and licensees
to abide by such rules and regulations. A copy of the current rules and
regulations is attached as Exhibit D.
31. RECORDING: Unless both parties consent in writing, neither this Lease
---------
nor a memorandum of this Lease may be recorded.
32. LIGHT, AIR AND VIEW: Landlord does not guarantee the continued present
-------------------
status of light, air or view over any property adjoining or in the vicinity of
the Building.
33. MISCELLANEOUS PROVISIONS:
------------------------
(a) NONWAIVER: No delay or omission in the exercise of any right or
---------
remedy of either party on any default by the other party shall
impair such right or remedy or be construed as a waiver of any
default. No acceptance of Rent or of any other payment by
Landlord from Tenant after any default by Tenant shall constitute
a waiver of any such default or any other default. Consent by
Landlord in any one instance shall not dispense with the
necessity of obtaining Landlord's consent in all other instances.
13
<PAGE>
(b) ATTORNEY'S FEES: In the event suit or action is instituted to
---------------
enforce any of the terms of this Lease, including any and all
bankruptcy claims, actions and proceedings deemed necessary or
desirable to enforce any of the terms of this Lease or otherwise
protect the interest of either party, the prevailing party shall
be entitled to recover such sums as the court may adjudge
reasonable as attorney's fees and expenses, including fees or
expenses that may be incurred in any appellate proceeding. In
the event neither party wholly prevails, the party which
substantially prevails shall be awarded a reasonable sum as
attorney's fees and litigation expenses.
(c) CAPTIONS: The captions in this Lease are for convenience only
--------
and are not to be considered in the interpretation of Lease
terms.
(d) GOVERNING LAW: This Lease shall be governed by and construed and
-------------
interpreted in accordance with the laws of the State of
Washington.
(e) ENTIRE AGREEMENT AND MODIFICATIONS: This Lease contains all
----------------------------------
agreements between Landlord and Tenant. No prior agreements or
understandings pertaining to the same shall be valid or of any
force or effect. This Lease may not be modified except in
writing signed by both parties.
(f) JOINT AND SEVERAL OBLIGATIONS: "Party" shall mean Landlord or
-----------------------------
Tenant; and if more than one person or entity is Landlord or
Tenant, the obligations imposed on that party shall be joint and
several.
(g) BROKER'S COMMISSIONS: Each party represents to the other that it
--------------------
has not had dealings with any real estate broker, finder, or
other person who would be entitled to any commission or fee in
connection with the negotiation, execution or delivery of this
Lease except Colliers International, whose fee shall be paid by
----------------------
Times Square Building LLC. The commission shall be a fee equal
-------------------------
to $3.50 per rentable square foot leased. This fees shall be
payable one-half upon lease execution of the Lease Amendment
enlarging the Premises and one-half upon occupancy of the space.
In addition, Colliers shall be paid a fee equal to $3.50 per
rentable square foot on any expansion space taken during the
first two (2) years of the initial lease term. This fee shall be
payable one-half upon execution and one-half upon occupancy of
the space. If any other claims for brokerage commissions,
finder's fees, or like payments arise out of or in connection
with this transaction, such claims shall be defended and if
sustained paid by the party whose alleged actions or commitment
form the basis of such claims.
(h) NAME: Tenant shall not use the name of the Landlord for any
----
purpose and shall not use the name of the Building for any
purpose other than as an address of the business to be conducted
by the Tenant on the Premises. Landlord shall have the right at
any time to change the name, number or designation by which the
Building or the Premises is known without any liability to
Tenant. Tenant shall not use any fictitious name to which
Landlord reasonably objects.
(i) SUCCESSOR AND ASSIGNS: All of the terms, conditions, covenants
---------------------
and agreements of this Lease are binding upon and, subject to the
provisions of Section 16 of this Lease, shall inure to the
benefit of Landlord, Tenant, and their respective heirs,
administrators, executors, successors and assigns.
(j) TIME: Time is of the essence of this Lease.
----
(k) SEVERABILITY: The unenforceability, invalidity or illegality of
------------
any provision of this Lease shall not render any other provision
unenforceable, invalid or illegal.
14
<PAGE>
(l) INTERPRETATION: This Lease has been submitted to the scrutiny of
--------------
all parties and their counsel, if desired, and shall be given a
fair and reasonable interpretation, without consideration or
weight being given to its having been drafted by any party or
such party's counsel.
(m) REMEDIES CUMULATIVE: The specified remedies to which Landlord
-------------------
may resort under the terms of this Lease are cumulative and are
not intended to be exclusive of any other remedies available to
Landlord at law, in equity, or otherwise.
(n) FORCE MAJEUR: Neither party shall have liability for any act,
------------
failure to act, delay, error, cost or other consequence of any
act of God, natural disaster, war, civil disturbance, court
order, or third party nonperformance, any interruption,
malfunction or error of communication or computer systems,
software, operations or facilities (whether or not such party's
could have anticipated or forestalled any such event or
occurrence), or any cause that is beyond such party's reasonable
control, except for payment of monetary amounts due hereunder or
for waste.
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease as of the date first
written above.
LANDLORD: TIMES SQUARE BUILDING LLC
/s/ Mark Houtchens
By:__________________________________
Mark Houtchens
Its: Authorized Agent
TENANT: ENCODING.COM, INC.
_____________________________________
/s/ D.C. Bullis
By:__________________________________
David Bullis
Its: President and COO
_______________________________
16
<PAGE>
STATE OF Washington )
----------------
) ss.
COUNTY OF King )
---------------
On this 24th day of August, 1999, before me, the undersigned, a
Notary Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Mark Houtchens, known to me to be the Authorized Agent of
-------------- ----------------
Times Square Building LLC, the licensed liability company that executed the
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said company, for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute said instrument.
--
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgement is the person whose true
signature appears on this document.
WITNESS my hand and official seal hereto affixed the day and year in the
certificate above written.
/s/ Dana Bollinger
____________________________________________________
Signature
Dana Bollinger
____________________________________________________
Print Name
NOTARY PUBLIC in and for the State of WA ,
_____________
residing at Seattle
________________________________________
My commission expires 7/15/00
______________________________
STATE OF WA )
) ss.
COUNTY OF King )
On this 12th day of August, 1999, before me, the undersigned, a
Notary Public in and for the State of Washington, duly commissioned and sworn,
personally appeared David Bullis, known to me to be the President and COO of
------------ -----------------
Encoding.com, Inc., the corporation that executed the foregoing instrument, and
- ------------------
acknowledged the said instrument to be the free and voluntary act and deed of
said corporation, for the uses and purposes therein mentioned, and on oath
stated that he was authorized to execute said instrument.
--
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgement is the person whose true
signature appears on this document.
WITNESS my hand and official seal hereto affixed the day and year in the
certificate above written.
/s/ Dana Bollinger
____________________________________________________
Signature
Dana Bollinger
____________________________________________________
Print Name
NOTARY PUBLIC in and for the State of WA ,
_____________
residing at Seattle
________________________________________
My commission expires 7/15/00
______________________________
<PAGE>
EXHIBIT 10.18
LEASE AGREEMENT
between
MARTIN TOBIAS AND ALEX TOBIAS
("LANDLORD")
and
ENCODING.COM, INC.
("TENANT")
Dated: September 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Lease; Rights with Regard to Sale of Property......................... 1
1.1 Lease...................................................... 1
1.2 Right of First Refusal..................................... 1
2. Term and Termination.................................................. 2
2.1 Initial Term............................................... 2
2.2 Extension Options.......................................... 2
2.3 Early Termination.......................................... 2
3. Rent.................................................................. 2
3.1 Monthly Rent............................................... 2
3.2 Periodic Rent Increases.................................... 2
3.3 Late Payments.............................................. 3
3.4 Additional Rent for Landlord's Work........................ 3
4. Taxes................................................................. 3
4.1 Real Estate Taxes.......................................... 3
4.2 Personal Property Taxes.................................... 3
5. Use................................................................... 4
6. Utilities............................................................. 4
6.1 Utilities.................................................. 4
6.2 Payment of Utilities....................................... 4
7. Maintenance and Repairs............................................... 4
7.1 Tenant's Obligations....................................... 4
7.2 Tenant's Failure to Repair................................. 5
7.3 Landlord's Obligations..................................... 5
8. Alterations and Improvements.......................................... 5
8.1 Signage.................................................... 5
8.2 Tenant's Security System................................... 5
8.3 Installation; Consent; Ownership........................... 6
8.4 Liens; Indemnification..................................... 6
8.5 Removal of Alterations; Surrender.......................... 6
8.6 Surrender.................................................. 7
9. Insurance; Indemnity.................................................. 7
9.1 Liability Insurance........................................ 7
9.2 Tenant's Personal Property Insurance....................... 7
9.3 Tenant's Real Property Insurance........................... 8
9.4 Waiver of Recovery and Subrogation......................... 8
9.5 Indemnification............................................ 8
10. Damage or Destruction; Condemnation.................................. 10
10.1 Damage Rendering Building Untenantable..................... 10
10.2 Condemnation............................................... 10
10.3 Abatement of Rent.......................................... 10
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
11. Assignment and Subletting............................................ 11
11.1 Assignment Without Consent................................ 11
11.2 Assignment With Consent................................... 11
11.3 Effect of Transfer........................................ 11
12. Landlord's Warranties................................................ 11
13. Tenant's Warranties.................................................. 12
14. Defaults; Remedies................................................... 12
14.1 Defaults.................................................. 12
14.2 Landlord's Remedies....................................... 12
14.3 Default by Landlord....................................... 13
14.4 Tenant's Remedies......................................... 13
14.5 Self-help................................................. 13
15. Environmental Provisions............................................. 14
15.1 Environmental Law......................................... 14
15.2 Hazardous Substances...................................... 14
15.3 Landlord's Representation; Agreement...................... 14
15.4 Tenant's Agreement........................................ 14
15.5 Indemnity................................................. 14
15 6 Survival.................................................. 15
16. General Provisions................................................... 15
16.1 Subordination............................................. 15
16.2 Tenant Audit.............................................. 15
16.3 Estoppel Statement........................................ 15
16.4 Landlord's Interests...................................... 16
16.5 Landlord Access........................................... 16
16.6 Severability.............................................. 16
16.7 Entire Agreement; Amendments; Waiver...................... 16
16.8 Binding Effect; Choice of Law............................. 16
16.9 Attorneys' Fees........................................... 17
16.10 Quiet Possession.......................................... 17
16.11 Counterparts.............................................. 17
17. Notices.............................................................. 17
18. Waiver of Consequential Damages...................................... 17
19. Confidentiality...................................................... 17
</TABLE>
-ii-
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease"), is made effective as of September 1,
-----
1998, (the "Commencement Date"), by and between Martin Tobias and Alex Tobias,
-----------------
individuals residing in the state of Washington (collectively, "Landlord"), and
--------
Encoding.com, Inc., a Delaware corporation ("Tenant").
------
1 Lease; Rights with Regard to Sale of Property.
1.1 Lease. Landlord leases to Tenant, and Tenant leases from Landlord,
subject to the terms and conditions set forth in this Lease, the building
("Building") and that certain real property (the "Land") located at 3406 East
-------- ----
Union Street, Seattle, Washington, and as more fully and legally described on
Exhibit A attached hereto, upon which the Building is located (collectively, the
- ---------
"Property"), together with appurtenances and the benefits of any appurtenant
--------
easements and rights of way.
1.2 Right of First Refusal. Landlord hereby grants to Tenant, so long as
Tenant is not in material default under this Lease, a right of first refusal to
purchase the Property on the terms and conditions contained in this Section 1.2.
(a) If at any time during the Term (as defined in Section 2.1),
Landlord receives a bona fide offer (an "Offer") from any person to purchase the
-----
property (the "Potential Buyer"), and Landlord wants to accept such offer,
---------------
Landlord shall send to Tenant a copy of the Offer, deleting the Potential
Buyer's name and notifying Tenant of Landlord's intention to accept the Offer.
Tenant shall have the right within thirty (30) days after receipt of the Offer
to accept the terms of the Offer in its own name or in the name of a nominee for
the gross purchase price and on the terms specified in the Offer subject to any
modifications permitted under Section 1.2(b).
(b) Landlord and Tenant acknowledge and agree that Tenant plans,
without obligation, to undertake substantial improvements (the "Improvements")
------------
to the Property pursuant to Section 8.3. Provided such Improvements are not
removed in accordance with Section 8.5, if Tenant chooses to accept an Offer,
Tenant shall be entitled to deduct from the purchase price contained in such
Offer an amount equal to the unamortized cost of those Improvements undertaken
by Tenant during the initial two years of the Lease (the "Initial
-------
Improvements"), as stated by Tenant in Tenant's Federal income tax return
- ------------
relating thereto. For purposes of this Section 1.2, the cost of the Improvements
shall be amortized using the straight-line amortization method, with the
amortization period beginning with the year in which the Improvements were made
and extending for the following five (5) years. To illustrate the mechanics of
this credit, assume that: (a) the cost of the Improvements is $250,000, made in
the first year of the Term; (b) the right of first refusal is exercised three
(3) years from the Commencement Date, and (c) the purchase price contained in
the Offer is $2,000,000. The cost of the Improvements will be amortized at the
rate of $50,000 per year, the amount of the credit will be $100,000 ($250,000
minus $150,000), and Tenant will be entitled to accept the terms of the Offer
with a purchase price of $1,900,000.
<PAGE>
(c) If Tenant elects not to purchase the Property within such thirty
(30) day period, Landlord may then sell the Property to the Potential Buyer,
provided that the sale is on the same terms and conditions and for the same
price set forth in the Offer, a true copy of which was sent to Tenant. In the
event Landlord sells the Property to the Potential Buyer, the terms of this
Lease shall continue in full force and effect as if the Property had not been
sold.
(d) The right of first refusal contained in this Section 1.2 shall
extend throughout the Term and any Options exercised by Tenant. The failure of
Tenant to exercise the right of first refusal shall not be considered a waiver
of such right with regard to any future sales of the Property by Landlord;
provided, however, that the right of first refusal shall not apply to any
successor to Landlord through a bona fide sale of the Property.
2. Term and Termination.
2.1 Initial Term. This Lease shall have a term (the "Term") of five (5)
----
years and shall commence on September 1, 1998 (the "Lease Commencement Date")
-----------------------
and shall end on September 1, 2003, or such later or earlier date as provided in
Sections 2.2 and 2.3 (the "Lease Termination Date"). Tenant shall not be
----------------------
obligated to pay Rent, as defined below, until Tenant takes possession of the
Property (the "Rent Commencement Date").
----------------------
2.2 Extension Options. Tenant shall have the right to extend this Lease
for one (1) additional period of five (5) years (an "Option"), upon the same
------
terms and conditions of this Lease. To exercise an Option, Tenant must not be in
material default under this Lease and must give written notice to Landlord that
Tenant is exercising the Option at least sixty (60) days before the Term
expires.
2.3 Early Termination. Notwithstanding any other provision of this Lease,
Tenant shall have the right, at Tenant's election, to terminate this Lease one
(1) year from the Lease Commencement Date by giving 30 days prior written
notice. Upon Tenant's early termination of the Lease pursuant to this Section
2.3, and as consideration therefor, Tenant shall pay to Landlord, within ten
(10) days of the effective date of such termination, the amount of Fifty Two
Thousand Four Hundred Forty Three Dollars ($52,443.00), which is equal to six
(6) months Rent (as defined in Section 3.1 below).
3. Rent.
3.1 Monthly Rent. Tenant shall pay to Landlord as monthly rent for the
Property Eight Thousand Seven Hundred Forty Dollars and Fifty Cents ($8,740.50),
in advance on or before the first day of each month of the Term (the "Basic
-----
Rent"). Basic Rent for a partial month shall be prorated on the basis of a
- ----
thirty (30) day month. Basic Rent shall be payable to Landlord at the address
stated herein or to such other persons or at such other places as Landlord may
designate in writing.
3.2 Periodic Rent Increases. Upon exercise of the Option at the expiration
of the Term, the amount due as Basic Rent under Section 3.1 shall be increased
by a percentage equal to the cumulative percentage increase in the Consumer
Price Index, U.S. City Average, All
-2-
<PAGE>
Urban Consumers (1982-84=100), as published by the United States Department of
Labor's Bureau of Labor Statistics, that has occurred during the preceding five
(5) years; provided, however, that the increase for each year cumulated shall be
no less than one percent (1%) and no more than five percent (5%).
3.3 Late Payments. Failure by Tenant to pay Basic Rent or any other sums
due hereunder within ten (10) business days after such payment is due shall
subject such payment to a late fee equal to five percent (5%) of the payment
that is late.
3.4 Additional Rent for Landlord's Work. During the initial Term of the
Lease, Tenant shall pay to Landlord, in addition to Basic Rent, a monthly
payment of One Thousand Two Hundred Forty One Dollars and Forty Cents
($1,241.40) as reimbursement to Landlord for work and improvements Landlord made
to Property prior to Tenant's possession of the Property ("Additional Rent").
---------------
Basic Rent and Additional Rent shall hereinafter be referred to as "Rent".
----
Tenant shall not pay Additional Rent during any Option period.
4. Taxes.
4.1 Real Estate Taxes. Tenant shall be responsible for and shall pay when
due, all general real estate taxes ("Real Estate Taxes"), levied against the
-----------------
Property that are allocable to the Term, including any local improvement
district assessment that is levied upon or assessed against the Property during
the Term or otherwise payable as of the Commencement Date. Real Estate Taxes
shall exclude, without limitation, any personal or corporate income, franchise,
gross receipts, corporation, capital levy, excess profits, revenue, inheritance,
gift, estate, payroll or stamp tax or any tax upon the sale, transfer or
assignment of Landlord's title or estate which at any time may be assessed
against or become a lien upon all or any part of the Property or this leasehold.
In addition, Real Estate Taxes shall exclude any liens or taxes, penalties or
interest that are allocable to the Property for any time prior to the Term. If
at any time during the Term the laws concerning the methods of real property
taxation prevailing at the commencement of the Term are changed so that a tax or
excise on rents or any other such tax, however described, is levied or assessed
against Landlord as a direct substitute in whole or in part for any Real Estate
Taxes, before delinquency the substitute tax or excise on rents shall be deemed
to be Real Estate Taxes. Landlord shall promptly provide Tenant with the
statement of the Real Estate Taxes upon receipt of the same.
4.2 Personal Property Taxes. Tenant shall pay prior to delinquency all
taxes assessed against and levied upon Tenant owned alterations and
improvements, utility installations, trade fixtures, furnishings, equipment and
all personal property of Tenant contained in the Building or on the Property.
When possible, Tenant shall cause its trade fixtures, furnishings, equipment and
all other personal property to be assessed and billed separately from the real
property of Landlord. If any of Tenant's personal property shall be assessed
with Landlord's real property, Tenant shall pay Landlord the taxes attributable
to Tenant within twenty (20) days after receipt of a written statement setting
forth the taxes applicable to Tenant's property.
-3-
<PAGE>
5 Use. The Building shall be used and occupied for office, computer and
audio/visual equipment, and maintenance of electronic products, sales activities
related thereto and such other lawful uses permitted by and in compliance with
applicable governmental regulations. Tenant shall, at its expense, comply
promptly with all laws, rules, and regulations promulgated by any governmental
authority having jurisdiction over the Building relating to Tenant's use. Tenant
shall not use or permit the use of the Building for any illegal purpose. Tenant
shall not use or permit the use of the Building in a manner that creates waste
or a nuisance, or causes damage to the Building, or that unreasonably disturbs
owners and/or occupants of, or causes damage to, neighboring premises or
properties. Tenant shall have the exclusive right to use, in compliance with all
laws, all of the parking stalls available for use located within the Building,
subject to the rules and regulations and any charges that may be established or
altered for such parking facilities from time to time.
6. Utilities.
6.1 Utilities. Landlord will provide the following utilities which shall
be directly metered to Tenant:
(a) Electricity for lighting, equipment, and appliances used in the
tenant's business,
(b) Heating, venting and air conditioning system that controls all
areas of the Building to a temperature appropriate for Tenant's business; and
(c) Water for drinking, restroom and office cleaning purposes.
6.2 Payment of Utilities. Tenant shall pay for all water, gas, heat,
light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Building or to Tenant,
together with any taxes thereon. Landlord shall promptly provide Tenant with
copies of all utility statements upon receipt of the same.
7. Maintenance and Repairs.
7.1 Tenant's Obligations. Subject to the provisions of Section 7.3
(Landlord's obligations to repair) and Section 10 (damage and destruction and
condemnation), Tenant shall, at Tenant's sole cost and expense and at all times,
keep the Building in good order, condition, and repair, including, without
limiting the generality of the foregoing, all equipment or facilities serving
the Building and located thereon, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, telecommunications, fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing system,
including fire alarm and/or smoke detection systems and equipment, fire
hydrants, fixtures, interior walls, ceilings, floors, windows, doors, plate
glass, and skylights. Tenant shall also keep the sidewalk adjacent to the
Building and all stairways, platforms, parking areas, and service areas which
solely serve and/or are immediately adjacent to the Building in good maintenance
and repair and clear of debris, rubbish, snow, ice and excess moisture or water.
Tenant, in keeping the Building in good order, condition and repair, shall
exercise and perform good maintenance practices. Tenant's obligations shall
include
-4-
<PAGE>
replacements or renewals when necessary to keep the Building and the
improvements on all or a part of the Building in good order, condition, and
state of repair. Tenant shall be responsible for all costs incurred in
connection with the maintenance and service of the following equipment and
improvements, if any, located in or on the Building: (i) heating, air
conditioning and ventilation equipment, (ii) fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing systems, including fire alarm and/or
smoke detection, and (iii) landscaping and yard maintenance. Tenant shall be
responsible for all costs and expenses required under such contract(s).
7.2 Tenant's Failure to Repair. If Tenant refuses or fails to perform its
repair obligations within a period of ten (10) days after receipt of written
notice or such longer period as may be reasonably required so long as Tenant has
commenced its repair obligations within ten (10) days after receipt of such
written notice from Landlord then, in addition to all other rights and remedies
available to Landlord, Landlord may, but is not required to, enter the Building
and make the repairs and the costs of the repairs shall be due from Tenant upon
demand provided, that Landlord shall not be obligated to give Tenant notice and
an opportunity to comply if there is an immediate danger to persons or property
or if an emergency exists and Tenant fails to perform its repair obligations.
7.3 Landlord's Obligations. At all times, Landlord shall, at Landlord's
sole cost and expense, keep in good order, condition and repair all structural
aspects of the Building and Property, including but not limited to the roof,
drains, downspouts, gutters, walls, floors, exterior utility services and
foundation of the Building. Landlord shall give reasonable advance notice to
Tenant of such repairs to the extent practical and feasible and Landlord's
repairs shall not affect Tenant's ability to transact business at the Building.
In the event Tenant's access to the Building is blocked due to Landlord's
repairs, Tenant's Rent shall be abated in an amount proportionate to that
portion of Tenant's space that is inaccessible due to the repairs. Other than
Landlord's obligations set forth in this Section 7.3 and in Section 10 hereof
(relating to destruction and condemnation of the Building), it is intended by
the parties hereto that Landlord have no further obligation to repair and
maintain the Building, the improvements located in or on the Building, or the
equipment in the Building, all of which obligations are intended to be that of
the Tenant under Section 7.1 of this Lease. It is the intention of the parties
that the terms of this Lease govern the respective obligations of the parties as
to maintenance and repair of the Building.
8. Alterations and Improvements.
8.1 Signage. Tenant is authorized to install at its expense a sign or
signs identifying Tenant by its business name on the Building exterior and to
install a sign at each employee and public entrance to the Building. All such
signs shall be installed in compliance with the requirements of applicable laws.
8.2 Tenant's Security System. Tenant may install keyed, combination, or
cipher locks on interior doors of the Building, provided Tenant obtains
Landlord's prior written consent, which shall not be unreasonably withheld.
Tenant may install an electronic security system in the Building, including, but
not limited to, pass card door lock systems and camera surveillance
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systems, provided Tenant obtains Landlord's prior written consent, which shall
not be unreasonably withheld. Tenant agrees to provide Landlord with such keys,
combinations, cards, passwords or other devices or information as required to
permit Landlord independent access to the Building. Landlord agrees to give
Tenant a minimum of one (1) full business day's notice prior to any entry by the
Landlord to the Building in the capacity as Landlord provided, however, that no
prior notice shall be required of Landlord in the case of an emergency situation
necessitating immediate action by Landlord to preserve or protect the Building
or Property.
8.3 Installation; Consent; Ownership. The parties agree that Tenant
intends, without obligation, to remodel and expand the Building substantially
and will incur all costs in connection with such a remodel. Consent to such
remodeling and expansion is hereby given by Landlord, conditioned upon: (i)
Tenant's acquiring all applicable permits required by governmental authorities,
(ii) the furnishing of copies of such permits together with a copy of the plans
and specifications for the alteration or improvement to Landlord prior to
commencement of the work, and (iii) the compliance by Tenant with all conditions
of such permits in a prompt and expeditious manner. Any alterations or
improvements by Tenant during the Term of this Lease (together, the "Tenant
------
Work") shall be done in a good and workmanlike manner, with good and sufficient
- ----
materials, and in compliance with all applicable law. Tenant shall promptly upon
completion furnish Landlord with as-built plans and specifications for any such
alteration or improvement.
8.4 Liens; Indemnification. Any alterations and additions to the Building
done by Tenant shall be for its own account and not as Landlord's agent. Tenant
has no authority, express or implied, to create or place any lien or encumbrance
of any kind or nature whatsoever upon, or in any manner to bind the interest of
Landlord in the Building, including with respect to those who may furnish
materials or perform labor or professional services with respect to any
construction or repairs. Tenant shall keep the Building free of and hold
Landlord harmless from any liens arising out of work performed, materials
furnished, or obligations incurred by or for Tenant. In the event that Tenant
shall contest the amount or validity of any such liens, Tenant shall furnish to
Landlord a surety bond satisfactory to Landlord in an amount equal to one and
one-half times the amount of such contested lien claim or demand, indemnifying
Landlord against liability, for the lien or claim, as required by law for the
holding of the Building free from the effect of such lien or claim. in addition,
Landlord may require Tenant to pay Landlord's reasonable attorneys' fees and
costs in participating in such action if Landlord shall decide it is in its best
interest to do so. Tenant agrees to provide Landlord with written notice of its
intent to cause the performance of any labor or services, or the furnishing of
any materials to or for the benefit of the Building, at least thirty (30) days
prior to the date of the commencement of performance, and Landlord shall have
the right to post notices of non-responsibility in or about the Building as
provided by law.
8.5 Removal of Alterations; Surrender. At any time during the Term, Tenant
may, at Tenant's expense and with Landlord's consent (which will not be
unreasonably withheld), remove Tenant's Work. All such removals shall be
accomplished in good workmanlike manner so as not to damage the primary
structure or structural qualities of the Building and other improvements on the
Building and Property. Unless otherwise agreed in writing, Landlord may
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require that Tenant's Work be removed by the expiration or earlier termination
of this Lease, notwithstanding that such installation may have been consented to
by Landlord. Landlord may require the removal at any time of all or any part of
Tenant's Work installed without the required consent of Landlord. Any part of
Tenant's Work that is not removed prior to the expiration or termination of this
Lease shall become the property of Landlord. In the event of removal, Tenant
shall, at its sole cost, repair any damage to the Building caused by such
removal of Tenant's Work.
8.6 Surrender. Tenant shall surrender the Property by the end of the last
day of the Lease term or any earlier termination date, with all of the
improvements, parts, and surfaces of the Building clean and free of debris and
in good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
---------------------
that would have been prevented by Tenant performing all of its obligations under
this Lease. The obligation of Tenant shall include the repair of any damage
occasioned by the installation, maintenance or removal of Tenant's alterations
and improvements.
9. Insurance; Indemnity.
9.1 Liability Insurance. Tenant shall purchase and keep in force during
the Term a Commercial General Liability Policy (a "Policy") with limits of not
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less than $1,000,000.00 per occurrence covering bodily injury to persons,
including death, and damage to property, however occasioned, in, on or about the
Property. Such insurance shall be with responsible insurers acceptable to
Landlord (whose acceptance shall not be unreasonably withheld or delayed) and
shall provide coverage for the Tenant's insurable contractual liability assumed
in Section 9.5. Tenant shall cause its Commercial General Liability insurer to
name Landlord as an additional insured under the Policy to the extent of its
insurable contractual liability assumed in Section 9.5. The Policy shall contain
a severability of interests provision, a provision that the insurance provided
to Landlord as additional insured shall be primary to and not contributory with
insurance maintained by Landlord, a provision that losses and damages to
Landlord's Property are payable directly to Landlord and a provision that an act
or omission of one of the insureds or additional insureds that would void or
otherwise reduce coverage shall not reduce or void the coverage as to the other
named and additional insureds. Upon demand, the Landlord will be furnished with
a certificate of insurance evidencing that the foregoing insurance is in effect.
Such insurance shall (a) be kept current throughout the Term of this Lease, (b)
reflect the status Landlord as additional insured, and (c) provide for thirty
(30) days advance notice to Landlord in the event of cancellation of the Policy.
9.2 Tenant's Personal Property Insurance. Throughout the Term, Tenant
shall maintain, at Tenant's expense, standard form property insurance insuring
against the perils of fire, extended coverage, vandalism, malicious mischief,
special extended coverage ("All Risk") and sprinkler leakage. This insurance
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policy shall be upon all property owned by Tenant, for which Tenant is legally
liable and which is located at the Building, including but not limited to
furniture, fittings, installations, fixtures, and any other personal property of
Tenant, in an amount not less than ninety percent (90%) of the replacement cost
thereof at Tenant's option, Tenant may undertake to maintain deductibles under
the property insurance policy and may elect to self-
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insure some or all of the property located at the Building. Any undertaking by
Tenant to assume deductibles or self-insure its property located at the Building
shall not serve to adversely affect Landlord, and Landlord shall be protected
against loss or damage to Tenant's property in the same manner as if Tenant's
property were fully insured.
9.3 Tenant's Real Property Insurance. At all times during the Term, Tenant
shall maintain a standard form property insurance policy with responsible
insurers covering the Building against the perils of fire, extended coverage,
vandalism, malicious mischief, special extended coverage ("All Risk") and
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sprinkler leakage, glass and signs with an endorsement to cover the cost of law
mandated changes to the Building in connection with restoration after a
casualty. Such insurance shall provide coverage for all property in which
Landlord holds an interest in an amount not less than one hundred percent (100%)
of the replacement value of the property. Tenant shall cause its Real Property
insurer to name Landlord as an additional insured under the Policy to the extent
of its insurable contractual liability assumed in Section 9.5. At Tenant's
option, Tenant may undertake to maintain deductibles under the property
insurance policy. Any undertaking by Tenant to assume deductibles shall not
serve to adversely affect Landlord, and Landlord shall be protected against loss
or damage to Landlord's property in the same manner as if Landlord's property
were fully insured. Upon demand, the Landlord will be furnished with a
certificate of insurance evidencing that the foregoing insurance is in effect.
Such insurance shall (a) be kept current throughout the Term of this Lease, (b)
reflect the status Landlord as additional insured, (c) provide for thirty (30)
days advance notice to Landlord in the event of cancellation of the Policy, (d)
provide that losses and damages to Landlord's Property are payable directly to
Landlord and (e) comply with any insurance coverage required under any mortgage
or deed of trust on the Property.
9.4 Waiver of Recovery and Subrogation. Landlord and Tenant each release
and relieve the other and waive their entire right of recovery for loss or
damage to property located within or constituting a part or all of the Building
to the extent that the loss or damage is covered by (i) the injured party's
insurance, or (ii) the insurance the non-injured party is required to have under
this Section 9, whichever is greater. This waiver applies whether or not the
loss is due to the negligent acts or emissions of Landlord or Tenant, or their
respective officers, directors, employees, agents, contractors, or invitees.
Each of Landlord and Tenant shall have their respective property insurers
endorse the applicable insurance policies to reflect the foregoing waiver of
claims, provided however, that the endorsement shall not be required if the
applicable policy of insurance permits the named insured to waive rights of
subrogation on a blanket basis, in which case the blanket waiver shall be
acceptable.
9.5 Indemnification.
(a) Tenant. Subject to the waiver in Section 9.4, Tenant shall
indemnify and hold harmless Landlord from claims, suits, actions, or liabilities
for personal injury, death, or for loss or damage to property that arises out of
(i) Tenant's use of the Property, (ii) the negligence or willful misconduct of
Tenant, its employees, agents, contractors, or invitees, or (iii) any breach or
default by Tenant in the performance of any obligation on Tenant's part to be
performed under this Lease. This indemnity does not apply (x) to claims, suits,
actions, or
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liabilities to the extent they are caused by the negligent acts or omissions or
willful misconduct of Landlord, its agents, employees, contractors or invitees,
(y) to damage claims, suits, actions or liabilities waived under Section 9.4, or
(z) to the indemnity in Section 15.5.
In the absence of comparative or concurrent negligence on the part of
Landlord, its agents, their affiliates and subsidiaries, or their respective
directors, employees, or contractors, the foregoing indemnity shall also include
reasonable costs, expenses, and attorney's fees incurred in connection with any
indemnified claim or incurred by Landlord in successfully establishing the right
to indemnity. Tenant shall have the right to assume the defense of any claim
subject to this indemnity. Landlord agrees to cooperate fully with Tenant and
Tenant's counsel in any matter where Tenant elects to defend, provided Tenant
promptly reimburses Landlord for reasonable costs and expenses incurred in
connection with its duty to cooperate.
The foregoing indemnity is conditioned upon Landlord providing prompt
notice to Tenant of any claim or occurrence that is likely to give rise to a
claim, suit, action, or liability that will fall within the scope of the
foregoing indemnity, along with sufficient details that will enable Tenant to
make a reasonable investigation of the claim. When the claim is caused by the
joint negligence or willful misconduct of Tenant and Landlord, Tenant's duty to
indemnify and defend shall be proportionate to Tenant's allocable share of joint
negligence or willful misconduct.
(b) Landlord. Subject to the waiver in Section 9.4, Landlord shall
indemnify and hold harmless Tenant from claims, suits, actions, or liabilities
for personal injury, death or for loss or damage to property that arises from
(i) any activity work, or thing done, permitted, or suffered by Landlord, acting
exclusively in his capacity as Landlord and not as an employee of Tenant, in or
about the Property (ii) the negligence or willful misconduct of Landlord, its
employees, agents, or contractors or (in) any breach or default by Landlord in
the performance of any obligation on Landlord's part to be performed under this
Lease. This indemnity does not apply to claims, suits, actions or liabilities
(x) to the extent they are caused by the negligent acts or omissions or willful
misconduct of Tenant, its agents, employees, contractors or invitees, (y) to
damage, claims, suits, actions or liabilities waived under Section 9.4, or (z)
to the indemnity in Section 15.5.
In the absence of comparative or concurrent negligence on the part of
Tenant, its agents, their affiliates and subsidiaries, or their respective
directors, employees or contractors, the foregoing indemnity shall also include
reasonable costs, expenses, and attorney's fees incurred in connection with any
indemnified claim or incurred by Tenant in successfully establishing the right
to indemnity. Landlord shall have the right to assume the defense of any claim
subject to this indemnity with counsel reasonably satisfactory to Tenant. Tenant
agrees to cooperate fully with Landlord and Landlord's counsel in any matter
where Landlord elects to defend, provided Landlord shall promptly reimburse
Tenant for reasonable costs and expenses incurred in connection with its duty to
cooperate.
The foregoing indemnity is conditioned upon Tenant providing prompt notice
to Landlord of any claim or occurrence that is likely to give rise to a claim,
suit, action or liability
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that will fall within the scope of the foregoing indemnity, along with
sufficient details that will enable Landlord to make a reasonable investigation
of the claim. When the claim is caused by the joint negligence or willful
misconduct of Tenant and Landlord, Landlord's duty to indemnify and defend shall
be proportionate to Landlord's allocable share of joint negligence or willful
misconduct.
10. Damage or Destruction; Condemnation.
10.1 Damage Rendering Building Untenantable. If all or a majority of the
Building is damaged or destroyed, then Landlord may at Landlord's option either
(i) repair such damage or destruction as soon as reasonably possible at
Landlord's expense to its condition existing at the time of the damage (not
including any damage or destruction caused by Tenant or to Tenant's fixtures,
equipment, personal property, or tenant improvements) and this Lease shall
continue in full force and effect, or (ii) give written notice to Tenant within
thirty (30) days after the date of occurrence of such damage of Landlord's
option to cancel and terminate this Lease, in which case this Lease shall
terminate as of the date of the occurrence of such damage and Landlord shall
return all prepaid rent from and after such date to Tenant. If (i) all or part
of the Building is damaged or destroyed through no fault or act of Tenant or
Tenant's access to the Building or parking area is materially obstructed or
hindered through fault or act of Landlord, and (ii) Landlord's repair will take
more than one hundred eighty (180) days to complete, or Landlord's removal of
the obstruction will take more than ten (10) days to complete, based on
Landlord's reasonable estimate, then Tenant may elect to terminate this Lease
effective as of the date of such event by written notice to Landlord given
within twenty (20) days from such date. If Tenant does not elect to terminate
this Lease pursuant to this Section, then Landlord shall immediately commence
and diligently pursue to completion repairs of such damage and/or removal of
such obstruction or hindrance. Tenant shall cooperate with Landlord in
connection with any restoration, repair or removal, including but not limited to
the approval and/or execution of required plans and specifications.
10.2 Condemnation. "Taking" means a taking by or condemnation by the
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exercise of the power of eminent domain by a public or quasi-public authority or
entity, whether or not there is a taking of title, or a conveyance in lieu
thereof. If there is a Taking of the entire Building or of the entire parking
area serving the Building, this Lease shall terminate as of the earlier of the
date title vests or the date Tenant is dispossessed by the Taking authority. If
(i) a Taking of part of the Building in Tenant's judgment reasonably exercised
materially interferes with Tenant's ability to conduct its business, or (ii) a
Taking substantially denies or interferes with Tenant's access to the Building,
Tenant shall have the right to terminate this Lease by giving Landlord notice of
its election within thirty (30) days of the Taking. The Lease shall terminate on
the earlier of the date when title vests, the date Tenant is dispossessed by the
Taking authority or sixty (60) days following Tenant's notice.
10.3 Abatement of Rent. If all or part of the Property or Building is
damaged or destroyed through no fault or act of Tenant, is subject to a Taking,
or Tenant's access to the Property, Building or parking area is obstructed or
materially hindered through fault or act of Landlord, Rent shall be abated in
the proportion that Tenant's use of the Property or Building are
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diminished by such damage, Taking or obstruction. The abatement shall continue
from the date the damage, Taking or obstruction occurred until five (5) business
days after Landlord completes the necessary repairs and restoration for which
Landlord is responsible and gives notice of such completion to Tenant. Except
for abatement of rent, if any, Tenant shall have no claim against Landlord for
any damages suffered by reason of any such damage, Taking or obstruction.
11. Assignment and Subletting.
11.1 Assignment Without Consent. Without Landlord's consent, the Property
may be subleased and/or the Lease may be assigned in part or whole (whether by
operation of law or otherwise) to a subsidiary of Tenant, to an entity with
which or into which Tenant may merge or to the purchaser of substantially all of
Tenant's assets.
11.2 Assignment With Consent. Except as provided in Section 11.1, Tenant
may only assign this Lease in part or whole or sublet all or any part of the
Property and Building if Tenant first obtains Landlord's consent to the proposed
assignment or subletting in writing. Landlord's consent shall not be
unreasonably withheld. Any assignment or subletting of this Lease made by Tenant
without the required consent shall be void.
Landlord's consent or refusal of consent shall be in writing and, if
Landlord refuses consent, the reasons for refusal shall be stated with
particularity. Landlord's consent to an assignment shall be accompanied by a
statement addressed to Tenant and the assignee or subtenant, upon which
statement Tenant and the assignee or subtenant may conclusively rely, stating
that Tenant is not in default under the Lease (or setting forth in what respects
Tenant is in default), that this Lease has not been amended or modified (or
setting forth such amendments or modifications), the expiration date of this
Lease, and the date to which Rent has been paid. Tenant shall pay all of
Landlord's reasonable fees for legal and/or financial services incurred by
Landlord in connection with Tenant's request to assign or sublet all or a
portion of the Lease.
11.3 Effect of Transfer. Landlord agrees, upon request by Tenant, (i) to
amend the notice address for Tenant to add the transferee, and (ii) to deliver
to the Tenant or its successor concurrently with the delivery thereof to such
transferee, copies of any notices of default delivered pursuant to the terms of
this Lease. Additionally, if requested of Landlord pursuant to an assignment or
sublease, the transferee shall have the right to cure any default under this
Lease within the applicable cure period provided for the Tenant in this Lease.
If the assignment or sublease permits Tenant to recover possession of the
Building from the transferee and again take possession of the Building as
Tenant, Landlord agrees to recognize Tenant again as the "Tenant" under this
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Lease if such a recovery should occur.
12. Landlord's Warranties. To induce Tenant to execute this Lease, and in
addition to the other representations and warranties of Landlord contained in
this Lease, Landlord warrants and represents as of the date hereof, that (i) it
is the owner of the Property with good and marketable title to the Building and
the Land, (ii) it has full right and lawful authority to enter into and perform
Landlord's obligations under this Lease for the full Term, and (iii) this Lease,
the Building, and any improvements constructed by Landlord, do not, to the best
of Landlord's knowledge, violate any applicable law without limitation, zoning,
building and energy codes, or
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the provisions of any instrument or agreement executed by Landlord that places
any restrictions, encumbrances or burdens on the Property.
13. Tenant's Warranties. Tenant represents and warrants to Landlord that it has
not engaged any broker, finder or other person who would be entitled to any
commission or fees from Landlord in respect of the negotiation, execution or
delivery of this Lease and Tenant shall indemnify and hold Landlord harmless
from and against any loss, cost, liability or expense incurred by Landlord as a
result of any claim asserted by any such broker, finder or other person based on
any arrangements or agreements made or alleged to have been made by or on behalf
of Tenant. The provisions of this Section 13 shall not apply to brokers with
whom Landlord has a brokerage agreement. Tenant represents and warrants that is
has been duly authorized to execute and deliver this Lease in accordance with a
duly adopted resolution of the board of directors of Tenant in accordance with
Tenant's bylaws, and that this Lease is binding upon Tenant in accordance
therewith.
14. Defaults; Remedies.
14.1 Defaults. Each of the following shall constitute a default (a
"Default") by Tenant:
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(a) The failure by Tenant to make any payment of Rent or any other
payment as required by this Lease within ten (10) business days after the
receipt of written notice from Landlord.
(b) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Tenant, other than described in Section 14.l(a) above, where such failure shall
continue for a period of thirty (30) days after receipt of written notice from
Landlord; provided, however, that if more than thirty (30) days are required for
Tenant to cure the breach, then Tenant shall not be in default if Tenant
commences such cure within such thirty (30) day period and diligently prosecutes
the cure to completion.
(c) The occurrence of any of the following events: (i) the making
by Tenant of any general arrangement or assignment for the benefit of creditors;
(ii) Tenant's becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any
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successor statute (unless, in the case of a petition filed against Tenant, the
petition is dismissed within sixty (60) days) (iii) the appointment of a trustee
or receiver to take possession of substantially all of Tenant's assets located
at the Building or of Tenant's interest in this Lease, where possession is not
restored to Tenant within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located at the
Building or of Tenants interest in this Lease, where such seizure is not
discharged within thirty (30) days, provided; however, in the event that any
provision of this Section 14.1 is contrary to any applicable law, such provision
shall be of no force or effect, and not affect the validity of the remaining
provisions.
14.2 Landlord's Remedies. In the event of any Default by Tenant, Landlord
may at any time thereafter, without limiting Landlord in the exercise of any
right or remedy which Landlord may have by reason of such default:
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(a) Terminate Tenant's right to possession of the Property by any
lawful means, in which case this Lease and the term hereof shall terminate and
Tenant shall immediately surrender possession of the Property to Landlord. In
such event Landlord shall be entitled to recover from Tenant all damages
incurred by Landlord by reason of Tenant's default including, but not limited
to, the cost of recovering possession of the Property, expenses of reletting,
which shall be limited to necessary renovation and alteration of the Building
and any real estate commission actually paid, the amount by which the unpaid
rent for the balance of the term exceeds the amount of such rental loss for the
same period that Tenant proves could be reasonably avoided and that portion of
the leasing commission paid by Landlord applicable to the unexpired term of this
Lease.
(b) Maintain Tenant's right to possession in which case this Lease
shall continue in effect whether or not Tenant shall have vacated or abandoned
the Property. In such event Landlord shall be entitled to enforce all of
Landlord's rights and remedies under this Lease, including the right to recover
the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the state of Washington. Unpaid
installments of rent and other unpaid monetary obligations of Tenant under the
terms of this Lease shall bear interest from the date due at the maximum rate
then allowable by law.
Landlord shall mitigate any damage by making reasonable efforts to relet
the Property or the Building on reasonable terms. Landlord may relet for a
shorter or longer period of time than the Lease Term and make reasonably
necessary repairs or alterations. All sums collected from reletting shall be
applied first to Landlord's reasonable and necessary expenses of reletting, and
then to the payment of amounts due from Tenant to Landlord under this Lease.
14.3 Default by Landlord. Except as otherwise provided in this Lease,
Landlord shall not be in default unless Landlord fails to perform any of its
obligations under the Lease, or to correct a breach of any warranty or
representation made in this Lease, within a reasonable time, but in no event
later than the (30) days after written notice by Tenant to Landlord specifying
the nature of Landlord's failure; provided, however, that if more than thirty
(30) days are required for Landlord to cure the breach then Landlord shall not
be in default if Landlord commences such cure within such thirty (30) day period
and diligently prosecutes the cure to completion.
14.4 Tenant's Remedies. If Landlord commits a Default, Tenant may pursue
any remedy now or hereafter available to Tenant under the laws or judicial
decisions of the state of Washington.
14.5 Self-Help. If either party Defaults, the other party may, without
being obligated to do so and without waiving the Default, cure the Default. The
defaulting party shall pay the nondefaulting party on demand all reasonable
costs, expenses and disbursements incurred by the nondefaulting party to cure
the Default.
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15. Environmental Provisions.
15.1 Environmental Law. The term "Environmental Law" means any federal,
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state or local law, statute, ordinance, regulation or order pertaining to
health, industrial by hygiene, environmental conditions or hazardous substances
or materials including those defined in this Section as "Hazardous Substances."
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15.2 Hazardous Substances. The term "Hazardous Substance" means any
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hazardous or toxic substance, material or waste, pollutants or contaminants, as
defined, listed or regulated, now or in the future by any federal, state or
local law, ordinance, code, regulation, rule, order or decree regulating,
relating to or imposing liability or standards of conduct concerning, any
environmental conditions, health or industrial hygiene, including without
limitation, (i) chlorinated solvents, (ii) petroleum products or by-products,
(iii) asbestos, and (iv) polychlorinated biphenyls.
15.3 Landlord's Representation; Agreement. To the actual knowledge of
Landlord, Landlord represents and warrants that (i) the Land and the Building do
not contain any Hazardous Substances in violation of Environmental Law, and (ii)
Landlord has complied with all mandatory requirements of Environmental Law.
Landlord agrees to comply with all Environmental Law regulating Hazardous
Substances found in, on or about the Property (including the Building) and to
promptly remedy any violation of such law with respect to Hazardous Substances
generated or disposed of by Landlord. Landlord and Tenant shall promptly give
written notice to the other party of any alleged or actual violation of any
Environmental Law affecting the Property (including the Building). If a
violation of an Environmental Law occurs or is discovered, Landlord may at
Landlord's option either (i) remedy such violation (except for violations caused
by Tenant) as soon as reasonably possible at Landlord's sole cost and expense,
or (ii) give sixty (60) days written notice to Tenant of Landlord's option to
cancel and terminate this Lease. If Landlord's remedy under section (i) above
will take more than one hundred eighty (180) days to complete based on
Landlord's reasonable estimate, then Tenant may elect to terminate this Lease
upon thirty (30) days written notice. If Tenant does not elect to terminate this
Lease pursuant to this section, then Landlord shall immediately commence and
diligently pursue the remedy of the violation of Environmental Law. Tenant shall
cooperate with Landlord in connection with the remedy, including but not limited
to the approval and/or execution of required remediation plans.
15.4 Tenant's Agreement. Neither Tenant nor its employees, agents or
contractors will use, generate, manufacture, produce, store, release, discharge
or dispose of on, under or about the Building, or off-site the Building, or
transport to or from the Building, any Hazardous Substance except in compliance
with Environmental Laws.
15.5 Indemnity. Each party (the "Indemnitor") shall protect, indemnify,
----------
defend and hold harmless the other party and its directors, officers, employees,
agents, parents, subsidiaries, successors and assigns (collectively, the
"Indemnitee") from any loss, damage, cost expense or liability (including
----------
reasonable attorneys' fees and costs) directly or indirectly arising out of or
attributable to the Indemnitor's use, generation, manufacture, production,
storage, release,
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<PAGE>
threatened release, discharge, disposal or presence of a Hazardous Substance on,
under or about the Property or a breach of any representation, warranty,
covenant or agreement contained in this Section 15 including, without
limitation, the costs of any required or necessary repairs, cleanup or
detoxification of the Property and the preparation and implementation of any
closure, remedial or other required plans. Rent shall abate to the extent the
presence of a hazardous Substance or a violation of Environmental Law (in either
case not caused by Tenant, its employees, agents or contractors) materially
interferes with Tenant's use of the Property.
15.6 Survival. This Section 15 shall survive expiration or termination of
this Lease.
16. General Provisions.
16.1 Subordination. This Lease, at Landlord's option, shall be subordinate
to any ground lease, mortgage, deed of trust, or any other hypothecation for
security hereafter placed upon the Building; provided, however, that (i) Tenant
is provided with an executed Subordination, Attornment, and Non-Disturbance
Agreement containing a provision to the effect that so long as Tenant is not in
default under the Lease beyond any applicable cure period, Tenant's possession
and enjoyment of the Property will not be disturbed and Tenant will not be
joined as a party defendant in any action or proceeding for the purpose of
diminishing Tenant's interest, rights, or estate under this Lease, and (ii) upon
foreclosure of any such mortgage or deed of trust or other proceeding or action
for the enforcement thereof, or of any sale thereunder, this Lease shall remain
in full force and effect and the rights and possession of Tenant under this
Lease shall not be disturbed. Provided the above conditions are met, Tenant
shall attorn to the successor of Landlord's interest under this Lease.
16.2 Tenant Audit. Tenant shall have the right, at Tenant's expense, to
review at reasonable times Landlord's books and records for any fiscal year, a
portion of which falls within the Term, for purposes of verifying Landlord's
calculation of amounts payable by Tenant to Landlord under Sections 4 and 6 of
this Lease. If Tenant disputes the amount in any statement set forth by
Landlord, Tenant shall have the right, and upon condition that Tenant first
deposits the full amount in dispute with Landlord, to cause Landlord's books and
records with respect to such fiscal year to be audited by a certified public
accountant selected by Tenant, subject to Landlord's reasonable approval. The
amount shall be appropriately adjusted on the basis of the audit. If the audit
discloses a liability for a refund or credit by Landlord to Tenant in excess of
ten percent (10%) of the amount previously reported by Landlord, the cost of the
audit shall be borne by Landlord. Otherwise, the cost of the audit shall be paid
by Tenant.
16.3 Estoppel Statement. Tenant shall at any time upon not less than
fifteen (15) days' prior written notice from Landlord execute, acknowledge, and
deliver to Landlord a written statement (i) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full
force and effect) and the date to which the Rent, security deposit, and other
charges are paid in advance, if any, and (ii) acknowledging that there are not,
to Tenant's knowledge, any uncured defaults on the pan of Landlord hereunder, or
specifying such defaults, if any, which are claimed.
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<PAGE>
16.4 Landlord's Interests. The term "Landlord" as used herein shall mean
--------
only the owner or owners at the time in question of the fee title. In the event
of any transfer of such title, Landlord herein named (and in case of any
subsequent transfers, the then grantor) shall be relieved from and after the
date of such transfer of all liability as respects Landlord's obligations
thereafter to be performed- provided that any funds in the hands of Landlord or
the then grantor at the time of such transfer, in which Tenant has an interest,
shall be delivered to the grantee. Nothing herein shall be deemed to relieve
Landlord of any liability for its acts, omissions or obligations occurring or
accruing up to and including the date of such transfer. Subject to the foregoing
conditions, the obligations contained in this Lease to be performed by Landlord
shall be binding on Landlord's successors and assignees, only during their
respective periods of ownership.
16.5 Landlord Access. Landlord shall be entitled to access to the Building
upon giving Tenant twenty four (24) hours' advance written notice, except in the
case of an emergency for which Landlord shall give Tenant such notice as is
practicable under the circumstances. Landlord shall cause the least interference
to Tenant's business reasonably possible and shall promptly finish any work for
which it entered the Building. If Landlord causes damage to Tenant's property,
Landlord shall be liable for any damage to the extent not covered by Tenant's
insurance or the insurance Tenant is required to carry under Section 9
(whichever is greater). Notwithstanding the foregoing, Rent shall not abate and
Landlord shall not be liable to Tenant for damages if Landlord enters the
Building for the purpose of making repairs pursuant to Section 7.3. Landlord and
Landlord's agents shall have the right to enter the Building at reasonable times
for the purpose of inspecting the same, showing the same to prospective
purchasers, tenants, or lenders, and making such alterations, repairs,
improvements or additions to the Building or to the Building as Landlord may
deem necessary or desirable.
16.6 Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision of this Lease.
16.7 Entire Agreement; Amendments; Waiver. This Lease contains the entire
integrated agreement of the parties with respect to any matter mentioned in this
Lease. No contemporaneous or prior agreement, understanding or statement
pertaining to any such matter shall be binding on the parties. This Lease may be
modified in writing only, signed by the parties. No waiver by Landlord or Tenant
of any provision hereof shall be deemed a waiver of any other provision hereof
or of any subsequent breach by Tenant or Landlord of the same or any other
provision.
16.8 Binding Effect; Choice of Law; Venue. This Lease shall bind the
parties, their personal representatives, successors and assigns. This Lease
shall be governed by the laws of the State of Washington. The parties hereby
irrevocably and unconditionally submit in any legal action or proceeding
relating to this Lease to the jurisdiction of the courts of the State of
Washington located in King County and, in any such action or proceeding, consent
to jurisdiction in such courts and waive any objection to the venue in any such
court.
-16-
<PAGE>
16.9 Attorneys' Fees. If either party brings an action to enforce the
terms of this Lease or to declare rights under this Lease, the prevailing party
in any such action, on trial or appeal, shall be entitled to its reasonable
attorneys' fees to be paid by the losing party as fixed by the court.
16.10 Quiet Possession. Landlord warrants and agrees that so long as
Tenant is not in default under this Lease, Tenant's peaceable and quiet
enjoyment of the Property shall not be disturbed by anyone claiming by or
through the Landlord.
16.11 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become a binding agreement when one or more counterparts have been signed
by each of the parties and delivered to the other party.
17. Notices. Any notice required under this Lease shall be to writing and sent
by certified mail or personally delivered as follows or delivered by facsimile
with prompt confirmation by telephone:
Landlord: Martin Tobias Tenant: Encoding.com, Inc.
Alex Tobias 3406 East Union Street
3601 East Union Street Seattle, WA 98122
Seattle, WA 8122 Attn: Charles Waite
Telephone No.: (206) 328-9041 Chairman of the Board
Facsimile No.: (206) 329-3276 Phone: (206) 285-7205
Fax: (206) 285-1128
Notices shall be deemed to have been given upon receipt or attempted
delivery where delivery is not accepted. Either party may change its address by
notifying the other party as set forth above, Tenant shall also give default
notices to Landlord's mortgagee after receiving notice from Landlord of the
mortgagee's name and address.
18. Waiver of Consequential Damages. Landlord and Tenant waive any claim for
consequential damages that one party may have against the other for breach of or
failure to perform or observe the requirements and obligations created by this
Lease. By way of illustration only and not by way of limitation, consequential
damages shall include lost profits, lost business opportunities, interference
with business or contractual expectancies, loss of equity in property (whether
the Building or other property), or any speculative or remote damages.
19. Confidentiality. Landlord shall not distribute, copy, or otherwise submit,
orally or in writing, this Lease or any summary thereof, to any other person or
entity, except its servant, agents, employees, attorneys, consultants, legal
representatives, successors and assigns. In addition, all information learned by
or disclosed to Landlord with respect to Tenant's business or information
disclosed or discovered during an entry by Landlord into the Building, shall be
kept strictly confidential by Landlord, Landlord's attorneys, consultants, legal
representatives. successors, assigns, employees, servants and agents and shall
not be used (except for Landlord's confidential internal purposes) or disclosed
to others by Landlord, or Landlord's servants, agents,
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<PAGE>
employees, legal representatives, successors or assigns, without the express
prior written consent of Tenant, which Tenant may withhold in its sole and
absolute discretion.
[Signature page follows]
-18-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease as of the date
first above written.
TENANT:
ENCODING.COM, INC.,
a Delaware corporation
/s/ Charles P. Waite, Jr.
By:______________________________
Charles P. Waite
Chairman of the Board of Directors
LANDLORD:
MARTIN TOBIAS
/s/ Martin Tobias
_____________________________
ALEX TOBIAS
/s/ Alex Tobias
_____________________________
[SIGNATURE PAGE TO LEASE AGREEMENT]
<PAGE>
STATE OF WASHINGTON )
) ss
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Charles P. Waite
is the person who appeared before me, and said person acknowledged that he
signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the Chairman of the Board of Directors of
ENCODING.COM, INC., to be the free and voluntary act of such party for the uses
and purposes mentioned in the instrument.
Dated: 12/9, 1998
/s/ Kristin S.P. Doyle
_____________________________________
Notary Public
Kristin S.P. Doyle
[Seal or Stamp] _____________________________________
[Printed Name]
My commission expires 11/1/01
<PAGE>
STATE OF WASHINGTON )
) ss
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Martin Tobias and
Alex Tobias are the persons who appeared before me, and said persons
acknowledged that he and she signed this instrument, on oath stated that he and
she were authorized to execute the instrument and acknowledged it to be the free
and voluntary act of such parties for the uses and purposes mentioned in the
instrument.
2/3/99
Dated: _______________
/s/ Donald Fleeks
___________________________________
Notary Public
Donald Fleeks
[Seal or Stamp] ___________________________________
[Printed Name]
2/4/99
My commission expires ___________
<PAGE>
EXHIBIT 10.19
LEASE AGREEMENT
THIS LEASE AGREEMENT ("Lease") is dated as of the 28th day of October,
1999, by and between WESTLAKE PARK ASSOCIATES, a Washington limited partnership
("Landlord"), and ENCODING.COM, a Delaware corporation ("Tenant").
Landlord and Tenant agree as follows:
ARTICLE 1.
DEFINED TERMS; LEASE DATA; EXHIBITS
The following terms shall have the following meanings unless otherwise
specifically modified herein:
Section 1.1 Building and Premises. "Building" means the Building in which
the Premises is located, known as the Centennial Building, 1904 Fourth Avenue,
Seattle, Washington, as more particularly described on Exhibit A. "Premises"
---------
means that space consisting of approximately Nine Thousand (9,000) rentable
square feet ("RSF") on the second floor of the Building, as outlined on Exhibit
-------
B. The actual RSF of the Premises shall be measured and mutually agreed to by
- -
Landlord and Tenant prior to the Commitment Date, with a written confirmation
thereof signed by both parties. "RSF" shall include Tenant's pro rata share of
common areas used by second floor tenants including first floor lobby.
Section 1.2 Term, Commencement and Expiration Date. The Commencement Date
means November 15, 1999. The term of this Lease ("Lease Term") shall be five
(5) years commencing on the Commencement Date. "Lease Year" means each twelve
(12) month period beginning with the first day of the month next following the
Commencement Date.
Section 1.3 Early Access; Delay Charges. Landlord shall make the Premises
available for Tenant's access no later than November 1, 1999, for purposes of
cabling, wiring and furniture and equipment installation. In the event that
Tenant's occupancy of the Premises is delayed by Landlord beyond November 7,
1999, then Landlord shall be obligated to pay to Tenant delay charges at the
rate of Two Thousand Five Hundred Dollars ($2,500) per day until such time as
Tenant is granted occupancy. Delay charges shall be paid within five (5) days
of demand by Tenant or, at Tenant's election, credited against Rent hereunder.
Section 1.4 Exhibits. Landlord and Tenant agree that this Lease is further
subject to the provisions of the attached Exhibits which are listed below. The
provisions of the Exhibits are understood to be an integral portion of this
Lease.
Exhibit A Legal Description
Exhibit B Premises Floor Plan
ARTICLE 2.
PREMISES
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
upon the terms and conditions herein set forth the Premises, together with
rights of ingress and egress over
<PAGE>
common areas in the Building, sidewalks, and other common areas associated
therewith. Prior to the Commencement Date, Landlord shall, at its cost and
expense: (a) steam clean all carpets within the Premises; (b) repair all damaged
walls within the Premises and provide painting touch-up where needed; and (c)
otherwise deliver the Premises to Tenant in "broom clean" condition.
ARTICLE 3.
RENT; SECURITY DEPOSIT
Section 3.1 Rent. Tenant shall pay Landlord without notice Basic Rent
in the amount of Twenty-seven Dollars ($27.00) per RSF in the Premises per year,
payable in equal monthly installments, and any other payments due hereunder
(collectively "Rent"), in lawful money of the United States of America in
advance on or before the first day of each month (or at other dates specified in
this Lease) during the Lease Term at Landlord's Notice Address set forth on the
signature page, or to such other party or at such other place as Landlord may
hereafter from time to time designate in writing. Rent shall commence on the
Commencement Date. Rent for any partial month at the beginning or end of the
Lease Term shall be prorated.
Section 3.2 Security Deposit. Tenant shall deposit with Landlord an
amount equal to one (1) month of Basic Rent ("Security Deposit"), upon Tenant's
execution and submission of this Lease. The Security Deposit shall serve as
security for the prompt, full and faithful performance by Tenant of the terms
and provisions of this Lease. If Tenant commits a default, or owes any amounts
to Landlord upon the expiration of this Lease, Landlord may use or apply the
whole or any part of the Security Deposit for the payment of Tenant's
obligations hereunder. The use or application of the Security Deposit or any
portion thereof shall not prevent Landlord from exercising any other right or
remedy provided hereunder or under any law and shall not be construed as
liquidated damages. Landlord shall not be required to keep the Security Deposit
separate from Landlord's general funds or pay interest on the Security Deposit.
Any remaining portion of the Security Deposit shall be returned to Tenant (or,
at Landlord's option, to the last assignee of Tenant's interest in this Lease)
within thirty (30) days expiration of this Lease.
ARTICLE 4.
USES
Section 4.1 General Use. The Premises shall be used for office purposes
or for any other lawful purposes which are consistent with applicable zoning
("Permitted Use") and for no other business or other purpose without the prior
written consent of Landlord. No act shall be done in or about the Premises that
is unlawful or that will increase the then existing rate of insurance on the
Building. Tenant shall not commit or allow to be committed any waste upon the
Premises, or any public or private nuisance or other act or thing that disturbs
the quiet enjoyment of any other Building tenant. Tenant shall not, without the
written consent of Landlord, use any apparatus, machinery or device in or about
the Premises that will cause any substantial noise, vibration, or fumes or
disturb the quiet enjoyment of any other Building tenant. Tenant shall comply
with all laws relating to its use or occupancy of the Premises or to the common
areas and shall observe such reasonable rules and regulations concerning
Tenant's use or occupancy of the Premises or related to the common areas as may
be adopted by Landlord
2
<PAGE>
from time to time and made available to Tenant so long as the same are not
inconsistent with this Lease.
Section 4.2 No Hazardous Substances. Tenant shall not dispose of or
otherwise allow the presence or release of any hazardous substances in the
Premises. Landlord represents and warrants to Tenant that no portion of the
Premises or the Building contains any hazardous substances. Landlord further
represents and warrants it has not received any notice, claim or demand from any
governmental agency or any other person claiming or indicating the location,
disposal or existence of any hazardous substances in the Building, including the
Premises. Landlord warrants, represents, covenants and agrees that it will not
use, produce, store, release, dispose of or bring into the Premises or the
Building any hazardous substances or allow any other entity or person to do so.
As used herein, the term "hazardous substances" includes any substance,
waste or material defined or designated as hazardous, toxic or danger (or any
similar term) by any federal, state or local statute, regulation, rule or
ordinance now or hereafter in effect including, without limitation, petroleum
products and by-products, asbestos, polychlorinated biphenyls, chlorinated
solvents, and urea formaldehyde.
Each party agrees to indemnify and hold harmless the other party against
any and all losses, liabilities, suits, obligations, fines, damages, judgments,
penalties, claims, charges, cleanup costs, remedial actions, costs and expenses
(including, without limitation, attorneys' fees and disbursements) which may be
imposed on, incurred or paid by, or asserted against the other party directly or
indirectly arising from or attributable to any misrepresentation or breach of
any warranty, covenant or agreement by the indemnifying party under this
section.
ARTICLE 5.
[INTENTIONALLY OMITTED]
ARTICLE 6.
PERSONAL PROPERTY TAXES
Tenant shall pay, prior to delinquency, all personal property taxes payable
with respect to all property owned by Tenant located on the Premises or in the
Building and promptly upon request of Landlord shall provide written proof of
such payment.
ARTICLE 7.
SERVICES BY LANDLORD
Landlord will provide to the Premises services customary to first-class
office buildings in the local area, including without limitation electricity for
lighting, office machines, computers, and copiers, hot and cold running water
and sewer, a Building security system and mechanical cooling, heating and
ventilation at such temperatures and in such amounts as are reasonably standard
for first-class office buildings in the local area. All services, including
elevator, Building access through the security system (by means of cards, keys
or other appropriate access devices), water, and the cooling, heating, and
ventilation system, shall be available to the Premises twenty-four (24) hours
per day, seven (7) days per week. The Building elevator(s) shall lock off the
Premises from general public access during nonbusiness hours of the Building
3
<PAGE>
in general. Landlord shall also provide daily bonded janitorial services for the
Premises, lamp replacement for Landlord-furnished lighting, toilet room supplies
and perimeter window washing, all with reasonable frequency customary to first-
class office buildings in the local area.
Landlord shall not be liable for any loss or damage caused by or resulting
from any variation, interruption or failure of such services due to any cause
whatsoever, except the willful misconduct of Landlord or its employees, agents,
contractors or invitees. Rent shall abate for the period of any interruption or
failure of such services caused by such willful misconduct, and for the period
of any interruption or failure due to any cause which extends for more than
forty-eight (48) hours. For those services within Landlord's reasonable
control, Landlord will correct any interruption of services as soon as
practicable.
Tenant shall have the right to establish its own procedures to maintain and
protect the internal security of the Premises in accordance with Tenant's needs.
Tenant, in its sole discretion, shall have the right to install additional
security devices for the Premises at its own cost and expense.
ARTICLE 8.
ASSIGNMENT AND SUBLETTING
Except as provided below, Tenant shall not, without Landlord's written
consent (which consent shall not unreasonably be withheld or delayed), assign or
transfer the Lease (or any interest therein) or sublease the Premises or any
portion thereof. Notwithstanding the foregoing, Tenant may, without Landlord's
prior written consent, sublet all or any portions of the Premises or assign the
Lease (or any interest therein) to: (i) a subsidiary, affiliate, division or
corporation controlled by or under common control with Tenant; (ii) a successor
corporation related to Tenant by merger, consolidation, nonbankruptcy
reorganization, or government action; or (iii) a purchaser of substantially all
of Tenant's assets located in the Premises. For the purpose of this Lease, no
sale or transfer of Tenant's capital stock or redemption or issuance of
additional stock of any class, including issuance of stock in connection with
Tenant's "going public," shall be deemed an assignment, subletting or any other
transfer of the Lease or the Premises. If Landlord's consent is required
hereunder, Landlord (a) shall respond to Tenant within ten (10) days after
receipt of written notice from Tenant requesting such consent ("Tenant's
Notice"), otherwise such consent shall be deemed given; and (b) shall have the
right, exercisable by providing Tenant with written notice within ten (10) days
after receipt of Tenant's Notice, to recapture that portion of the Premises
proposed to be subleased and enter into a direct lease with the proposed
Subtenant, in which event Tenant shall be released from all liability under this
Lease for the space so recaptured effective upon Tenant's vacation thereof.
ARTICLE 9.
CARE OF PREMISES
Section 9.1 Tenant shall keep the interior of the Premises in a
reasonably neat, clean and sanitary condition and shall at all times preserve
them in good condition and repair, ordinary wear and tear or damage due to
casualty or condemnation excepted. If Tenant shall fail to do so, Landlord shall
notify Tenant of such failure. If, after receiving such notice, Tenant fails
within
4
<PAGE>
the period of time allowed for cure of default to place the Premises in said
condition and state of repair, Landlord may at its option do so and Tenant on
demand shall pay the costs thereof.
Section 9.2 Landlord shall repair and maintain in a first-class condition
the structural portions of the Building, including, without limitation, the
elevators, plumbing, air conditioning, heating and electrical systems, whether
located within or outside the Premises, the Building roof, curtain wall, all
exterior glass doors and plate glass, elevators, escalators, telephone and
electrical closets, all lobbies and corridors, balconies, landscaping, walkways,
and the interior portions (excluding the Premises) of the Building above and
below grade. Landlord covenants and agrees that Landlord's right to enter the
Premises to make alterations, repairs or additions, whether pursuant to this
section or as anywhere else provided for in this Lease, shall be exercised in
accordance with Tenant's security regulations and such work shall be performed
with the least possible amount of interference to Tenant, and at times when the
nature of such work will least interfere with or otherwise unreasonably distract
Tenant from the conduct of its business. Rent shall be abated in the event
Landlord, for any reason, fails to commence and complete any repairs required to
be made by Landlord under this section within a period of two (2) business days
after notice to Landlord of the need for such repairs or in the event the
performance of any repair work required under this section interferes with
Tenant's use of the Premises, such abatement to be based upon the extent such
failure interferes with Tenant's normal use of the Premises.
ARTICLE 10.
SURRENDER OF PREMISES
Subject to the terms of Article 13 relating to damage and destruction, upon
----------
expiration or termination of the Lease Term whether by lapse of time or
otherwise (including any holdover period), Tenant at its expense shall: (1)
remove Tenant's goods and effects and those of all persons claiming under
Tenant, (2) leave the Premises broom clean, and (3) promptly and peacefully
surrender the Premises. Any property left on the Premises after the expiration
or termination of the Lease Term shall be deemed to have been abandoned and the
property of Landlord to dispose of as Landlord deems expedient, and Tenant shall
be liable for all reasonable costs associated with the disposal of such
property; provided that Tenant shall have reasonable notice and opportunity to
--------
remove such property itself before it shall be deemed abandoned.
ARTICLE 11.
ALTERATIONS
Tenant, at its own expense, may make from time to time any nonstructural
alterations to the Premises, and, provided Tenant first obtains Landlord's
written consent which shall not unreasonably be withheld or delayed, any
structural alterations, additions, and improvements in and to the Premises
("Work") that it may deem necessary or suitable for the conduct of its business
therein. Landlord, without expense to itself, shall cooperate with Tenant in
securing building and other permits and other authority necessary from time to
time for any Work permitted under this Lease. All Work shall be performed in a
good and workmanlike manner and all materials used shall be of a quality
comparable to those in the Premises and Building. Tenant shall have the right
to remove all alterations, additions and improvements made by Tenant, so long as
Tenant repairs any damage to the Premises caused by such removal.
5
<PAGE>
Landlord at its option and expense may make any repairs, alterations,
additions or improvements that Landlord may deem necessary or advisable for the
preservation, safety or improvement of the Premises or the Building; provided
--------
that such repairs, alterations, etc. shall not interfere with Tenant's access to
or normal use and enjoyment of the Premises and that Rent shall be abated in the
event and to the extent of any such interference.
ARTICLE 12.
ENTRY AND INSPECTION
Upon twenty-four (24) hours prior notice to Tenant, Landlord, at all
reasonable times, may enter the Premises for the purpose of inspecting the
Premises subject to Tenant's reasonable security requirements; provided that
--------
Rent shall be abated to the extent Landlord's entry onto the Premises materially
interferes with Tenant's operations on the Premises. Nothing in this section
shall impose upon Landlord any obligation not expressly imposed elsewhere in
this Lease. Landlord shall have the right at reasonable times to enter the
Premises for the purpose of showing the Premises to prospective tenants during
the period beginning ninety (90) days prior to the expiration or sooner
termination of this Lease.
ARTICLE 13.
DAMAGE BY FIRE OR OTHER CASUALTY
Section 13.1 Loss (Insured or Uninsured). If the Premises or the Building
is damaged by fire or other casualty, Landlord shall with all due diligence
repair or rebuild the damaged portion to at least the condition existing
immediately before said casualty. Landlord shall use any insurance proceeds
received as a result of the casualty for such purpose, together with such funds
as are necessary to complete such repair or restoration. Tenant consents to
insurance proceeds being paid to and placed in the custody of the lienholder of
any mortgage or deed of trust encumbering the Premises; provided that the
--------
lienholder shall first agree in writing with Landlord for the benefit of Tenant
to make the proceeds of such insurance available for repair and restoration of
the Premises as required in this section.
Section 13.2 Major Damage. For purposes of this section, "Major Damage"
means (i) damage to such extent that the estimated cost of full repair of such
damage is greater than fifty percent (50%) of the full replacement value of the
property damaged, or (ii) damage rendering the Premises or the Building
substantially unusable for its intended purpose for more than three (3) months.
Notwithstanding Section 13.1 above, in the event of Major Damage to the Building
------------
or the Premises, Landlord may elect not to restore the damage by so notifying
Tenant within thirty (30) days after the casualty. Upon such notice, this Lease
shall terminate, the Tenant shall have no further obligation to pay Rent, and
Landlord shall retain any insurance proceeds. If Landlord elects to restore any
Major Damage to the Premises on the Building, it shall commence restoration in
the same manner as provided in Section 13.1.
------------
Section 13.3 Tenant's Option to Terminate. If the Building is damaged so
as to render the whole or any substantial portion of the Premises untenantable
in Tenant's good faith opinion for a period of sixty (60) days or more, or if
Landlord fails to notify Tenant whether it will repair any Major Damage within
thirty (30) days after the same occurs, then Tenant shall have the option to
terminate this Lease upon ten (10) days' notice to Landlord. In addition, if
6
<PAGE>
Landlord is required to repair any damage under this section, Tenant may
terminate this Lease by notice to Landlord if Landlord has not restored and
rebuilt the Premises within six (6) months after the occurrence of such damage
or destruction.
Section 13.4 Abatement of Rent. Upon occurrence of any casualty, Rent
shall be prorated and abated during the period beginning with the date of the
casualty and continuing until the Premises are restored as required in this
section in the proportion that the Rent for the part of the Premises unusable by
Tenant for its normal operations bears to the Rent for the entire Premises.
Section 13.5 Tenant's Property. Landlord will not carry insurance of any
kind on furniture, furnishings, fixtures, or equipment owned by Tenant, and
Landlord shall not be obligated to repair any damage thereto or replace the
same, except as otherwise expressly provided elsewhere in this Lease.
ARTICLE 14.
INDEMNIFICATION
Section 14.1 Tenant's Indemnification Obligations. Tenant shall indemnify,
hold harmless and defend Landlord from and against all liabilities, damages,
losses, claims, actions, costs, and expenses, including reasonable attorneys'
and other professional fees, in conjunction with loss of life, personal injury
and/or property damage arising out of the occupancy or use of Tenant of any part
of the Premises or the Building, occasioned wholly or in part by any act or
omission of Tenant or its officers, agents, servants, employees, contractors,
licensees, guests, invitees or visitors. The foregoing provisions shall not be
construed to make Tenant responsible for loss, damage, liability or expense
resulting form injuries to persons or property caused by the negligence of
Landlord, its officers, agents, servants, employees, contractors, licensees,
guests, invitees or visitors, or other tenants of the Building.
Section 14.2 Landlord's Indemnification Obligations. Landlord shall
indemnify, hold harmless and defend Tenant from and against all liabilities,
damages, losses, claims, actions, costs and expenses, including reasonable
attorneys' and other professional fees, in conjunction with or arising out of
(a) any failure by Landlord to perform any of the agreements, terms, covenants
or conditions of this Lease on Landlord's part to be performed, (b) any
accident, injury or damage that happens in, upon or about the Premises or the
Building caused by the negligence or intentional act or omission of Landlord,
its officers, agents, servants, employees, contractors, licensees, guests,
invitees, or visitors, or any third party unrelated to Tenant, or (c) Landlord's
failure to comply with any laws, ordinances, requirements, orders, directions,
rules or regulations of any federal, state, county or municipal governmental
authority or agreement of record affecting the Premises or the Building.
ARTICLE 15.
INSURANCE
Section 15.1 Liability Insurance.
(a) Tenant. Throughout the Lease Term Tenant at its own expense shall
keep and maintain in full force and effect, a policy of commercial general
liability insurance insuring
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Tenant's activities upon, in or about the Premises against claims of bodily
injury or death or property damage or loss with a limit of not less than Two
Million Dollars ($2,000,000) combined single limit per occurrence and in the
aggregate (per policy year).
(b) Landlord. Throughout the Lease Term Landlord at its own expense
shall keep and maintain in full force and effect a policy of commercial general
liability insurance insuring Landlord's activities upon, in or about the
Premises and the Development against claims of bodily injury or death or
property damage or loss with a limit of not less than Ten Million Dollars
($10,000,000) combined single limit per occurrence and in the aggregate (per
policy year).
Section 15.2 Property Insurance.
(a) Tenant. Throughout the Lease Term Tenant shall at its option
either keep and maintain what is commonly referred to as "all risk" coverage
insurance on Tenant's personal property in the Premises (including without
limitation inventory, trade fixtures, floor coverings, furniture, and property
removable by Tenant under this Lease), or self-insure against any damage to or
loss of such property.
(b) Landlord. Throughout the Lease Term Landlord at its own expense
shall keep and maintain in full force and effect what is commonly referred to as
"all risk" coverage insurance or its equivalent, covering all perils covered by
the broadest extended coverage endorsement obtainable from insurance companies
on the Building, including the Premises and all tenant improvements, in the
amount of their full replacement value, including demolition and removal of
debris.
Section 15.3 Insurance Policy Requirements. All insurance required under
this section shall be with companies rated AX or better in Best's Insurance
Guide and duly authorized to do business in Washington. No insurance policy
required under this section to be carried by either Landlord or Tenant shall be
cancelled or reduced in coverage and each insurance policy shall provide that it
is not subject to cancellation or a reduction in coverage except after thirty
(30) days prior written notice to the other party. Tenant and Landlord shall
deliver to the other prior to the Commencement Date and from time to time
thereafter, copies of policies of such insurance or certificates evidencing the
existence and amounts of same and naming the other party as an additional
insured thereunder. The limits of any required insurance policy shall not limit
the liability of Tenant or Landlord under this Lease.
Section 15.4 Waiver of Subrogation. Notwithstanding any other provision to
the contrary herein, Landlord and Tenant release each other, their agents and
employees from liability and waive all right of recovery against each other for
any loss from perils insured against under their respective policies for damages
caused by fire or other perils (including all risk extended coverage) that are
covered by insurance, regardless of any fault or negligence. Each party shall
use reasonable efforts to cause its insurance carrier(s) to consent to the
foregoing waiver of rights of subrogation against the other party.
Notwithstanding the foregoing, no such release shall be effective if its effect
would be to void coverage under the aforesaid insurance polic(ies). Each party
shall obtain appropriate waiver(s) from its own insurance compan(ies).
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ARTICLE 16.
ADVERTISING AND SIGNS
Tenant shall not place any sign on the exterior of the Premises or the
Building, or on any part of the interior of the Premises visible from the
exterior thereof, without the prior written consent of Landlord.
Notwithstanding the foregoing, Tenant may install such signage as it deems
appropriate on any floor occupied solely by Tenant, its sublessees and
assignees. All signage, permitted or consented to hereunder shall be installed,
maintained and removed by Tenant at its sole expense.
ARTICLE 17.
INSOLVENCY AND LIENS
Section 17.1 Insolvency. If Tenant becomes insolvent or voluntarily or
involuntarily bankrupt, or if a receiver, assignee or other liquidating officer
is appointed for the business of Tenant and Tenant shall fail to terminate such
bankruptcy proceeding or remove such receivership within sixty (60) days after
commencement of such proceedings or receivership, Landlord at its option may
terminate this Lease and Tenant's right of possession under this Lease.
Section 17.2 Liens. Tenant shall not permit any lien to be filed against
the Premises or the Building by reason of obligations incurred by or on behalf
of Tenant and Tenant hereby indemnifies and holds Landlord harmless from any
liability from any such lien; provided, however, that Tenant, at its sole cost
-------- -------
and expense and after written notice and furnishing of an appropriate bond to
Landlord, may contest any lien by appropriate proceedings conducted in good
faith and with due diligence.
ARTICLE 18.
CONDEMNATION
Section 18.1 Entire Taking. If all of the Premises are taken by eminent
domain, this Lease shall automatically terminate as of the date title vests in
the condemning authority and all Rent and other payments shall be paid to that
date.
Section 18.2 Partial Taking. In the event of (i) a taking of only a
portion of the Premises but the remainder of the Premises remaining after such
taking is unsuitable in Tenant's reasonable discretion for its business
operations, or (ii) a taking of any portion of the Building which materially
detracts from the character of the Building, then, in any such event, Tenant
shall have the right to cancel this Lease effective on the date title to the
property vests in the condemning authority. Tenant shall give notice of its
election hereunder not later than thirty (30) days in advance of the date Tenant
must vacate in the event of a taking specified in this Section.
Section 18.3 Abatement of Rent. Upon a partial taking of the Premises,
Rent shall be prorated in the same proportion that the Rent for the part of the
Premises taken bears to the Rent for the total Premises immediately before the
taking. Rent shall also likewise be abated for any portion of the Premises that
is not taken but is rendered temporarily unusable by Tenant by virtue of repairs
or restoration necessitated by the taking of other space.
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Section 18.4 Restoration of Premises by Landlord. If this Lease is not
terminated pursuant to Section 18.2 above, Landlord shall make any restoration
------------
of the remainder of the Building and the Premises necessitated by reason of the
partial taking as promptly as reasonably practicable and within the time periods
prescribed in the event of a casualty governed by Section 13 to restore them to
----------
the same condition (as circumstances permit) as existed immediately before the
partial taking.
Section 18.5 Awards and Damages. Landlord reserves all rights to damages
to the Premises for any partial or entire taking and Tenant hereby assigns to
Landlord any right Tenant may have to such damages or award (except any award or
portion thereof allocated to Tenant's personal property or improvements paid for
by Tenant), and Tenant shall make no claim against Landlord or the condemning
authority for damages for termination of the leasehold interest. Tenant shall
have the right, however, to claim and recover from the condemning authority
compensation for any loss to which Tenant may be put for Tenant's moving
expenses, business interruption or taking of Tenant's personal property or
improvements paid for by Tenant (not including Tenant's leasehold interest).
ARTICLE 19.
DEFAULT
Section 19.1 Tenant's Right to Cure. Tenant shall have a period of ten
(10) days from the date of receipt of written notice from Landlord to Tenant
within which to cure any default in the payment of Rent and other sums due
hereunder. Tenant shall have a period of twenty (20) days from the date of
written notice from Landlord to Tenant within which to cure any other default
hereunder, but with respect to any such default that cannot reasonably be cured
within twenty (20) days, the default shall not be deemed to be uncured if Tenant
commences cure within twenty (20) days and for so long as Tenant is diligently
prosecuting the cure thereof.
Section 19.2 Landlord's Re-entry. Upon any uncured default of this Lease
by Tenant, Landlord, besides other rights or remedies it may have, at its
option, may enter the Premises or any part thereof, in compliance with
applicable law, and expel, remove or put out Tenant or any other persons who may
be thereon, together with all personal property found therein, and Landlord may
terminate this Lease, or it may from time to time, without terminating this
Lease and as agent of Tenant, relet the Premises or any part thereof for such
term or terms (which may be for a term less than or extending beyond the term
hereof), and at such reasonable rental or rentals and upon such other terms and
conditions as Landlord reasonably may deem advisable, with the right to repair,
renovate, remodel, redecorate, alter and change the Premises, Tenant remaining
liable for any deficiency computed as hereinafter set forth. In the case of any
default re-entry and/or disposition by summary proceedings or otherwise, all
delinquent Rent shall become due thereupon and be paid up to the time of such
re-entry or dispossession together with such reasonable expenses as Landlord may
incur for attorneys' fees, advertising expenses, brokerage fees and/or putting
the Premises in good order and repair.
Section 19.3 Reletting the Premises. Rents received by Landlord from such
reletting shall be applied first to the payment of any indebtedness form Tenant
to Landlord other than Rent; second, to the payment of any costs and expenses of
such reletting and including, but not limited to, attorneys' fees, advertising
fees and brokerage fees, and to the payment of any repairs
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to the Premises necessitated by Tenant's occupancy thereof; third, to the
payment of Rent due and to become due hereunder, and, if after so applying said
rents there is any deficiency in the Rent to be paid by Tenant under this Lease,
Tenant shall pay monthly on the dates specified herein the difference between
such Rent and the amount for which Tenant proves the Premises could have been
rented. Any payment made or suits brought to collect the amount of such
difference for any months shall not prejudice in any way the right of Landlord
to collect such differences for any subsequent month. Landlord shall make all
reasonable efforts to mitigate its damages by reletting the Premises. No such
re-entry or taking possession of the Premises shall be construed as an election
on Landlord's part to terminate this Lease unless a written notice of such
intention is given to Tenant. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to terminate this Lease
for such previous breach and default.
Section 19.4 Right to Perform. If Tenant fails to pay any sum of money
required to be paid by Tenant to a person or entity other than Landlord or fails
to perform any other act to be performed by Tenant hereunder, and such failure
continues for thirty (30) days after notice thereof by Landlord, Landlord may,
but shall not be obligated so to do, and without waiving or releasing Tenant
from any obligations of Tenant, make any such payment or perform any such other
act on Tenant's part to be made or performed as provided in this Lease.
Notwithstanding any other provision hereof, Landlord may undertake repairs in an
emergency or to prevent further damage to the Building or Premises without
delivery of notice and expiration of the above-described cure period. Landlord
shall have (in addition to any other right or remedy of Landlord), the same
rights and remedies in the event of the nonpayment of sums due under this
subsection as in the case of default by Tenant in the payment of Rent.
Section 19.5 Landlord's Default. If Landlord defaults in performance of
any of its obligations under this Lease, which default is not cured within
thirty (30) days from date of notice of such default, Tenant may cure the same
at the expense of Landlord. Rent shall abate to the extent Landlord's default
interferes with Tenant's normal business operations. Notwithstanding the
foregoing, if Landlord's default results in an emergency jeopardizing Tenant's
business operations Tenant shall have the right to cure the default after verbal
notice to Landlord and Landlord shall reimburse Tenant on demand for all
reasonable and necessary expenses of such cure. Any sums payable by Landlord to
Tenant pursuant to this section shall be paid on demand, and if not paid within
ten (10) days may at Tenant's election be offset against the next monthly
installment(s) of Rent until satisfied in full.
ARTICLE 20.
HOLDOVER
If Tenant shall, with the written consent of Landlord, hold over beyond the
expiration of the Lease Term, such tenancy shall be deemed a month-to-month
tenancy which may be terminated as provided by applicable state law. During
such tenancy Tenant shall be bound by all the terms, covenants and conditions as
herein specified so far as applicable.
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ARTICLE 21.
NOTICES
All notices under this Lease shall be in writing and delivered in person or
sent by registered or certified mail, return receipt requested, postage prepaid,
to Landlord and to Tenant at the addresses listed below (and after the Lease
commences, mailed or delivered to Tenant at the Premises) or such other
addresses as may from time to time be designated by any such party in writing.
Notices shall be deemed given when delivered or if mailed as aforesaid, upon the
earlier of three (3) days after the date of such mailing or the date of receipt.
ARTICLE 22.
COSTS AND ATTORNEYS' FEES
If Tenant or Landlord shall bring any action arising out of this Lease, the
losing party shall pay the prevailing party a reasonable sum for attorneys' fees
and costs in such suit, at trial and on appeal, and such attorneys' fees and
costs shall be deemed to have accrued on the commencement of such action.
ARTICLE 23.
ESTOPPEL CERTIFICATES
Tenant shall, from time to time, upon written request of Landlord, execute,
acknowledge and deliver to Landlord or its designee a written statement stating:
the date this Lease was executed and the date it expires; the date the Term
commenced and the date Tenant accepted the Premises; the amount of Basic Rent
and date to which such Rent has been paid; and certifying to the best of its
knowledge: that this Lease is in full force and effect and has not been
assigned, ratified, supplemented or amended in any way (or specifying the date
and terms of any agreement so affecting this Lease); that no rent in excess of
the true Rent owed Landlord is returnable to Tenant (or specifying the amount
due); that this Lease represents the entire agreement between the parties as to
this leasing; that all conditions under this Lease to be performed by Landlord
have been satisfied (or specifying the conditions unsatisfied); that all
required contributions by Landlord to Tenant on account of Tenant's Improvements
have been received (or specifying the amount still outstanding); that on this
date there are no existing claims, defenses or offsets which Tenant has against
the enforcement of this Lease by Landlord (or specifying the nature and amount
of such claims, defenses of offsets); that no Rent has been paid more than one
month in advance (or specifying the amount of Rent prepaid); and the amount of
any security deposit held by Landlord.
ARTICLE 24.
TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer or transfers of Landlord's interest in the
Premises or the Building, other than a transfer for security purposes only, the
transferor shall be automatically relieved of any and all obligations and
liabilities on the part of Landlord accruing from and after the date of such
transfer and such transferee shall have no obligation or liability with respect
to any matter occurring or arising prior to the date of such transfer and Tenant
agrees to attorn to the transferee; provided that Landlord is not relieved of
--------
any liability, including its indemnity
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obligations, with respect to matters in existence or events occurring prior to
the transfer and the transferee assumes and agrees to perform all obligations of
Landlord to be performed and be bound by all of Landlord's representations,
warranties, covenants and liabilities under this Lease from and after the date
of transfer.
ARTICLE 25.
NONWAIVER
Waiver by Landlord or Tenant of any term, covenant or condition herein
contained or any breach thereof shall not be deemed to be a waiver of such term,
covenant, or condition or of any subsequent breach of the same or any other
term, covenant or condition herein contained. The subsequent acceptance of Rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular Rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
Rent.
ARTICLE 26.
QUIET POSSESSION
Landlord warrants that, so long as Tenant is not in default under this
Lease beyond any applicable cure period with respect to a default for which
Landlord has notified Tenant this Lease is being terminated, Tenant's quiet
possession of the Premises shall not be disturbed by Landlord or others claiming
through Landlord.
ARTICLE 27.
PARKING
During the entire Lease Term, Landlord shall provide Tenant up to, at
Tenant's option, seven (7) employee parking stalls in the parking lot adjacent
to the Building (the "Parking Lot") at a monthly rate which shall be the current
rate charged to other parking tenants at the Parking Lot (currently One Hundred
Fifty Dollars ($150.00) per month per stall).
ARTICLE 28.
[INTENTIONALLY OMITTED]
ARTICLE 29.
GENERAL
Section 29.1 Headings. Titles to sections of this Lease are not a part of
this Lease and shall have no effect upon the construction or interpretation of
any part hereof.
Section 29.2 Heirs and Assigns. All of the covenants, agreements, terms
and conditions contained in this Lease shall inure to and be binding upon
Landlord and Tenant and their respective heirs, executors, administrators,
successors and assigns.
Section 29.3 No Brokers. Except for Colliers International (for whose
commission or fee Landlord shall be responsible for paying up to Twenty-one
Thousand Dollars ($21,000) and Tenant shall be responsible for paying the
balance, if any), Landlord and Tenant each represents
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and warrants to the other that it has not engaged any other broker, finder or
other person who would be entitled to any commission or fees from Landlord or
Tenant in respect of the negotiation, execution or delivery of this Lease.
Landlord and Tenant, as applicable, shall indemnify and hold harmless the other
against any loss, cost, liability or expense incurred by the other as a result
of any claim asserted by any such broker, finder or other person on the basis of
any arrangements or agreements made or alleged to have been made by or on behalf
of Landlord or Tenant, as applicable.
Section 29.4 Entire Agreement. This Lease contains all covenants and
agreements between Landlord and Tenant relating in any manner to the leasing,
use and occupancy of the Premises and Tenant's use of the Building and other
matters set forth in this Lease. No prior agreements or understandings
pertaining to the same shall be valid or of any force or effect and the
covenants and agreements of this Lease shall not be altered, modified or added
to except in writing signed by Landlord and Tenant.
Section 29.5 Severability. Any provision of this Lease that shall prove to
be invalid, void or illegal shall in no way affect, impair or invalidate any
other provision hereof and the remaining provisions hereof shall nevertheless
remain in full force and effect.
Section 29.6 Force Majeure. Except as otherwise expressly provided in this
Lease, time periods for either party's performance under any provisions of this
Lease shall be extended for periods of time during which such performance is
prevented due to circumstances beyond such party's reasonable control, including
without limitation, strikes, embargoes, shortages of labor or materials,
governmental regulations, acts of God, war or other strife.
Section 29.7 Building Directory. Landlord shall maintain in the lobby of
the Building a directory which shall include the names of Tenant and its
employees as reasonably requested by Tenant. Such list shall be updated from
time to time when requested by Tenant.
Section 29.8 Governing Law. This Lease shall be governed by and construed
in accordance with the laws of the State of Washington.
Section 29.9 Notice Addresses. All notices given under this Lease shall be
sent to the addresses set forth on the signature page of this Lease, or to such
other address as either party from time to time may provide the other in
writing.
Section 29.10 No Joint Venture. The relationship between the parties is
strictly one of landlord and tenant. Nothing in this Lease or otherwise shall be
construed or deemed to create a joint venture with respect to the Building
between Landlord and Tenant.
Section 29.11 Time; Approvals and Consents. Time is of the essence of this
Lease. Whenever a party's approval or consent is required or permitted under
this Lease, such approval or consent shall not be unreasonably withheld, delayed
or conditioned unless specifically provided to the contrary herein.
Section 29.12 Right of First Refusal. In the event that at any time during
the term of this Lease, any space on the Second Floor of the Building becomes
available for lease (the "Expansion Space"), Landlord shall deliver to Tenant a
notice of the availability of the
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Expansion Space and an offer to Tenant to lease the Expansion Space (the
"Notice") as part of the Premises under this Lease. The determination of the
term, the amount of Basic Rent, and applicable tenant improvement allowance for
the Expansion Space shall be proposed by Landlord and shall be included in the
Notice to Tenant. Tenant shall have the right within fifteen (15) days from
receipt of the Notice to accept the offer and lease the Expansion Space on the
terms, covenants and conditions proposed by Landlord. If Tenant timely accepts
Landlord's offer to lease the Expansion Space, an amendment to this Lease shall
be prepared and executed by Landlord and Tenant. If Tenant fails to respond
within the allocated time, Tenant shall be deemed to have rejected the offer as
it relates to the then offered Expansion Space and Landlord may lease such space
to third parties on substantially the same terms as offered in the Notice (or on
terms clearly more favorable to Landlord), but Tenant's right of first refusal
hereunder shall continue in effect for other space on the Second Floor in the
Building and for the Expansion Space should it not be leased to a third party
within one hundred twenty (120) days following delivery of the Notice.
Section 29.13 Rooftop Rights; Utilities. For and in consideration of
Tenant's entering into this Lease, Landlord hereby grants to Tenant during the
Lease Term the right to install, maintain, operate, repair and replace on the
rooftop of the Building one or more communications dishes and/or antennae,
together with cable connections to the Premises. All rooftop equipment shall be
installed in a location reasonably acceptable to Tenant. Tenant shall be
responsible for the costs and expenses of installing such equipment and removing
such equipment at the end of the Lease Term. Landlord hereby covenants and
agrees that it shall not, during the Lease Term, construct any additional
improvements on or over the roof of the Building.
Section 29.14 Tenant's Access to Utilities. During the Lease Term, Tenant
shall have the right to access all utilities serving the Premises on a 24 hour,
7 day per week basis.
Section 29.15 Landlord's Representations and Warranties. In addition to
any other representations and warranties set forth in this Lease, Landlord
hereby represents and warrants to Tenant as follows:
(i) Landlord has such title to the Premises and the Building
as required to be able to grant the leasehold and appurtenant rights to Tenant
therein as described in this Lease;
(ii) the grant of leasehold and appurtenant rights to Tenant in
this Lease do not violate (or have been granted in compliance with) all rights
of third parties in and to the Building;
(iii) Landlord is not aware of any components or conditions
existing with respect to the Premises or the Building that do or may reasonably
be expected to (A) constitute violations of existing rules, regulations,
applicable laws, statutes or codes; (B) constitute violations of applicable
federal, state or local environmental protection or hazardous or toxic
substances legislation, rules or regulations; (C) contain (other than incidental
or trace amounts of) hazardous substances, or give rise to notice obligations
under "worker's right to know" or comparable legislation; or (D) render the
Premises (or the other portions of the Building as to which Tenant is granted
appurtenant rights) not reasonably fit or useable for their intended purposes;
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(iv) the existing HVAC, electrical and plumbing systems and
equipment serving the Premises are in good working condition as of the date of
Lease execution;
(v) the existing restrooms and common areas are not presently in
full compliance with the Americans With Disabilities Act of 1990 ("ADA") as of
the execution date of Lease, however, if it becomes necessary in the future to
modify such restrooms or common areas to comply with the ADA or other similar
laws or regulations, Landlord shall be responsible for all such modifications,
at its cost and expense; and
(vi) there are no Year 2000 Conditions that would have a material
adverse effect on the operations of the Building or its systems. A "Year 2000
Condition" means any condition that would cause software not to (a) correctly
handle date information before, during and after January 1, 2000, (b) function
accurately and without interruption before, during and after January 1, 2000,
without any change in operations associated with the advent of the new century,
(c) respond to two-digit, year-date input in a way that resolves the ambiguity
as to century in a disclosed, defined and predetermined manner, and (d) store
and provide output of date information in ways that are unambiguous as to
century.
IN WITNESS WHEREOF, the Landlord and the Tenant have executed this Lease as
of the day and year first above written.
LANDLORD: WESTLAKE PARK ASSOCIATES, a Washington limited
partnership
/s/ Barry N. Ampay
By_____________________________________________
Its General Partner
Address:
c/o Mayflower Park Hotel
405 Olive Way
Seattle, Washington 98101
Telephone: (206) 382-6992
Telecopy: (206) 382-6996
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TENANT: ENCODING.COM, INC.,
a Delaware corporation
By_________________________________________
Its__________________________________
Address:
414 Olive Way, Suite 400
Seattle, Washington 98101
Attention: Chief Financial Officer
Telephone: (206) 832-4102
Telecopy: (206) 832-4001
EXHIBITS:
A Legal Description
B Premises Floor Plan
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this _____ day of December, 1999, before me, a Notary Public in and for
the State of Washington, personally appeared ____________________, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person who signed this instrument; on oath stated that HE/SHE was authorized to
execute the instrument as general partner of WESTLAKE PARK ASSOCIATES, a
Washington limited partnership; acknowledged said instrument to be HIS OR HER
free and voluntary act and deed, as general partner, for the uses and purposes
therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal the day
and year first above written.
_________________________________________________
NOTARY PUBLIC in and for the State of Washington,
residing at______________________________________
My appointment expires___________________________
Print Name_______________________________________
17
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STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this _____ day of December, 1999, before me, a Notary Public in and for
the State of Washington, personally appeared __________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person who executed this instrument, on oath stated that _____ was
authorized to execute the instrument, and acknowledged it as the
________________________ of ENCODING.COM, INC., to be the free and voluntary act
and deed of said corporation for the uses and purposes mentioned in the
instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal the day
and year first above written.
_________________________________________________
NOTARY PUBLIC in and for the State of Washington,
residing at______________________________________
My appointment expires___________________________
Print Name_______________________________________
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EXHIBIT 10.20
MARTIN SMITH INC
500 WATERMARK TOWER OFFICE LEASE
1109 FIRST AVENUE
SEATTLE, WA 98101-2988 83 KING BUILDING
TEL 682-3300 FAX 340-1283
This Lease is made this 7th day of June 1999 by and between MS1 83 King L.L.C.,
a Washington limited liability company ("Landlord"), and Alive.com, a Washington
corporation ("Tenant"), who agree as follows:
1. Fundamental Terms. As used in this Lease, the following capitalized terms
shall have the following meanings:
(a) "Land" means the land on which the Building is located, situated in the
City of Seattle, County of King, State of Washington, which is described on
Exhibit A.
(b) "Building" means the building in which the Premises are located,
commonly known as the 83 King Building, the street address of which is 83 South
King Street, Seattle, Washington 98104.
(c) From the "Commencement Date" (defined below) through the day
immediately preceding the "First Expansion Space Commencement Date" (defined
below), "Premises" means that certain space outlined in red on Exhibit B
---------
(sometimes also referred to as the "Initial Space") From the First Expansion
Space Commencement Date through the day immediately preceding the "Second
Expansion Space Commencement Date" (defined below), "Premises" means the Initial
Premises plus that certain space outlined in blue in Exhibit B (the latter space
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is hereinafter referred to as the "First Expansion Space"). From the Second
Expansion Space Commencement Date through the Expiration Date, "Premises" means
the Initial Premises plus the First Expansion Space plus that certain space
outlined in green on Exhibit B (the latter space is hereinafter referred to as
---------
the "Second Expansion Space"). All portions of the Premises are located on the
third floor of the Building and the Premises shall at all times be designated as
Suite 300.
(d) "Agreed Areas" means the agreed amount of rentable square feet of space
in the Building and the Premises. Landlord and Tenant stipulate and agree for
all purposes under this Lease that the Building contains approximately 204,316
rentable square feet of space (the "Building Area") and that (i) as of the
Commencement Date, the Premises will contain a total of approximately 15,654
rentable square feet of space, (ii) as of the First Expansion Space Commencement
Date, the Premises will contain a total of approximately 19,229 rentable square
feet of space (in other words, Landlord and Tenant stipulate and agree that the
First Expansion Space contains approximately 3,575 rentable square feet of
space) and (iii) as of the Second Expansion Space Commencement Date, the
Premises will contain a total of approximately 24,043 rentable square feet of
space (in other words, Landlord and Tenant stipulate and agree that the Second
Expansion Space contains approximately 4,814 rentable square feet of space). The
"Premises Area" is hereby defined to be such total number of rentable square
feet of space in
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the Premises at the time in question (e.g., prior to the First Expansion Space
Commencement Date, the Premises Area will be 15,654 rentable square feet).
Landlord and Tenant further agree that the Building Area may exclude portions of
the Building which are used for other than office purposes, such as areas used
for retail purposes or for storage purposes.
(e) "Tenant's Share" for the period commencing on the Commencement Date
means the Premises Area divided by the Building Area, expressed as a percentage,
which is seven and sixty-six/100ths percent (7.66%); commencing on the First
Expansion Space Commencement Date, Tenant's Share shall be increased to and mean
nine and forty-one/100ths percent (9.41%); and commencing on the Second
Expansion Space Commencement Date, Tenant's Share shall be increased to and mean
eleven and seventy-seven/100ths percent (11.77%). Notwithstanding the foregoing,
if one or more of the faculties, services and utilities the costs of which are
included within the definition of Operating Costs is not furnished to one or
more tenants or to particular types of tenants, then in connection with the
calculation of Tenant's Share of each of such costs the Building Area shall be
reduced by the number of rentable square feet of space occupied by such tenants
and Tenant's Share shall be separately computed as to each of such costs.
If a portion of the Building is damaged or condemned, or any other event
occurs which alters the number of rentable square feet of space in the Premises
or the Building, then Landlord shall adjust Tenant's Share to equal the number
of rentable square feet of space then existing in the Premises (as altered by
such event) divided by the number of rentable square feet of space then existing
in the Building (as altered by such event).
(f) "Commencement Date" means August 15, 1999, or such earlier or later
date as provided in Section 4 hereof. "First Expansion Space Commencement Date"
means September 1, 2000, or such earlier or later date as provided in Section 4
hereof, on the understanding that Section 4 shall, for such purposes, be deemed
modified to pertain just to the First Expansion Space (e.g., the phrase "First
Expansion Space Commencement Date" shall be substituted for the phrase
"Commencement Date", the phrase "First Expansion Space" shall be substituted for
the word "Premises", etc.). "Second Expansion Space Commencement Date" means
September 1, 2001, or such earlier or later date as provided in Section 4
hereof, on the understanding that Section 4 shall, for such purposes, be deemed
modified to pertain just to the Second Expansion Space (e.g., the phrase "Second
Expansion Space Commencement Date" shall be substituted for the phrase
"Commencement Date", the phrase "Second Expansion Space" shall be substituted
for the word "Premises", etc.).
(g) "Expiration Date" means August 31, 2004.
(h) "Term" means the period of time commencing on the Commencement Date and
ending on the Expiration Date, unless sooner terminated pursuant to this Lease.
(i) "Minimum Monthly Rent" means the following amounts as to the following
periods during the Term of this Lease, The following schedule is based upon a
rate per rentable square foot per year applicable to all rentable square feet
then in the Premises of $23.00 from the Commencement Date through August 31,
2000; $24.00 from September 1, 2000 through August 31, 2001; $25.00 from
September 1, 2001 through August 31, 2002, $26.00 from September 1,
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2002 to August 31, 2003; and $27.00 from September 1, 2003 through August 31,
2004. All such rent per square foot per year adjustment dates are fixed
regardless of any change in the Commencement Date. However, if the First
Expansion Space Commencement Date and/or the Second Expansion Space Commencement
Date are adjusted pursuant to Section 1(f) and Section 4 to be other than
September 1, 2000 and September 1, 2001, respectively, the following Minimum
Monthly Rent increases reflecting the addition of the First Expansion Space
and/or the Second Expansion Space (as the case may be) will adjust accordingly.
In other words, as an example, on September 1, 2000, the rent will increase to
$24.00 per rentable square foot per year under all circumstances, but such
increased rate will apply just to the initial Space if the First Expansion Space
Commencement Date had not yet occurred (as of the First Expansion Space
Commencement Date, such $24.00 per rentable square foot per year rate will apply
to the First Expansion Space as well):
Period Monthly Amount
------ --------------
Commencement Date to August 31, 2000 $30,003.50 per month
September 1, 2000 to August 31, 2001 $38,458.00 per month
September 1, 2001 to August 31, 2002 $50,089.58 per month
September 1, 2002 to August 31, 2003 $52,093.17 per month
September 1, 2003 to August 31, 2004 $54,096.75 per month
(j) "Permitted Use" means use for purposes of general
business/administrative offices for a software design company.
(k) "Base Year" means the calendar year 1999. Such Base Year shall apply to
the Initial Space, the First Expansion Space and the Second Expansion Space.
(l) "Prepaid Rent" means Zero Dollars ($0.00).
(m) "Security Deposit" means Twenty-five Thousand and no/100ths Dollars
($25,000.00). Landlord acknowledges that it is currently holding the sum of
$25,000.00 as a Security Deposit under that certain lease by and between
Landlord's predecessor in interest, Sprincin King Street Partners, a California
limited partnership, and Tenant (which was then known as Yesler Software, Inc.,
a Washington corporation), dated July 20, 1998 (the "Previous Lease"). Upon
termination of the Previous Lease, if Tenant is not in default, Landlord shall
transfer the Security Deposit under the Previous Lease to this Lease, and Tenant
hereby agrees to such transfer. If Tenant is in default upon termination of the
Previous Lease, Tenant shall deposit the Security Deposit with Landlord on the
Commencement Date of this Lease.
(n) "Landlord's Address for Notice" means 83 King Building, c/o Martin
Smith Inc, 1109 First Avenue, Suite 500, Seattle, Washington 98101-2988.
(o) "Landlord's Address for Payment of Rent" means 83 King Building, c/o
Martin Smith Inc, 1109 First Avenue, Suite 500, Seattle, Washington 98101-2988.
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(p) "Tenant's Address for Notice" means Alive.com, Inc., a Washington
corporation, 83 South King Street, Suite 300, Seattle, Washington 98104. Prior
to the Commencement Date, "Tenant's Address for Notice" shall be as provided in
the Previous Lease (namely, Suite 414 in the Building).
(q) "Landlord's Agent" means Martin Smith Inc or such other agent as
Landlord may appoint from time to time.
(r) "Brokers" mean Martin Smith Inc representing the Landlord and Dan Stutz
of Martin Smith Inc representing the Tenant. Landlord and Tenant each agree that
they fully understand and consent to such dual agency relationship.
(s) "Exhibits" means the following Exhibits to this Lease:
Exhibit A - Legal Description of the Property
Exhibit B - Outline Drawing of the Premises
Exhibit C - Work Letter
Exhibit D - Rules and Regulations
(t) "Rider" means the following Rider which is attached hereto: Rider dated
June 7, 1999 by and between MSI 83 King L.L.C., a Washington limited liability
company ("Landlord"), and Alive.com, Inc., a Washington corporation ("Tenant").
(u) "Definitions" means the words and phrases defined in Section 41
captioned "Definitions".
2. Premises. Landlord leases to Tenant and Tenant leases from Landlord the
Premises for the Term.
3. Appurtenances. Tenant, and its authorized representatives, shall have the
right to use, in common with others and subject to the Rules and Regulations,
the Common Areas of the Building. Landlord shall have the right, in Landlord's
sole discretion, from time to time to (i) make changes to the Building interior
and exterior and Common Areas, including without limitation, changes in the
location, size, shape, number and appearance thereof, (ii) to close temporarily
any of the Common Areas for maintenance purposes so long as reasonable access to
the Premises remains available, and (iii) to use the Common Areas while engaged
in making additional improvements, repairs or alterations to the Building. All
of the windows and exterior walls of the Premises and any space in the Premises
used for shafts, stacks, pipes, conduits, ducts, electrical equipment or other
utilities or Building facilities are reserved solely to Landlord and Landlord
shall have rights of access through the Premises for the purpose of operating,
maintaining and repairing the same, provided, however, that such changes shall
not materially affect Tenant's access to, or use and occupancy of, the Premises.
4. Term.
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(a) Commencement Date. This Lease shall become legally binding as of the
earlier of the date Landlord and Tenant execute this Lease or the date Tenant
enters onto the Premises with Landlord's consent, and shall remain in full force
and effect thereafter until the expiration of the Term, unless sooner terminated
pursuant to this Lease. The Term shall commence on the Commencement Date and
expire on the Expiration Date. The Commencement Date shall be the earlier to
occur of:
(i) The date specified in Section 1; or
(ii) If Tenant shall occupy the Premises for the Permitted Use prior to
the Commencement Date specified in Section 1 or the date, then the date of such
early occupancy.
(b) Tenant Termination Rights. If Landlord is unable to deliver possession
of the Premises to Tenant on the Commencement Date as a result of causes beyond
its reasonable control, Landlord shall not be liable for any damage caused by
failing to deliver possession and this Lease shall not be void or voidable.
Tenant shall not be liable for Rent until Landlord delivers possession of the
Premises to Tenant. No delay in delivery of possession of the Premises to Tenant
shall change the Expiration Date or operate to extend the Term. If Landlord does
not deliver possession of the Premises to Tenant within six (6) months of the
Commencement Date, then Tenant may elect to terminate this Lease by giving
notice to Landlord within thirty (30) days following the end of such six (6)
month period.
(c) Confirmation of Commencement Date. When the Commencement Date as
provided in Subsection 4(a)(ii) or 4(b) has been established as an earlier or
later date than the Commencement Date specified in Section 1, Landlord shall
confirm the Commencement Date by notice to Tenant.
5. Minimum Monthly Rent; Late Charge.
(a) Minimum Monthly Rent. Tenant shall pay to Landlord the Minimum Monthly
Rent without deduction, offset, prior notice or demand, in advance on the first
day of each month during the Term. Minimum Monthly Rent for any partial month
shall be prorated at the rate of 1/30th of the Minimum Monthly Rent per day.
Minimum Monthly Rent is exclusive of any sales, franchise, business or
occupation or other tax based on rents (other than Landlord's general income
taxes) and should such taxes apply during the Term, the Minimum Monthly Rent
shall be increased by the amount of such taxes. All Rent shall be paid to
Landlord at Landlord's Address for Payment of Rent or at such other address as
Landlord may specify by notice to Tenant.
(b) Late Charge. Tenant acknowledges that the late payment by Tenant of
any Rent will cause Landlord to incur administrative, collection, processing and
accounting costs and expenses not contemplated under this Lease, the exact
amount of which are extremely difficult or impracticable to fix. Therefore, if
any Rent is not received by Landlord from Tenant by the fifth (5th) calendar day
after such Rent is due, Tenant shall immediately pay to Landlord a late charge
equal to five percent (5%) of the amount of such Rent or Seventy-five and
no/100ths Dollars ($75.00), whichever is greater. Landlord and Tenant agree that
this late charge represents a reasonable estimate of such costs and expenses and
is fair compensation to Landlord for its loss
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<PAGE>
caused by Tenant's nonpayment. Should Tenant pay said late charge but fail to
pay contemporaneously therewith all unpaid amounts of Rent, Landlord's
acceptance of this late charge shall not constitute a waiver of Tenant's default
with respect to Tenant's nonpayment nor prevent Landlord from exercising all
other rights and remedies available to Landlord under this Lease or under law.
6. Prepaid Rent and Security Deposit. No Prepaid Rent is due under this Lease.
The Security Deposit has been or will be deposited by Tenant in accordance with
the terms of Section 1(m). It shall serve as security for the performance by
Tenant of the provisions of this Lease. If Tenant is in default, Landlord may
use the Security Deposit, or any portion of it, to cure the default, including
without limitation, paying for the cost of any work necessary to restore the
Premises, the Tenant improvements and any alterations to good condition or to
compensate Landlord for all damage sustained by Landlord resulting from Tenant's
default. Tenant shall within five (5) days of demand pay to Landlord a sum equal
to the portion of the Security Deposit expended or applied by Landlord as
provided in this Section so as to maintain the Security Deposit in the sum
initially deposited with Landlord. If Tenant is not in default as of the
expiration or termination of the Term, including without limitation, in default
in payment of the Rent for the last month of the Term, then Landlord shall
return the Security Deposit, without interest, to Tenant within a reasonable
period of time after the expiration or termination of the Term. Landlord's
obligations with respect to the Security Deposit are those of a debtor and not a
trustee. Landlord may commingle the Security Deposit with Landlord's general and
other funds.
7. Real Property Taxes.
(a) Payment of Tenant's Share of Increases In Real Property Taxes. Tenant
shall pay to Landlord, as Additional Rent, monthly, in advance on the first day
of each month during the Term, an amount equal to one-twelfth (1/12th) of
Tenant's Share of all increases in Real Property Taxes that are or will be
levied or assessed against the Property during each calendar year during the
Term over and above the Real Property Taxes that are levied or assessed against
the Property during the Base Year as reasonably estimated by Landlord. Such
Additional Rent is exclusive of any sales, franchise, business or occupation or
other tax based on rents and should such taxes apply during the Term, such
Additional Rent shall be increased by the amount of such taxes. Within one
hundred twenty (120) days after the end of each calendar year during the Term or
within such longer period of time as may be reasonably necessary, Landlord shall
furnish to Tenant a statement of the Real Property Taxes for the preceding
calendar year and Tenant's Share of the increase in Real Property Taxes. If
Tenant's Share of the increase in such Real Property Taxes for that calendar
year over such Real Property Taxes for the Base Year exceeds the monthly
payments made by Tenant, then Tenant shall pay Landlord the deficiency within
thirty (30) days after receipt of the statement. If Tenant's payments made
during that calendar year exceed Tenant's Share of the increase in such Real
Property Taxes for that calendar year over such Real Property Taxes for the Base
Year, then, at Landlord's option, either Landlord shall pay Tenant the excess at
the time Landlord furnishes the statement to Tenant, or Tenant shall be entitled
to offset the excess against the next installment(s) of Minimum Monthly Rent and
Additional Rent, provided, however, that at the end of the Term Landlord shall
pay Tenant the excess at the time Landlord furnishes the statement to Tenant.
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(b) General and Special Assessments. With respect to any general or
special assessments which may be levied against or upon the Property, or which
under the laws then in force may be evidenced by improvement or other bonds or
may be paid in annual installments, only the amount of such annual installment,
and interest due thereon, shall be included in the computation of Real Property
Taxes.
(c) Proration. Tenant's Share of Real Property Taxes shall be prorated on
the basis of a 360-day year to account for any fractional portion of a tax year
included in the Term at its commencement and expiration.
(d) No Effect on Minimum Monthly Rent. Notwithstanding anything to the
contrary in this Section, the Minimum Monthly Rent payable by Tenant shall in no
event be less than the Minimum Monthly Rent specified in Section 1.
8. Personal Property Taxes. Tenant shall pay prior to delinquency all personal
property taxes assessed against and levied upon trade fixtures, furnishings,
equipment and all other personal property of Tenant contained in the Premises or
elsewhere, If possible, Tenant shall cause such trade fixtures, furnishings,
equipment and all other personal property of Tenant to be assessed and billed
separately from the Property.
9. Operating Costs.
(a) Payment of Tenant's Share of Increases In Operating Costs. Tenant
shall pay to Landlord, as Additional Rent, monthly, in advance on the first day
of each month during the Term, an amount equal to one-twelfth (1/12th) of
Tenant's Share of the increase in the Operating Costs of the Property for each
calendar year during the Term over the Operating Costs for the Base Year as
reasonably estimated by Landlord. Landlord shall reasonably estimate the
Operating Costs for the Base Year and for each calendar year during the Term
based on the Operating Costs that would have been incurred if the Building had
been 95% occupied during the Base Year or each such calendar year, as the case
may be, taking into account historical operating costs for the Building. Such
Additional Rent is exclusive of any sales, franchise, business or occupation or
other tax based on rents and should such taxes apply during the Term, such
Additional Rent shall be increased by the amount of such taxes. Within one
hundred twenty (120) days after the end of each calendar year during the Term or
within such longer period of time as may be reasonably necessary, Landlord shall
furnish to Tenant a statement of the Operating Costs for the preceding calendar
year and Tenant's Share of the increase in the Operating Costs. If Tenant's
Share of the increase in the Operating Costs for that calendar year over the
Operating Costs for the Base Year exceeds the monthly payments made by Tenant,
then Tenant shall pay Landlord the deficiency within thirty (30) days after
receipt of the statement. If Tenant's payments made during that calendar year
exceed Tenant's Share of the increase in the Operating Costs for that calendar
year over the Operating Costs for the Base Year, then, at Landlord's option,
either Landlord shall pay Tenant the excess at the time Landlord furnishes the
statement to Tenant, or Tenant shall be entitled to offset the excess against
the next installment(s) of Minimum Monthly Rent and Additional Rent, provided,
however, that at the end of the Term Landlord shall pay Tenant the excess at the
time Landlord furnishes the statement to Tenant.
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(b) Proration. Tenant's Share of Operating Costs shall be prorated on the
basis of a 360 day year to account for any fractional portion of a year included
in the Term at its commencement and expiration.
(c) No Effect on Minimum Monthly Rent. Notwithstanding anything to the
contrary in this Section, the Minimum Monthly Rent payable by Tenant shall in no
event be less than the Minimum Monthly Rent specified in Section 1.
10. Use. Tenant shall use the Premises for the Permitted Use and for no other
use without Landlord's prior written consent. Tenant agrees that it has
determined to its satisfaction that the Premises can be used for the Permitted
Use. Tenant waives any right to terminate this Lease if the Premises cannot be
used for the Permitted Use during the Term unless the prohibition on use is the
result of actions taken by Landlord. Tenant's use of the Premises shall be in
accordance with the following:
(a) Insurance. Tenant shall not do, bring, or keep anything in or about
the Premises or the Property that will cause a cancellation of any insurance
covering the Property. If the rate of any insurance carried by Landlord on the
Property as published by the Washington Survey and Rating Bureau, or any
successor rating bureau or agency, is increased as a result of Tenant's use,
then Tenant shall pay to Landlord not less than ten (10) days before the date
Landlord is obligated to pay a premium on the insurance, a sum equal to the
difference between the original premium and the increased premium.
(b) Compliance with Laws. Tenant shall comply with all Laws concerning the
Premises and Tenant's use of the Premises.
(c) Waste, Nuisance and Improper Use. Tenant shall not use the Premises in
any manner that will constitute waste, nuisance or unreasonable annoyance to
other tenants in the Building, including without limitation, (i) the use of
loudspeakers or sound or light apparatus that can be heard or seen outside the
Premises, (ii) for cooking or other activities that cause odors that can be
detected outside the Premises, or (iii) for lodging or sleeping rooms.
(d) Damage to Property. Tenant shall not do anything in, on or about the
Premises that will cause damage to the Property.
(e) Rules and Regulations. Tenant and its authorized representatives shall
comply with the Rules and Regulations set forth on Exhibit D attached hereto.
---------
Landlord shall have the right to amend the Rules and Regulations from time to
time. In the event of a conflict between this Lease and the Rules and
Regulations, as amended, this Lease shall control. Landlord shall have the right
to enforce the Rules and Regulations. Landlord shall have no liability or
responsibility whatsoever with respect to the noncompliance by other tenants or
their authorized representatives with any of such Rules and Regulations.
11. Hazardous Substances. Tenant shall not dispose of or otherwise allow the
release of any Hazardous Substances in, on or under the Premises, or the
Property, or in any tenant improvements or alterations placed on the Premises by
Tenant. Tenant represents and warrants to
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Landlord that Tenant's intended use of the Premises does not involve the use,
production, disposal or bringing on to the Premises of any Hazardous Substances,
except for products normally used in general business offices which constitute
Hazardous Substances, provided that such products are used, stored and disposed
of in accordance with applicable laws and manufacturer's and supplier's
guidelines. Tenant shall promptly comply with all laws and with all orders,
decrees or judgments of governmental authorities or courts having jurisdiction,
relating to the use, collection, treatment, disposal, storage, control, removal
or cleanup of Hazardous Substances, on or under the Premises or the Property, or
incorporated in any tenant improvements or alterations, at Tenant's expense.
(a) Compliance; Notification. After notice to Tenant and a reasonable
opportunity for Tenant to effect such compliance, Landlord may, but is not
obligated to, enter upon the Premises and take such actions and incur such costs
and expenses to effect such compliance as it deems advisable to protect its
interest in the Premises and the Property, provided, however that Landlord shall
not be obligated to give Tenant notice and an opportunity to effect such
compliance if (i) such delay might result in material adverse harm to the
Premises, or the Property, or (ii) an emergency exists. Tenant shall reimburse
Landlord for the full amount of all costs and expenses incurred by Landlord in
connection with such compliance activities, and such obligation shall continue
even after expiration or termination of the Term. Tenant shall notify Landlord
immediately of any release of any Hazardous Substances on the Premises or the
Property.
(b) Indemnity by Tenant. Tenant agrees to hold Landlord harmless from and
against any and all damages, charges, cleanup costs, remedial actions, costs and
expenses, which may be imposed on, incurred or paid by, or asserted against
Landlord, the Premises or the Property by reason of, or in connection with (1)
any misrepresentation, breach of warranty or other default by Tenant under this
Lease, or (2) the acts or omissions of Tenant, its authorized representatives,
or any subtenant or other person for whom Tenant would otherwise be liable,
resulting in the release of any Hazardous Substances on the Premises or the
Property.
(c) Acknowledgment as to Hazardous Substances. Tenant acknowledges that
the Premises may contain Hazardous Substances, and Tenant accepts the Premises
and the Building notwithstanding such Hazardous Substances. If Landlord is
required by any law to take any action to remove or abate any Hazardous
Substances, or if Landlord deems it necessary to conduct special maintenance or
testing procedures with regard to any Hazardous Substances, or to remove or
abate any Hazardous Substances, Landlord may take such action or conduct such
procedures at times and in a manner that Landlord deems appropriate under the
circumstances, and Tenant shall permit the same.
(d) Survival. The provisions of this Section shall survive the expiration
or sooner termination of the Term. No subsequent modification or termination of
this Lease by agreement of the parties or otherwise shall be construed to waive
or to modify any provisions of this Section unless the termination or
modification agreement or other document expressly so states in writing.
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12. Landlord's Maintenance; Inclusion in Operating Costs.
(a) Landlord's Maintenance. Except as provided in Section 13 captioned
"Tenant's Maintenance; Remedies", Section 23 captioned "Destruction" and Section
24 captioned "Condemnation" and except for damage caused by any negligent or
intentional act or omission of Tenant or its authorized representatives,
Landlord shall maintain in good condition and repair the following: (i) the
structural parts of the Building, which structural parts include only the
foundations, bearing and exterior walls (excluding glass and doors), subflooring
and roof, (ii) the building standard lighting fixtures, window coverings and
ceiling tiles and the unexposed electrical, plumbing and sewage systems,
including without limitation, those portions lying outside the Premises, (iii)
the heating, ventilating and air-conditioning system, if any, servicing the
Building, (iv) the lobbies, corridors, elevators, public or common restrooms and
other common areas of the Building, and (v) the sidewalks, grounds, landscaping,
parking and loading areas, if any, and other common areas of the Property.
(b) Inclusion in Operating Costs. The cost of maintaining, repairing,
replacing or servicing the portions of the Building that Landlord is required to
maintain pursuant to this Section shall be included in Operating Costs to the
extent provided in Section 9 captioned "Operating Costs".
13. Tenant's Maintenance; Remedies.
(a) Tenant's Maintenance. Except as provided in Section 12 captioned
"Landlord's Maintenance; Inclusion in Operating Costs", Section 23 captioned
"Destruction" and Section 24 captioned "Condemnation" and except for damage
caused by any grossly negligent or intentional act or omission of Landlord or
its authorized representatives, Tenant, at its cost, shall maintain in good
condition and repair the Premises, including without limitation, all of the
Tenant Improvements (except for latent defects), Tenant's alterations, Tenant's
trade fixtures, Tenant's personal property, signs, walls, interior partitions,
wall coverings, windows, non-building standard window coverings, glass, doors,
carpeting and resilient flooring, non-building standard ceiling tiles, plumbing
fixtures and non-building standard lighting fixtures. Tenant shall be liable for
any damage to the Premises and the Building resulting from the acts or omissions
of Tenant or its authorized representatives.
(b) Landlord's Remedies. If Tenant fails to maintain the Premises in good
condition and repair as required by Subsection 13(a) and if such failure is not
cured within thirty (30) days after notice of such failure is given by Landlord
to Tenant, then Landlord may, at its option, cause the Premises to be maintained
in good condition and repair and Tenant shall promptly reimburse Landlord for
all costs incurred by Landlord in performance of Tenant's obligation to maintain
the Premises.
14. Tenant Improvements and Alterations; Trade Fixtures.
(a) Tenant Improvements and Alterations. Tenant accepts the Premises in
"AS IS" condition without any obligations for the performance of improvements or
other work by Landlord. Tenant shall not make any improvements or alterations to
the Premises without
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Landlord's prior written consent. Any improvements and alterations made by
either party shall remain on and be surrendered with the Premises on expiration
or termination of the Term, except that Landlord can elect by giving notice to
Tenant within thirty (30) days before the expiration of the Term, or within
thirty (30) days after termination of the Term, to require Tenant to remove any
improvements and alterations that Tenant has made to the Premises. If such
removal is necessary, Landlord shall notify Tenant prior to installation of such
items/improvements that must be removed at the end of the Term. If Landlord so
elects, Tenant, at its cost, shall restore the Premises to the condition
designated by Landlord in its election, before the last day of the Term, or
within thirty (30) days after notice of election is given, whichever is later.
Any improvements and alterations that remain on the Premises on expiration or
termination of the Term shall automatically become the property of Landlord and
title to such improvements and alterations shall automatically pass to Landlord
at such time without any payment therefor by Landlord to Tenant. If Tenant or
its authorized representatives make any improvements or alterations to the
Premises as provided in this Section, then such improvements and alterations (i)
shall be made in a first class manner in conformity with then building standard
improvements, (ii) shall be made utilizing then building standard materials,
(iii) shall be made in compliance with the Rules and Regulations and the
reasonable directions of Landlord, (iv) shall be made pursuant to a valid
building permit to be obtained by Tenant, at its cost, (v) shall be made in
conformity with then applicable Laws, including without limitation, building
codes, (vi) shall not be commenced until five (5) days after Landlord has
received notice from Tenant stating the date the installation of such
improvements and alterations is to commence so that Landlord can post and record
an appropriate notice of nonresponsibility; and (vii) shall be made in
compliance with all of the terms and provisions of Exhibit C.
(b) Trade Fixtures. Tenant shall not install any trade fixtures in or on
the Premises without Landlord's prior written consent.
15. Mechanics' Liens. Tenant shall pay, or cause to be paid, all costs of
labor, services and/or materials supplied in connection with any Work. Tenant
shall keep the Property free and clear of all mechanics' liens and other liens
resulting from any Work. Prior to the commencement of any Work or the supply or
furnishing of any labor, services and/or materials in connection with any Work,
Tenant shall provide Landlord with a labor and material payment bond in an
amount equal to one hundred percent (100%) of the aggregate price of all
contracts therefor, with release of the bond conditioned on Tenant's payment in
full of all claims of lien claimants for such labor, services and/or materials
supplied in the prosecution of the Work. Said payment bond shall name Landlord
as a primary obligee, shall be given by a surety which is satisfactory to
Landlord, and shall be in such form as Landlord shall approve in its sole
discretion. Tenant shall have the right to contest the correctness or validity
of any such lien if, immediately on demand by Landlord, it procures and records
a lien release bond issued by a responsible corporate surety in an amount
sufficient to satisfy statutory requirements therefor in the State of
Washington. Tenant shall promptly pay or cause to be paid all sums awarded to
the claimant on its suit, and, in any event, before any execution is issued with
respect to any judgment obtained by the claimant in its suit or before such
judgment becomes a lien on the Premises, whichever is earlier. If Tenant shall
be in default under this Section, by failing to provide security for or
satisfaction of any mechanic's or other liens, then Landlord may (but shall
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not be obligated to), in addition to any other rights or remedies it may have,
discharge said lien by (i) paying the claimant an amount sufficient to settle
and discharge the claim, (ii) procuring and recording a lien release bond, or
(iii) taking such other action as Landlord shall deem necessary or advisable,
and, in any such event, Tenant shall pay as Additional Rent, on Landlord's
demand, all costs (including reasonable attorney fees) incurred by Landlord in
settling and discharging such lien together with interest thereon in accordance
with Section 39 captioned "interest on Unpaid Rent" from the date of Landlord's
payment of said costs. Landlord's payment of such costs shall not waive any
default of Tenant under this Section.
16. Utilities and Services.
(a) Utilities and Services Furnished by Landlord. Landlord shall furnish
the Premises with:
(i) Electricity for lighting and power suitable for the use of the
Premises for ordinary general office purposes; provided, however, that Tenant
shall not at any time have a connected electrical load for lighting purposes in
excess of the wattage per square foot of Premises Area required for building
standard amounts of lighting, or a connected load for all other power
requirements in excess of four (4) watts per square foot of Premises Area as
determined by Landlord, and the electricity so provided for lighting and power
shall not exceed such limits, subject to any lower limits set by any
governmental authority with respect thereto;
(ii) Subject to the reasonable limitations of the existing building
systems, heating, ventilating and air-conditioning, if the Building has an air-
conditioning system, to maintain a temperature range in the Premises which is
customary for similar office space in the Seattle, Washington area (but in
compliance with any applicable governmental regulations with respect thereto).
Tenant agrees to keep closed, when necessary, blinds, draperies and windows
which must be closed to provide for the efficient operation of the heating and
air conditioning systems, if any, and Tenant agrees to cooperate with Landlord
and to abide by the regulations and requirements which Landlord may prescribe
for the proper functioning and protection of the heating, ventilating and air-
conditioning system, if any. If Tenant requires heating, ventilating and air
conditioning to the Premises other than during normal business hours from 7:30
A.M. to 6:00 P.M. daily, and from 8:00 A.M. to 1:00 P.M. Saturdays, except
Sundays and those legal holidays generally observed in the State of Washington,
Landlord shall, upon Tenant's request made not less than 24 hours before the
time Tenant requires the after hour service, and not later than Noon on the
Friday before any Saturday or Sunday on which Tenant requires such service, and
not later than Noon of the day before any holiday on which Tenant requires such
service (except as otherwise provided in the Rules and Regulations), furnish
such heating, ventilating and air conditioning. If Tenant receives such
services, then Tenant shall pay, upon demand, an amount equal to Tenant's
proportionate share of the actual direct cost to Landlord in providing the
heating, ventilating and air conditioning outside of normal business hours;
(iii) Water for restroom and drinking purposes and access to restroom
facilities;
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(iv) Elevator service for general office pedestrian usage if the
Building is serviced by elevators;
(v) Relamping of building-standard light fixtures;
(vi) Washing of interior and exterior surfaces of exterior windows
with reasonable frequency; and
(vii) Janitorial service five (5) times per week, except holidays.
(b) Payment for Excess Utilities and Services. All services and utilities
for the Premises not required to be furnished by Landlord pursuant to Section
16(a) shall be paid for by Tenant. If Tenant requires, on a regular basis,
water, heat, air conditioning, electric current, elevator or janitorial service
in excess of that provided for in Section 16(a), then Tenant shall first obtain
the written consent of Landlord which consent may be withheld in Landlord's sole
discretion. If Landlord consents to such excess use, Landlord may install an
electric current or water meter (including, without limitation, any additional
wiring, conduit or panel required therefor) to measure the excess electric
current or water consumed by Tenant or may cause the excess usage to be measured
by other reasonable methods (e.g., by temporary "check" meters or by survey).
Tenant shall pay to Landlord upon demand (i) the cost of any and all water,
heat, air conditioning, electric current, janitorial, elevator or other services
or utilities required to be furnished to Tenant in excess of the services and
utilities required to be furnished by Landlord as provided in Section 16(a);
(ii) the cost of installation, maintenance and repair of any meter installed in
the Premises; (iii) the cost of all electricity and water consumed by Tenant in
connection with any dedicated heating, ventilating and/or air conditioning,
computer power and/or air conditioning, telecommunications or other special
systems of Tenant, including any power usage other than through existing
standard 110-volt AC outlets; and (iv) any cost incurred by Landlord in keeping
account of or determining such excess utilities or services furnished to Tenant.
Landlord's failure to bill Tenant for any such excess utilities or services
shall not waive Landlord's right to bill Tenant for the excess at a later time.
(c) Temperature Balance. Landlord makes no representation to Tenant
regarding the adequacy or fitness of the heating, ventilating and air-
conditioning systems, if any, in the Building to maintain temperatures that may
be required for, or because of, any of Tenant's equipment which uses other than
the fractional horsepower normally required for office equipment, and Landlord
shall have no liability for loss or damage suffered by Tenant or others in
connection therewith. If the temperature otherwise maintained in any portion of
the Premises by the heating, air conditioning or ventilation system is affected
as a result of (i) any lights, machines or equipment (including without
limitation electronic data processing machines) used by Tenant in the Premises,
(ii) the occupancy of the Premises by more than one person per two hundred (200)
square feet of rentable area therein, (iii) an electrical load for lighting or
power in excess of the limits per square foot of rentable area of the Premises
specified in Section 16(a), or (iv) any rearrangement of partitioning or other
improvements, Landlord may install any equipment, or modify any existing
equipment (including the standard air conditioning equipment) Landlord deems
necessary to restore the temperature balance. The cost of any such
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equipment, including without limitation, the cost of design and installation
thereof, and the cost of operating, metering, maintaining or repairing the same,
shall be paid by Tenant to Landlord upon demand. Tenant shall not install or
operate window-mounted heating or air-conditioning units.
(d) Special Electrical or Water Connections; Electricity Use. Tenant will
not, without the prior written consent of Landlord, which Landlord in its sole
discretion may refuse, connect or use any apparatus or device in the Premises
(i) using current in excess of 110 volts or (ii) which will cause the amount of
electricity, water, heating, air conditioning or ventilation furnished to the
Premises to exceed the amount required for use of the Premises for ordinary
general office purposes, as determined by Landlord, during normal business hours
or (iii) which would cause Tenant's connected load to exceed any limits
established in Section 16(a). Tenant shall not connect with electric current
except through existing outlets in the Premises and shall not connect with water
pipes except through existing plumbing fixtures in the Premises. In no event
shall Tenant's use of electricity exceed the capacity of existing feeders to the
Building or the risers or wiring installation, and Landlord may prohibit the use
of any electrical equipment which in Landlord's opinion will overload such
wiring or interfere with the use thereof by other tenants in the Building. If
Landlord consents to the use of equipment requiring such changes, Tenant shall
pay the cost of installing any additional risers, panels or other facilities
that may be necessary to furnish energy to the Premises.
Landlord will not permit additional coring of the floor of the Premises in
order to install new electric outlets in the Premises unless Tenant furnishes
Landlord with X-ray scans of the floor area where the Tenant wishes to place
additional electrical outlets and Landlord, in its absolute discretion, is
satisfied, on the basis of such X-ray scans and other information obtained by
Landlord, that coring of the floor in order to install such additional outlets
will not weaken the structure of the floor.
(e) Landlord's Duties. Landlord shall not be in default under this Lease
or liable for any damages resulting from, or incidental to, any of the
following, nor shall any of the following be an actual or constructive eviction
of Tenant, nor shall the Rent be abated by reason of: (i) failure to furnish or
delay in furnishing any of the services described in this Section when such
failure or delay is caused by accident or any condition beyond the reasonable
control of Landlord, including the making of necessary repairs or improvements
to the Premises or to the Building, (ii) any electrical surges or spikes, or
(iii) failure to make any repair or to perform any maintenance, unless such
failure shall persist for an unreasonable time after notice of the need for such
repair or maintenance is given to Landlord by Tenant. Landlord shall use
reasonable efforts to remedy any interruption in the furnishing of such
services.
(f) Governmental Regulations. Any other provisions of this Section
notwithstanding, if any governmental authority or utility supplier imposes any
laws, controls, conditions, or other restrictions upon Landlord, Tenant, or the
Building, relating to the use or conservation of energy or utilities, mandated
changes in temperatures to be maintained in the Premises or the Building or the
reduction of automobile or other emissions (collectively, the "Controls"), or in
the event Landlord is required or elects to make alterations to the Building in
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order to comply with the Controls, Landlord may, in its sole discretion, comply
and may require Tenant to comply with the Controls or make such alterations to
the Building in order to comply with the Controls. Such compliance and the
making of such alterations shall not constitute an actual or constructive
eviction of Tenant, impose on Landlord any liability whatsoever, or entitle
Tenant to any abatement of Rent.
17. Indemnity.
(a) Generally. Tenant shall hold Landlord harmless from and against any
and all damages arising out of any damage to any persons or property occurring
in, on or about the Premises or the Property resulting from the acts or
omissions of Tenant or its authorized representatives. Landlord shall hold
Tenant harmless from and against any and all damages arising out of any damage
to any persons or property occurring in, on or about the Premises or the
Property resulting from the acts or omissions of Landlord or its authorized
representatives. A party's obligation under this Section to indemnify and hold
the other party harmless shall be limited to the sum that exceeds the amount of
insurance proceeds, if any, received by the party being indemnified.
(b) Concurrent Negligence of Landlord and Tenant. Notwithstanding Section
17(a) above, in the event of concurrent negligence of Tenant, or its authorized
representatives, on the one hand, and that of Landlord, or its authorized
representatives, on the other hand, which concurrent negligence results in
damage to any persons or property occurring in, on or about the Premises or the
Property, either party's obligation to indemnity the other party as set forth in
Section 17(a) shall be limited to the extent of the negligence of the
indemnifying party, or its authorized representatives, including the
indemnifying party's proportional share of costs and attorneys' fees incurred in
connection with any claims, actions or proceedings brought with respect to such
damage.
(c) Waiver of Worker's Compensation Immunity. The indemnification
obligations contained in this Section shall not be limited by any worker's
compensation, benefit or disability laws, and each indemnifying party hereby
waives (solely for the benefit of the indemnified party) any immunity that said
indemnifying party may have under the Industrial Insurance Act, Title 51 RCW and
similar worker's compensation, benefit or disability laws.
(d) Provisions Specifically Negotiated. LANDLORD AND TENANT ACKNOWLEDGE BY
THEIR EXECUTION OF THIS LEASE THAT EACH OF THE INDEMNIFICATION PROVISIONS OF
THIS LEASE (SPECIFICALLY INCLUDING BUT NOT LIMITED TO THOSE RELATING TO WORKER'S
COMPENSATION BENEFITS AND LAWS) WERE SPECIFICALLY NEGOTIATED AND AGREED TO BY
LANDLORD AND TENANT.
18. Exemption of Landlord from Liability. Landlord and Landlord's Agent shall
not be liable for injury to Tenant's business or loss of income therefrom or for
damage which may be sustained by the person, goods, wares, merchandise or
property of Tenant, its authorized representatives, or any other person in or
about the Premises, caused by or resulting from fire, steam, electricity, gas,
water or rain, which may leak or flow from or into any part of the
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Premises, or from the breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures of the same, whether the said damage or injury resulting from
conditions arising upon the Premises or upon other portions of the Building or
the Property unless such injury or damage is caused by the gross negligence or
willful misconduct of Landlord or its authorized representatives.
19. Commercial General Liability and Property Damage Insurance. Tenant, at its
cost, shall maintain commercial general liability insurance (including
contractual liability and products and completed operations liability) with
liability limits of not less than $1,000,000 per occurrence and $2,000,000
annual aggregate, insuring against all liability of Tenant and its authorized
representatives arising out of or in connection with Tenant's use and occupancy
of the Premises and property damage insurance with liability limits of not less
than $500,000. All such commercial general liability and property damage
insurance shall insure performance by Tenant of the indemnity provisions of
Section 17 captioned "indemnity". Landlord and Landlord's Agent shall be
additional named insureds on such insurance policy.
20. Tenant's Fire Insurance. Tenant, at its cost, shall maintain on all of
Tenant's Alterations, Trade Fixtures and Personal Property in, on or about the
Premises, a policy of standard All Risk fire insurance, in an amount equal to at
least their full replacement cost. The proceeds of any such policy shall be used
by Tenant for the restoration of Tenant's Alterations and Trade Fixtures and the
replacement of its Personal Property. Any portion of such proceeds not used for
such restoration shall belong to Tenant.
21. Waiver of Subrogation. Landlord and Tenant release each other, and their
respective authorized representatives, from any claims for damage to any person
or to the Premises and the Building and to Tenant's Alterations, Trade Fixtures
and Personal Property that are caused by or result from risks insured against
under any insurance policies carried by the parties, in force at the time of any
such damage and collectible. Landlord and Tenant shall cause each insurance
policy obtained by it to provide that the insurance company waives all right of
recovery by way of subrogation against either party in connection with any
damage covered by any insurance policy. Neither party shall be liable to the
other for any damage caused by fire or any of the risks insured against under
any insurance policy required by this Lease.
22. Other Insurance Matters. All insurance required to be carried by Tenant
under this Lease shall: (i) be issued by insurance companies authorized to do
business in the State of Washington with a rating of NVI or better as rated in
the most recent edition of Best's Insurance Reports; (ii) be issued as a primary
policy, and (iii) contain an endorsement requiring thirty (30) days' prior
written notice from the insurance company to both parties, to Landlord's Agent,
and, if requested by Landlord, to Landlord's lender, before cancellation or
change in the coverage, scope, or amount of any policy. Each policy or a
certificate of the policy, together with evidence of payment of premiums, shall
be deposited with Landlord on or before the Commencement Date, and on renewal of
the policy not less than ten (10) days before expiration of the term of the
policy.
23. Destruction.
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(a) Insured Damage. If during the Term the Premises or the Building are
partially or totally destroyed by any casualty that is covered by any insurance
carried by Landlord covering the Building, rendering the Premises partially or
totally inaccessible or unusable, Landlord shall restore the Premises or the
Building to substantially the same condition as they were in immediately before
such destruction, if (i) the insurance proceeds available to Landlord equal or
exceed the cost of such restoration, (ii) in the opinion of a registered
architect or engineer appointed by Landlord such restoration can be completed
within one hundred eighty (180) days after the date on which Landlord obtains
all permits necessary for such restoration, and (iii) such restoration is
permitted under then existing laws to be done in such a manner as to return the
Premises, or the Building, as the case may be, to substantially the same
condition as they were in immediately before such destruction. To the extent
that the insurance proceeds must be paid to a mortgagee under, or must be
applied to reduce any debt secured by, a mortgage covering the Property, the
insurance proceeds shall be deemed not to be available to Landlord unless such
mortgagee permits Landlord to use the insurance proceeds for such restoration.
Such destruction shall not terminate this Lease.
(b) Major or Uninsured Damage. If during the Term the Premises or the
Building are partially or totally destroyed by any casualty and Landlord is not
obligated under Section 23(a) captioned "Insured Damage" to restore the Premises
or the Building, as the case may be, then Landlord may, at its election, either
(i) restore the Premises or the Building to substantially the same condition as
they were in immediately before such destruction, or (ii) terminate this Lease
effective as of the date of such destruction. If Landlord does not give Tenant
notice within sixty (60) days after the date of such destruction of its election
to restore the Premises or the Building, as the case may be, Landlord shall be
deemed to have elected to terminate this Lease. if Landlord elects to restore
the Premises or the Building, as the case may be, Landlord shall use
commercially reasonable efforts to complete such restoration within one hundred
eighty (180) days after the date on which Landlord obtains all permits necessary
for such restoration, provided, however, that such one hundred eighty (180) day
period shall be extended by a period equal to any delays caused by Force
Majeure, and such destruction shall not terminate this Lease.
(c) Damage to the Building. If during the Term the Building is partially
destroyed by any casualty and if in the opinion of Landlord the Building should
be restored in such a way as to materially alter the Premises, then Landlord
may, at Landlord's election, terminate this Lease by giving notice to Tenant of
Landlord's election to do so within sixty (60) days after the date of such
destruction.
(d) Extent of Landlord's Obligation to Restore. If Landlord is required or
elects to restore the Premises as provided in this Section, Landlord shall not
be required to restore alterations made by Tenant, Tenant's trade fixtures and
Tenant's personal property, such excluded items being the sole responsibility of
Tenant to restore.
(e) Abatement or Reduction of Rent. In case of damage to, or destruction
of, the Premises or the Building the Minimum Monthly Rent shall be abated or
reduced, between the date of destruction and the date of completion of
restoration, by an amount that is in the same
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ratio to the Minimum Monthly Rent as the total number of square feet of the
Premises that are so damaged or destroyed bears to the total number of square
feet in the Premises.
24. Condemnation. If during the Term there is any taking of part or all of the
Premises or the Building by condemnation, then the rights and obligations of the
parties shall be as follows:
(a) Minor Taking. If there is a taking of less than ten percent (10%) of
the Premises, this Lease shall remain in full force and effect.
(b) Major Taking. If there is a taking of ten percent (10%) or more of the
Premises and if the remaining portion of the Premises is of such size or
configuration that Tenant is unable to conduct its business in the Premises,
then the Term shall terminate as of the date of taking.
(c) Taking of Part of the Building. If there is a taking of a part of the
Building other than the Premises and if in the opinion of Landlord the Building
should be restored in such a way as to materially alter the Premises, then
Landlord may terminate the Term by giving notice to such effect to Tenant within
sixty (60) days after the date of vesting of title in the condemnor and the Term
shall terminate as of the date specified in such notice, which date shall not be
less than sixty (60) days after the giving of such notice.
(d) Award. The entire award for the Premises, the Building and the
Property, shall belong to and be paid to Landlord, Tenant hereby assigning to
Landlord Tenant's interest therein, if any, provided, however, that Tenant shall
have the right to claim and recover from the condemnor compensation for the loss
of any alterations made by Tenant, Tenant's trade fixtures, Tenant's personal
property, moving expenses and business interruption.
(e) Abatement of Rent. If any part of the Premises is taken by
condemnation and this Lease remains in full force and effect, on the date of
taking the Minimum Monthly Rent shall be reduced by an amount that is in the
same ratio to the Minimum Monthly Rent as the total number of square feet in the
Premises taken bears to the total number of square feet in the Premises
immediately before the date of taking.
25. Assignment and Subletting.
(a) Landlord's Consent; Definitions. Tenant acknowledges that the Building
is a multi-tenant office building, occupied by tenants specifically selected by
Landlord, and that Landlord has a legitimate interest in the type and quality of
such tenants, the location of tenants in the Building and in controlling the
leasing of space in the Building so that Landlord can better meet the particular
needs of its tenants and protect and enhance the relative image, position and
value of the Building in the office building market. Tenant further acknowledges
that the rental value of the Premises may fluctuate during the Term in
accordance with market conditions, and, as a result, the Rent paid by Tenant
under the Lease at any particular time may be higher or lower than the then
market rental value of the Premises. Landlord and Tenant agree, and the
provisions of this Section are intended to so provide, that, if Tenant
voluntarily assigns its interest in this Lease or in the Premises or subleases
any part or all of the Premises, a portion of the profits from any increase in
the market rental value of the Premises shall belong to Landlord. Tenant
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acknowledges that, if Tenant voluntarily assigns this Lease or subleases any
part or all of the Premises, Tenant's investment in the subject portion of the
Premises (specifically including, but not limited to, tenant improvements, good
will or other assets) may be lost or reduced as a result of such action.
(b) Consent Required. Tenant shall not voluntarily assign or encumber its
interest in this Lease or in the Premises, or sublease any part or all of the
Premises, without Landlord's prior written consent, which consent shall not be
unreasonably withheld. Any assignment, encumbrance or sublease without
Landlord's consent shall be voidable and, at Landlord's election, shall
constitute a default by Tenant under this Lease. In determining whether to
approve a proposed assignment or sublease, Landlord shall place primary emphasis
on the proposed transferee's reputation and creditworthiness, the character of
the business to be conducted by the proposed transferee at the Premises and the
affect of such assignment or subletting on the tenant mix in the Building. In
addition, Landlord shall have the right to approve the specific form of any
assignment or sublease agreement. In no event shall Landlord be obligated to
consent to any assignment or subletting which increases (i) the Operating Costs,
(ii) the burden on the Building services, or (iii) the foot traffic, elevator
usage or security concerns in the Building, or creates an increased probability
of the comfort and/or safety of the Landlord and other tenants in the Building
being unreasonably compromised or reduced (for example, but not exclusively,
Landlord may deny consent to an assignment or subletting where the space will be
used for a school or training facility, an entertainment, sports or recreation
facility, retail sales to the public (unless Tenant's permitted use is retail
sales), a personnel or employment agency, a medical office, or an embassy or
consulate or similar office. Landlord shall not be obligated to approve an
assignment or subletting to (x) a current tenant of the Building or (y) a
prospective tenant of the Building with whom Landlord is then negotiating.
Landlord's foregoing rights and options shall continue throughout the entire
term of this Lease. No consent to any assignment, encumbrance or sublease shall
constitute a waiver of the provisions of this Section and no other or subsequent
assignment, encumbrance or sublease shall be made without Landlord's prior
written consent. Neither an assignment or subletting nor the collection of Rent
by Landlord from any person other than Tenant, nor the application of any such
Rent as provided in this Section shall be deemed a waiver of any of the
provisions of this Section or release Tenant from its obligation to comply with
the terms and provisions of this Lease and Tenant shall remain fully and
primarily liable for all of Tenant's obligations under this Lease, including the
obligation to pay Rent under this Lease. Any personal guarantee(s) of Tenant's
obligations under this Lease shall remain in full force and effect following any
such assignment or subletting. Landlord may condition approval of an assignment
or subletting hereunder on an increase in the amount of the Security Deposit or
on receipt of personal guarantees of the assignee's or sublessee's obligations
under this Lease. If Landlord approves of an assignment or subletting hereunder
and this Lease contains any renewal options, expansion options, rights of first
refusal, rights of first negotiation or any other rights or options pertaining
to additional space in the Building, such rights and/or options shall not run to
the assignee or subtenant, it being agreed by the parties hereto that any such
rights and options are personal to Tenant named herein and may not be
transferred.
(c) Conditions to Assignment or Sublease. Tenant agrees that any
instrument by which Tenant assigns or sublets all or any portion of the Premises
shall expressly provide that the
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assignee or subtenant may not further assign or sublet the assigned or sublet
space without Landlord's prior written consent (which consent shall not, subject
to Landlord's rights under Section 25(b), be unreasonably withheld or delayed),
and that the assignee or subtenant will comply with all of the provisions of
this Lease and that Landlord may enforce the Lease provisions directly against
such assignee or subtenant. If this Lease is assigned, whether or not in
violation of the terms and provisions of this Lease, Landlord may collect Rent
from the assignee. If the Premises, or any part thereof, is sublet, Landlord
may, upon a default under this Lease, collect rent from the subtenant. In either
event, Landlord may apply the amount collected from the assignee or subtenant to
Tenant's obligation to pay Rent under this Lease.
(d) Events Constituting an Assignment or Sublease. For purposes of this
Section, the following events shall be deemed an assignment or sublease, as
appropriate: (i) the issuance of equity interests (whether stock, partnership
interests or otherwise) in Tenant, or any assignee or subtenant, if applicable,
or any entity controlling any of them, to any person or group of related
persons, in a single transaction or a series of related or unrelated
transactions, such that, following such issuance, such person or group shall
have Control (as defined below) of Tenant, or any assignee or subtenant, if
applicable; or (ii) a transfer of Control of Tenant, or any assignee or
subtenant, if applicable, or any entity controlling any of them, in a single
transaction or a series of related or unrelated transactions (including, without
limitation, by consolidation, merger, acquisition or reorganization), except
that the transfer of outstanding capital stock or other listed equity interests
by persons or parties other than "insiders" within the meaning of the Securities
Exchange Act of 1934, as amended, through the "over-the-counter" market or any
recognized national or international securities exchange, shall not be included
in determining whether Control has been transferred. "Control" shall mean direct
or indirect ownership of fifty percent (50%) or more of all the legal and
equitable interest in any business entity.
(e) Processing Expenses. Tenant shall pay to Landlord the amount of
Landlord's cost of processing each proposed assignment or subletting, including
without limitation, attorneys' and other professional fees, and the cost of
Landlord's administrative, accounting and clerical time (collectively,
"Processing Costs"), and the amount of all direct and indirect expense incurred
by Landlord arising from the assignee or sublessee taking occupancy of the
subject space, including without Limitation, costs of freight elevator operation
for moving of furnishings and trade fixtures, security service, janitorial and
cleaning service, rubbish removal service, costs of changing signage, and costs
of changing locks and making new keys (collectively, "Occupancy Costs").
Notwithstanding anything to the contrary herein, Landlord shall not be required
to process any request for Landlord's consent to an assignment or subletting
until Tenant has paid to Landlord the amount of Landlord's estimate of the
Processing Costs and the Occupancy Costs.
(f) Consideration to Landlord. In the event of any assignment or sublease,
whether or not requiring Landlord's consent, Landlord shall be entitled to
receive, as Additional Rent, one-half (1/2) of any consideration, including
without limitation, payment for leasehold improvements owned by Landlord, paid
by the assignee or subtenant for the assignment or sublease and, in the case of
sublease, the excess of the amount of rent paid for the sublet space by the
subtenant over the total amount of Minimum Monthly Rent under Section 5 and
Additional
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Rent under Sections 7 and 9. Upon Landlord's request, Tenant shall assign to
Landlord all amounts to be paid to Tenant by the assignee or subtenant and shall
direct such assignee or subtenant to pay the same directly to Landlord. If there
is more than one sublease under this Lease, the amounts (if any) to be paid by
Tenant to Landlord pursuant to the preceding sentence shall be separately
calculated for each sublease and amounts due Landlord with regard to any one
sublease may not be offset against rental and other consideration pertaining due
under any other sublease.
With regard to an approved assignment or subletting, Tenant acknowledges
that Landlord's agreement to deal directly with the assignee or subtenant with
regard to such party's occupancy of the Premises and the administration of the
Lease, without requiring Tenant to monitor or become directly involved in such
matters, constitutes appropriate and acceptable consideration for the capture by
Landlord of any rent or consideration paid by the assignee or subtenant in
excess of that required to be paid by Tenant under the Lease.
(g) Procedures. If Tenant desires to assign this Lease or any interest
therein or sublet all or part of the Premises, Tenant shall give Landlord
written notice thereof designating the space proposed to be sublet and the terms
proposed. Landlord shall have the prior right and option (to be exercised by
written notice to Tenant given within fifteen (15) days after receipt of
Tenant's notice) (i) to sublet from Tenant any portion of the Premises proposed
by Tenant to be sublet, for the term for which such portion is proposed to be
sublet, but at the same Rent (including Additional Rent as provided for in
Sections 7 and 9) as Tenant is required to pay to Landlord under this Lease for
the same space, computed on a pro rata square footage basis, and during the term
of such sublease Tenant shall be released of its obligations under the Lease
with regard to the subject space, (ii) if the term of the sublease (including
any renewal terms) will expire during the final eighteen (18) months of the Term
(or if Tenant has exercised a renewal option, if any, then during the final
eighteen (18) months of the subject renewal period), to terminate this Lease as
it pertains to the portion of the Premises so proposed by Tenant to be sublet,
or (iii) to approve Tenant's proposal to sublet conditional upon Landlord's
subsequent written approval of the specific sublease obtained by Tenant and the
specific subtenant named therein. If Landlord exercises its option in (i) above,
then Landlord may, at Landlord's sole cost, construct improvements in the
subject space and, so long as the improvements are suitable for general office
purposes, Landlord shall have no obligation to restore the subject space to its
original condition following the termination of the sublease. If Landlord
exercises its option described in (iii) above, Tenant shall submit to Landlord
for Landlord's written approval Tenant's proposed sublease agreement (in which
the proposed subtenant shall be named) together with a current reviewed or
audited financial statement prepared by a certified public accountant for such
proposed subtenant and a credit report on such proposed subtenant prepared by a
recognized credit reporting agency. If Landlord fails to exercise any aforesaid
option to sublet or to terminate, this shall not be construed as or constitute a
waiver of any of the provisions of this Section. If Landlord exercises any such
option to sublet or to terminate, Landlord shall not have any liability for any
real estate brokerage commission(s) or with respect to any of the costs and
expenses that Tenant may have incurred in connection with its proposed
subletting, and Tenant agrees to hold Landlord harmless from and against any and
all claims (including, without limitation, claims for commissions) arising from
such proposed subletting.
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Landlord's foregoing rights and options shall continue throughout the Term. For
purposes of this Section, a proposed assignment of this Lease in whole or in
part shall be deemed a proposed subletting of such space.
(h) Documentation. No permitted subletting by Tenant shall be effective
until there has been delivered to Landlord a counterpart of the sublease in
which the subtenant agrees to be and remain jointly and severally liable with
Tenant for the payment of Rent pertaining to the sublet space and for the
performance of all of the terms and provisions of this Lease; provided, however,
that the subtenant shall be liable to Landlord for rent only in the amount set
forth in the sublease. No permitted assignment shall be effective unless and
until there has been delivered to Landlord a counterpart of the assignment in
which the assignee assumes all of Tenant's obligations under this Lease arising
on or after the date of the assignment. The failure or refusal of a subtenant or
assignee to execute any such instrument shall not release or discharge the
subtenant or assignee from its liability as set forth above.
(i) No Merger. Without limiting any of the provisions of this Section, if
Tenant has entered into any subleases of any portion of the Premises, the
voluntary or other surrender of this Lease by Tenant, or a mutual cancellation
by Landlord and Tenant, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies or, at the
option of Landlord, operate as an assignment to Landlord of any or all such
subleases or subtenancies.
26. Default. The occurrence of any of the following shall constitute a default
by Tenant under this Lease:
(a) Failure to Pay Rent. Failure to pay Rent when due, if the failure
continues for a period of three (3) business days after notice of such default
has been given by Landlord to Tenant.
(b) Failure to Comply with Rules and Regulations. Failure to comply with
the Rules and Regulations, if the failure continues for a period of twenty-four
(24) hours after notice of such default is given by Landlord to Tenant. If the
failure to comply cannot reasonably be cured within twenty-four (24) hours, then
Tenant shall not be in default under this Lease if Tenant commences to cure the
failure to comply within twenty-four (24) hours and diligently and in good faith
continues to cure the failure to comply.
(c) Other Defaults. Failure to perform any other provision of this Lease,
if the failure to perform is not cured within thirty (30) days after notice of
such default has been given by Landlord to Tenant. If the default cannot
reasonably be cured within thirty (30) days, then Tenant shall not be in default
under this Lease if Tenant commences to cure the default within thirty (30) days
and diligently and in good faith continues to cure the default.
(d) Appointment of Trustee or Receiver. The appointment of a trustee or
receiver to take possession of substantially all of the Tenant's assets located
at the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within sixty (60) days; or the attachment, execution or other
judicial seizure of substantially all of Tenant's assets
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located at the Premises or of Tenant's interest in this Lease, where such
seizure is not discharged within sixty (60) days.
27. Remedies. If Tenant commits a default, Landlord shall have the following
alternative remedies, which are in addition to any remedies now or later allowed
by law:
(a) Maintain Lease in Force. Maintain this Lease in full force and effect
and recover the Rent and other monetary charges as they become due, without
terminating Tenant's right to possession, irrespective of whether Tenant shall
have abandoned the Premises. If Landlord elects to not terminate the Lease,
Landlord shall have the right to attempt to re-let the Premises at such rent and
upon such conditions and for such a term, and to do all acts necessary to
maintain or preserve the Premises as Landlord deems reasonable and necessary
without being deemed to have elected to terminate the Lease including removal of
all persons and property from the Premises; such property may be removed and
stored in a public warehouse or elsewhere at the cost of and for the account of
Tenant. In the event any such re-letting occurs, this Lease shall terminate
automatically upon the new Tenant taking possession of the Premises.
Notwithstanding that Landlord fails to elect to terminate the Lease initially,
Landlord at any time during the term of this Lease may elect to terminate this
Lease by virtue of such previous default of Tenant.
(b) Terminate Lease. Terminate Tenant's right to possession by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Premises to Landlord. In such event Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default including without limitation thereto, the following: (i) The
worth at the time of award of any unpaid Rent which had been earned at the time
of such termination; plus (ii) the worth at the time of award of the amount by
which the unpaid Rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus (iii) the worth at the time of award of the
amount by which the unpaid Rent for the balance of the Term after the time of
award exceeds the amount of such rental loss that is proved could be reasonably
avoided; plus (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, including without limitation, any costs or expenses incurred
by Landlord in (A) retaking possession of the Premises, including reasonable
attorney fees therefor, (B) maintaining or preserving the Premises after such
default, (C) preparing the Premises for reletting to a new tenant, including
repairs or necessary alterations to the Premises for such reletting, (D) leasing
commissions, and (E) any other costs necessary or appropriate to relet the
Premises; plus (v) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
state law. Upon any such re-entry Landlord shall have the right to make any
reasonable repairs, alterations or modifications to the Premises, which Landlord
in its sole discretion deems reasonable and necessary. As used in Subsection
27(b)(i) the "worth at the time of award" is computed by allowing interest at
the rate of eighteen percent (18%) per year from the date of default. As used in
Subsections 27(b)(ii) and 27(b)(iii) the "worth at the time of award" is
computed by discounting such amounts at the discount rate of eight percent (8%)
per year.
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28. Bankruptcy.
(a) Assumption of Lease. If Tenant becomes a Debtor under Chapter 7 of the
Bankruptcy Code ("Code") or a petition for reorganization or adjustment of debts
is filed concerning Tenant under Chapters 11 or 13 of the Code, or a proceeding
is filed under Chapter 7 of the Code and is transferred to Chapters 11 or 13 of
the Code, the Trustee or Tenant, as Debtor and as Debtor-in-Possession, may not
elect to assume this Lease unless, at the time of such assumption, the Trustee
or Tenant has:
(i) Cured all defaults under the Lease and paid all sums due and owing
under the Lease or provided Landlord with "Adequate Assurance" (as defined
below) that: (i) within ten (10) days from the date of such assumption, the
Trustee or Tenant will completely pay all sums due and owing under this Lease
and compensate Landlord for any actual pecuniary loss resulting from any
existing default or breach of this Lease, including without limitation,
Landlord's reasonable costs, expenses, accrued interest, and attorneys' fees
incurred as a result of the default or breach; (ii) within twenty (20) days from
the date of such assumption, the Trustee or Tenant will cure all non-monetary
defaults and breaches under this Lease, or, if the nature of such non-monetary
defaults is such that more than twenty (20) days are reasonably required for
such cure, that the Trustee or Tenant will commence to cure such non-monetary
defaults within twenty (20) days and thereafter diligently prosecute such cure
to completion; and (iii) the assumption will be subject to all of the provisions
of this Lease.
(ii) For purposes of this Section, Landlord and Tenant acknowledge
that, in the context of a bankruptcy proceeding involving Tenant, at a minimum,
"Adequate Assurance" shall mean: (i) the Trustee or Tenant has and will continue
to have sufficient unencumbered assets after the payment of all secured
obligations and administrative expenses to assure Landlord that the Trustee or
Tenant will have sufficient funds to fulfill the obligations of Tenant under
this Lease; (ii) the Bankruptcy Court shall have entered an Order segregating
sufficient cash payable to Landlord and/or the Trustee or Tenant shall have
granted a valid and perfected first lien and security interest and/or mortgage
in or on property of Trustee or Tenant acceptable as to value and kind to
Landlord, to secure to Landlord the obligation of the Trustee or Tenant to cure
the monetary and/or non-monetary defaults and breaches under this Lease within
the time periods set forth above; and (iii) the Trustee or Tenant, at the very
minimum, shall deposit a sum equal to two (2) month's Minimum Monthly Rent to be
held by Landlord (without any allowance for interest thereon) to secure Tenant's
future performance under the Lease.
(b) Assignment of Lease. If the Trustee or Tenant has assumed the Lease
pursuant to the provisions of this Section for the purpose of assigning Tenant's
interest hereunder to any other person or entity, such interest may be assigned
only after the Trustee, Tenant or the proposed assignee have complied with all
of the terms, covenants and conditions of this Lease, including, without
limitation, those with respect to Additional Rent. Landlord and Tenant
acknowledge that such terms, covenants and conditions are commercially
reasonable in the context of a bankruptcy proceeding of Tenant. Any person or
entity to which this Lease is assigned pursuant to the provisions of the Code
shall be deemed without further act or deed to have assumed all of the
obligations arising under this Lease on and after the date of such
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assignment. Any such assignee shall upon request execute and deliver to Landlord
an instrument confirming such assignment.
(c) Adequate Protection. Upon the filing of a petition by or against
Tenant under the Code, Tenant, as Debtor and as Debtor-In-Possession, and any
Trustee who may be appointed agree to adequately protect Landlord as follows:
(i) to perform each and every obligation of Tenant under this Lease until such
time as this Lease is either rejected or assumed by Order of the Bankruptcy
Court; (ii) to pay all monetary obligations required under this Lease, including
without limitation, the payment of Minimum Monthly Rent, Tenant's Share of Real
Property Taxes, Tenant's Share of Operating Costs and any other sums payable by
Tenant to Landlord under this Lease which is considered reasonable compensation
for the use and occupancy of the Premises; (iii) provide Landlord a minimum of
thirty (30) days prior written notice, unless a shorter period is agreed to in
writing by the parties, of any proceeding relating to any assumption of this
Lease or any intent to abandon the Premises, which abandonment shall be deemed a
rejection of this Lease; and (iv) to perform to the benefit of Landlord as
otherwise required under the Code. The failure of Tenant to comply with the
above shall result in an automatic rejection of this Lease.
29. Limitation of Actions. Any claim, demand, right or defense of any kind by
Tenant which is based upon or arises in connection with this Lease or the
negotiations prior to its execution, shall be barred unless Tenant commences an
action thereon, or interposes in a legal proceeding a defense by reason thereof,
within one (1) year after the date Tenant actually becomes aware of the act or
omission on which such claim, demand, right or defense is based.
30. Limitation on Landlord's Liability. Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the part
of Landlord are made and intended not as personal covenants, undertakings and
agreements or for the purpose of binding Landlord personally or the assets of
Landlord except Landlord's interest in the Property, but are made and intended
for the purpose of binding only the Landlord's interest in the Property. No
personal liability or personal responsibility is assumed by, nor shall at any
time be asserted or enforceable against Landlord or its partners and their
respective heirs, legal representatives, successors and assigns on account of
this Lease or on account of any covenant, undertaking or agreement of Landlord
contained in this Lease.
31. Signs. Tenant shall not have the right to place, construct or maintain any
sign, advertisement, awning, banner or other exterior decoration without
Landlord's consent. Any sign that Tenant has Landlord's consent to place,
construct and maintain shall comply with all laws, and Tenant shall obtain any
approval required by such laws. Landlord makes no representation with respect to
Tenant's ability to obtain such approval.
32. Landlord's Right to Enter the Premises. Landlord and its authorized
representatives shall have the right to enter the Premises at reasonable times
and upon reasonable prior notice (except in an emergency when no such notice
shall be required) for any of the following purposes: (i) to determine whether
the Premises are in good condition and whether Tenant is complying with its
obligations under this Lease, (ii) to do any maintenance; to make any
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restoration to the Premises or the Building that Landlord has the right or the
obligation to perform, and to make any improvements to the Premises or the
Building that Landlord deems necessary, (iii) to serve, post or keep posted any
notices required or allowed under the provisions of this Lease, (iv) to post any
ordinary "For Sale" signs at any time during the Term and to post any ordinary
"For Lease" signs during the last ninety (90) days of the Term, and (v) to show
the Premises to prospective brokers, agents, purchasers, tenants or lenders, at
any time during the Term.
Landlord shall not be liable in any manner for any inconvenience,
annoyance, disturbance, loss of business, nuisance, or other damage arising out
of Landlord's entry on the Premises as provided in this Section, except damage
resulting from the grossly negligent or willful acts of Landlord or its
authorized representatives. Tenant shall not be entitled to an abatement or
reduction of Rent if Landlord exercises any right reserved in this Section.
Landlord shall conduct its activities on the Premises as allowed in this Section
in a reasonable manner so as to cause minimal inconvenience, annoyance or
disturbance to Tenant.
33. Subordination. This Lease is and shall be prior to any mortgage recorded
after the date of this Lease affecting the Property. If, however, a lender
requires that this Lease be subordinate to any mortgage, this Lease shall be
subordinate to that mortgage if Landlord first obtains from the lender a written
agreement that provides substantially the following:
"As long as Tenant performs its obligations under this Lease, no
foreclosure of, deed given in lieu of foreclosure of, or sale under the
mortgage, and no steps or procedures taken under the mortgage, shall affect
Tenant's rights under this Lease."
Tenant shall attorn to any purchaser at any foreclosure sale, or to any
grantee or transferee designated in any deed given in lieu of foreclosure.
Tenant shall execute the written agreement and any other documents required by
the lender to accomplish the purposes of this Section.
34. Right to Estoppel Certificates. Tenant, within ten (10) business days after
notice from Landlord, shall execute and deliver to Landlord, in recordable form,
a certificate stating that this Lease is unmodified and in full force and
effect, or in full force and effect as modified and stating the modifications.
The certificate shall also state the amount of Minimum Monthly Rent, the dates
to which Rent has been paid in advance, and the amount of any Prepaid Rent or
Security Deposit and such other matters as Landlord may reasonably request.
Failure to deliver the certificate within such ten (10) business day period
shall be conclusive upon Tenant for the benefit of Landlord and any successor to
Landlord, that this Lease is in full force and effect and has not been modified
except as may be represented by Landlord requesting the certificate.
35. Transfer of Landlord's Interest. If Landlord sells or transfers the
Property, Landlord, on consummation of the sale or transfer, shall be released
from any liability thereafter accruing under this Lease if Landlord's successor
has assumed in writing, for the benefit of Tenant, Landlord's obligations under
this Lease. If any Security Deposit or Prepaid Rent has been paid by Tenant,
Landlord shall transfer such Security Deposit or Prepaid Rent to Landlord's
successor
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and on such transfer Landlord shall be discharged from any further liability
with respect to such Security Deposit or Prepaid Rent.
36. Attorneys' Fees. If either party shall bring any action for relief against
the other party, declaratory or otherwise, arising out of this Lease, including
any action by Landlord for the recovery of Rent or possession of the Premises,
the losing party shall pay the successful party a reasonable sum for attorneys'
fees which shall be deemed to have accrued on the commencement of such action
and shall be paid whether or not such action is prosecuted to judgment.
37. Surrender; Holding Over.
(a) Surrender. On expiration or ten (10) days after termination of the
Term, Tenant shall surrender the Premises and all Tenant's improvements and
alterations to Landlord broom clean and in good condition. Tenant shall remove
all of its trade fixtures and personal property within the time period stated in
this Section. Tenant, at its cost, shall perform all restoration made necessary
by, and repair any damage to the Premises caused by, the removal of its trade
fixtures, personal property and signs to Landlord's reasonable satisfaction
within the time period stated in this Section. Landlord may, at its election,
retain or dispose of in any manner any of Tenant's trade fixtures or personal
property that Tenant does not remove from the Premises on expiration or within
ten (10) days after termination of the Term as allowed or required by the
provisions of this Lease by giving ten (10) days notice to Tenant. Title to any
such trade fixtures and personal property that Landlord elects to retain or
dispose of on expiration of such ten (10) day period shall vest in Landlord.
Tenant waives all claims against Landlord for any damage to Tenant resulting
from Landlord's retention or disposition of any such trade fixtures and personal
property. Tenant shall be liable to Landlord for Landlord's costs for storing,
removing and disposing of Tenant's trade fixtures and personal property. If
Tenant fails to surrender the Premises to Landlord on expiration or ten (10)
days after termination of the Term as required by this Section, Tenant shall pay
Landlord Rent in an amount equal to twice the Minimum Monthly Rent applicable
for the month immediately prior to the expiration or termination of the Term for
the entire time Tenant thus remains in possession and Tenant shall hold Landlord
harmless from all damages resulting from Tenant's failure to timely surrender
the Premises, including without limitation, (i) any Rent payable by, or any
damages claimed by, any prospective tenant of any part or all of the Premises,
and (ii) Landlord's damages resulting from such prospective tenant rescinding or
refusing to enter into the prospective lease of part or all of the Premises by
reason of Tenant's failure to timely surrender the Premises. If Tenant, without
Landlord's prior consent, remains in possession of the Premises after expiration
or termination of the Term, or after the date in any notice given by Landlord to
Tenant terminating this Lease, such possession by Tenant shall be deemed to be a
tenancy at sufferance terminable at any time by either party.
(b) Holding Over with Landlord's Consent. If Tenant, with Landlord's prior
consent, remains in possession of the Premises after expiration or termination
of the Term, or after the date in any notice given by Landlord to Tenant
terminating this Lease, such possession by Tenant shall be deemed to be a month-
to-month tenancy terminable by Landlord by a notice given to Tenant at least
twenty (20) days prior to the end of any such monthly period or by Tenant by a
notice given to Landlord at least thirty (30) days prior to the end of any such
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monthly period. During such month-to-month tenancy, Tenant shall pay Rent in the
amount then agreed to in writing by Landlord and Tenant. All provisions of this
Lease, except those pertaining to term, shalt apply to the month-to-month
tenancy.
38. Agency Disclosure; Broker.
(a) Agency Disclosure. Martin Smith Inc hereby discloses that it
represents both the Landlord and the Tenant in this transaction.
(b) Broker. Landlord and Tenant each represent to the other that neither
is represented by any broker, agent or finder with respect to this Lease in any
manner, except the Brokers. The commission due to the Brokers shall be paid by
Landlord pursuant to a separate agreement.
39. Interest on Unpaid Rent. In addition to the Late Charge as provided in
Section 5(b), Rent not paid when due shall bear interest from the date due until
paid at the rate of eighteen percent (18%) per year, or the maximum legal rate
of interest, whichever is less.
40. Consent. Whenever the consent of either Landlord or Tenant is required
under this Lease, such consent shall not be effective unless given in writing
and shall not be unreasonably withheld or delayed, provided, however, that such
consent may be conditioned as provided in this Lease.
41. Definitions. As used in this Lease, the following words and phrases,
whether or not capitalized, shall have the following meanings:
(a) "Additional Rent" means pass-throughs of increases in Operating Costs
and Taxes, as defined in this Lease, and other monetary sums to be paid by
Tenant to Landlord under the provisions of this Lease.
(b) "Alteration" means any addition or change to, or modification of, the
Premises made by Tenant, including without limitation, fixtures, but excluding
trade fixtures as defined in this Section.
(c) "Authorized representatives" means any officer, agent, employee,
independent contractor or invitee of either party.
(d) "Award" means all compensation, sums or anything of value awarded, paid
or received on a total or partial condemnation.
(e) "Common Areas" means all areas outside the Premises and within the
Building or on the Land that are provided and designated by Landlord from time
to time for the general, non-exclusive use of Landlord, Tenant and other tenants
of the Building and their authorized representatives, including without
limitation, common entrances, lobbies, corridors, stairways and stairwells,
elevators, escalators, public restrooms and other public portions of the
Building.
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(f) "Condemnation" means the exercise of any governmental power, whether by
legal proceedings or otherwise, by a condemnor and a voluntary sale or transfer
by Landlord to any condemnor, either under threat of condemnation or while legal
proceedings for condemnation are pending.
(g) "Condemnor" means any public or quasi-public authority or entity having
the power of condemnation.
(h) "Damage" means any injury, deterioration, or loss to a person,
property, the Premises or the Building caused by another person's acts or
omissions or by Acts of God. Damage includes death.
(i) "Damages" means a monetary compensation or indemnity that can be
recovered in the courts by any person who has suffered damage to his person,
property or rights through another's acts or omissions:
(j) "Date of taking" means the date the condemnor has the right to
possession of the property being condemned.
(k) "Encumbrance" means any mortgage, deed of trust or other written
security device or agreement affecting the Premises, and the note or other
obligation secured by it, that constitutes security for the payment of a debt or
performance of an obligation.
(l) "Expiration" means the coming to an end of the time specified in the
Lease as its duration, including any extension of the Term.
(m) "Force majeure" means strikes, lockouts, labor disputes, shortages of
labor or materials, fire or other casualty, Acts of God or any other cause
beyond the reasonable control of a party.
(n) "Good condition" means the good physical condition of the Premises and
each portion of the Premises, including without limitation, all of the Tenant
Improvements, Tenant's alterations, Tenant's trade fixtures, Tenant's Personal
Property, all as defined in this Section, signs, walls, interior partitions,
windows, window coverings, glass, doors, carpeting and resilient flooring,
ceiling tiles, plumbing fixtures and lighting fixtures, all of which shall be in
conformity with building standard finishes, ordinary wear and tear, damage by
fire or other casualty and taking by condemnation excepted.
(o) "Hazardous substances" means any industrial waste, toxic waste,
chemical contaminant or other substance considered hazardous, toxic or lethal to
persons or property or designated as hazardous, toxic or lethal to persons or
property under any laws, including without limitation, asbestos material or
materials containing asbestos.
(p) "Hold harmless" means to defend and indemnify from all liability,
losses, penalties, damages as defined in this Section, costs, expenses
(including without limitation,
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attorneys' fees), causes of action, claims or judgments arising out of or
related to any damage, as defined in this Section, to any person or property.
(q) "Law" means any constitution, statute, ordinance, regulation, rule,
resolution, judicial decision, administrative order or other requirement of any
federal, state, county, municipal or other governmental agency or authority
having jurisdiction over the parties or the Property, or both, in effect either
at the time of execution of this Lease or at any time during the Term, including
without limitation, any regulation or order of a quasi-official entity or body
(e.g. board of fire examiners or public utilities) and any legally effective
conditions, covenants or restrictions affecting the Property.
(r) "Lender" means the mortgagee, beneficiary, secured party or other
holder of an encumbrance, as defined in this Section.
(s) "Lien" means a charge imposed on the Premises by someone other than
Landlord, by which the Premises are made security for the performance of an act.
(t) "Maintenance" means repairs, replacement, repainting and cleaning.
(u) "Mortgage" means any deed of trust, mortgage or other written security
device or agreement affecting the Premises, and the note or other obligation
secured by it, that constitutes security for the payment of a debt or
performance of an obligation.
(v) "Mortgagee" means the beneficiary under a deed of trust or mortgagee
under a mortgage.
(w) "Mortgagor" means the grantor or trustor under a deed of trust or
mortgagor under a mortgage.
(x) "Operating Costs" means all costs of any kind incurred by Landlord in
operating, cleaning, equipping, protecting, lighting, repairing, replacing,
heating, air-conditioning, maintaining and insuring the Property. Operating
Costs shall include, without limitation, the following costs: (i) salaries,
wages, bonuses and other compensation (including hospitalization, medical,
surgical, retirement plan, pension plan union dues, life insurance, including
group life insurance, welfare and other fringe benefits, and vacation holidays
and other paid absence benefits) relating to employees of Landlord or its agents
directly engaged in the operation, repair, or maintenance of the Property; (ii)
payroll, social security, workers' compensation, unemployment and similar taxes
with respect to such employees of Landlord or its authorized representatives,
and the cost of providing disability or other benefits imposed by law or
otherwise with respect to such employees; (iii) uniforms (including the
cleaning, replacement and pressing thereof) provided to such employees; (iv)
premiums and other charges incurred by Landlord with respect to fire earthquake,
other casualty, all risk, rent loss and liability insurance, any other insurance
as is deemed necessary or advisable in the reasonable judgment of Landlord and,
after the Base Year, costs of repairing an insured casualty to the extent of the
deductible amount under the applicable insurance policy; (v) water charges and
sewer rents or fees; (vi) license, permit and inspection fees; (vii) sales, use
and excise taxes on goods and services
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purchased by Landlord in connection with the operation, maintenance or repair of
the Property and Building systems and equipment; (viii) telephone, facsimile,
messenger, express delivery service, postage, stationery supplies and other
expenses incurred in connection with the operation, management, maintenance, or
repair of the Property; (ix) property management fees and expenses; (x) repairs
to and physical maintenance of the Property, including building systems and
appurtenances thereto and normal repair and replacement of worn-out equipment,
facilities and installations, but excluding the replacement of major building
systems (except to the extent provided in (xvi) and (xvii) below); (xi)
janitorial, window cleaning, security, extermination, water treatment, rubbish
removal, plumbing and other services and inspection or service contracts for
elevator, electrical, HVAC, mechanical and other building equipment and systems
or as may otherwise be necessary or proper for the operation or maintenance of
the Property; (xii) supplies, tools, materials, and equipment used in connection
with the operation, maintenance or repair of the Property; (xiii) accounting,
legal and other professional fees and expenses; (xiv) painting the exterior or
the public or common areas of the Building and the cost of maintaining the
sidewalks, landscaping and other common areas of the Property; (xv) all costs
and expenses for electricity, chilled water, air conditioning, water for
heating, gas, fuel, steam, heat, lights, power and other energy related
utilities required in connection with the operation, maintenance and repair of
the Property; (xvi) the cost of any improvements which Landlord elects to
capitalize made by Landlord to the Property during the Term in compliance with
the requirements of any laws or regulation or insurance requirement with which
the Property was not required to comply during the Base Year, as reasonably
amortized by Landlord, with interest on the unamortized balance at the rate of
twelve percent (12%) per year, or the maximum legal rate of interest, whichever
is less; (xvii) the cost of any improvements which Landlord elects to capitalize
made by Landlord to the Property during the term of this Lease for the
protection of the health and safety of the occupants of the Property or that are
intended to reduce other Operating Costs, as reasonably amortized by Landlord,
with interest on the unamortized balance at the rate of twelve percent (12%) per
year, or the maximum legal rate of interest, whichever is less; (xviii) a
reasonable reserve for repair or replacement of equipment used in the
maintenance or operation of the Property; (xix) the cost of furniture,
draperies, carpeting, landscaping and other customary and ordinary items of
personal property (excluding paintings, sculptures and other works of art)
provided by Landlord for use in common areas of the Building or in the Building
office (to the extent that such Building office is dedicated to the operation
and management of the Property), such costs to be amortized over the useful life
thereof; (xx) any such expenses and costs resulting from substitution of work,
labor, material or services in lieu of any of the above itemizations, or for any
such additional work, labor, services or material resulting from compliance with
any laws or orders applicable to the Property; (xxi) Building office rent or
rental value; and (xxii) all other costs which, in accordance with generally
accepted accounting principles used by Landlord, as applied to the maintenance
and operation of office and/or retail buildings, are properly chargeable to the
operation and maintenance of the Property.
Operating Costs shall not include the following: (i) depreciation on the
Building; (ii) debt service; (iii) capital improvements, except as otherwise
provided in clauses (xvi) and (xvii) above, (iv) rental under any ground or
underlying leases; (v) Real Property Taxes, (vi) attorneys' fees and expenses
incurred in connection with lease negotiations with prospective tenants; (vii)
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the cost of tenant improvements; (viii) advertising expenses; or (ix) real
estate broker's or other leasing commissions.
(y) "Parties" means Landlord and Tenant.
(z) "Party" means Landlord or Tenant.
(aa) "Person" means one or more human beings, or legal entities or other
artificial persons, including without limitation, partnerships, corporations,
trusts, estates, associations and any combination of human beings and legal
entities.
(bb) "Property" means the Premises, Building and Land.
(cc) "Provision" means any term, agreement, covenant, condition, clause,
qualification, restriction, reservation, or other stipulation in the Lease that
defines or otherwise controls, establishes, or limits the performance required
or permitted by either party.
(dd) "Real Property Taxes" means any form of tax, assessment, general
assessment, special assessment, lien, levy, bond obligation, license fee,
license tax, tax or excise on rent, or any other levy, charge or expense,
together with any statutory interest thereon, (individually and collectively,
the "Impositions"), now or hereafter imposed or required by any authority having
the direct or indirect power to tax, including any federal, state, county or
city government or any school, agricultural, lighting, drainage or other
improvement or special assessment district thereof, (individually and
collectively, the "Governmental Agencies") on any interest of Landlord or Tenant
or both (including any legal or equitable interest of Landlord or its mortgagee,
if any) in the Premises or the Property, including without limitation:
(i) any Impositions upon, allocable to or measured by the area of the
Premises or the Property, or the rental payable hereunder, including without
limitation, any gross income tax or excise tax levied by any Governmental
Agencies with respect to the receipt of such rental; or
(ii) any Impositions upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair or use or occupancy by
Tenant of the Premises or any portion thereof; or
(iii) any Impositions upon or with respect to the building equipment
and personal property used in connection with the operation and maintenance of
the Property or upon or with respect to the furniture, fixtures and decorations
in the common areas of the Property.
(iv) any Impositions upon this Lease or this transaction or any
document to which Tenant is a party creating or transferring an interest or an
estate in the Premises; or
(v) any Impositions by Governmental Agencies (whether or not such
Impositions constitute tax receipts) in substitution, partially or totally, of
any impositions now or previously included within the definition of real
property taxes, including those calculated to increase tax
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increments to Governmental Agencies and to pay for such services as fire
protection, water drainage, street, sidewalk and road maintenance, refuse
removal or other governmental services formerly provided without charge to
property owners or occupants; or
(vi) any and all costs, including without limitation, the fees of
attorneys, tax consultants and experts, incurred by Landlord should Landlord
elect to negotiate or contest the amount of such real property taxes in format
or informal proceedings before the Governmental Agency imposing such real
property taxes; provided, however, that real property taxes shall in no event
include Landlord's general income, inheritance, estate, gift or franchise taxes.
(ee) "Rent" means Minimum Monthly Rent, as adjusted from time to time under
this Lease, Additional Rent, Prepaid Rent, Security Deposit, alt as defined in
this Section, payments of Tenant's Share of increases in Real Property Taxes and
Operating Costs, insurance, utilities and other charges payable by Tenant to
Landlord.
(ff) "Rentable square feet of space" as to the Premises or the Building, as
the case may be, means the number of usable square feet of space times the
applicable R/U Ratio(s) as defined in this Section.
(gg) "Restoration" means the reconstruction, rebuilding, rehabilitation and
repairs that are necessary to return damaged portions of the Premises and the
Building to substantially the same physical condition as they were in
immediately before the damage.
(hh) "R/U Ratio" means the rentable area of a floor of the Building divided
by the usable area of such floor, both of which shall be computed in accordance
with American National Standard Z65.1-1996 Method of Measuring Floor Space in
Office Buildings as published by the Building Owners and Managers Association,
as amended from time to time.
(ii) "Substantially complete" or "substantially completed" or "substantial
completion" means the completion of Landlord's construction obligation, subject
to completion or correction of "punch list" items, that is, minor items of
incomplete or defective work or materials or mechanical maladjustments that are
of such a nature that they do not materially interfere with or impair Tenant's
use of the Premises for the Permitted Use.
(jj) "Successor" means assignee, transferee, personal representative, heir,
or other person or entity succeeding lawfully, and pursuant to the provisions of
this Lease, to the rights or obligations of either party.
(kk) "Tenant Improvements" means (i) the improvements and alterations
described in Exhibit C, (ii) window coverings, lighting fixtures, plumbing
---------
fixtures, cabinetry and other fixtures installed by either Landlord or Tenant at
any time during the Term, and (iii) any improvements and alterations of the
Premises made for Tenant by Landlord at any time during the Term.
(ll) "Tenant's personal property" means Tenant's equipment, furniture, and
movable property placed in the Premises by Tenant.
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(mm) "Tenant's trade fixtures" means any property attached to the Premises
by Tenant.
(nn) "Termination" means the ending of the Term for any reason before
expiration, as defined in this Section.
(oo) "Work" means the construction of any improvements or alterations or
the performance of any repairs done by Tenant or caused to be done by Tenant on
the Premises as permitted by this Lease.
42. Miscellaneous Provisions.
(a) Entire Agreement. This Lease sets forth the entire agreement of the
parties as to the subject matter hereof and supersedes all prior discussions and
understandings between them. This Lease may not be amended or rescinded in any
manner except by an instrument in writing signed by a duly authorized officer or
representative of each party hereto.
(b) Governing Law. This Lease shall be governed by, and construed and
enforced in accordance with, the laws of the State of Washington.
(c) Severability. Should any of the provisions of this Lease be found to
be invalid, illegal or unenforceable by any court of competent jurisdiction,
such provision shall be stricken and the remainder of this Lease shall
nonetheless remain in full force and effect unless striking such provision shall
materially alter the intention of the parties.
(d) Jurisdiction. In the event any action is brought to enforce any of the
provisions of this Lease, the parties agree to be subject to exclusive in
personam jurisdiction in the Superior Court, King County, for the State of
Washington or in the United States District Court for the Western District of
Washington and agree that in any such action venue shall lie exclusively at
Seattle, Washington.
(e) Waiver. No waiver of any right under this Lease shall be effective
unless contained in a writing signed by a duty authorized officer or
representative of the party sought to be charged with the waiver and no waiver
of any right arising from any breach or failure to perform shall be deemed to be
a waiver of any future right or of any other right arising under this Lease.
(f) Captions. Section captions contained in this Lease are included for
convenience only and form no part of the agreement between the parties.
(g) Notices. All notices or requests required or permitted under this Lease
shall be in writing. If given by Landlord such notices or requests may be
personally delivered or sent by certified mail, return receipt requested,
postage prepaid. If given by Tenant such notices or requests shall be sent by
certified mail, return receipt requested, postage prepaid. Such notices or
requests shall be deemed given when so delivered or mailed, irrespective of
whether such notice or request is actually received by the addressee. All
notices or requests to Landlord shall be sent to Landlord at Landlord's Address
for Notice and all notices or requests to Tenant shall be sent
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to Tenant at Tenant's Address for Notice. Either party may change the address to
which notices shall be sent by notice to the other party.
(h) Binding Effect. Subject to the provisions of Section 25 captioned
"Assignment and Subletting", this Lease shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns. No
permitted assignment of this Lease or Tenant's rights hereunder shall be
effective against Landlord unless and until an executed counterpart of the
instrument of assignment shall have been delivered to Landlord and Landlord
shall have been furnished with the name and address of the assignee. The term
"Tenant" shall be deemed to include the assignee under any such permitted
assignment.
(i) Effectiveness. This Lease shall not be binding or effective until
properly executed and delivered by Landlord and Tenant.
(j) Gender and Number. As used in this Lease, the masculine shall include
the feminine and neuter, the feminine shall include the masculine and neuter,
the neuter shall include the masculine and feminine, the singular shall include
the plural and the plural shall include the singular, as the context may
require.
(k) Time of the Essence. Time is of the essence in the performance of all
covenants and conditions in this Lease for which time is a factor.
Dated the date first above written.
Landlord: Tenant:
MSI 83 King L.L.C., a Washington limited Alive.com, Inc., a Washington
company corporation
By /s/ H. Martin Smith, III By /s/ Jeffrey R. Brown
_____________________________ ____________________________
H. Martin Smith, III
Manager Printed Name: Jeffrey R. Brown
_________________
Its COO & Sr. VP
___________________________
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EXHIBIT 10.21
STANDARD OFFICE LEASE-MODIFIED GROSS NET
1. Basic Lease Provisions ("Basic Lease Provisions").
1.1 Parties: This Lease, dated, for reference purposes only, November 9,
1999, is made by and between DOWNTOWN ENTERTAINMENT ASSOCIATES, LP, a California
limited partnership (herein called "Lessor"), and encoding.com, Inc., a Delaware
corporation (herein called "Lessee").
1.2 Premises: Suite 200 on the Building's 2nd floor, consisting of
approximately 4,632 rentable square feet, more or less, as defined in paragraph
2 and as shown on Exhibit A hereto (the "Premises"). The Premises address is
1424 Second Street, Suite 200, Santa Monica, CA 90401.
1.3 Building: Commonly described as being located at 1422-24 Second
Street, in the City of Santa Monica, County of Los Angeles, State of California,
and as defined in paragraph 2.
1.4 Permitted Use: General office use, subject to paragraph 6.
1.5 Term: Five (5) years and zero (0) months commencing upon the
Commencement Date and ending five (5) years thereafter. The "Commencement Date"
is January 1, 2000.
1.6 Base Rent: For the first year of the Lease Term, the Base Rent shall
be Fifteen Thousand Fifty-Four and 00/100 Dollars ($15,054.00) per month,
payable on the 1st day of each month, in advance, per paragraph 4.1, subject to
increase as provided below.
1.7 Base Rent Increase: On each annual anniversary of the Commencement
Date during the term hereof, the monthly Base Rent payable under paragraph 1.6
above shall be adjusted as provided in paragraph 4.3 below.
1.8 Rent Paid Upon Execution: Fifteen Thousand Fifty-Four and 00/1 00
Dollars ($15,054.00) (first month's rent).
1.9 Security Deposit: Sixteen Thousand and 00/1 00 Dollars ($16,000.00),
plus additional security in the form of an Irrevocable Letter of Credit as set
forth in paragraph 5.1 hereof.
1.10 Lessee's Share of Operating Expenses: 17.305%, as defined in
paragraph 4.2, based on a total of 26,767 rentable square feet in the Building.
1.11 Base Year: 2000.
1.12 Guarantor: N/A
1.13 Option to Renew. One (1) option to renew for a five (5) year period
pursuant to paragraph 39.5 hereof.
1.14 Notices. Notices shall be in writing and given pursuant to paragraph
23 hereof.
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2. Premises, Parking and Common Areas.
2.1 Premises: The Premises are a portion of a building, herein sometimes
referred to as the "Building" identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Building
Project." Lessor hereby leases to Lessee and Lessee leases from Lessor for the
term, at the rental, and upon all of the conditions set forth herein, the real
property referred to in the Basic Lease Provisions, paragraph 1.2, as the
"Premises," including rights to the Common Areas as hereinafter specified.
2.2 Vehicle Parking: So long as Lessee is not in default, and subject to
the rules and regulations attached hereto as Exhibit B, and as established by
Lessor or its parking operator from time to time, Lessor shall use its
commercially reasonable efforts to provide Lessee with the right to lease twelve
(12) monthly parking spaces in the City Parking Structure #6 (across from the
Building) at the prevailing rates. If Lessor is unable to provide twelve (12)
monthly parking spaces in Structure #6, then Lessor shall either a) reimburse
Lessee monthly the difference between its hourly parking rates and the then
current monthly parking rates or b) secure the balance of spaces in any adjacent
building or surface lot within two blocks of the Building that is mutually
agreeable to Lessor and Lessee. Lessee shall also have the right to use four (4)
monthly valet parking spaces at a monthly cost of $125.00 per space, as long as
the spa located at 1422 Second Street is using valet parking services. The valet
parking cost will be subject to changing valet parking rates as determined by
the valet parking company (currently $9.50 per hour per parking attendant).
2.2.1 Monthly parking fees shall be payable in advance prior to the
first day of each calendar month.
2.2.2 If Lessee commits, permits or allows any of the prohibited
activities, described in the Lease or the rules then in effect, then Lessor or
its parking operator shall have the right, without notice, in addition to such
other rights and remedies that it may have, to remove or tow away the vehicle
involved and charge the cost to Lessee, which cost shall be immediately payable
upon demand by Lessor or its parking operator.
2.2.3 Lessor agrees to provide any changes in parking rules to Lessee
in writing, before said rules go into effect.
2.3 Common Areas - Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Building Project that are provided and designated by the Lessor from time
to time for the general non-exclusive use of Lessor, Lessee and of other lessees
of the Building Project and their respective employees, suppliers, shippers,
customers and invitees, including, but not limited to, common entrances,
lobbies, corridors, stairways and stairwells, public restrooms, elevators,
escalators, outdoor eating areas (excluding the deck/patio adjacent to the
interior office space of Suite 200), parking areas to the extent not otherwise
prohibited by this Lease, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative
walls.
2.4 Common Areas - Rules and Regulations. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with respect
to the Building Project and Common Areas, and to cause its employees, suppliers,
shippers, customers, and invitees to so abide and conform; provided, however,
that the terms of this Lease shall control if there is an inconsistency between
the terms of this Lease and the terms of any such rules and
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<PAGE>
regulations. Lessor or such other person(s) as Lessor may appoint shall have the
exclusive control and management of the Common Areas and shall have the right,
from time to time, to reasonably modify, amend and enforce said rules and
regulations for the safety, care, order, or cleanliness of the Common Areas.
Such modifications and amendments shall not unreasonably and materially
interfere with Lessee's conduct of its business or Lessee's use and enjoyment of
the Premises and shall not require payment of additional moneys. Although Lessor
is not responsible to Lessee for the non-compliance with said rules and
regulations by other lessees, their agents, employees and invitees of the
Building Project, Lessor shall not unreasonably enforce the rules and
regulations against Lessee. Lessor agrees to give Lessee ten (10) days advance
written notice of any changes to the rules and regulations before said changes
go into effect.
2.5 Common Areas - Changes. Lessor shall have the right, from time to
time, if such changes do not materially and unreasonably interfere with Lessee's
access to or use of the Premises:
(a) To make changes to the Building interior and exterior and Common
Areas, including, without limitation, changes in the location, size, shape,
number and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, discretion of traffic, decorative walls, landscaped areas and walkways;
provided, however, Lessor shall at all times provide the parking facilities
required by applicable law and by the specific terms of this Lease;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land and improvements outside the boundaries of
the Building Project to be a part of the Common Areas, provided that such other
land and improvements have a reasonable and functional relationship to the
Building Project;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Building Project, or any portion
hereof;
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Building Project as Lessor may, in
the exercise of sound business judgment deem to be appropriate.
2.6 Use of Roof for Satellite Antenna. Lessee has requested that it be
permitted to install a Satellite Antenna on the roof of the Building. Lessor
represents and warrants that:
(a) There is sufficient space on the roof to accommodate the base of a
Satellite Antenna meeting the specifications attached as Exhibit E; and
(b) The roof of the Building is strong enough to provide adequate
support for such Satellite Antenna.
Lessor covenants that it will grant Lessee access to the roof in connection
with the installation and maintenance of the Satellite Antenna, provided that
Lessee installs the Satellite Antenna at Lessee's own expense and complies with
all applicable laws, ordinances, rules, and regulations of governmental
authorities; and, provided further, that such Satellite Antenna will be situated
so that it will not interfere with any existing antenna, also situated on the
roof, that
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belongs to Pacific Bell. Such Satellite Antenna will occupy the space on the
roof, as marked on Exhibit F, designated as the approved location.
Lessee will use the structural engineer of Lessor's Building Project
("Lessor's Structural Engineer") in engineering the installation of the
Satellite Antenna. From time to time, Lessee may change the specifications of
the Satellite Antenna (including, but not limited to, changes in the quality as
well as the number of Satellite Antennas situated on the roof) so long as: (i)
the square footage occupied on the roof by such changed specifications does not
exceed the square footage occupied by a Satellite Antenna meeting the
specifications provided in Exhibit D, and (ii) the resulting impact (in terms of
the pressure borne by the roof and the structure of the Building) caused by such
changed specifications will not exceed the impact of a Satellite Antenna meeting
the specifications provided in Exhibit D.
Lessee shall pay additional rent in the amount of One Thousand and 00/100
Dollars ($1,000.00) per month for the period during which Lessee in fact
maintains a Satellite Antenna upon the roof. Such additional rent, if any, is
subject to the Rent Increase provided for in paragraph 4.3. Rent for any period
which is for less than one (1) month shall be prorated based upon the actual
number of days of the calendar month involved. At Lessor's request, Lessee will
remove the Satellite Antenna at the end of the Lease Term and will repair any
damage caused by its removal. In addition, Lessee will indemnify Lessor for any
damage to the Building Project caused by such Satellite Antenna (other than
damage caused by the roof lacking the strength to provide adequate support for
the Satellite Antenna or caused by the gross negligence or willful misconduct of
Lessor's Structural Engineer in the installation thereof).
3. Term.
3.1 Term. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 Delay in Possession. Lessee may make modifications and changes to the
plans for the Tenant Improvements, subject to Lessor's reasonable approval. If
Substantial Completion of Lessor's Work (as outlined in the Work Letter attached
hereto as Exhibit C) does not occur within sixty (60) days after receipt,
on-site, of all materials required to complete the Tenant Improvements, there
shall be an abatement of rent until such time as Substantial Completion of
Lessor's Work is attained. Lessor hereby covenants and agrees to use its
commercially reasonable efforts to expeditiously obtain all materials required
to complete the Tenant Improvements upon specification of the same.
3.3 Early Possession. If Lessee occupies a portion of the Premises prior
to said Commencement Date, such occupancy shall be subject to all provisions of
this Lease, such occupancy shall not change the termination date, and Lessee
shall pay rent and other expenses for that portion of the Premises so occupied.
4. Rent.
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4.1 Base Rent. Subject to adjustment as hereinafter provided in paragraph
4.3, and except as may be otherwise expressly provided in this Lease, Lessee
shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1 .6
of the Basic Lease Provisions, without offset or deduction, unless the offset or
deduction is made by Lessee as permitted under the express terms of this Lease
(paragraphs 4.4, 9.5, and 11.5) allowing for abatement of rent. Lessee shall pay
Lessor upon execution hereof the advance Base Rent described in paragraph 1 .8
of the Basic Lease Provisions. Rent for any period during the term hereof which
is for less than one month shall be prorated based upon the actual number of
days of the calendar month involved. Rent shall be payable in lawful money of
the United States to Lessor at the address stated herein or to such other
persons or at such other places as Lessor may designate in writing.
4.2 Operating Expenses. Lessee shall pay to Lessor during the term hereof,
in addition to the Base Rent, Lessee's Share, as hereinafter defined, of all
Operating Expenses, as hereinafter defined, during each calendar year of the
term of this Lease, to the extent the Operating Expenses for any such calendar
year exceeds the Operating Expense Stop, as hereinafter defined, in accordance
with the following provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease, as the
percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which
percentage has been determined by dividing the approximate rentable square
footage of the Premises by the total approximate square footage of the rentable
space contained in the Building Project. It is understood and agreed that the
square footage figures set forth in the Basic Lease Provisions are
approximations which Lessor and Lessee agree are reasonable and shall not be
subject to revision except in connection with an actual change in the size of
the Premises or a change in the space available for lease in the Building
Project. In the event either the Premises and/or Building Project is expanded or
reduced, then Lessee's Share shall be appropriately adjusted, and as to the
calendar year in which such change occurs, Lessee's Share shall be determined on
the basis of the number of days during that particular calendar year that such
Lessee's Share was in effect. It is further agreed that Lessee shall in no event
be entitled to a credit to or adjustment of Lessee's Share of Operating Expenses
payable hereunder, even if the ratio of Operating Expenses actually paid by
Lessee compared to total Operating Expenses actually paid by other lessees of
the Building Project exceeds Lessee's Share (as it might, by way of example only
and not limitation, if some leases of the Building Project are made on a "gross"
basis, in which case the lessees under such leases would not directly pay any
portion of the Operating Expenses).
(b) "Operating Expenses" means Lessor's operating expenses that are
reasonable, actual and necessary (as determined by Lessor in its reasonable
discretion), out-of-pocket (except Le~or may use its normal accrual method of
accounting), obtained at competitive prices, and that are directly attributable
to the operation, repair, maintenance, and replacement, in neat, clean, safe,
good order and condition, of the Building Project, as determined under generally
accepted accounting principles consistently applied, including the following:
(i) The Common Areas, including their surfaces, coverings,
decorative items, carpets, drapes and window coverings, and including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,
stairways, parkways, driveways, landscaped areas, striping bumpers, irrigation
systems, Common Area lighting facilities, building exteriors and roofs, fences
and gates;
(ii) All heating, air conditioning, plumbing, electrical systems,
life safety equipment, telecommunication and other equipment used in common by,
or for the benefit of, lessees or occupants of the Building Project, including
elevators and escalators, lessee directories, fire detection systems including
sprinkler system maintenance and repair;
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(iii) Trash disposal, janitorial and security services for the
Common Areas;
(iv) Any other service to be provided by Lessor that is elsewhere
in this Lease stated to be an "Operating Expense";
(v) The cost of the premiums for the liability and property
insurance policies to be maintained by Lessor under paragraph 8 hereof;
(vi) The amount of the Real Property Taxes to be paid by Lessor
under paragraph 10.1 hereof, however Lessee shall not be responsible for any
increase in property taxes due solely from a sale, refinance, or "change in
ownership" of the Building during the initial lease Term;
(vii) The cost of water, sewer, gas, electricity, and other
publicly mandated services to the Building Project;
(viii) Labor, salaries, and applicable fringe benefits and costs,
materials, supplies, and tools, used in maintaining and/or cleaning the Building
Project and accounting and a management fee of five (5%) percent of base rental
income attributable to the operation of the Building Project;
(ix) Replacing and/or adding improvements mandated by any
governmental agency and any repairs or removals necessitated thereby amortized
over its useful life due to a change in law occurring after the Commencement
Date; and
(x) Replacements of equipment or improvements, as amortized on a
straight-line basis over such equipment or improvement's useful life.
(c) Notwithstanding anything above to the contrary, Operating Expenses
shall not include the following:
(i) Any expenses paid by any lessee directly to third parties,
or as to which Lessor is otherwise reimbursed by any third party, other lessee,
or by insurance proceeds;
(ii) Legal fees and related costs and disbursements relating to
disputes with lessees, Lessor's negligence, the enforcement of leases and
defending Lessor's interest in the real property;
(iii) Any costs, fines, or penalties incurred because Lessor
violated any governmental rule or authority;
(iv) Any real estate brokerage commissions, leasing commissions
(or fees in lieu of commissions), costs, disbursements, and other expenses
incurred for leasing, renovating, or improving space in order to procure
tenants;
(v) Costs (including permit, license, and inspection fees)
incurred in renovating, improving, decorating, painting, or redecorating vacant
or other interior premises space for tenants;
(vi) Nonrecurring costs incurred to remedy structural defects in
original construction materials or installations other than those structural
defects first discovered more than one (1) year following the Commencement Date;
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(vii) Costs incurred to test, survey, cleanup, contain, abate,
remove, or otherwise remedy hazardous wastes or asbestos-containing materials
from the Building Project unless the waste or asbestos-containing materials from
the Building Project were in or on the Building Project because of Lessee's
negligence or intentional acts;
(viii) Depreciation and amortization on the Building;
(ix) Overhead and profit paid to any affiliate of Lessor for
management or other services on or to the Property or for supplies or other
materials to the extent that the costs of the services, supplies, or materials
exceed the competitive costs of the services, supplies, or materials were they
not provided by an affiliate;
(x) Payments on mortgages or deeds of trust and/or ground lease
payments (if any);
(xi) Advertising and promotional expenditures;
(xii) Utility Additions under paragraph 7.4 which are not for the
benefit of Lessee;
(xiii) The cost of any water provided for the use of a tenant
operating a spa; and
(xiv) Other expenses that under generally accepted accounting
principles consistently applied would not be considered normal maintenance,
repair, management, or operation expenses.
(d) Lessee's Share of Operating Expenses to the extent in excess of the
Operating Expense Stop shall be payable by Lessee within ten (10) days after a
reasonably detailed statement of actual expenses ("Statement") is presented to
Lessee by Lessor. At Lessor's option, however, an amount may be estimated by
Lessor from time to time of Lessee's Share of annual Operating Expenses and the
same shall be payable monthly or quarterly, as Lessor shall designate, during
each calendar year of the Lease term, on the same day as the Base Rent is due
hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of
Operating Expenses as aforesaid, Lessor shall deliver to Lessee within ninety
(90) days after the expiration of each calendar year a reasonably detailed
Statement showing Lessee's Share of the actual Operating Expenses incurred
during the preceding year. If Lessee's payments under this paragraph 4.2(d)
during said preceding calendar year exceed Lessee's Share as indicated on said
Statement, Lessee shall be entitled to credit the amount of such overpayment
against Lessee's Share of Operating Expenses next falling due. If Lessee's
payments under this paragraph during said preceding calendar year were less than
Lessee's Share as indicated on said Statement, Lessee shall pay to Lessor the
amount of the deficiency within thirty (30) days after delivery by Lessor to
Lessee of said Statement.
(i) Within one hundred eighty (180) days after receipt of a
Statement by Lessee ("Review Period"), if Lessee disputes the amount set forth
in the Statement, Lessee's employees or an independent certified public
accountant (which accountant is a member of a nationally or regionally
recognized accounting firm) designated by Lessee, may, after reasonable notice
to Lessor and at reasonable times, inspect Lessor's records at Lessor's offices,
provided that Lessee is not then in default after expiration of all applicable
cure periods and provided further that Lessee and such accountant or
representative shall, and each of them shall use their commercially reasonable
efforts to cause their respective agents and employees to, maintain all
information contained in Lessor's records in strict confidence. Notwithstanding
the foregoing, Lessee shall only have the right to review Lessor's records one
(1)time during any
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twelve (12) month period. Lessor's failure to dispute the amounts set forth in
any Statement within the Review Period shall be deemed to be Lessee's approval
of such Statement and Lessee, thereafter, waives the right or ability to dispute
the amounts set forth in such Statement.
(ii) If after such inspection, but within thirty (30) days after
the Review Period, Lessee notifies Lessor in writing that Lessee still disputes
such amounts, a certification as to the proper amount shall be made, at Lessee's
expense, by an independent certified public accountant selected by Lessor and
who is a member of a nationally or regionally recognized accounting firm. Lessor
shall cooperate in good faith with Lessee and the accountant to show Lessee and
the accountant the information upon which the certification is to be based.
However, if such certification by the accountant proves that the Operating
Expenses set forth in the Statement were overstated by more than ten percent
(10%), then the cost of the accountant and the cost of such certification shall
be paid for by Lessor. Promptly following the parties' receipt of such
certification, the parties shall make such appropriate payments or
reimbursements, as the case may be, to each other, as are determined to be owing
pursuant to such certification.
(e) If the Building Project is less than ninety-five (95%) percent
occupied during all or a portion of the Base Year or any Expense Year, as
hereinafter defined, Lessor shall make an appropriate adjustment to the variable
components of Operating Expenses for such year or applicable portion thereof,
employing sound accounting and management principles, to determine the amount of
Operating Expenses that would have been paid had the Building Project been
ninety-five (95%) percent occupied; and the amount so determined shall be deemed
to have been the amount of Operating Expenses for such year, or applicable
portion thereof. "Expense Year" is defined as each calendar year occurring
during the Term beginning with the Base Year, which shall be the first Expense
Year.
(f) Lessor shall use reasonable efforts to keep Operating Expenses at
reasonable amounts, while maintaining a first-class office building.
(g) "Operating Expense Stop" is defined as the amount of Operating
Expenses for the Base Year.
4.3 Rent Increase. At the times set forth in paragraph 1.7 of the Basic
Lease Provisions, the monthly Base Rent payable under paragraph 4.1 of this
Lease shall increase at a fixed rate of three and one-half (3.5%) percent.
4.4 Rent Abatement. Should Lessee use only $20 per usable square foot of
the Tenant Improvement Allowance outlined in the Work Letter (Exhibit C), Lessee
shall pay 1/2 rent for the first two months of the Lease Term. Should Lessee use
only $15 per usable square foot of the Tenant Improvement Allowance outlined in
the Work Letter (Exhibit C), Lessee shall pay 1/2 rent for the first four months
of the Lease Term.
5. Security Deposit. Lessee shall deposit with Lessor the Security Deposit set
forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's
faithful performance of Lessee's obligations hereunder. If Lessee fails to pay
rent or other charges due hereunder, or otherwise defaults with respect to any
provision of this Lease, Lessor may use, apply or retain all or any portion of
said deposit for the payment of any rent or other charge in default for the
payment of any other sum to which Lessor may become obligated by reason of
Lessee's default, or to compensate Lessor for any loss or damage which lessor
may suffer thereby. If Lessor so uses or applies all or any portion of said
deposit, Lessee shall within ten (10) days after written demand therefor deposit
cash with Lessor in an amount sufficient to restore said deposit to the full
amount then required of Lessee. If the monthly Base Rent shall, from time to
time, increase
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during the term of this Lease, Lessee shall, at the time of such increase,
deposit with Lessor additional money as a Security Deposit so that the total
amount of the Security Deposit held by Lessor shall at all times bear the same
proportion to the then current Base Rent as the initial Security Deposit bears
to the initial Base Rent set forth in paragraph 1.6 of the Basic Lease
Provisions. Lessor shall not be required to keep said Security Deposit separate
from its general accounts. If Lessee performs all of the Lessee's obligations
hereunder, said deposit, or so much thereof as has not heretofore been applied
by Lessor, shall be returned, without payment of interest or other increment for
its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of
Lessee's interest hereunder) at the expiration of the term hereof, and after
Lessee has vacated the Premises. No trust relationship is created herein between
Lessor and Lessee with respect to said Security Deposit. Lessor shall not be
required to keep the Security Deposit in an interest-bearing account, and any
interest accruing shall be earned by Lessor.
5.1 Additional Lease Security. As additional security for the performance
of its obligations under this Lease, at or prior to the Commencement Date Lessee
shall deliver to Lessor an Irrevocable Letter of Credit in substantially the
form set forth as Exhibit F hereto in the amount of One Hundred Eighty Thousand
and 00/1 00 Dollars ($180,000.00), subject to reduction of such amount by Twenty
Thousand and 00/100 Dollars ($20,000.00) on each anniversary of the Commencement
Date. By way of example, the Letter of Credit shall be in the amount of
$180,000.00, until the first (1st) anniversary of the Commencement Date, at
which time it shall be reduced to $160,000.00, until the second (2nd)
anniversary of the Commencement Date, at which time it shall be reduced to
$140,000.00, until the third (3rd) anniversary of the Commencement Date, at
which time it shall be reduced to $120,000.00, until the fourth (4th)
anniversary of the Commencement Date, at which time it shall be reduced to
$100,000.00, for the duration of the Lease Term. Notwithstanding the foregoing,
if Lessee becomes a publicly held company with stockholder's equity in excess of
$25 million, upon submission of a financial statement by a national public
accounting firm certifying thereto, this requirement shall be waived, and Lessee
shall have the immediate right to cancel any such Irrevocable Letter of Credit.
6. Permitted Use.
6.1 Permitted Use. The Premises shall be used only for the Permitted Use
set forth in the Basic Lease Information and for no other uses. Lessee shall not
commit waste, overload the floors or structure of the Building Project, subject
the Premises, the Building Project, or the Common Areas to any use which would
damage the same or increase the risk of loss or violate any insurance coverage,
permit any unreasonable odors, smoke, dust, gas, substances, noise or vibrations
to emanate from the Premises, take any action which would constitute a nuisance
or would disturb, obstruct or endanger any other Lessees, take any action which
would abrogate any warranties, or use or allow the Premises to be used for any
unlawful purpose. Lessee shall have the right in common with other Lessees of
Lessor to use the parking facilities of the Building Project. Lessee agrees not
to overburden the parking facilities and agrees to cooperate with Lessor and
other Lessees in the use of parking facilities.
6.2 Compliance with Law.
(a) Lessor represents and warrants that, as of the Commencement Date,
the building shell and core will be in compliance with the American Disabilities
Act of 1990 ("ADA"). Should it be discovered that said building shell and core
are not in compliance with the ADA as of the Commencement Date, Lessor shall
correct the same at Lessor's sole cost and expense.
(b) Lessee shall, at Lessee's expense, promptly comply with all
applicable statutes, ordinances, rules, regulations, orders, and requirements of
any fire insurance underwriters or rating bureaus, now in effect or which may
hereafter come into effect, whether or not they reflect a change in policy from
that now existing, during the term or any part of the term
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hereof, relating in any manner to the occupation and use by Lessee of the
Premises. Lessee shall conduct its business in a lawful manner and shall not use
or permit the use of the Premises or the Common Areas in any manner that will
tend to create waste or a nuisance or shall tend to disturb other occupants of
the Building Project. Lessee's aforesaid obligation regarding compliance with
covenants and restrictions of record is subject to Lessee's receipt and
reasonable approval of such covenants and restrictions; provided that Lessee
shall be deemed to have approved such conditions and restrictions if it does not
notify Lessor in writing of its specific objections thereto within ten (10) days
of its receipt thereof.
6.3 Condition of Premises.
Lessor shall deliver the Premises to Lessee on the Commencement Date
(unless Lessee is already in possession). Lessor represents and warrants that on
the Commencement Date, the Premises will comply with all applicable laws,
ordinances, rules, regulations of governmental authorities, covenants and
restrictions, and will be zoned to permit general office use. Subject to, and in
reliance on Lessor's representations and warranties set forth in this paragraph
6.3, Lessee acknowledges that (i) it has satisfied itself by its own independent
investigation that the Premises are suitable for its intended use, and that
neither Lessor nor Lessor's agent or agents has made any representation or
warranty as to the present or future suitability of the Premises, Common Areas,
or Building Project for the conduct of Lessee's business, and (ii) Lessee shall
have a period of thirty (30) days following the Commencement Date to object to
the presence of any latent defects in the portion of the Premises constructed by
Lessor or under Lessor's control by notifying Lessor thereof in writing within
such time period.
7. Maintenance, Repairs, Alterations and Common Area Services.
7.1 Lessor's Obligations. Lessor shall keep the Building Project,
including the Building's exterior walls, roof, and common areas, in good
condition and repair within a reasonable time after receiving notice or having
actual knowledge of the need for repairs or maintenance; provided, however,
Lessor shall not be obligated to paint, repair or replace wall coverings, or to
repair or replace any improvements that are not ordinarily a part of the
Building or are above then Building standards. Lessor shall make the repairs and
replacements to maintain the Building in a condition comparable to first class
office buildings. Except as provided in paragraph 9.5, there shall be no
abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Building Project or any part
thereof, or on account of any interruption of services or of access to the
Premises, Building or Building Project; provided, however, that if the Premises
are unusable by an event other than damage or destruction, condemnation or an
act or omission of Lessee or Lessee's agents, contractors, invitees or
employees, and if such condition persists for more than (a) ten (10) consecutive
days, then Monthly Base Rent hereunder and all operating expenses and other
parking costs shall be abated, on a day-by-day basis, for every day thereafter
that such condition continues, and (b) ninety (90) consecutive days, then Lessee
may terminate this Lease as of such ninetieth (90th) consecutive day by
providing Lessor with irrevocable written notice of its election within ten (10)
days thereafter. Lessee expressly waives the benefits of any statute now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Premises in good order, condition and repair.
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7.2 Lessee's Obligations.
(a) Notwithstanding Lessor's obligation to keep the Premises in good
condition and repair, Lessee shall be responsible for payment of the cost
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) that
serves only Lessee or the Premises, to the extent such cost is attributable to
causes beyond normal wear and tear. Lessee shall be responsible, at its sole
cost and expense, for painting, repairing or replacing wall coverings, repairing
and maintaining the interior of the Premises (other than equipment which is part
of, and affects, the Building's overall systems, such as HVAC, which shall be
Lessor's obligation) and to repair or replace any Premises improvements that are
not ordinarily a part of the Building or that are above then Building standards.
Lessor may, at its option, upon reasonable notice, elect to have Lessee perform
any particular such maintenance or repairs the cost of which is otherwise
Lessee's responsibility hereunder.
(b) On the last day of the Term hereof, or on any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices by Lessee. Lessee
shall repair any damage to the Premises occasioned by the installation or
removal of Lessee's trade fixtures, alterations, furnishings and equipment.
Except as otherwise stated in this Lease, and subject to the terms and
conditions of this Lease, Lessee shall leave the air lines, power panels,
electrical distribution systems, lighting fixtures, air conditioning, window
coverings, wall coverings, carpets, wall paneling, ceilings and plumbing on the
Premises and in good operating condition.
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7.3 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent (which
consent shall not be unreasonably withheld or unduly delayed) make any
alterations, improvements additions, Utility Installations or repairs in, on or
about the Premises, or the Building Project. As used in this paragraph 7.3 the
term "Utility Installation" shall mean carpeting, window and wall coverings,
power panels, electrical distribution systems, lighting fixtures, air
conditioning, plumbing, and telephone and telecommunication wiring and
equipment, but shall not include the Satellite Antenna, if any, that Lessee may
install on the roof of the Building in accordance with the provisions of
paragraph 2.6 hereof. At the expiration of the term, Lessor may require the
removal of any or all of said alterations, improvements, additions or Utility
Installations, and the restoration of the Premises and the Building Project to
their prior condition, at Lessee's expense; provided that Lessee shall not be
required to remove alterations, improvements, additions or Utility Installations
made pursuant to the terms of the Work Letter and, provided further that, with
respect to alterations, improvements, additions or Utility Installations for
which Lessee has requested (and was required pursuant to the terms of the Lease
to request) Lessor's consent to install, Lessor shall be required to request
their removal at the time Lessor grants its consent if Lessor wishes to require
their removal upon the termination of the Lease. Should Lessor permit Lessee to
make its own alterations, improvements, additions or Utility Installations,
Lessee shall use only such contractor as has been expressly approved by Lessor
(which approval shall not be unreasonably withheld), and Lessor may require
Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and
completion bond in an amount equal to one hundred fifty percent (150%) of the
estimated cost of such improvements, to insure Lessor against any liability for
mechanic's and materialmen's liens and to insure completion of the work. Should
Lessee make any alterations, improvements, additions or Utility Installations
without the prior approval of Lessor, or use a contractor not expressly approved
by Lessor, Lessor may, at any time during the term of this Lease, require that
Lessee remove any part or all of the same.
(b) Any alterations, improvements, additions or Utility Installations
in or about the Premises or the Building Project that Lessee shall desire to
make shall be presented to Lessor in written form, with proposed detailed plans.
If Lessor shall give its consent to Lessee's making such alteration,
improvement, addition or Utility Installation, the consent shall be deemed
conditioned upon Lessee acquiring a permit to do so from the applicable
governmental agencies, furnishing a copy thereof to Lessor prior to the
commencement of the work, and compliance by Lessee with all conditions of said
permit in a prompt and expeditious manner.
(c) Except for work performed by Lessor, Lessee shall pay, when due,
all claims for labor or materials furnished or alleged to have been furnished to
or for Lessee at or for use in the Premises, which claims are or may be secured
by any mechanic's or materialmen's lien against the Premises, the Building or
the Building Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises by Lessee, and Lessor
shall have the right to post notices of non-responsibility in or on the Premises
or the Building as provided by law. Lessee shall at all times keep the Premises,
the Building and the Building Project free and clear of liens attributable in
any way to a work of improvement commissioned by Lessee, or to the acts or
omissions of Lessee, any of Lessee's employees, agents, or contractors, or any
of their employees, agents or sub-contractors. If Lessee shall, in good faith,
contest the validity of any such lien, claim or demand, then Lessee shall, at
its sole expense defend itself and Lessor against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against Lessor or the Premises, the Building or the Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount not less than one
hundred fifty percent (150%) of the amount of such contested lien claim or
demand indemnifying Lessor against liability for the
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same and holding the Premises, the Building and the Building Project free from
the effect of such lien or claim. In addition, Lessor may require Lessee to pay
Lessor's reasonable attorneys' fees and costs in participating in such action if
Lessor shall decide it is to Lessor's best interest so to do.
(e) All alterations, improvements, additions and Utility
Installations (which do not constitute trade fixtures of Lessee), which may be
made to the Premises by Lessee, including but not limited to, floor coverings,
panelings, doors, drapes, built-ins, moldings, sound attenuation, and lighting
and telephone or communication systems, conduit, wiring and outlets, shall be
made and done in a good and workmanlike manner and of good and sufficient
quality and materials and shall be the property of Lessor and remain upon and be
surrendered with the Premises at the expiration of the lease term, unless Lessor
requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in
default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's
personal property and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the Premises or
the Building, and other than Utility Installations, shall remain the property of
Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2,
it being understood and agreed that Lessee shall have the right to remove the
Satellite Antenna provided Lessee repairs any damage caused by its removal.
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
Installations.
7.4 Utility Additions. Lessor reserves the right to install new or
additional utility facilities throughout the Building Project for the benefit of
Lessor or Lessee, or any other lessee of the Building Project, including, but
not by way of limitation, such utilities as plumbing, electrical systems,
security systems, communication systems, and fire protection and detection
systems, so long as such installations do not unreasonably interfere with
Lessee's use of the Premises.
8. Insurance; Indemnity.
8.1 Liability Insurance-Lessee. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease a policy of Commercial General
Liability insurance utilizing an Insurance Services Office standard form with
Broad Form General Liability Endorsement (GL0404), or equivalent, in an amount
of not less than $2,000,000 per occurrence of bodily injury and property damage
combined or in a greater amount as reasonably determined by Lessor and shall
insure Lessee with Lessor as an additional insured against liability arising out
of the use, occupancy or maintenance of the Premises. Compliance with the above
requirement shall not, however, limit the liability of Lessee hereunder. Lessor
may only require such increased amounts of insurance if such increased amounts
are then generally required by owners of comparable first-class office buildings
in the Santa Monica area.
8.2 Liability Insurance-Lessor. Lessor shall be required to maintain
contractual and comprehensive general liability insurance comparable to such
liability insurance required of Lessee under paragraph 8.1. Any premiums for
liability insurance maintained by Lessor relating to the Premises, the Building
or the Building Project shall be Operating Expenses hereunder.
8.3 Property Insurance-Lessee. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease for the benefit of Lessee,
replacement cost all-risks insurance, including without limitation fire and
extended coverage insurance, with vandalism and malicious mischief, sprinkler
leakage and earthquake sprinkler leakage endorsements, in an amount sufficient
to cover not less than 100% of the full replacement costs, as the same may
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exist from time to time, of all of Lessee's personal property, fixtures,
equipment and tenant improvements.
8.4 Property Insurance-Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Building Project and improvements thereon, but not Lessee's
personal property, fixtures, equipment or tenant improvements, in the amount of
the full replacement cost thereof, as the same may exist from time to time,
utilizing Insurance Services Office standard form, or equivalent providing
protection against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, plate glass, and such other
perils as Lessor deems advisable or may be required by a lender having a lien on
the Building Project. In addition, Lessor shall obtain and keep in force, during
the term of this Lease, a policy of rental value insurance covering a period of
one year, with loss payable to Lessor, which insurance shall also cover all
Operating Expenses for said period. Lessee will not be named in any such
policies carried by Lessor and shall have no right to any proceeds therefrom.
The policies required by these paragraphs 8.2 and 8.4 shall contain such
deductibles as Lessor or the aforesaid lender may determine. In the event that
the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof,
the deductible. amounts under the applicable insurance policies shall be deemed
an Operating Expense. Lessee shall not do or permit to be done anything which
shall invalidate the insurance policies carried by Lessor. Lessee shall pay the
entirety of any increase in the property insurance premium for the Building
Project over what it was immediately prior to the commencement of the term of
this Lease if the increase is specified by Lessor's insurance carrier as being
caused by the nature of Lessee's occupancy or any act or omission of Lessee.
8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability
insurance policies required under paragraph 8.1 or certificates evidencing the
existence and amounts of such insurance within seven (7) days after the
Commencement Date of this Lease.
Each policy required to be obtained by Lessee hereunder shall: (a) be
issued by insurers authorized to do business in the state in which the Building
is located and rated not less than financial class X, and not less than
policyholder rating A, in the most recent version of Best's Key Rating Guide, or
the equivalent rating in any other comparable guide selected by Lessor (provided
that, in any event, the same insurance company shall provide the coverages
described in paragraphs 8.1 and 8.3 above); (b) be in form reasonably
satisfactory from time to time to Lessor; (c) name Lessee as named insured
thereunder and shall name Lessor and, at Lessor's request, Lessor's mortgagees
and ground lessors of which Lessee has been informed in writing, as additional
insureds; (d) not have a deductible amount exceeding Five Thousand Dollars
($5,000.00); (e) specifically provide that the insurance afforded by such policy
for the benefit of Lessor and Lessor's mortgagees and ground lessors shall be
primary, and any insurance carried by Lessor or Lessor's mortgagees and ground
lessors shall be excess and non-contributing; (f) except for worker's
compensation insurance, contain an endorsement that the insurer waives its right
to subrogation as described in paragraph 8.6 below: and (g) contain an
undertaking by the insurer to notify Lessor (and the mortgagees and ground
lessors of Lessor who are named as additional insureds) in writing not less than
thirty (30) days prior to any material change, reduction in coverage,
cancellation or other termination thereof. Lessee agrees to deliver to Lessor,
as soon as practicable after the placing of the required insurance, but in no
event later than ten (10) days after the date Lessee takes possession of all or
any part of the Premises, certified copies of each such insurance policy (or
certificates from the insurance company evidencing the existence of such
insurance and Lessee's compliance with the foregoing provisions of this
paragraph 8). Lessee shall cause replacement policies or certificates to be
delivered to Lessor not less than thirty (30) days prior to the expiration of
any such policy or policies. If any such initial or replacement policies or
certificates are not furnished within the time(s) specified herein, Lessee shall
be deemed to be in material default under this Lease without the benefit of any
additional
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notice or cure period provided herein, and Lessor shall have the right, but not
the obligation, to procure such policies and certificates at Lessee's expense.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other,
for direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. If necessary all property insurance policies required under this Lease
shall be endorsed to so provide.
8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessor's master or ground lessor, partners and lenders, from and against
any and all claims for damage to the person or property of anyone or any entity
arising from Lessee's use of the Building Project, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessee's agents,
contractors, employees or invitees and from and against all costs, attorneys'
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against Lessor by
reason of any such matter, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified. However, notwithstanding the
foregoing, Lessor shall indemnify and hold Lessee harmless from any loss, cost,
liability, damage or expense, including, but not limited to, penalties, fines,
attorneys' fees or costs to any person, property, or entity to the extent
resulting from the gross negligence or willful misconduct of Lessor, its agents,
contractors, employees, or invitees. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon or about the Premises arising from any cause and
Lessee hereby waives all claims in respect thereof against Lessor, except to the
extent such damages or claims result from the gross negligence or willful
misconduct of the Lessor, its agents, contractors, employees, or invitees.
8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for loss of or damage to the goads, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Building Project, nor shall Lessor be liable for
injury to the person of Lessee, Lessee's employees, agents or contractors,
whether such damage or injury is caused by or results from theft, fire, steam,
electricity, gas, water or rain, or from the breakage, leakage, obstruction or
other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, or from any other cause, whether said damage
or injury results from conditions arising upon the Premises or upon other
portions of the Building Project, or from other sources or places, or from new
construction or the repair, alteration or improvement of any part of the
Building Project, or of the equipment, fixtures or appurtenances applicable
thereto, and regardless of whether the cause of such damage or injury or the
means of repairing the same is inaccessible, Lessor shall not be liable for any
damages arising from any act or neglect of any other lessee, occupant or user of
the Building Project, nor from the failure of Lessor to enforce the provisions
of any other lease of any other lessee of the Building Project except to the
extent such damages or claims result from the gross negligence or willful
misconduct of the Lessor, its agents, contractors, employees, or invitees.
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8.9 No Representation of Adequate Coverage. Lessor makes no representation
that the limits or forms of coverage of insurance specified in this paragraph 8
are adequate to cover Lessee's property or obligations under this Lease.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is less than fifty percent (50%) of the then Replacement Cost of
the Building.
(c) "Premises Building Total Destruction" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is fifty percent (50%) or more of the then Replacement Cost of
the Building.
(d) "Building Project Buildings" shall mean all of the buildings on
the Building Project site.
(e) "Building Project Buildings Total Destruction" shall mean if the
Building Project Buildings are damaged or destroyed to the extent that the cost
of repair is fifty percent (50%) or more of the then Replacement Cost of the
Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was caused
by an event required to be covered by the insurance described in paragraph 8.
The fact that an Insured Loss has a deductible amount shall not make the loss an
uninsured loss.
(g) "Replacement Cost" shall mean the amount of money necessary to be
spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.
(h) "Hazardous Material Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by a
Hazardous Material in, on, or under the Premises.
9.2 Premises Damage; Premises Building Partial Damage.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is an
Insured Loss and which falls into the classification of either Premises Damage
or Premises Building Partial Damage, then Lessor shall, as soon as reasonably
possible and to the extent insurance proceeds are available and the required
materials and labor are readily available through usual commercial channels, at
Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or
tenant improvements originally paid for by Lessee) to its condition existing at
the time of the damage, and this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is not
an Insured Loss and which falls within the classification of Premises Damage or
Premises Building Partial Damage, unless
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caused by a willful act of Lessee (in which event Lessee shall make the repairs
at Lessee's expense), which damage prevents Lessee from making any substantial
use of the Premises, Lessor may at Lessor's option either (i) repair such damage
as soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) give written notice to Lessee
within thirty (30) days after the date of the occurrence of such damage of
Lessor's intention to cancel and terminate this Lease as of the date of the
occurrence of such damage, in which event this Lease shall terminate as of the
date of the occurrence of such damage.
9.3 Premises Building Total Destruction; Building Project Total
Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time
during the term of this Lease there is damage, whether or not it is an insured
Loss, which falls into the classifications of either (i) Premises Building Total
Destruction, or (ii) Building Project Total Destruction, then Lessor may at
Lessor's option either (i) repair such damage or destruction as soon as
reasonably possible at Lessor's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, but not Lessee's fixtures, equipment or
tenant improvements, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.
9.4 Damage Near End of Term.
(a) Subject to paragraph 9.4(b), if at any time during the last
twelve (12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within 30 days after the date of occurrence of such
damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Damage during the
last twelve (12) months of the term of this Lease. If Lessee duly exercises such
option during said twenty (20) day period, Lessor shall, at Lessor's expense,
repair such damage, but not Lessee's fixtures, equipment or tenant improvements,
as soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise such option during said twenty (20) day
period, then Lessor may at Lessor's option terminate and cancel this Lease as of
the expiration of said twenty (20) day period by giving written notice to Lessee
of Lessor's election to do so within ten (10) days after the expiration of said
twenty (20) day period, notwithstanding any term or provision in the grant of
option to the contrary.
9.5 Abatement of Rent; Lessee's Remedies.
(a) If, in the event of Premises Damage, Lessor repairs or restores
the Building or Premises pursuant to the provisions of this paragraph 9, and any
part of the Premises are not usable (including loss of use due to loss of access
or essential services), the rent payable hereunder (including Lessee's Share of
Operating Expenses) for the period during which such damage, repair or
restoration continues shall be abated, provided (1) the damage was not the
result of the gross negligence or willful misconduct of Lessee, and (2) such
abatement shall only be to the extent the operation of Lessee's business from
the Premises is adversely affected. Except for said abatement of rent, if any,
Lessee shall have no claim against Lessor for any damage suffered by reason of
any such damage, destruction, repair or restoration.
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(b) If Lessor shall elect or shall be obligated to repair or restore
the Premises or the Building under the provisions of this paragraph 9 and shall
not commence such repair or restoration within ninety (90) days after such
occurrence, or if Lessor shall not complete the restoration and repair within
one hundred eighty (180) days after such occurrence, Lessee may at Lessee's
option cancel and terminate this Lease by giving Lessor written notice of
Lessee's election to do so at any time prior to the commencement or completion,
respectively, of such repair or restoration. In such event this Lease shall
terminate as of the date of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with any
such restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.
9.6 Termination-Advance Payments. Upon termination of this Lease pursuant
to this paragraph 9, an equitable adjustment shall be made concerning advance
rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's Security Deposit as has not
theretofore been applied by Lessor.
9.7 Waiver. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Tax, as defined
in paragraph 10.3, applicable to the Building Project subject to reimbursement
by Lessee of Lessee's Share of such taxes in accordance with the provisions of
paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 Additional Improvements. Lessee shall not be responsible for paying
any increase in Real Property Tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Building
Project by other lessees or by Lessor for the exclusive enjoyment of any other
lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses
are payable under paragraph 4.2(c) the entirety of any increase in Real Property
Tax if assessed solely by reason of additional improvements placed upon the
Premises by Lessee or at Lessee's request.
10.3 Definition of "Real Property Tax." As used herein, the term "Real
Property Tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Building Project or any portion thereof by any
authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Lessor in the Building Project or in any portion
thereof, as against Lessor's right to rent or other income therefrom, and as
against Lessor's business of leasing the Building Project. The term" Real
Property Tax " shall also include any tax, fee, levy, assessment or charge (I)
in substitution of, partially or totally, any tax, fee, levy, assessment or
charge hereinabove included within the definition of" Real Property Tax," or
(ii) the nature of which was hereinabove included within the definition of" Real
Property Tax," or (iii) which is imposed for a service or right not charged
prior to June 1, 1978, or, if previously charged, has been increased since June
1, 1978, or (iv) which is imposed as a result of a change in ownership, as
defined by applicable local statutes for property tax purposes, of the Building
Project or which is added to a tax or charge hereinbefore included within the
definition of Real Property Tax by reason of such change of ownership, or (v)
which is
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imposed by reason of this transaction, any modifications or changes hereto, or
any transfers hereof.
(a) The term "Real Property Tax" excludes (i) any income taxes, and (ii)
penalties or interest for late payments except to the extent that such late
payments were caused by Lessee's failure to make payments of Base Rent and/or
Lessee's Share of Operating Expenses as and when due pursuant to the provisions
of this Agreement.
(b) If Lessor receives a refund of any portion of Real Estate Taxes that
were included in the Operating Expenses paid by Lessee, then Lessor shall
reimburse Lessee its pro rata share of the refunded taxes, less any expenses
that Lessor reasonably incurred to obtain the refund.
10.4 Joint Assessment. If the improvements or property, the taxes for
which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not
separately assessed, Lessee's portion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessor's work sheets
or such other information (which may include the cost of construction) as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
11. Utilities.
11.1 Services Provided by Lessor. Lessor shall provide heating,
ventilation, air conditioning ("HVAC"), and janitorial service as reasonably
necessary to maintain comfortable use and occupancy of the Premises given
Lessee's space plan and needs, reasonable amounts of electricity for normal
lighting and office machines, water for reasonable and normal drinking and
lavatory use, and replacement light bulbs and/or florescent tubes and ballasts
for standard overhead fixtures. Janitorial service shall be contracted directly
by Lessee or contracted by Lessor and billed by Lessor, without mark-up or
additional cost, to Lessee. Costs incurred by Lessor in providing such services
shall be Operating Expenses, except for electricity, which shall be individually
metered and shall be paid by Lessee as additional rent and janitorial services
as contracted directly by Lessee. Lessor is aware of Lessee's above normal
electrical load and HVAC requirements and will ensure the following:
(a) There are 400 amps of three-phase current supplied to the
Premises as of the Commencement Date;
(b) As of the Commencement Date, there will be two (2) separate
dedicated 5-ton HVAC units connected to the Premises which are separately
metered;
(c) All electricity (including electricity used to operate the HVAC
unit) supplied to the Premises is submetered exclusively to the Premises; and
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(d) Lessor will assure that there are conduits to the Premises
sufficient to handle fiber and accommodate two (2) separate T-1 lines (one for
data and one for telephone). Lessor represents and warrants that Lessee shall
have the right to contract with such carriers or service providers as Lessee
may, in its sole discretion, choose for the installation and use of these lines.
The costs of providing the items in (b) shall be paid for from the Tenant
Improvement Allowance, provided however, that such costs shall be the
responsibility of Lessee if the Tenant Improvement Allowance has been depleted.
11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a
reasonable proportion to be determined by Lessor of all charges jointly metered
with other premises in the Building.
11.3 Hours of Service. Any utilities provided by Lessor pursuant to
Section 11.1 shall be provided 24 hours per day, seven (7) days per week. Any
services provided by Lessor pursuant to Section 11.1 (exclusive of janitorial
services which shall be contracted directly by Lessee, or contracted by Lessor
and billed by Lessor to Lessee) shall be provided from 8:00 a.m. to 6:00 p.m.,
Monday through Friday (excluding generally observed national, state or local
holidays). Services required at other times shall be subject to advance request
and reimbursement by Lessee to Lessor of the cost thereof.
11.4 Excess Usage by Lessee. Lessee shall not make connection to the
utilities except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water, lighting
or power, or suffer or permit any act that causes extra burden upon the
utilities or services, including but not limited to security services, over
standard office usage for the Building Project; provided that Lessee shall be
entitled to make connections necessary for excess usage if it does so at its own
cost and expense, in compliance with all laws and regulations and without
detriment to the Leased Premises or the balance of the Building Project. Lessor
shall require Lessee to reimburse Lessor for any excess expenses or costs that
may arise out of a breach of this subparagraph by Lessee. Lessor may, in its
sole discretion, install at its own expense supplemental equipment and/or
separate metering applicable to Lessee's excess usage or loading.
11.5 Interruptions. There shall be no abatement of rent and Lessor shall
not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service, except when the cause
thereof was within Lessor's control; provided, however, that if the Premises are
rendered unusable by an event other than damage or destruction, condemnation or
an act or omission of Lessee or Lessee's agents, contractors, invitees or
employees, and if such condition persists for more than (a) ten (10) consecutive
days, then Monthly Base Rent hereunder (but not other rent hereunder) shall be
abated, on a day-by-day basis, for every day thereafter that such condition
continues, and (b) ninety (90) consecutive days, then Lessee may terminate this
Lease as of such ninetieth (90th) consecutive day by providing Lessor with
irrevocable written notice of its election within ten (10) days thereafter.
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12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which cannot be unreasonably withheld.
Lessor shall respond to Lessee's request for consent hereunder in a timely
manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. Neither the use by, nor the subletting to, any majority owned or
controlled (whether directly or indirectly) subsidiary or Affiliate of Lessee of
all or a portion of the Premises shall be deemed to be an assignment or
subletting. An "Affiliate" is defined as an entity controlled by, controlling,
or under common control with Lessee, or an entity resulting from merger,
consolidation, or asset acquisition.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) No assignment or subletting shall release Lessee of Lessee's
obligations hereunder or alter the primary liability of Lessee to pay the rent
and other sums due Lessor hereunder, including the payment of Lessee's Share of
Operating Expenses, and to perform all other obligations to be performed by
Lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee pending
approval or disapproval of such assignment without being deemed to have
consented thereto.
(c) Neither a delay in the approval or disapproval of such assignment
or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for the breach of any of the terms or
conditions of this paragraph 12 or this Lease.
(d) If Lessee's obligations under this Lease have been guaranteed by
third parties, then an assignment or sublease, and Lessor's consent thereto,
shall not be effective unless said Guarantor give their written consent to such
sublease and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent and such
action shall not relieve such persons from liability under this Lease or said
sublease; provided, however, such persons shall not be responsible to the extent
any such amendment or modification enlarges or increases the obligations of the
Lessee or sublessee under this Lease or such sublease.
(f) In the event of any default under this Lease, Lessor may proceed
directly against Lessee, any Guarantor or anyone else responsible for the
performance of this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no default then
exists under this Lease of the obligations to be performed by Lessee nor shall
such consent be deemed a waiver of any then existing default, except as may be
otherwise stated by Lessor at the time.
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(h) The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent null
and void.
12.3 Additional Terms and Conditions Applicable to Subletting/Assignment.
Regardless of Lessor's consent, the following terms and conditions shall apply
to any subletting (and in the case of subparagraph (f), assignment) by Lessee of
all or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
hereafter made by Lessee and Lessor may collect such rent and income and apply
same toward Lessee's obligations under this Lease; provided, however, that until
a default shall occur in the performance of Lessee's obligations under this
Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under such
sublease. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a default exists in
the performance of Lessee's obligations under this Lease, to pay to Lessor the
rents due and to become due under the sublease. Lessee agrees that such
sublessee shall have the right to rely upon any such statement and request from
Lessor, and that such sublessee shall pay such rents to Lessor without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee or Lessor for any such rents
so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective unless and
until it has been approved in writing by Lessor, except when Lessor's consent is
not required, as outlined in paragraph 12.1 above. In entering into any
sublease, Lessee shall use only such form of sublease as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublessee shall, by reason
of entering into a sublease under this Lease, be deemed, for the benefit of
Lessor, to have assumed and agreed to conform and comply with each and every
obligation herein to be performed by Lessee other than such obligations as are
contrary to or inconsistent with provisions contained in a sublease to which
Lessor has expressly consented in writing.
(c) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of Lessee under such sublease from the time of
the exercise of said option to the termination of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or Security Deposit
paid by such sublessee to Lessee or for any other prior defaults of Lessee under
such sublease.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such defaults cured by the sublessee.
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(f) Notwithstanding anything to the contrary in the foregoing, fifty
percent (50%) of any rent or other economic consideration received by Lessee as
a result of an assignment or subletting Lease to an entity that is not an
Affiliate of Lessee resulting in thirty (30%) percent or more of the Premises
occupied by an entity other than Lessee, as defined in paragraph 12.1 above,
which exceeds, in the aggregate, (i) the total rent which Lessee is obligated to
pay to Lessor under the Lease (prorated to reflect obligations allocable to any
portion of the Premises subleased), plus (ii) any reasonable and customary
brokerage commissions (not to exceed five percent (5%) of base rent payable
under the assignment or sublease), and attorneys' fees (not to exceed $750 per
assignment or subletting), and reasonable, customary and necessary tenant
improvement costs actually paid by Lessee in connection with such assignment or
subletting, shall be paid to Lessor within ten (10) days after receipt thereof
as additional rent hereunder, without altering or reducing any other obligations
of Lessee hereunder.
12.4 Lessor's Expenses. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including without limitation attorneys', architects',
engineers' and other consultants' fees.
12.5 Conditions to Consent. With respect to transfers for which Lessor's
approval is required pursuant to this paragraph 12, Lessor reserves the right to
condition any approval to assign or sublet upon Lessor's determination that (a)
the proposed assignee or sublessee shall conduct a business on the Premises of a
quality substantially equal to that of Lessee and consistent with the general
character of the other occupants of the Building Project and not in violation of
any exclusives or rights then held by other lessees, and (b) the proposed
assignee or sublessee be at least as financially responsible as Lessee was
expected to be at the time of the execution of this Lease or of such assignment
or subletting, whichever is greater.
13. Default; Remedies.
13.1 Default. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee. Vacation
of the Premises shall include the failure to occupy the Premises for a
continuous period of ninety (90) days or more, whether or not the rent is paid,
unless Lessee has sublet or assigned the Premises.
(b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 13.1(a) (vacation or abandonment), 13.1(e)
(insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30.3
(subordination/self-operating), 33 (auctions), or 41.1 (easements), all of which
are hereby deemed to be material, non-curable defaults without the necessity of
any notice by Lessor to Lessee thereof; the breach by Lessee of any of the
covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d)
(alterations) or 12.1 (assignment or subletting), where such breach shall
continue for a period of fifteen (15) days after written notice thereof from
Lessor to Lessee.
(c) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of five (5) days after written notice
thereof from Lessor to Lessee.
(d) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee
other than those
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referenced in subparagraphs (b) and (c), above, where such failure shall
continue for a period of thirty (30) days after written notice thereof from
Lessor to Lessee; provided, however, that if the nature of Lessee's
noncompliance is such that more than thirty (30) days are reasonably required
for its cure, then Lessee shall not be deemed to be in default if Lessee
commenced such cure within said thirty (30) day period and thereafter diligently
pursues such cure to completion. To the extent permitted by law, such thirty
(30) day notice shall constitute the sole and exclusive notice required to be
given to Lessee under applicable Unlawful Detainer statutes.
(e) (i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as
defined in 11 U.S.C. (S) 101 or any successor statute thereto (unless, in the
case of a petition filed against Lessee, the same is dismissed within ninety
(90) days; (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days. In the event that any provision of this paragraph 13.1(e) is contrary to
any applicable law, such provision shall be of no force or effect.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's
obligation hereunder, was materially false.
13.2 Lessor's Remedies.
(a) Termination. In the event of any default by Lessee, in addition
to any other remedies available to Lessor under this Lease, at law or in equity,
Lessor shall have the immediate option to terminate this Lease and all rights of
Lessee hereunder. In the event that Lessor shall elect to so terminate this
Lease, then Lessor may recover from Lessee:
(i) the worth at the time of award of any unpaid rent which
had been earned at the time of such termination; plus
(ii) the worth at the time of the award of the amount by which
the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that Lessee
proves could have been reasonably avoided; plus
(iii) the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Lessee proves could be
reasonable avoided; plus
(iv) any other amount necessary to compensate Lessor for all
the detriment proximately caused by Lessee's failure to perform its
obligations under this Lease or which, in the ordinary course of
things, would be likely to result therefrom including, but not
limited to: "Unreimbursed Leasehold Improvement and Rental Abatement
Costs" (as defined below); attorneys' fees; brokers' commissions; the
costs of refurbishment, alterations, renovation and repair of the
Premises; and removal (including the repair of damage caused by such
removal) and storage (or disposal) of Lessee's personal property,
equipment, fixtures, Lessee's alterations, additions, leasehold
improvements and any other items which Lessee is required under this
Lease to remove but does not remove. As used herein, the term
"Unreimbursed Leasehold Improvement and Rental Abatement Costs" shall
mean the product when multiplying (i) the sum of any
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leasehold improvement allowance plus any other costs provided, paid
or incurred by Lessor in connection with the design and construction
of the initial leasehold improvements installed in the Premises on or
prior to the Commencement Date pursuant to the Work Letter, together
with the amount, if any, of Abated Rent provided for in Paragraph 4.1
hereof, by (ii) the fraction, the numerator of which is the number of
months of the term of this Lease not yet elapsed as of the date on
which this Lease is terminated (excluding any unexercised renewal
options), and the denominator of which is the total number of months
of the term of this Lease (excluding any unsecured renewal options).
For example, if the total costs paid or incurred by Lessor with
respect to the initial leasehold improvements, plus the amount of
Abated Rent, was $100,000.00, the Lease term was sixty (60) months,
and the Lease was terminated by reason of Lessee's default at the end
of twelve (12) months, the Unreimbursed Leasehold Improvement and
Rental Abatement Costs would be equal to $80,000.00 (i.e., $80,000.00
equals $100,000.00 x 48/60).
As used in subparagraphs (i) and (ii), above, the "worth at the time
of award" is computed by allowing interest at the maximum interest rate which
Lessor is permitted by law to charge to Lessee (the "Lease Rate"). As used in
subparagraph (iii), above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%).
(b) Re-Entry Rights. In the event of any default by Lessee, in
addition to any other remedies available to Lessor under this Lease, at law or
in equity, Lessor shall also have the right, with or without terminating this
Lease, to re-enter the Premises and remove all persons and property from the
Premises; such property may be removed, stored and/or disposed of pursuant to
this Lease or any other procedures permitted by applicable law. No re-entry or
taking possession of the Premises by Lessor pursuant to this paragraph 13.2(b),
and no acceptance of surrender of the Premises or other action on Lessor's part,
shall be construed as an election to terminate this Lease unless a written
notice of such intention be given to Lessee or unless the termination thereof be
decreed by a court of competent jurisdiction.
(c) Continuation of Lease. In the event of any default by Lessee, in
addition to any other remedies available to Lessor under this Lease, at law or
in equity, Lessor shall have the right to continue this Lease in full force and
effect, whether or not Lessee shall have abandoned the Premises. The foregoing
remedy shall also be available to Lessor pursuant to California Civil Code
Section 1951.4 and any successor statute thereof in the event Lessee has
abandoned the Premises. In the event Lessor elects to continue this Lease in
full force and effect pursuant to this paragraph 13.2(c), then Lessor shall be
entitled to enforce all of its rights and remedies under this Lease, including
the right to recover rent as it becomes due. Lessor's election not to terminate
this Lease pursuant to this paragraph 13.2(c) or pursuant to any other provision
of this Le~Lease, at law or in equity, shall not preclude Lessor from
subsequently electing to terminate this Lease or pursuing any of its other
remedies.
(d) Rights and Remedies Cumulative. All rights, options and remedies
of Lessor contained in this paragraph 13.2 and elsewhere in this Lease shall be
construed and held to be cumulative, and no one of them shall be exclusive of
the other, and Lessor shall have the right to pursue any one or all of such
remedies or any other remedy or relief which may be provided by law or in
equity, whether or not stated in this Lease. Nothing in this paragraph 13.2
shall be deemed to limit or otherwise affect Lessee's indemnification of Lessor
pursuant to any provision of this Lease.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days
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after written notice by Lessee to Lessor and to the holder of any mortgage or
deed of trust covering the Premises whose name and address shall have
theretofore been furnished to Lessee in writing, specifying wherein Lessor has
failed to perform such obligation; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are required for
performance then Lessor shall not be in default if Lessor commences performance
within such 30-day period and thereafter diligently pursues the same to
completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due
hereunder will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed on Lessor by the terms of any mortgage or trust
deed covering the Building Project. Accordingly, if any installment of Base
Rent, Operating Expenses, or any other sum due from Lessee shall not be received
by Lessor or Lessor's designee within ten (10) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a late charge equal to ten (10%) percent of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof or the Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs; provided that if so
much of the Premises or the Building Project are taken by such condemnation as
would substantially and adversely affect the operation and profitability of
Lessee's business conducted from the Premises, Lessee shall have the option, to
be exercised only in writing within thirty (30) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within thirty (30) days after the condemning authority shall have taken
possession), to terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the rent and Lessee's Share of
Operating Expenses shall be reduced in the proportion that the floor area of the
Premises taken bears to the total floor area of the Premises. Common Areas taken
shall be excluded from the Common Areas usable by Lessee and no reduction of
rent shall occur with respect thereto or by reason thereof. Lessor shall have
the option in its sole discretion to terminate this Lease as of the taking of
possession by the condemning authority, by giving written notice to Lessee of
such election within thirty (30) days after receipt of notice of a taking by
condemnation of any part of the Premises or the Building Project. Any award for
the taking of all or any part of the Premises or the Building Project under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be. made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any separate award for loss of or damage to Lessee's trade fixtures,
removable personal property and unamortized tenant improvements that have been
paid for by Lessee. For that purpose the cost of such improvements shall be
amortized over the original term of this Lease excluding any options. In the
event that this Lease is not terminated by reason of such condemnation, Lessor
shall to the extent of severance damages received by Lessor in connection with
such condemnation, repair any damage to the Premises caused by such condemnation
except to the extent that Lessee has been reimbursed therefor by the condemning
authority.
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15. Broker's Fee.
(a) The brokers involved in this transaction are Lee & Associates as "dual
agent", (collectively "Brokers"). Lessor shall pay to said brokers a fee as set
forth in a separate agreement between Lessor and said broker for brokerage
services rendered by said broker to Lessor in this transaction. The fee paid by
Lessor shall constitute full satisfaction of amounts claimed by Lee &
Associates.
(b) Lessor agrees to pay said fee not only on behalf of Lessor but also on
behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's interest in this Lease, whether such
transfer is by agreement or by operation of law, shall be deemed to have assumed
Lessor's obligation under this paragraph 15. Each listing broker shall be a
third party beneficiary of the provisions of this paragraph 15 to the extent of
their interest in any commission arising under this Lease and may enforce that
right directly against Lessor; provided, however, that all brokers having a
right to any part of such total commission shall be a necessary party to any
suit with respect thereto.
(c) Lessee and Lessor each represents and warrants to the other that
neither has had any dealings with any person, firm, broker or finder (other than
the person(s), if any, whose names are set forth in paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
party.
16. Estoppel Certificate.
(a) Each party (as "Responding Party") shall at any time, upon not less
than ten (10) days' prior written notice from the other party ("Requesting
Party") execute, acknowledge and deliver to the Requesting Party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to the Responding Party's knowledge, any
uncured defaults on the part of the Requesting Party, or specifying such
defaults if any are claimed, and (iii) in the case of Lessee, certify as to such
other matters as may be requested by Lessor or by a prospective purchaser or
encumbrancer of all or any part of the Building Project. Any such statement may
be conclusively relied upon by any prospective purchaser or encumbrancer of the
Building Project or of the business of Lessee.
(b) At the Requesting Party's option, the failure to deliver such statement
within such time shall be a material default of this Lease by the party who is
to respond, without any further notice to such party, or it shall be conclusive
upon such party that (i) this Lease is in full force and effect, without
modification except as may be represented by the Requesting Party, (ii) there
are no uncured defaults in the Requesting Party's performance, (iii) if Lessor
is the Requesting Party, not more than one month's rent has been paid in
advance, and (iv) if Lessor is the Requesting Party, there are no remaining
obligations of the Requesting Party under this Lease yet to be performed.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a Lessee's
interest in a ground lease of the
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Building Project, and, in the event of any transfer of such title or interest,
Lessor herein named (and in case of any subsequent transfers then the grantor)
shall be relieved from and after the date of such transfer of all liability as
to Lessor's obligations that accrue after a transfer of Lessor's interest,
provided that any funds in the hands of Lessor or the then grantor at the time
of such transfer, in which Lessee has an interest, shall be delivered to the
grantee, and that the purchaser of Lessor's interest assumes (by operation of
law or otherwise) Lessor's remaining obligations under this Lease. The
obligations contained in this Lease to be performed by Lessor shall, subject as
aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
18. Severability. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law or judgments from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence with respect to the obligations to
be performed under this Lease.
21. Additional Rent. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense and any other expenses payable by Lessee hereunder shall be deemed to be
rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction nor
the Lessor or any employee or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises or the Building Project and Lessee acknowledges that
Lessee assumes all responsibility regarding the Occupational Safety Health Act,
the legal use and adaptability of the Premises and the compliance thereof with
all applicable laws and regulations in effect during the term of this Lease.
23. Notices. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to Lessee
or to Lessor at the address noted below or adjacent to the signature of the
respective parties, as the case may be. Mailed notices shall be deemed given
upon actual receipt at the address required, or forty-eight hours following
deposit in the mail, postage prepaid, whichever first occurs. Either party may
by notice to the other specify a different address for notice purposes except
that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee. A copy of all notices required or
permitted to be given to Lessee hereunder shall be concurrently transmitted to
Davis Wright Tremaine LLP, Los Angeles, California, Attention: Marc E.
Jacobowitz, Esq., at such address as will be provided to Lessor.
24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any
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other provision hereof or of any subsequent breach by Lessee of the same or any
other provision. Lessor's consent to, or approval of, any act shall not be
deemed to render unnecessary the obtaining of Lessor's consent to or approval of
any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall
not be a waiver of any preceding breach by Lessee of any provision hereof, other
than the failure of Lessee to pay the particular rent so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of acceptance of such
rent.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be one hundred twenty-five percent (125%) of the Base Rent in effect for
the last month of the Term of this Lease for the first two (2) months of such
holdover, one hundred fifty percent (150%) of the Base Rent in effect for the
last month of the Term of this Lease for the third (3rd) and fourth (4th) months
of such holdover, and two hundred percent (200%) of the Base Rent in effect for
the last month of the Term of this Lease thereafter, and all Options, if any,
granted under the terms of this Lease shall be deemed terminated and be of no
further effect during said month to month tenancy.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. Each provision of this Lease performable by
Lessee and Lessor shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State of
California applicable to contracts to be wholly performed within such State.
30. Subordination.
30.1 Mortgages and Deeds of Trust. Subject to paragraph 30.2, this Lease
is subordinate to prior or subsequent mortgages or deeds of trust covering this
Building.
30.2 Foreclosures. If any mortgage or deed of trust is foreclosed, then:
(a) This Lease shall continue;
(b) Lessee's quiet possession shall not be disturbed if Lessee is not
in Default;
(c) Lessee will attorn to and recognize the mortgagee or purchaser at
foreclosure sale ("Successor Lessor") as Lessee's landlord for the remaining
Term; and
(d) The Successor Lessor shall not be bound by:
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(i) any payment of Base Rent or additional rent for more than
one month in advance, except the Security Deposit and free rent, if any,
specified in the Lease;
(ii) any amendment, modification, or ending of this Lease
without Successor Lessor's consent after the Successor Lessor's name is given to
Lessee unless the amendment, modification, or ending is specifically authorized
by the original Lease and does not require Lessor's prior agreement or consent;
and
(iii) any liability for any act or omission of a prior lessor.
30.3 Self-Operating. Paragraph 30 is self-operating. However, Lessee shall
promptly execute and deliver any documents needed to confirm this arrangement.
Lessee's failure to execute such documents within ten (10) days after written
demand shall constitute a material default by Lessee hereunder without further
notice to Lessee.
31. Attorneys' Fees.
31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the same
or a separate suit, and whether or not such action is pursued to decision or
judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
31.2 The attorneys' fee award shall not be computed in accordance with any
court fee schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all other
costs and expenses incurred in the preparation and service of notices of default
and consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such default.
32. Lessor's Access.
32.1 Lessor and Lessor's agents shall have the right to enter the Premises
at reasonable times with 24 hours prior notice, except in case of emergency) for
the purpose of inspecting the same, performing any services required of Lessor,
showing the same to prospective purchasers, lenders, or lessees (provided that
the interior of the Premises will not be shown to prospective lessees until no
more than 90 days remain in the scheduled term of the Lease), taking such safety
measures, erecting such scaffolding or other necessary structures, making such
alterations, repairs, improvements or additions to the Premises or to the
Building Project as Lessor may reasonably deem necessary or desirable and the
erecting, using and maintaining of utilities, services, pipes and conduits
through the Premises and/or other premises as long as there is no material
adverse effect to Lessee's use of the Premises. Lessor may at any time place on
or about the Building (but not in the interior of the Premises) any ordinary
"For Sale" signs and Lessor may at any time during the last 90 days of the term
hereof place on or about the Premises any ordinary "For Lease" signs.
32.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the same.
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32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and safes,
and in the case of emergency to enter the Premises by any reasonably appropriate
means, and any such entry shall not be deemed a forceable or unlawful entry or
detainer of the Premises or an eviction. Lessee waives any charges for damages
or injuries or interference with Lessee's property or business in connection
therewith.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.
34. Signs. Lessee, at Lessee's sole cost and expense, shall have right to
install a sign adjacent to the main entry door, in a size and location to be
mutual agreed upon between Lessee and Lessor. Lessor shall have the right to
approve the fabrication and attachment details of any lessee signage, with such
approval not to be unreasonably withheld, conditioned or delayed.
34.1 Lessee shall have the right to place the firm's name, the name of
each of Lessee's professionals and other employees and the name(s) of any
subtenants on the building's directory board in the lobby of the building.
34.2 Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. Guarantor. In the event that there is a guarantor of this Lease, as named
in Section 1.12 hereof, said guarantor shall have the same obligations as Lessee
under this Lease, and shall execute a guaranty in the form and substance of
Exhibit E attached hereto, contemporaneous with Lessee's execution of this
Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Building Project.
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39. Options.
39.1 Definition. As used in this paragraph the work "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other space within the Building Project or other property of
Lessor or the right of first offer to lease other space within the Building
Project or other property of Lessor; (3) the right or option to purchase the
Premises or the Building Project, or the right of first refusal to purchase the
Premises or the Building Project or the right or first offer to purchase the
Premises or the Building Project, or the right or option to purchase other
property of Lessor, or the right of first refusal to purchase other property of
Lessor or the right of first offer to purchase other property of Lessor.
39.2 Options Personal. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee, except to an assignee which is a majority-
owned Affiliate or a New Owner. The Options, if any, herein granted to Lessee
are not assignable separate and apart from this Lease, nor may any Option be
separated from this Lease in any manner, either by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i) during
the time commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance
alleged in said notice of default is cured, or (ii) during the period of time
commencing on the day after a monetary obligation to Lessor is due from Lessee
and unpaid (without any necessity for notice thereof to Lessee) and continuing
until the obligation is paid, or (iii) in the event that Lessor has given to
Lessee three or more notices of default under paragraph 13.1(c), or paragraph
13.1(d), whether or not the defaults are cured, during the 12-month period of
time immediately prior to the time that Lessee attempts to exercise the subject
Option, (iv) if Lessee has committed any non-curable breach, including without
limitation those described in paragraph 13.1(b), or is otherwise in default of
any of the terms, covenants or conditions of this Lease.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force of effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1(d) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, (iii)
Lessor gives to Lessee three or more notices of default under paragraph 13.1(c),
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or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee
has committed any non-curable breach, including without limitation those
described in paragraph 13.1(b), or is otherwise in default of any of the terms,
covenants and conditions of this Lease.
39.5 Option to Renew/Fair Market Rental Rate
(a) Provided that an Event of Default by Lessee is not then in
existence under the Lease, either at the time of the exercise of the Options set
forth herein or at the time of the commencement of the Extension Periods
hereunder, Lessee may elect to extend the Term of this Lease ("Extension
Option") for all of the Premises for one (1) additional period of five (5) years
(the "Extension Period"), by delivering to Lessor not later than six (6) months
nor sooner than nine (9) months before the end of the initial Term of this Lease
a written notice (the "Option Notice") of such election. The Extension Period
shall commence on the day immediately following the last day of the Term and
shall be subject to all the terms and conditions of this Lease except that the
amount of the Letter of Credit shall be reviewed based on Lessee's then current
financial condition and the rent for the Extension Period shall be determined as
provided below.
(b) The Extension Options set forth herein are personal to Lessee
and any Affiliate of Lessee.
(c) The Base Rent for the Extension Period shall be the greater of
a) three and one-half (3.5%) over the then current rental rate, and b) 98% of
Fair Market Rental Rate (as hereinafter defined) as of the commencement of the
Extension Period, as long as no broker represents Lessee in the transaction.
(d) For purposes of the Lease, the term "Fair Market Rental Rate"
shall mean the annual amount per rentable square foot that Lessor has accepted
in current transactions between parties of comparable credit-worthiness, for
comparable space, for a comparable use, for a comparable period of time
("Comparable Transactions") in the Building, or if there are not a sufficient
number of Comparable Transactions in the Building, what a comparable landlord of
a Comparable Building with comparable vacancy factors would accept in Comparable
Transactions. In any determination of Comparable Transactions appropriate
consideration shall be given to the annual rental rates per rentable square
foot, the standard of measurement by which the rentable square footage is
measured, the ratio of rentable square feet to usable square feet, the type of
escalation clause (e.g., whether increases in additional rent are determined on
a net or gross basis, and if gross, whether such increases are determined
according to a base year or a base dollar amount expense stop), the extent of
Lessee's liability under the Lease, abatement provisions reflecting free rent
and/or no rent during the period of construction or subsequent to the
Commencement Date as to the space in question, length of the lease term, size
and location of premises being leased, building standard work letter and/or
other generally applicable conditions of tenancy (other than Tenant Improvement
Allowances) for such Comparable Transactions. The intent is that Lessee will
obtain the same rent and other economic benefits that Lessor would otherwise
give in Comparable Transactions and that Lessor will make, and receive the same
economic payments and concessions that Lessor would otherwise make, and receive
in Comparable Transactions.
Lessor shall determine the Fair Market Rental Rate by using its good faith
judgment. Lessor shall provide written notice of such amount within seven (7)
days (but in no event later than ten (10) days after Lessee provides the notice
to Lessor of its interest in exercising Lessee's option rights which require a
calculation of the Fair Market Rental Rate). Lessee shall have twelve (12) days
("Lessee's Review Period") after receipt of Lessor's notice of the new rental
within which to accept such rental or to reasonably object thereto in writing.
In the event Lessee objects, Lessor and Lessee shall attempt to agree upon such
Fair Market Rental Rate using their best good faith efforts. If Lessor and
Lessee fail to reach agreement within twelve (12) days
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following Lessee's Review ("Outside Agreement Date"), then each party shall
place in a separate sealed envelope their final proposal as to Fair Market
Rental Rate and such determination shall be submitted to arbitration in
accordance with Subsections (a) through (e) below. Failure of Lessee to so elect
in writing within Lessee's Review Period shall conclusively be deemed its
rejection of the Fair Market Rental Rate determined by Lessor.
In the event that Lessor fails to timely generate the initial written
notice of Lessor's opinion of the Fair Market Rental Rate which triggers the
negotiation period of this Lease, then Lessee may commence such negotiations by
providing the initial notice, in which event Lessor shall have fifteen (15) days
("Lessor's Review Period") after receipt of Lessee's notice of the new rental
within which to accept such rental. In the event Lessor fails to accept in
writing such rental proposed by Lessee, then such proposal shall be deemed
rejected, and Lessor and Lessee shall attempt in good faith to agree upon such
Fair Market Rental Rate using their best good faith efforts. If Lessor and
Lessee fail to reach agreement within fifteen (15) days following Lessor's
Review Period (which shall be, in such event, the "Outside Agreement Date" in
lieu of the above definition of such date), then each party shall place in a
separate sealed envelope their final proposal as to the Fair Market Rental Rate
and such determination shall be submitted to arbitration in accordance with
Subsections (a) through (e) below.
(a) Lessor and Lessee shall meet with each other within five (5)
business days of the Outside Agreement Date and exchange the sealed envelopes
and then open such envelopes in each other's presence. If Lessor and Lessee do
not mutually agree upon the Fair Market Rental Rate within five (5) business
days of the exchange and opening of envelopes, then, within ten (10) business
days of the exchange and opening of envelopes, Lessee shall decide whether or
not to exercise its option based on a rental rate determined by an independent
arbitrator.
(b) Should Lessee thereupon provide Lessor written notice
exercising its option pending decision on rental rate by an independent
arbitrator, Lessor and Lessee shall agree upon and jointly appoint a single
arbitrator who shall by profession be a real estate lawyer or broker who shall
have been active over the five (5) year period ending on the date of such
appointment in the leasing of commercial properties in the vicinity of the
Building. Neither Lessor nor Lessee shall consult with such broker or lawyer as
to his or her opinion as to Fair Market Rental Rate prior to the appointment.
The determination of the arbitrator shall be limited solely to the issue of
whether Lessor's or Lessee's submitted Fair Market Rental Rate for the Premises
is the closest to the actual Fair Market Rental Rate for the Premises as
determined by the arbitrator, taking into account the requirements of this
Lease. Such arbitrator may hold such hearings and require such briefs as the
arbitrator, in his or her sole discretion, determines is necessary. In addition,
Lessor or Lessee may submit to the arbitrator, with a copy to the other party,
within five (5) business days after the appointment of the arbitrator any market
data and additional information that such party deems relevant to the
determination of the Fair Market Rental Rate ("FMRR Data") and the other party
may submit a reply in writing within five (5) business days after receipt of
such FMRR Data.
(c) The arbitrator shall, within fifteen (15) days of his or her
appointment, reach a decision as to whether the parties shall use Lessor's or
Lessee's submitted Fair Market Rental Rate, and shall notify Lessor and Lessee
of such determination.
(d) The decision of the arbitrator shall be binding upon Lessor and
Lessee, except as provided below.
(e) If Lessor and Lessee fail to agree upon and appoint an
arbitrator, then the appointment of the arbitrator shall be made by the
Presiding Judge of the Los Angeles Superior Court, or, if he or she refuses to
act, by any judge having jurisdiction over the parties.
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(f) The cost of arbitration shall be paid by Lessor and Lessee
equally.
40. Security Measures - Lessor's Reservations.
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Building Project. Lessee assumes all responsibility for
the protection of Lessee, its agents, and invitees and the property of Lessee
and of Lessee's agents and invitees from acts of third parties. Nothing herein
contained shall prevent Lessor, at Lessor's sole option, from providing security
protection for the Building Project or any part thereof, in which event the cost
thereof shall be included within the definition of Operating Expenses, as set
forth in paragraph 4.2(b).
40.2 Without limiting its rights at law or elsewhere under this Lease,
Lessor shall have the following rights:
(a) To change the name, address or title of the Building Project or
building in which the Premises are located upon not less than 90 days' prior
written notice;
(b) To, at Lessee's expense, provide and install Building standard
graphics on the door of the Premises and such portions of the Common Areas as
Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any
business as long as such exclusive does not conflict with any rights expressly
given herein;
(d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Building Project or on pole signs in the Common Areas.
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the
Building or the Building Project or their name(s) in connection with Lessee's
business;
(b) Allow anyone, except in emergency, to go upon the roof of the
Building unless in connection with use of the roof for a Satellite Antenna
pursuant to paragraph 2.6.
41. Easements.
41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable, and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
42. Lessor's Right to Perform. Except as specifically provided otherwise in
this Lease, all
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covenants and agreements by Lessee under this Lease shall be performed by
Lessee at Lessee's sole cost and expense and without any abatement
or offset of rent. If Lessee shall fail to pay any sum of money (other than
Basic Rent) or perform any other act on its part to be paid or performed
hereunder and such failure shall continue for three (3) days with respect to
monetary obligations (or ten (10) days with respect to non-monetary obligations)
then, notwithstanding anything to the contrary provided elsewhere herein, after
Lessee's receipt of written notice thereof from Lessor, Lessor may, without
waiving or releasing Lessee from any of Lessee's obligations, make such payment
or perform such other act on behalf of Lessee. All sums so paid by Lessor and
all necessary incidental costs incurred by Lessor in performing such other acts,
together with interest at the Lease Rate, shall be payable by Lessee to Lessor
within five (5) days after demand therefor as additional rent. The foregoing
rights are in addition to any and all remedies available to Lessor upon Lessee's
default as described in paragraph 13.2.
43. Limitation on Lessor's Liability. Notwithstanding anything contained in
this Lease to the contrary, the obligations of Lessor under this Lease
(including any actual or alleged breach or default by Lessor) do not constitute
personal obligations of the individual partners, directors, officers or
shareholders of Lessor or Lessor's partners, and Lessee shall not seek recourse
against the individual partners, directors, officers or shareholders of Lessor
or Lessor's partners, or any of their personal assets for satisfaction of any
liability with respect to this Lease. In addition, in consideration of the
benefits accruing hereunder to Lessee and notwithstanding anything contained in
this Lease to the contrary, Lessee hereby covenants and agrees for itself and
all of its successor and assigns that the liability of Lessor for its
obligations under this Lease (including any liability as a result of any actual
or alleged failure, breach or default hereunder by Lessor), shall be limited
solely to, and Lessee's and its successors' and assigns' sole and exclusive
remedy shall be against, Lessor's interest in the Building Project and proceeds
therefrom, and no other assets of Lessor.
44. Toxic Materials.
(a) Definitions.
For purposes of this paragraph 44, "Hazardous Material" shall mean
any substance:
(i) the presence of which requires investigation or
remediation under any federal, state or local statute, regulation, ordinance,
order, action or policy; or
(ii) which is or becomes defined as a "hazardous waste" or
"hazardous substance" under any federal, state or local statute, regulation,
ordinance or amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. section 9601
et seq.) and or the Resource Conservation and-Recovery Act (42 U.S.C. section
6901 et seq.); or
(iii) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is
or becomes regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, the State of
California or any political subdivision thereof; or
(iv) the presence of which on the Premises, Building or
Building Project causes or threatens to cause a nuisance upon the Premises,
Building or Building Project or to adjacent properties or poses or threatens to
pose a hazard to the Premises, Building or Building Project or to the health or
safety of persons on or about the Premises, Building or Building Project; or
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(v) without limitation which contains gasoline, diesel fuel
or other petroleum hydrocarbons; or
(vi) without limitation which contains polychlorinated
bipheynols (PCBs), asbestos or urea formaldehyde foam insulation; or
(vii) which is or becomes defined as "medical waste" under the
Medical Waste Management Act (Health & Safety Code Sections 25015-25099.3).
For purposes of this paragraph 44, "Environmental Requirements" means
all applicable present and future statutes, regulations, rules, ordinances,
codes, licenses, permits, orders, approvals, plans, authorizations, concessions,
franchises and similar items, of all governmental agencies, departments,
commissions, boards, bureaus or instrumentalities of the United States, states
and political subdivisions thereof and all applicable judicial and
administrative and regulatory decrees, judgments and orders relating to the
protection of human health or the environment, including without limitation:
(i) all requirements, including but not limited to those
pertaining to reporting, licensing, permitting, investigation and remediation of
emissions, discharges, releases or threatened releases of "Hazardous Materials,"
chemical substances, pollutants, contaminants or hazardous or toxic substances,
materials or wastes whether solid, liquid or gaseous in nature, into the air,
surface water, groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
chemical substances, pollutants, contaminants or hazardous or toxic substances,
materials, or wastes, whether solid, liquid or gaseous in nature; and
(ii) all requirements pertaining to the protection of the
health and safety of employees or the public.
For purposes of this paragraph 44, "Environmental Damages" means all
claims, judgments, damages, losses, penalties, fines, liabilities (including
strict liability), encumbrances, liens, costs and expenses of investigation and
defense of any claim, whether or not such claim is ultimately defeated, and of
any good faith settlement of judgment, of whatever kind or nature, contingent or
otherwise, matured or unmatured, foreseeable or unforeseeable, including without
limitation reasonable attorneys' fees and disbursements and consultants' fees,
any of which are incurred at any time as a result of the existence on or after
the date upon which Lessee takes possession of the Premises (the "Possession
Date") of "Hazardous Material" upon, about, beneath the Premises, Building or
Building Project or migrating or threatening to migrate to or from the Premises,
Building or Building Project or the existence of a violation of "Environmental
Requirements" pertaining to the Premises, Building or Building Project,
regardless of whether the existence of such "Hazardous Material" or the
violation of "Environmental Requirements" arose prior to the present ownership
or operation of the Premises, Building or Building Project, and including
without limitation:
(i) damages for personal injury, or injury to property or
natural resources occurring upon or off of the Premises, Building or Building
Project, foreseeable or unforeseeable, including, without limitation, lost
profits, consequential damages, the cost of demolition and rebuilding of any
improvements on real property, interest and penalties including but not limited
to claims brought by or on behalf of employees of Lessee, with respect to which
Lessee waives any immunity to which it may be entitled under any industrial or
worker's compensation laws;
(ii) fees incurred for the service of attorneys, consultants,
contractors, experts, laboratories and all other costs incurred in connection
with the investigation
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or remediation of such "Hazardous Materials" or violation of "Environmental
Requirements" including, but not limited to, the preparation of any feasibility
studies or reports or the performance of any cleanup, remedial, removal,
response, abatement, containment, closure, restoration or monitoring work
required by any federal, state or local governmental agency or political
subdivision or reasonably necessary to make full economic use of the Premises,
Building or Building Project or any other property or otherwise expended in
connection with such conditions, and including without limitation any attorneys'
fees, costs and expenses incurred in enforcing this Lease or collection of any
sums due hereunder;
(iii) liability to any third person or governmental agency to
indemnify such person or agency for costs expended in connection with the items
referenced in subparagraph (ii) herein; and
(iv) diminution in the value of the Premises, Building or
Building Project, and damages for the loss of business and restriction on the
use of or adverse impact on the marketing of rentable or usable space or of any
amenity of the Premises, Building or Building Project.
(b) Lessee's Obligations.
Lessee, at its sole cost and expense, shall comply with all
Environmental Requirements relating to the storage, use and disposal of all
Hazardous Materials, including those materials identified in Sections 66680
through 66685 of Title 22 of the California Administrative Code, Division 4,
Chapter 30 ("Title 22") as the same may be amended from time to time. If Lessee
does store, use or dispose of any Hazardous Materials, Lessee shall notify
Lessor in writing at least ten (10) days prior to the first appearance of such
materials on the Premises, Building or Building Project, and Lessor shall have
the right to disapprove of Lessee's use thereof on the Premises (provided that
Lessor's failure to disapprove thereof shall not constitute Lessor's approval
thereof or excuse Lessee from complying with the terms of this paragraph 45),
and Lessee's failure to so notify Lessor shall constitute a default under this
Lease. Lessee shall be solely responsible for and shall protect, defend,
indemnify, and hold Lessor, its agents and contractors harmless from and against
all Environmental Damages arising out of or in connection with the storage, use
and disposal of Hazardous Materials by Lessee, its officers, employees, agents,
representatives, servants, sublessees, concessionaires, licensees, contractors,
invitees or permittees. If the presence of Hazardous Materials on the Premises,
Building or Building Project caused or permitted by Lessee results in
contamination or deterioration of water or soil resulting in a level of
contamination greater than the levels established by any governmental agency
having jurisdiction over such contamination, then Lessee shall, at its sole cost
and expense, promptly take any and all action necessary to clean up such
contamination if required by law or as a condition to the issuance or continuing
effectiveness of any governmental approval which relates to the use of the
Premises, Building or Building Project. If at any time prior to the expiration
of the Lease term, Lessor shall reach a reasonable good faith determination that
Lessee or its officers, employees, agents, representatives, servants,
sublessees, concessionaires, Licensees, contractors, invitees or permittees have
at any time violated any Environmental Requirements, discharged any Hazardous
Material onto the Premises, Building or Building Project, or surrounding areas
or otherwise subjected Lessor or the Building Project to liability for
Environmental Damages, then Lessor shall have the right to require Lessee to
conduct appropriate tests of water and soil and to deliver to Lessor the result
of such tests to demonstrate that no contamination in excess of legally
permitted levels has occurred as a result of Lessee's use of the Premises,
Building or Building Project. If the presence of Hazardous Materials on the
Premises, Building or Building Project is caused or permitted by Lessee or its
officers, employees, agents, representatives, servants, sublessees,
concessionaires, licensees, contractors, invitees or permittees such that Lessor
or Lessee becomes obligated to conduct the necessary clean-up of such
contamination as required above, then, Lessee shall further be solely
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responsible for, and shall protect, defend, indemnify and hold Lessor, its
agents and contractors harmless from and against all claims, costs and
liabilities, including actual attorneys' fees, expert witness fees and costs,
arising out of or in connection with any removal, cleanup and restoration work
and materials required hereunder to return the Premises, Building or Building
Project and any other property of whatever nature to conditions which existed
prior to Lessee's use thereof and which are within acceptable levels according
to all Environmental Requirements or any other Federal, State or local
governmental requirements. Lessee's obligations hereunder shall survive the
termination of this Lease.
45. Authority. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of such
entity, represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
46. Conflict. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the computer-generated, typewritten or handwritten provisions,
if any, shall be controlled by the computer-generated, typewritten or
handwritten provisions.
47. No Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
48. Lender Modification. Lessee agrees to make such reasonable modifications to
this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Building
Project, provided that the term and net rental hereunder shall not be affected
thereby.
49. Multiple Parties. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.
50. Work Letter. This Lease is supplemented by that certain Work Letter of even
date executed by Lessor and Lessee attached hereto as Exhibit C and incorporated
herein by this reference.
51. Attachments. Attached hereto are the following documents which constitute a
part of this Lease:
Exhibit A: Description of the Premises
Exhibit B: Rules and Regulations
Exhibit C: Work Letter
Exhibit C-1: Lessee's Space Plans and Specifications
Exhibit D: Specifications for Satellite Antenna
Exhibit E: Letter of Credit
Exhibit F: Satellite Antenna Placement
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
<TABLE>
<CAPTION>
LESSOR LESSEE
<S> <C>
DOWNTOWN ENTERTAINMENT ASSOCIATES, ENCODING.COM, INC.
a California limited partnership a Delaware corporation
/s/ Steaven K. Jones /s/ Larry Culver
By________________________________________ By_____________________________________________
Steaven K. Jones Larry Culver
General Partner Chief Financial Officer
Steaven Jones Family Limited Partnership II encoding.com
Executed at Executed at
Kirkland, WA
__________________________________________ _______________________________________________
on________________________________________ on_____________________________________________
Address: Address:
__________________________________________ 414 Olive Way, Suite 300
__________________________________________ Seattle, Washington 98101
__________________________________________ _______________________________________________
</TABLE>
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<PAGE>
EXHIBIT A
Description of the Premises
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EXHIBIT B
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
Dated: November 9, 1999
By and Between DOWNTOWN ENTERTAINMENT ASSOCIATES, as Lessor,
and ENCODING.COM, INC., A Delaware corporation, as Lessee
GENERAL RULES -- IN ALL CASES, CONTRARY PROVISIONS
IN THE LEASE SHALL GOVERN OVER INCONSISTENT
PROVISIONS IN THESE RULES AND REGULATIONS
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in
good faith judges to be a threat to the safety, reputation, or property of the
Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Building
Project
4. Lessee shall not keep animals or birds within the Building Project,
and shall not bring bicycles, motorcycles or other vehicles into areas not
designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Except as is specifically permitted by the terms of the Lease, no
sign, advertisement of notice shall be displayed, printed or affixed on or to
the Premises or to the outside or inside of the Building or so as to be visible
from outside the Premises or Building without Lessor's prior written consent.
Lessor shall have the right to remove any non-approved sign, advertisement or
notice, without notice to and at the expense of Lessee, and Lessor shall not be
liable in damages for such removal. All approved signs or lettering on doors and
walls shall be printed, painted, affixed or inscribed at the expense of Lessee
by Lessor or by a person selected by Lessor and in a manner and style acceptable
to Lessor.
7. The sidewalks, halls, passages, exits, entrances, elevators and
stairways and other portions of the common areas shall not be obstructed by
Lessee or used for any purpose other than for ingress and egress from Lessee's
Premises.
8. Toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein.
9. Lessee shall not overload the floor of the Premises or mark, drive
nails, screw or drill into the partitions, ceilings or floor or in any way
deface the Premises nor shall Lessee suffer
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or permit any thing in or around the Premises or Building that causes excessive
vibration or floor loading in any part of the Building Project.
10. Lessor shall have the right to prescribe the weight, size and position
of all safes and other heavy equipment brought into the Building. The times and
manner of moving the same in and out of the Building shall be prescribed by
Lessor, and all such moving must be done under the supervision of Lessor. Lessor
may exclude from the Building any such heavy or bulky equipment or articles, the
weight of which may exceed the floor load for which the Building is designed, or
such equipment or articles as may violate any provisions of the Lease of which
these rules and regulations are a part. Lessee shall not use any machinery or
other bulky articles on the Premises, even though its installation may have been
permitted, which may cause any noise, or jar, or tremor in the floors or walls,
or which by its weight might injure the floor of the Building. Safes or other
heavy equipment shall, as considered necessary by Lessor, stand on a platform of
such thickness as is necessary to properly distribute the weight.
11. Lessee shall not use or keep in the Premises, Building or Building
Project any kerosene, gasoline or inflammable, explosive or combustible fluid or
material, or use any method of heating or air-conditioning other than that
supplied by Lessor.
12. Lessee shall not lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved by Lessor.
13. Lessee shall cooperate with Lessor in obtaining maximum effectiveness
of the cooling system by closing drapes when the sun's rays fall directly on
windows of the Premises. Lessee shall not obstruct, alter, or in any way impair
the efficient operation of Lessor's heating, ventilating and air-conditioning
system. Lessee shall not tamper with or change the setting of any thermostats or
control valves.
14. The Premises shall not be used for manufacturing or for the storage of
merchandise. Lessee shall not, without Lessor's prior written consent, occupy or
permit any portion of the Premises to be occupied or used for the manufacture or
sale of liquor or tobacco in any form, or as a barber or manicure shop, or as an
employment bureau. The Premises shall not be used for lodging or sleeping or for
any improper, objectionable or immoral purpose. No auction shall be conducted on
the Premises.
15. Lessee shall not make, or permit to be made, any unseemly or
disturbing noises, or disturb or interfere with occupants of the Building, the
Building Project or neighboring buildings or premises or those having business
with it by the use of any musical instrument, radio, phonographs or unusual
noise, or in any other way.
16. No bicycles, vehicles or animals of any kind shall be brought into or
kept in or about the Premises, and no cooking shall be done or permitted by any
lessee in the Premises, except that the preparation of coffee, tea, hot
chocolate and similar items, and the use of a microwave for reheating items and
cooking popcorn and the like, for lessees, their employees and visitors shall
be permitted. No lessee shall cause or permit any unusual or objectionable odors
to be produced in or permeate from or throughout the Premises.
17. The sashes, sash doors, skylights, windows and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by any lessee, nor shall any
bottles, parcels or other articles be placed on the windowsills.
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<PAGE>
18. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any lessee, nor shall any changes be made in existing
locks or the mechanisms thereof unless Lessor is first notified thereof, gives
written approval, and is furnished a key therefor. Each lessee must, upon the
termination of its tenancy, give the Lessor all keys of stores, offices, or
toilets and toilet rooms, either furnished to, or otherwise procured by, such
lessee, and in the event of the loss of any keys so furnished, such lessee shall
pay Lessor the cost of replacing the same or of changing the lock or locks
opened by such key if Lessor shall deem it necessary to make such change.
19. Lessor shall have the right to prohibit any advertising by any lessee
which, in Lessor's opinion, tends to impair the reputation of the Building or
the Building Project or its desirability as an office building and upon written
notice from Lessor any lessee shall refrain from and discontinue such
advertising.
20. Any person employed by any lessee to do janitorial work shall, while
in the Building or the Building Project and outside of the Premises, be subject
to and under the control and direction of the office of the Building Project
(but not as an agent or servant of Lessor, and the lessee shall be responsible
for all acts of such persons).
21. No air conditioning unit or other similar apparatus shall be installed
or used by any lessee without the prior written consent of Lessor. Lessee shall
pay the cost of all electricity used for air conditioning in the Premises if
such electrical consumption exceeds normal office requirements or is
attributable to after hours use, regardless of whether additional apparatus is
installed pursuant to the preceding sentence.
22. There shall not be used in any space, or in the public halls of the
Building, either by any lessee or others, any hand trucks except those equipped
with rubber tires and side guards.
23. All electrical ceiling fixtures hung in offices or spaces along the
perimeter of the Building must be florescent and/or of a quality, type, design
and bulb color approved by Lessor.
24. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
25. Lessee shall not deface the walls, partitions or other surfaces of
the Premises or Building Project.
26. Furniture, significant freight and equipment shall be moved into or
out of the Building only with Lessor's knowledge and consent, and subject to
such reasonable limitations, techniques and timing, as may be designated by
Lessor. Lessee shall be responsible for any damage to the Building Project
arising from any such activity.
27. Lessee shall not employ any service or contractor for services or work
to be performed in the Building, except as approved by Lessor.
28. Lessor reserves the right to close and lock the Building on Saturdays,
Sundays and legal holidays, and on other days between the hours of 8 P.M. and
6.30 A.M. of the following day, or such other hours as Lessor may determine. If
Lessee uses the Premises during such periods (which shall require advance
written notice to Lessor and Lessor's prior written consent), Lessee shall be
responsible for securely locking any doors it may have opened for entry and
shall be required to pay such fee for services as may be charged by Lessor to
other tenants of the Building.
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<PAGE>
29. No window coverings, shades or awnings shall be installed or used by
Lessee.
30. No Lessee, employee or invitee shall go upon the roof of the Building.
31. Lessee shall not suffer or permit smoking or carrying of lighted
cigars or cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
32. Lessee shall not use any method of heating or air conditioning other
than as provided by Lessor.
33. Lessee shall not install, maintain or operate any vending machines
upon the Premises without Lessor's written consent.
34. The Premises shall not be used for lodging or manufacturing.
35. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
36. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
37. Lessee assumes all risks from theft or vandalism and agrees to keep
its Premises locked as may be required.
38. Lessor reserves the right to make such other reasonable
non-discriminatory rules and regulations, not in conflict with Lessee's rights
and obligations under the Lease, as it may from time to time deem necessary
for the appropriate operation and safety of the Building Project and its
occupants. Lessee agrees to abide by these and such rules and regulations.
39. All doors opening onto public corridors shall be kept closed, except
when being used for ingress and egress.
40. The requirements of lessees will be attended to only upon application
to the Office of the Building.
41. Canvassing, soliciting and peddling in the Building are prohibited and
each lessee shall cooperate to prevent the same.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer
than full size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized
Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges.
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<PAGE>
Lessee will pay such replacement charge as is reasonably established by Lessor
for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking spaces
from floor to floor, within one floor, and/or to reasonably adjacent offsite
locations(s), and to reasonably allocate them between compact and standard size
spaces, as long as the same complies with applicable laws, ordinances and
regulations.
6. Users of the parking area will obey all posted signs and park only in
the areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.
8. Validation, if established, will be permissable only by such method or
methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the
parking structure or Common Areas is prohibited.
10. Lessee shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations, laws
and agreements.
11. Lessor reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a license
only and no bailment is intended or shall be created hereby.
13. Lessor or its agent may tow or otherwise remove any vehicles which
are parked illegally in the parking areas, which are parked in the parking areas
for more than seventy-two (72) consecutive hours without Lessor's prior written
consent or which constitute a nuisance or annoyance to other users of the
Building Project or parking areas. Such towing shall be at the sole cost and
expense of the lessee which is in any way responsible for the presence of such
vehicle in the parking area (for example, if the vehicle is parked by any
particular lessee's invitee, customer or employer, such lessee shall be
responsible for the cost of towing such vehicle).
page 46
<PAGE>
EXHIBIT C
WORK LETTER TO STANDARD OFFICE LEASE
Dated: November 9, 1999
By and Between: DOWNTOWN ENTERTAINMENT ASSOCIATES, as Lessor,
and ENCODING.COM, INC. a Delaware corporation, as Lessee
1. The Premises shall be constructed by Lessor, with Lessor's contribution
of a Tenant Improvement Allowance, as outlined below.
2. Completion of Tenant Improvements.
Lessor shall construct and complete the Premises substantially in
accordance with the plans and specifications prepared by Lessor's space planner,
attached hereto as Exhibit C-1 (the "Tenant Improvements"). The parties hereto
covenant and agree that, in lieu of the rent abatement provided in Section 4.4
hereof, Lessee may elect, no later than two (2) weeks following the date of
Substantial Completion, to expend any unused Tenant Improvement Allowance on
additional improvements to the Premises. If Lessee makes such election, Lessee
shall be responsible for making such improvements and shall submit receipts or
other proof of the expenditures for such improvements to Lessor. Lessor shall,
no later than thirty (30) days following its receipt of such proof reimburse
Lessee for the same up to the aggregate amount of any unused Tenant Improvement
Allowance.
3. Preparation of Plans and Specifications
Lessor has contracted directly with a space planner to prepare space
plans for the Tenant Improvements. All space planning costs (including but not
limited to working drawings, engineering plan costs and permit fees) shall be
part of the Tenant Improvement Allowance outlined below. Said space planning
costs shall not exceed $4,000.00 (Four Thousand Dollars).
4. Construction.
Lessor shall contribute a Tenant Improvement Allowance of Ninety Seven
Thousand Three Hundred Ten and 92/100 Dollars ($97,310.92), or $25 per usable
square foot, toward the cost of the Tenant Improvements. Lessor shall have the
right to use any portion of the Tenant Improvement Allowance for the hard cost
of tenant improvements. Space planning and design, construction fee, built-in
furniture and telecommunications/computer cabling shall not exceed Twenty
Thousand dollars ($20,000.00). If Lessee makes any changes to the plans and
specifications, Lessee shall be responsible for any and all costs exceeding the
Tenant Improvement Allowance. Upon receipt of Lessee's request to change said
plans and specifications, Lessee must submit a signed change order and the total
cost of the change (in excess of the Tenant Improvement Allowance) to Lessor.
Lessor's contractor will submit bi-weekly draws to Lessor. Upon Lessee's
approval, Lessor will pay the draw, less a ten (10%) percent reserve until the
lien period has expired, out of the Tenant Improvement Allowance within fourteen
working days, based on the percentage of the Tenant Improvements completed.
Lessor will pay Lessor's contractor the remaining reserve funds upon expiration
of the lien period. Lessee shall not be entitled to receive, as a cash payment,
credit against rent or otherwise, any portion of the Tenant Improvement
Allowance not actually expended for the cost of the Tenant Improvements.
page 47
<PAGE>
Lessor shall construct said Tenant Improvements in a good and workmanlike
manner of good and sufficient materials and in accordance with said approved
final plans and specifications, a building permit from the City of Santa Monica,
and all applicable rules, regulations, laws or ordinances.
As Lessor is engaged as project manager, Lessor shall charge a $1 per
usable square foot fee for the supervision and/or overhead associated with the
Tenant Improvements.
Lessor shall cause Lessor's contractor(s) to provide with certificate(s) of
insurance showing an insurance policy with liability and workmen's compensation
insurance of no less than $2 million and naming Lessor as additional insured.
Lessee shall pay all invoices promptly and shall cause no liens to be placed on
the Building Project; provided, however, that Lessee will not be required to pay
for any construction or related costs until all of the Tenant Improvement
Allowance has been expended (subject to the dollar limitations of this paragraph
4).
5. Completion.
5.1 Lessor has obtained a building permit to construct the Tenant
Improvements.
5.2 The term "Substantial Completion," as used in the Lease and this Work
Letter, is hereby defined to mean attainment of all of the following:
(a) The City of Santa Monica shall have made a final inspection of
the Tenant Improvements and authorized a final release of restrictions on the
use of public utilities in connection therewith, and the Tenant Improvements
shall have been completed so that the only incomplete items are minor or
insubstantial details of construction, mechanical adjustments, or finishing
touches like touch-up plastering or painting;
(b) Lessee, its employees, agents, and invitees have ready access to
the Building and Premises through the lobby, entranceways, elevators, and
hallways;
(c) The decoration, fixtures, and equipment to be installed by Lessor
as outlined in the space plan are installed and in good operating order;
(d) The following items are installed and in good operating order:
(1) building lobby, (ii) hallways on floor on which Premises are located
(including walls, flooring, ceiling, lighting, etc.), (iii) elevators, HVAC,
utilities, and plumbing serving the Premises, and (iv) the doors and hardware;
and
(e) The Premises are broom clean.
5.3 Should Lessee make any changes to the plans and specifications
resulting in a delay to the construction ("Lessee's Delay"), each said Delay
shall not result in a delay of the Commencement Date.
6. Taking of Possession of Premises.
Lessee may enter the Premises after the Commencement Date and prior to
Substantial Completion for the installation of telephones, computer cabling and
other equipment, as long as said installation does not interfere with the
construction thereof.
page 48
<PAGE>
7. Warranties.
To the extent permitted thereunder, Lessor shall allow Lessee to avail
itself of the benefit of any warranties given to Lessor in connection with work
to the Leased Premises performed by, or at the direction of, Lessor.
page 49
<PAGE>
E-Music.com 6/30/99 Confidential Quotation
Exhibit 10.22
Note: Portions of this exhibit indicated by "[*]" are subject to a confidential
treatment request, and have been omitted from this exhibit. Complete, unredacted
copies of this exhibit have been filed with the Securities and Exchange
Commission as part of this company's confidential treatment request.
[LOGO OF ENCODING.COM]
[*]
Emusic.com, Inc.
Encoding.com would like to validate our strong desire to have a strategic and
long-term relationship with Emusic.com by delivering what we believe to be a
very compelling proposal. The below proposal is intended to encompass all of
Emusic's encoding for a period of [*] and is designed with a full partnership in
mind. Please note that the pricing you are being offered here is confidential to
E-music and the terms herein should not be disclosed to any third party.
The terms of this agreement are good until the last day of June 1999.
You will notice in the pricing section that we have given you [*] prices for the
encoding of [*] CDs initially and all ongoing volumes for a period of [*].
Also pricing for Windows Media encoding has been added here as well at a very
reasonable rate.
Encoding Requirements
Please review this document carefully and let me know if there are sections that
are unclear or if we are missing some pressing details.
The following are your requirements, as we understand them.
. Support for the highest quality encoding from [*] format into [*] formats.
Encoding of [*] CDs into [*] formats, [*]. Possible support for [*].
. [*] files will be encoded using the [*].
. [*] samples will be encoded into [*].
. [*] samples will be captured [*] seconds into a song unless otherwise
requested. [*].
. Scanning of cover art into at least [*] formats. [*] at a frame size to be
determined.
. Receive media from labels and generate an electronic package slip for E-
music.com for rectification purposes.
. Tracking of all media that is shipped to encoding.com without a packing slip
by our internal tracking number, UOC and album title.
. Data entry for all [*] CDs to be used for meta data entry, naming, and cross
reference to web site.
. Deliveries of media back to E-music.com [*].
. Require dedicated capacity in the encoding.com lab in an ongoing capacity for
projects that can not yield the normal 2-4 week lead-time.
[*] Confidential Treatment Request
Quotation valid through June 1999
<PAGE>
E-Music.com 6/30/99 Confidential Quotation
Digitization & Encoding Services; Data Work, and Scanning
Encoding
encoding.com is in a phase in our company culture where the partnerships we make
are as important as anything. By this we are prepared to jump into this
partnership with both feet and offer you the same strategic pricing for your
initial encoding project as all ongoing encoding work.
Please find below a brief description of the two opportunities available to you.
Pricing Short: Please also see contingencies below.
Straight customer/client relationship.
-----------------------------------------------------------------
Encoding- MP3 and RA Scanning Data
-----------------------------------------------------------------
Initial [*]CDs [*] [*] [*]
-----------------------------------------------------------------
1-year ongoing [*] [*] [*]
-----------------------------------------------------------------
Earn out opportunity: with the below opportunity you can save upwards of [*] off
the initial encoding project for a [*] royalty on all online sales of media we
encoded for a period of [*].
-----------------------------------------------------------------
Encoding- MP3 and RA Scanning Data
-----------------------------------------------------------------
Initial [*] CDs [*] [*] [*]
-----------------------------------------------------------------
1-year ongoing [*] [*] [*]
-----------------------------------------------------------------
We are not concerned with which option you choose, but we did want to give you a
way to defer your pricing even more if appropriate.
Initial [*]CDs (material):
The following are conditions of this very strategic pricing for your initial [*]
CDs.
. Work order is executed and a PO generated for the initial amount by June 30th
1999.
. Jointly Sponsored press release announcing project and partnership
. Minimum annual commitment of [*] CDs for a period of 1-year. This will be
dedicated capacity that will be priority access for E-Music.
. Link exchange where appropriate
. Possible other promotional or marketing events
. [*] downloads for all encoding.com employees for a period of 6-months.
Specifics:
Set-up per CD: [*]
Database integration: [*]
Material Warehousing
6 months from 1st shipment [*]
Encoding cost per track/song
[*] file: [*]
[*] [*]
Total for [*] Tracks: [*]
[*] tracks per CD on average
We will work with you over the next week to put in place a delivery schedule for
this deployment.
*If not executed by June 30th 1999 the price of [*] will apply for per track
encoding.
[*] Confidential Treatment Request
Quotation valid through June 1999
<PAGE>
E-Music.com 6/30/99 Confidential Quotation
Data Entry
Encoding.com has put in place a very robust data entry process and management
software. Over the past year we have created custom databases for a number of
clients with similar needs as your own. The following is our understanding of
your data entry requirements and the pricing that we are able to offer to
implement these. [*] The following are based on our ability to enter data for
[*] CDs per hour per data entry employee.
Please also note that we have looked in the past at the use of the [*] as a tool
for propagating meta fields in our clients databases. [*].
Caveat: When encoding.com is given an electronic packing slip for the CDs we
are receiving the data entry costs associated with those CDs will be [*] per CD.
Fields to be captured:
[*]
Format for export: [*]
Cost per CD: [*]
Total Costs for [*] CDs: [*]*
* this number will be less if [*]
Scans
Encoding.com has the ability to scan cover art for E-Music.com as part of our
normal fulfillment process. For this project we will capture [*] formats as
follows:
[*]
Costs per scan: [*]
Costs for [*] scans: [*]
List price is [*] and [*] additional format..
[*] Confidential Treatment Request
Quotation valid through June 1999
<PAGE>
E-Music.com 6/30/99 Confidential Quotation
We will deliver the image files to you on CDR or DLT depending on your
requirements. Sometimes we have found that it is easier to manage the audio
files on CDR depending on your usage. We will work with you on this.
Fulfillment and Delivery
Fulfillment and delivery is how we return your media to you or to your hosting
provider. The options here are via DAT, CDR, or FTP. We don't recommend FTP
because of timeliness for this amount of data.
DLT delivery media for [*] CDs worth of compressed media and cover art.
Approximately [*] of data to be delivered
[*] can fit on an individual DLT
[*] needed; @ [*] per DLT
Delivery Costs: [*]
CDR Delivery: [*]
We will work with your operations teams to put in place a structure for how we
deliver, store and retrieve media to and for E-music.
Summary:
We are very interested in working with you on this project. We believe that we
are the only choice in the industry that can handle these volumes of audio
encoding. Please let me know what other information you need from me and I will
work to provide it. These prices are valid through June 1999.
Initial [*] CD encoding project
---------------------------------------------------------------------
Item Count Your Costs Total
---------------------------------------------------------------------
Encoding [*] Songs into [*] [*] [*]
---------------------------------------------------------------------
[*] Encoding [*] [*]
---------------------------------------------------------------------
Data Entry [*] CDs ([*]fields) [*] [*]
---------------------------------------------------------------------
Scans [*] [*] [*]
---------------------------------------------------------------------
Delivery [*] DLT [*] [*]
---------------------------------------------------------------------
CDR ongoing [*]
---------------------------------------------------------------------
Total Project [*]
Costs
---------------------------------------------------------------------
1-year volume commitment: Additional Volume.
---------------------------------------------------------------------
Item Count Your Costs Total
---------------------------------------------------------------------
Encoding [*] songs into [*] [*] [*]
---------------------------------------------------------------------
[*] encoding [*] [*]
---------------------------------------------------------------------
Data Entry [*] CDs ([*]fields) [*] [*]
---------------------------------------------------------------------
Scans [*] [*] [*]
---------------------------------------------------------------------
Delivery [*] DLT [*] [*]
---------------------------------------------------------------------
CDR ongoing [*]
---------------------------------------------------------------------
Total Project [*]
Costs
---------------------------------------------------------------------
[*] Confidential Treatment Request
Quotation valid through June 1999
<PAGE>
E-Music.com 6/30/99 Confidential Quotation
* Contingent on this work-order being signed by June 30th 1999. Otherwise the
ongoing pricing schedules will be applied.
Ongoing Work:
Contingent on the signing of this work agreement we will work with Emusic.com to
put in place a structure and a process for handling all mass ongoing encoding
work for Emusic.com as well as how we will reserve dedicated lab time. In
signing this document Emusic.com asserts its willingness to enter into an
agreement of this nature.
The following is the pricing that we are able to offer Emusic.com for this
ongoing work as stated earlier.
---------------------------------------------------------------------
Encoding- MP3, RA, Scanning Data
and Windows Media
---------------------------------------------------------------------
[*] ongoing [*] [*] [*] per CD
---------------------------------------------------------------------
Ongoing volumes are estimated at [*] tracks [*].
Terms and Conditions
The primary terms of our agreement require that you guarantee to have the rights
to the content and we agree not to use the content for other purposes without
your approval. We require a [*] deposit on all contracted work. The balance will
be invoiced monthly against the past months work.
1. CONTROLLING TERMS. Pricing is valid until June 31st 1999 and are valid for
a period of one year from the execution of this document. The terms and
conditions of sale contained herein shall apply to all provisions of encoding
services and related services by encoding.com, Inc. ("encoding.com") and to all
purchase orders or other offers accepted by encoding.com related thereto
(collectively, the "Service"). These terms and conditions may in some instances
conflict with or add to some of the terms and conditions affixed to the purchase
order or the procurement document issued by the Customer. In such case, the
terms and conditions contained herein shall govern exclusively and ACCEPTANCE OF
CUSTOMER'S ORDER IS EXPRESSLY CONDITIONED UPON CUSTOMER'S ACCEPTANCE OF THE
TERMS AND CONDITIONS CONTAINED HEREIN irrespective of whether the Customer
accepts these conditions by oral or written acknowledgment, by implication or by
acceptance of or payment for the provision of the Service ordered hereunder
based on the content, materials and/or elements (collectively, the "Content")
provided to encoding.com by Customer.
2. TERMS OF PAYMENT. Payment must be made in US dollars and may be made in
cash, cashier's check, money order, travelers checks, check drawn on local bank
or Visa / MasterCard. All COD orders must be paid for and picked up Monday
through Friday between the hours of 9:00 AM and 5:00 PM. Credit terms are net 15
days. Interest at the maximum rate allowed by law will be charged on all
accounts not paid within 30 days unless previous arrangements have been made
with the encoding.com. ANY CLAIMS FOR ADJUSTMENT IN CONNECTION WITH AN INVOICE
MUST BE PRESENTED IN WRITING WITHIN 10 DAYS OF THE DATE OF THE INVOICE IN
QUESTION.
3. PRICES; LIENS. Prices for the Service are those shown on the face of this
acknowledgment, provided, however, that if such prices are based on the purchase
of a minimum quantity of Service and Customer fails to purchase such minimum
quantity, encoding.com has the right to collect from Customer the difference
between the price paid by Customer for the Service purchased and encoding.com's
standard price for such Service in quantity actually purchased by Customer.
encoding.com shall have a lien and security interest on tapes, CDs, files and
other property delivered by Customer to encoding.com and/or made by encoding.com
therefrom for the balance of any account due us by the Customer, including
collection and attorney's fees. Customer hereby authorizes encoding.com to
execute and file, on Customer's behalf, a financing or other statement
evidencing this security interest. When necessary, Customer agrees to execute
necessary documentation for perfecting such security interest.
4. SHIPPING. If encoding.com provides shipping and handling services for
Customer's materials, surcharges will apply. Shipping and delivery dates are
approximate. In no event, for any reason whether or not beyond encoding.com's
control, shall encoding.com be liable to Customer or any other party for any
losses, damages or liability for delay in delivery of shipped materials; nor
shall any delay in delivery of shipped materials constitute grounds for
cancellation of Customer's work order.
5. DELIVERY. The delivery dates set forth on this acknowledgment are
approximate only, and encoding.com is not liable for any damages to Customer,
nor shall encoding.com be in breach of its obligations to the Customer, because
of any delivery made within a reasonable time after the stated delivery date.
encoding.com may by written notice to Customer change any delivery date, and
such date shall become the agreed upon delivery date unless Customer objects to
such date in writing delivered to encoding.com within ten (10) days of receipt
of encoding.com's notice. encoding.com shall not be liable for any late
delivery caused by the failure of the Customer to provide in a timely manner any
necessary information to affect such delivery.
6. FORCE MAJEURE. encoding.com is not liable for any failure to deliver, or
delay in the delivery of, any Service due to a cause beyond its control,
including but not limited to acts of God, fires, typhoons, earthquakes, labor
disputes, governmental actions or inability to obtain materials, components,
energy, encoding facilities, or transportation. In the event of any such delay,
the data of delivery or performance hereunder shall be extended by a period
equal to the time lost by reason of such delay. If encoding.com's production is
curtailed for any of the above reasons, encoding.com may allocate its production
among its various customers. Such allocation shall be in a commercially fair
and reasonable manner.
7. STORAGE. It is the Customer's responsibility to arrange for removal of
materials from encoding.com at the completion of each project. At the
Customer's request, encoding.com will store tapes and Content for a maximum of
60 days. encoding.com reserves the right to ship tapes and/or Content to the
Customer, freight collect, at the conclusion of the 60 day period or to charge a
storage fee or to otherwise dispose of the materials.
8. RIGHT TO REFUSE SERVICE. encoding.com reserves the right to refuse service
and/or process any Content which encoding.com, in its sole discretion, deems
unlawful, pornographic, degrading, likely to incite prejudice or passion or
otherwise inappropriate.
9. CUSTOMER WARRANTIES. Customer represents and warrants that (a) Customer has
sufficient rights in the Content to use it in the manner contemplated by this
acknowledgment, (b) the Content does not infringe upon or violate any patent,
copyright, trade secret, trademark or other intellectual property right of any
third party or any obscenity law or other applicable law, rule or regulation in
any jurisdiction in which the Content may be viewed or retrieved, (c)
encoding.com's
[*] Confidential Treatment Request
Quotation valid through June 1999
<PAGE>
E-Music.com 6/30/99 Confidential Quotation
provision of the Service and/or hosting of the Content hereunder
will not infringe upon or violate any patent, copyright, trade secret, trademark
or other intellectual property right of any third party, including but not
limited to any and all performance license rights, mechanical license rights,
synchronization license rights and rights under the Digital Performance Right in
Sound Recordings Act of 1995, or any obscenity law or other applicable law, rule
or regulation in any jurisdiction in which the Content can be viewed or
retrieved, and (d) the Content and encoding.com's provision of the Service on
behalf of Customer is not for any illegal, obscene, offensive or immoral
purpose.
10. ENCODING.COM LIMITED WARRANTY; LIMITED LIABILITY; EXCLUSION OF
CONSEQUENTIAL DAMAGES. It is understood and agreed that the Customer's
materials are transported, received, processed, used and stored at Customer's
risk. ENCODING.COM SHALL NOT BE LIABLE FOR ANY LOST PROFITS OR OTHER DAMAGES
CAUSED BY THE LOSS, DAMAGE OR DESTRUCTION OF MATERIALS BELONGING TO THE CUSTOMER
OR ANY OTHER PERSON WHILE IN TRANSIT OR POSSESSION OF ENCODING.COM UNLESS CAUSED
BY THE NEGLIGENCE OF ENCODING.COM IN WHICH EVENT, THE LIABILITY OF ENCODING.COM
SHALL BE LIMITED TO THE REPLACEMENT OF A SIMILAR QUANTITY OF BLANK TAPE OR
MAGNETIC OR OPTICAL MEDIA TO THE MATERIALS WHICH WERE LOST, DAMAGED OR
DESTROYED. EXCEPT FOR SUCH REPLACEMENT, ENCODING.COM SHALL HAVE NO FURTHER
LIABILITY REGARDING THE LOSS, DAMAGE OR DESTRUCTION OF SUCH MATERIALS.
ENCODING.COM SHALL NOT BE LIABLE TO CUSTOMER OR ANY OTHER PERSON FOR ANY ACT OR
OMISSION OF ANY PERSON SELECTED BY ENCODING.COM TO PERFORM SERVICES OR FURNISH
MATERIALS TO CUSTOMER. IF MATERIALS FURNISHED BY ENCODING.COM ARE FOUND TO BE
DEFECTIVE IN MANUFACTURE, ENCODING.COM SHALL REPLACE SUCH MATERIALS WITH A
SIMILAR QUANTITY OF BLANK TAPE, OR MAGNETIC OR OPTICAL MEDIA, PROVIDED THE
CUSTOMER NOTIFIES ENCODING.COM IN WRITING WITHIN THIRTY DAYS AFTER SHIPMENT OF
SUCH DEFECT. EXCEPT FOR SUCH REPLACEMENT, ENCODING.COM SHALL HAVE NO FURTHER
LIABILITY IN CONNECTION WITH SUCH DEFECTIVE MATERIALS. ENCODING.COM MAKES NO
WARRANTY, EXPRESSED OR IMPLIED WITH RESPECT TO THE MATERIALS OR SERVICES
PROVIDED IT ASSUMES NO RESPONSIBILITY FOR THE CHARACTER OR QUALITY OF MATERIALS
OR SERVICES PROVIDED BY IT. ENCODING.COM EXPRESSLY DISCLAIMS ALL WARRANTIES
EXPRESSED OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING ANY IMPLIED WARRANTY OR
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ALL WARRANTIES WITH RESPECT
TO THE SERVICE ARE STRICTLY LIMITED TO THOSE SET FORTH IN THIS ACKNOWLEDGMENT.
IN NO EVENT WILL ENCODING.COM BE LIABLE TO THE CUSTOMER FOR ANY CONSEQUENTIAL,
INDIRECT, SPECIAL, OR INCIDENTAL DAMAGES EVEN IF ENCODING.COM HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING THE FOREGOING, ENCODING.COM
MAKES NO REPRESENTATION OR WARRANTIES OF ANY TYPE WHATSOEVER REGARDING THE
HOSTING OF ANY CONTENT ON ITS NETWORK OR ANY SUBCONTRACTOR'S OR OTHER PARTY'S
NETWORK OR THE PERFORMANCE OR RELIABILITY OF ANY SUCH NETWORK, OR ANY CONNECTION
TO, TRANSMISSION OVER, RESULTS OF OR USE OF ANY NETWORK CONNECTION OR FACILITIES
PROVIDED (OR FAILED TO BE PROVIDED) UNDER THIS ACKNOWLEDGMENT AND ENCODING.COM
MAKES NO WARRANTY WHATSOEVER FOR PRODUCTS OR SERVICES NOT ACTUALLY PRODUCED OR
PROVIDED BY ENCODING.COM.
11. INDEMNIFICATION BY CUSTOMER. Customer agrees to defend, protect, indemnify
and hold encoding.com harmless from and against all claims of any kind, whether
based in contract, in tort (including negligence or strict liability), or
resulting from (a) services provided by encoding.com on behalf of Customer
hereunder, except for any damages arising exclusively out of any material breach
of this acknowledgment by encoding.com, (b) any use by encoding.com of any data
or files provided by Customer to encoding.com under this acknowledgment, (c) any
breach by Customer of this acknowledgment, including without limitation any
failure by Customer to observe or satisfy any terms or conditions of this
acknowledgment, (d) any violation of any applicable federal, state or local laws
with regard to the transmission and use of information and content, including
laws related to privacy, publicity, the Communications Decency Act of 1996,
arising out of the Customer Content, (e) any infringement of any United States
or other patent, trademark, copyright, trade secret or other intellectual
property right, including but not limited to any and all performance license
rights, mechanical license rights, synchronization license rights and rights
under the Digital Performance Right in Sound Recordings Act of 1995, relating to
the Content supplied by Customer to encoding.com or the Services provided
hereunder, or (f) otherwise for any losses, expenses, damages and liabilities,
direct, indirect, special or consequential which may arise out of Customer's
use, distribution or sale of goods or services covered hereby except those
caused solely by the sole gross negligence of encoding.com.
12. ACKNOWLEDGMENT. Customer acknowledges that encoding.com, in its sole
discretion, may subcontract all or part of the hosting services to be provided
hereunder. CUSTOMER FURTHER ACKNOWLEDGES THAT ENCODING.COM WILL HAVE NO
LIABILITY FOR THE FAILURE OF ANY NETWORK OR SERVER IN CONNECTION WITH THE
HOSTING OF ANY CONTENT.
13. ORDER CANCELLATION. If an order for the Service is canceled, Customer must
pay for orders scheduled for delivery or performance within ninety (90) days of
encoding.com's receipt of cancellation notice.
14. MISCELLANEOUS. Any waiver by encoding.com of any default by the Customer
hereunder shall not be deemed to be a continuing waiver of such default or a
waiver of any other default or of any of the terms and conditions of this
acknowledgment. The terms and conditions of this acknowledgment may not be
superseded, modified, or amended except in a writing stating that it is a
modification and signed by an authorized representative of each party hereto,
provided, however, that encoding.com may modify the specifications of the
Service provided hereunder if the modification does not change the form, fit or
function of the Service. This acknowledgment (not including any of the terms
and conditions of the Customer's purchase order or any similar document issued
by Customer), constitutes the entire agreement between the Customer and
encoding.com with regard to the Service listed on the face of this
acknowledgment, and expressly supersedes and replaces any prior or
contemporaneous agreements, written or oral, relating to such goods or services.
This acknowledgment is governed by, construed and enforced in accordance with
the laws of the State of Washington, without regard to conflict of laws
provisions. Both parties agree that any litigation or arbitration between the
parties shall take place in King County, Washington, and both parties waive any
objection to personal jurisdiction or venue in any forum located in that county.
In any suit or action brought to enforce any term, condition or covenant of this
acknowledgment or to recover damages arising from any breach of the
acknowledgment, the losing party shall pay the prevailing party's reasonable
attorneys' fees and all other costs and expenses which may be incurred by the
prevailing party in any suit, action or in any reviews or appeals therefrom.
ACKNOWLEDGED AND AGREED:
E-music.com
By: /s/ Joseph Howell
------------------------------------
Its: Chief Financial Officer
[*] Confidential Treatment Request
Quotation valid through June 1999
<PAGE>
E-Music.com 6/30/99 Confidential Quotation
Rider to encoding.com Terms and Conditions
The following changes will be applied to the attached encoding.com Terms and
Conditions.
1. Payment terms:
Insert: EMusic agrees to pay encoding.com [*] of the total project costs in
advance as called out by the contract. encoding.com will invoice EMusic for [*]
of the total amount of this project in the amount of [*] immediately net 0 and
an additional [*] on the last billing cycle of September.
During the first [*] of the project, encoding.com will invoice EMusic normally
outside of this [*] down payment. EMusic will pay these invoices per the terms
of the agreement. During the second [*] of the project the down payment that was
made by EMusic will be applied to encoding.com invoices.
2. Data Entry Rider:
The attached form outlines in detail the fields that need to be captured by
encoding.com in the data entry portion of the encoding process. The fields that
are called out are also defined so each item is clear for all data entry people
across all CDs in the project.
Also-The data fields that are called out in the attached sheet are different
than the ones that were called out in the original proposal. Some of these are
different because of differences in how we defined a parameter and others
because new requirements became available. As such the new pricing will be as
follows but WILL NOT affect the total value of the contract;
Old Pricing per CD: [*] per CD for data entry.
New Pricing per CD: [*] per CD for data entry.
Pricing is based on an estimate of a [*] increase in the amount of time needed
to capture the meta information currently requested and a mark up of the old
price of [*].
Encoding.com and EMusic will review these prices and structure every [*] as
appropriate to ensure that significant costs are not being endured in either
direction.
/s/ Al David June 30, 1999
- --------------------------------------------------------------------------------
Signature Al David--Sr. Director, Operations Date
(Minister of the Digital Bit)
Accepted by encoding.com
/s/ Todd Hinders June 30, 1999
- --------------------------------------------------------------------------------
Todd Hinders--Minister of Entertainment Date:
[*] Confidential Treatment Request
Quotation valid through June 1999
<PAGE>
Exhibit 10.23
Note: Portions of this exhibit indicated by "[*]" are subject to a confidential
treatment request, and have been omitted from this exhibit. Complete, unredacted
copies of this exhibit have been filed with the Securities and Exchange
Commission as part of this company's confidential treatment request.
SERVICES AGREEMENT
This Services Agreement (this "Agreement") is executed as of this
17th day of December, 1999 (the "Effective Date") by and between encoding.com,
Inc., a Delaware corporation ("Encoding"), and Valley Media, Inc., a Delaware
corporation ("Valley").
RECITALS
A. Encoding offers services and applications for encoding,
optimizing and delivering audio and video content on the Internet.
B. Valley is a distributor of music and video entertainment
products.
C. Valley desires to obtain certain services from Encoding that
will allow Valley to include a digital music sampling service as part of the
consumer database it offers to its retail customers.
AGREEMENT
In consideration of the foregoing and the mutual promises and
covenants contained herein, and for other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, Valley and Encoding
hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following definitions
will apply:
1.1. The term "Confidential Information" means any information that one
party (the "Disclosing Party") furnishes or makes available to the
other party (the "Receiving Party") and all information related to
the business of one party (the "Disclosing Party") which the other
party (the "Receiving Party") acquires in the course of performing
its obligations under this Agreement; provided, however, that the
term "Confidential Information" does not include any information
that the Receiving Party can prove (a) is generally available to or
known by the public, (b) was available to or known by the Receiving
Party on a non-confidential basis prior to disclosure by the
Disclosing Party, (c) was independently developed for the Receiving
Party by persons who were not given access to the information
disclosed by the Disclosing Party, or (d) becomes generally known
to the public after the Effective Date through no act or omission
of the Receiving Party.
1.2. The term "Major Labels" means, collectively, [*], and (f) any
affiliate, division or subsidiary of any of the entities described
in parts (a) through (e) of this Section 1.2.
2. Inventory Loan. Valley maintains an inventory of compact discs containing
prerecorded music (each, a "CD" and, collectively, the "CDs"). Valley will
[*], one copy of each stock-keeping unit maintained by Valley among its
inventory of CDs during the term of this Agreement, including the original
artwork and packaging for each such CD (each, a "Loaned CD" and,
collectively, the "Loaned CDs"). Valley will deliver the Loaned CDs to
Encoding. Encoding will [*] in delivering the Loaned CDs. In addition,
Encoding will pay Valley a handling charge of [*] per Loaned CD delivered
to Encoding by Valley.
[*] Confidential Treatment Request
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3. Product Information File. Valley maintains an electronic data file
containing [*] for each recording contained in a CD in its inventory (the
"Product Information File"). Valley will deliver to Encoding, at [*]
charge, one electronic copy of the Product Information File. In addition,
during the term of this Agreement, Valley will deliver to Encoding daily
updates of the Product Information File ("PIF Updates") containing artist
and UPC information for recordings contained in CDs that have been added to
Valley's inventory since the original Product Information File or the last
PIF Update was delivered to Encoding by Valley, whichever was later. For
purposes of this Agreement, the term "Product Information File" means the
Product Information File as updated and/or amended by Encoding to
incorporate any and all PIF Updates. Valley will not be required to deliver
updates of the Product Information File to Encoding following the
termination or expiration of this Agreement unless the parties agree
otherwise.
4. Encoding of Loaned CDs.
4.1. For each recording contained in a Loaned CD (each, a "Recording"
and, collectively, the "Recordings"), Encoding will create a
storable electronic file containing a copy of that Recording in
digital form (each, a "Song File" and, collectively, the "Song
Files"). Encoding will create each Song File in a manner that will
allow that Song File to be encoded into each of the streaming and
downloading formats and at each of the data rates described in
Exhibit A hereto, which is incorporated herein by this reference.
Valley may amend Exhibit A from time to time to include additional
streaming and/or downloading formats and/or additional data rates,
and Encoding will create Song Files and Song Clips (as defined
below) for each Recording in such additional formats and/or at such
additional data rates in accordance with a schedule agreed upon by
both parties. Valley will [*] by Encoding in encoding the Loaned
CDs into such additional formats and/or at such additional data
rates pursuant to this Section 4.1.
4.2. From each Song File, Encoding will create a sound clip (each, a
"Song Clip" and, collectively, the "Song Clips") of a length, in
each of the formats and at each of the data rates described in
Exhibit B hereto, which is incorporated herein by this reference.
4.3. Encoding will link each Song Clip to that portion of the Product
Information File containing product information for the Recording
underlying the Song Clip, so that users of the Product Information
File [*] for a particular Recording will be able to [*].
4.4. Encoding will create a storable electronic file containing a copy
of the cover art of each Loaned CD in digital form (each, a "Cover
Art File" and, collectively, the "Cover Art Files". Encoding will
incorporate the Cover Art Files into the Product Information File
so that a digital image of the cover art for a Loaned CD will
appear on each screen viewed by a user of the Product Information
File that contains information regarding a Recording contained in
that Loaned CD.
[*] Confidential Treatment Request
2
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4.5. After Encoding has created Song Files and Song Clips for each
Recording contained in a Loaned CD, and created a Cover Art File
for that Loaned CD, Encoding will promptly return the Loaned CD to
Valley. Valley will [*] in delivering the returned Loaned CDs.
Encoding may return Loaned CDs without shrink-wrap, and Encoding
will use [*] efforts to have each returned Loaned CD in a condition
that would allow Valley to return the Loaned CD to the vendor from
which it was purchased without any refurbishment on Valley's part;
provided, however, if Encoding is not able to return a Loaned CDs
in such returnable condition, Encoding will pay [*] of Valley's
wholesale cost for any such Loaned CD.
4.6. Encoding will update and/or amend the Product Information File on a
daily basis to incorporate the information contained in any and all
PIF Updates.
4.7. If, in carrying out its responsibilities under this Agreement, but
without any separate obligation to do so, Encoding becomes aware of
a Recording that is contained in a Loaned CD [*].
4.8. Encoding will attempt to create a customized clip service that will
allow an artist or label to select the portion of a Recording by
that artist or label that is used to create a Song Clip for that
Recording. The artist or label would be required to bear the cost
related to the creation of any such customized Song Clip.
5. Music Sampling Service. Valley and Encoding will use the Product
Information File and the Song Clips to create a music sampling service (the
"Sampling Service") that will be sold or licensed to third parties.
Encoding and Valley each will have the right to sell or license the
Sampling Service to third parties; provided, however, that neither Encoding
nor Valley may sell, license or otherwise transfer the Sampling Service or
any portion thereof to [*]. Encoding and Valley will each be responsible
for collecting sales revenue and/or license fees from their respective
customers and/or licensees. During the term of this Agreement, Encoding and
Valley will each be entitled to [*] of any license fees received by the
other party for selling or licensing the Sampling Service, but only to the
extent [*]. Encoding will perform the following services to support the
Sampling Service:
5.1. Encoding will store the Song Clips on its business systems and use
those systems to stream the Song Clips to consumers using the
Sampling Service. In hosting and streaming the Sampling Service,
Encoding will maintain interface capabilities that are consistent
with industry standards. Encoding's right to host and stream the
Sampling Service on behalf of Valley under this Section 5.1. is not
exclusive, and Valley may retain other persons or entities to
perform such services in accordance with the following conditions.
Valley will notify Encoding in writing if it wishes to have hosting
and streaming services for the Sampling Service performed by a
person or entity other than Encoding (the "Third Party Service
Provider"). For a period of sixty (60) days following Encoding's
receipt of such notice, Valley and Encoding will negotiate in good
faith regarding Encoding's provision of such services instead of
the Third Party Service Provider. If, at the conclusion of such
sixty (60) day period, Valley and Encoding have not reached an
agreement for Encoding to perform such services after negotiating
in good faith, Valley will be permitted to retain the Third Party
Service Provider to perform such services.
[*] Confidential Treatment Request
3
<PAGE>
5.2. Encoding will collect the data described in Exhibit D hereto (the
"Consumer Data"), which is incorporated herein by this reference,
regarding the usage and purchasing habits of consumers that use the
Sampling Service.
6. Minimum Service Levels. In consideration of the capital expenditures that
will be incurred by Encoding in connection with this Agreement, which are
described in Section 7.1. below, Valley [*] that Encoding will receive
revenues from the Sampling Service of at least [*] during each three month
period (an "Installment Period") during the first twelve (12) months after
the Sampling Service becomes operational (the "Guaranteed Period") for a
total guaranteed payment of at least [*]. If Encoding does not receive
revenues from the Sampling Service of at least [*] during each Installment
Period during the Guaranteed Period, Valley will make a payment to Encoding
(each, a "Guaranteed Payment") within thirty (30) Days of the conclusion of
applicable Installment Period equal to the difference between [*] and the
amount of revenues actually received by Encoding from the Sampling Service
during the applicable Installment Period (the "Sampling Service Revenue");
provided, however, that Encoding will not be entitled to receive the
Guaranteed Payment if (a) the Sampling Service is not operational on or
before [*] if Valley has provided the Priority CDs (as defined below)
within 30 days of the Effective Date,or [*], which is incorporated herein
by this reference; provided, further, that Valley shall not be obligated to
make a Guaranteed Payment for a particular Installment Period if Encoding
has received an average of [*] from Guaranteed Payments and Sampling
Service Revenue and all Guaranteed Payments for the Installment Period in
question and each preceding Installment Period. For purposes of this
Section 6, the Sampling Service will become "operational" when Encoding has
created Song Files and Song Clips for the [*] Loaned CDs designated as
"Priority CDs" within 30 days of the Effective Date. For the purposes of
this Section 6, all references to "revenue" shall be revenue calculated in
accordance with U.S. GAAP.
7. Service Fees.
7.1. Capital Expenses. Encoding will pay all the necessary upfront
capital equipment charges necessary for the creation of the
Sampling Service which are estimated to total [*] and to include:
7.1.1. Facilities
7.1.2. Ripping Stations
7.1.3. Encoding Stations
7.1.4. Raid Online Storage
7.1.5. Nearline Storage System
7.1.6. Computer servers and Equipment
7.2. Shared Costs. In consideration of the services performed by
Encoding under this Agreement, Encoding and Valley will [*] the
costs of creating the Song Files and Song Clips. The costs will
include [*]. Encoding estimates these direct costs to total [*].
Therefore, Valley will pay Encoding a total of [*] on [*] for the
non-refundable expenses for setting up the Sampling Service. The
above estimates are fixed and in the event the actual costs for
this service increase or decrease, Valley will [*].
[*] Confidential Treatment Request
4
<PAGE>
7.3. Maintenance Costs. For the ongoing maintenance encoding of new
inventory for the Sampling Service, Valley and Encoding will [*]
the actual direct ongoing encoding costs estimated at the rate of
[*] per CD used in the Sampling Service. Therefore, Valley would
pay Encoding a service fee of [*] per such CD. These costs are
fixed through September 2000. In the event, the costs for
maintenance are determined to increase or decrease by [*] or
higher, the parties agree to renegotiate this clause and its fee
schedule in good faith. Encoding will invoice Valley on a monthly
basis that reflects the actual number of files added to the
Sampling Service inventory. Valley and Encoding will each pay [*]
of all shipping and handling charges to and from the Valley and
Encoding.com facilities.
7.4. Streaming Costs. Encoding will charge Valley [*] for the ongoing
streaming and hosting costs. [*] is defined as the [*] plus [*] of
the [*] plus [*].
8. Ownership and Rights upon Termination.
8.1. Loaned CDs.
8.1.1. The Loaned CDs are, and will at all times remain, Valley's
sole and exclusive property, and Valley will have the right to
demand the return of any or all of the Loaned CDs, with
Encoding and Valley to each pay [*] of the cost of such
return, including the original artwork and packaging for each
Loaned CD, at any time; provided, however, that, if at any
time any or all of the Loaned CDs (other than any Loaned CDs
purchased by Encoding pursuant to Section 9.2 of this
Agreement) are determined to be Encoding's property, Encoding
hereby grants Valley a security interest in such Loaned CDs.
8.1.2. Upon the expiration or termination of this Agreement,
Encoding will promptly return all of the Loaned CDs, including
the original artwork and packaging for each Loaned CD, with
Encoding and Valley to each pay [*] of the cost of such
return, to Valley (other than any Loaned CDs Encoding has
already returned to, or purchased from, Valley pursuant to
Section 9.2 of this Agreement).
8.2. Files and Clips.
8.2.1. The Song Clips, the Song Files and the Cover Art Files will
be, and will at all times remain, the sole and exclusive
property of Valley; provided, however, that, if at any time
any or all of the Song Files and/or the Song Clips and/or the
Cover Art Files are determined to be Encoding's property,
Encoding hereby grants Valley a security interest in such Song
Files and/or Song Clips and/or Cover Art Files .
8.2.2. The Product Information File and any and all PIF Updates
will be, and will at all times remain, the sole and exclusive
property of Valley; provided, however, that, if at any time
the Product Information File, any portion thereof, or any or
all of the PIF Updates are determined to be Encoding's
property, Encoding hereby grants Valley a security interest in
the Product Information File and/or such PIF Updates.
[*] Confidential Treatment Request
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8.2.3. Valley hereby grants Encoding a worldwide, perpetual,
irrevocable, nonexclusive license to use, store, modify, copy
and distribute the Product Information File, the PIF Updates,
the Song Clips, the Song Files and the cover Art Files. This
license will survive any termination or expiration of this
Agreement. Encoding will have the right to sublicense the
Product Information File, the PIF Updates, the Song Files, the
Song Clips and the Cover Art Files to any entity other than
[*].
8.2.4. Upon the expiration or termination of this Agreement, or at
any earlier time, upon demand by Valley, Encoding will
promptly deliver to Valley, [*], copies of all of the Song
Files, Song Clips and Cover Art Files in the formats
maintained hereunder; provided, however, if Valley terminates
this Agreement as a result of a breach of this Agreement by
Encoding pursuant to Section 18.2, Encoding shall [*].
8.3. Consumer Data. All of the Consumer Data will be, and will at all
times remain, the sole and exclusive property of Valley; provided,
however, that Valley will pay Encoding [*] all revenues received by
Valley through the sale, licensing or other commercial exploitation
of all or any portion of the Consumer Data during the term of this
Agreement.
9. Audiofile License and Deleted Product.
9.1. At the same time the parties enter into this Agreement, they will
enter into an Audiofile License Agreement substantially in the form
attached hereto as Exhibit F (the "Audiofile License"), which is
incorporated herein by this reference, pursuant to which Valley
will license its audiofile database ("Audiofile") to Encoding on a
royalty free basis during the term of this Agreement. If Valley is
notified by any of its suppliers that the supplier is deleting one
of the Loaned CDs from its catalog, Valley will post a deletion
notice regarding the Loaned CD on Audiofile, and Encoding will
return its copy of the Loaned CD to Valley on or before the Last
Customer Return Date stated in the deletion notice, with Encoding
and Valley to [*] of the cost of such return.
9.2. If Valley posts a deletion notice regarding a Loaned CD on
Audiofile and Audiofile is fully operational and accessible by
Encoding, and Encoding fails to return its copy of the Loaned CD to
Valley prior to the Last Customer Return Date stated in the
deletion notice, Encoding will purchase the Loaned CD from Valley
at Valley's wholesale price for the Loaned CD.
10. Initial Warrant Grant. Encoding will issue warrants for [*] shares of
Encoding common stock with a strike price of [*] per share and an exercise
period of [*] (the "Initial Warrants"). The Initial Warrants will be
granted upon commencement of this agreement.
11. Rights Acquisition. Encoding will grant Valley an additional [*] on the
same terms and conditions as the Initial Warrants in consideration of
Valley's certification attached hereto as Exhibit G (the "Certificate"),
which is incorporated herein by this reference, regarding Valley's attempts
to [*]. The statements contained in the Certificate will constitute
representations and warranties of Valley under this Agreement. If Valley
enters into a definitive written agreement with [*] regarding the matters
set forth in the Certificate, Valley will provide a copy of such agreement
to Encoding.
12. Future Endeavors.
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12.1. Valley and Encoding will explore the possibility of a variety of
new offerings leveraging either the existing assets such as the
Song Files, Song Clips and/or the PIF for additional Internet Music
services including digital downloading services for Valley's
customers, Internet radio broadcasts, Internet or digital juke
boxes, "just-in-time" compact disc manufacturing; or offerings
leveraging other assets of Valley and Encoding.
12.2. Valley and Encoding agree that both parties will mutually agree
upon the appropriate business model for all new jointly created new
ventures. In such ventures as may occur, Encoding and Valley will
[*] but will attempt to structure the ventures so [*].
13. Representations and Warranties of Encoding. To induce Valley to enter into
this Agreement and to perform the transactions contemplated hereunder,
Encoding represents and warrants as follows:
13.1. Organization. Encoding is a corporation duly organized, validly
existing and in good standing under the laws of the state of
Delaware.
13.2. Authority; Consents and Approvals; No Violations. Encoding has
the full corporate power and authority and legal right to execute
and deliver this Agreement, and otherwise to perform its
obligations hereunder. This Agreement has been validly executed and
delivered by Encoding and will constitute a valid and binding
obligation of Encoding enforceable in accordance with its terms,
except to the extent such enforceability may be limited by the
effects of bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally, and by
the effect of general principles of equitable law, regardless of
whether such enforceability is considered in a proceeding in equity
or at law. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby do not and
will not violate any provision of Encoding's Certificate of
Incorporation or Bylaws, or violate, conflict with, result in a
breach of or constitute (with or without due notice, lapse of time
or both) a default under any agreement, license, contract,
franchise, permit, indenture, lease, or other instrument to which
Encoding is a party, or by which it or any of its assets are bound.
13.3. Performance Standards. Encoding will perform the services
described in Sections 4 and 5 of this Agreement in a professional
and workmanlike manner that is consistent with the highest
industry standards.
14. Representations and Warranties of Valley. To induce Encoding to enter
into this Agreement and to perform the transactions contemplated hereunder,
Valley represents and warrants as follows:
14.1. Organization. Valley is a corporation duly organized, validly
existing and in good standing under the laws of the state of
Delaware.
14.2. Authority; Consents and Approvals; No Violations. Valley has the
full corporate power and authority and legal right to execute and
deliver this Agreement, and otherwise to perform its obligations
hereunder. This Agreement has been validly executed and delivered
by Valley and will constitute a valid and binding obligation of
Valley enforceable in accordance with its terms, except to the
extent such enforceability may be limited by the effects of
bankruptcy, insolvency,
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reorganization, moratorium or other similar laws affecting
creditors' rights generally, and by the effect of general
principles of equitable law, regardless of whether such
enforceability is considered in a proceeding in equity or at law.
The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby do not and will not violate
any provision of Valley's Certificate of Incorporation or Bylaws or
violate, conflict with, result in a breach of or constitute (with
or without due notice, lapse of time or both) a default under any
agreement, license, contract, franchise, permit, indenture, lease,
or other instrument to which Valley is a party, or by which it or
any of its assets are bound.
15. Indemnification. Each party will, at all times, indemnify, defend and
hold the other party harmless from and against any and all third-party
claims, damages, liabilities, costs and expenses (including reasonable
attorney's fees) arising out of any breach or alleged breach by the
indemnifying party of any representation, warranty or obligation of such
party under this Agreement. In addition, each party will, at all times,
indemnify, defend and hold the other party harmless from and against any
and all third-party claims, damages, liabilities, costs and expenses
(including reasonable attorney's fees) arising out of any infringement or
alleged infringement of the patents, copyrights, trademarks or other
intellectual property rights of any third party that results from the
commercial use of the Sampling Service by the indemnifying party, any of
the indemnifying party's licensees, or any person or entity that has
purchased the Sampling Service, or any portion thereof, from the
indemnifying party.
16. Limitation on Damages. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
OTHER FOR INDIRECT OR CONSEQUENTIAL DAMAGES, WHETHER OR NOT SUCH PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND REGARDLESS OF THE FORM
OF ACTION.
17. Confidential Information. Neither Encoding nor Valley may use any
Confidential Information of the other except as permitted under this
Agreement. In addition, neither Encoding nor Valley may disclose any
Confidential Information of the other unless (a) such disclosure is made to
the Disclosing Party's employees or agents on a "need to know" basis or (b)
such disclosure is required by law or legal process and the party from whom
such disclosure is required has given the other party prior notice of such
requirement and has cooperated with the non-Disclosing Party to oppose
disclosure. For purposes of this Agreement, any unauthorized use or
disclosure of Confidential Information by an employee or agent of either
party will be treated as an unauthorized disclosure by such party.
18. Term and Termination.
18.1. This Agreement will terminate on the [*]of the Effective Date (the
"Initial Termination Date"), unless both parties provide a written
amendment at least ninety (90) days prior to the Initial
Termination Date, in which case this Agreement will be extended for
an additional [*] years and will terminate upon the [*] anniversary
of the Effective Date.
18.2. Either party may terminate this Agreement if (i) the other party
materially breaches any of its obligations under this Agreement,
(ii) the non-breaching party sends written notice to the breaching
party describing the breach in reasonable detail, and (iii) the
breaching party does not cure the breach within thirty (30) days
following its receipt of such notice.
[*] Confidential Treatment Request
8
<PAGE>
18.3. Either party may terminate this Agreement if (i) the other party
becomes insolvent, or (ii) a petition is filed by or against the
other party under any bankruptcy or insolvency laws and, in the
event of any involuntary petition, the petition is not dismissed
within forty-five (45) days of the filing date.
18.4. The parties may terminate this Agreement by mutual consent through
a signed writing.
19. Press Release. Upon execution of this Agreement, Encoding and Valley
will issue a joint press release (the "Press Release") announcing the
execution of this Agreement and briefly describing the transactions
contemplated hereby. Neither party will issue the Press Release, nor any
other release concerning this Agreement or the transactions contemplated
hereby, without the other party's prior consent.
20. Miscellaneous
20.1. Assignment. Neither party may assign any of its rights under this
Agreement without the other party's prior written consent;
provided, however, that either party may assign its rights under
this Agreement to any affiliate of such party, any entity into
which such party is merged or any entity that purchases
substantially all of the assets of such party.
20.2. Further Assurances. In addition to the obligations required to be
performed by the parties hereto under the other provisions of this
Agreement, the parties agree to perform, without further
consideration, such other acts and to execute, file, acknowledge
and deliver such other instruments and documents, including without
limitation UCC-1 financing statements covering the Loaned CDs, the
Song Files, the Song Clips, the Product Information File and the
PIF Updates, as may be reasonably required to carry out the
provisions and purposes of this Agreement and to fully and properly
consummate the transactions contemplated hereby.
20.3. Amendment and Waiver. No amendment or modification of this
Agreement will be effective unless set forth in a writing signed by
an authorized representative of the party against which enforcement
of such amendment is sought. No waiver by a party of the other
party's obligation to comply with any provision of this Agreement
will be deemed or will constitute a waiver of the nonwaiving
party's obligation to comply with any other provision of this
Agreement or with the nonwaiving party's obligation to comply with
the waived provision on a subsequent occasion.
20.4. Arbitration. Any dispute or controversy arising between Encoding
and Valley regarding this Agreement will be submitted to
arbitration in the state of the defending party in accordance with
the rules then in effect of the American Arbitration Association.
Any award made by an arbitrator pursuant to this Section 20.4 will
be binding upon both parties in the absence of fraud and may be
entered in any court of competent jurisdiction.
20.5. Notices. Any notice to a party pursuant to this Agreement shall be
given by one of the following means: (a) certified or registered
United States mail, postage prepaid, (b) private courier or express
service requesting evidence of receipt as a part of its service, or
(c) by telecopy, with a copy also to
[*] Confidential Treatment Request
9
<PAGE>
be given by first class United States mail, postage prepaid, or by
any means permitted under parts (a) or (b) of this Section 20.5.
Notices shall be given to the parties at the following addressees:
If to Valley: Valley Media, Inc.
1280 Santa Anita Court
Woodland, California 95776
Attention: Sachin Adarkar
Fax Number: (530) 406-5231
If to Encoding: encoding.com, Inc.
414 Olive Way, 3rd Floor
Seattle, Washington 98101
Attention: CFO
Fax Number: 206-832-4001
with a mandatory copy to: Venture Law Group
4750 Carillon Point
Kirkland, WA 98033
Attention: John W. Robertson
Fax Number: (425) 739-8750
20.6. Binding Effect. Upon execution of this Agreement by all parties
hereto, this Agreement shall inure to the benefit of, and be
binding on and enforceable against, the parties and their
respective heirs, legal representatives, successors and permitted
assigns.
20.7. Entire Agreement. This Agreement, including the exhibits and
schedules hereto, together with the Audiofile License and the
Warrant, constitute the entire agreement and understanding between
the parties with respect to the subject matter hereof, and
supersede any prior or contemporaneous agreements or understandings
relating to the subject matter hereof, whether written or oral.
20.8. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of
which, taken together, will constitute one and the same instrument.
20.9. Attorneys' Fees. If any arbitration, legal action or other
proceeding is brought for the enforcement of this Agreement, or
because of an alleged dispute, breach, default or misrepresentation
in connection with any of the provisions of this Agreement, the
successful or prevailing party will be entitled to recover
reasonable attorneys' fees and other costs incurred in such action
or proceeding, in addition to any other relief to which it may be
entitled.
20.10. Survival. The provisions of Sections 1, 8.3, 15, 16, 17, and 20
will survive any termination or expiration of this Agreement.
20.11. Headings. The headings of the paragraphs and sections of this
Agreement are included for purposes of convenience only and shall
not affect the construction or interpretation of any provisions
hereunder.
[*] Confidential Treatment Request
10
<PAGE>
20.12. Partial Invalidity. The invalidity of any part or provision of this
Agreement will not affect the enforceability of the remainder of
this Agreement.
20.13. Governing Law. This Agreement will be governed by and construed in
accordance with the substantive laws of the State of California
applicable to contracts entered into and performed entirely within
that state.
[*] Confidential Treatment Request
11
<PAGE>
In witness whereof, the parties have executed this Services
Agreement as of the Effective Date.
Valley Media, Inc. encoding.com, Inc.
/s/ Sachin Adarkar /s/ David C. Bullis
____________________________ __________________________
By: By:
Its: Its:
[*] Confidential Treatment Request
12
<PAGE>
[LOGO] EXHIBIT 10.24
STARTER KIT LOAN AND SECURITY AGREEMENT
Borrower: Encoding.com, Inc. Address: 1725 Westlake Avenue N., Suite 102
Date: August 4, 1998 Seattle, WA 98109
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made and entered into on the
above date between IMPERIAL BANK ("Bank"), whose address is 226 Airport Parkway,
San Jose, California 95110 with a loan production office located at 777 108th
Avenue NE, Suite 1670, Bellevue, Washington 98004 and the party(ies) named above
(jointly and severally, "Borrower"), whose chief executive office is located at
the above address ("Borrower's Address").
1. Loans. Bank will make loans to Borrower (the "Loans") in amounts
determined by Bank in its reasonable business judgment up to the amount (the
"Credit Limit") shown on the Schedule to this Agreement (the "Schedule"),
provided no Event of Default and no event which, with notice or passage of time
or both, would constitute an Event of Default is occurring or has occurred. All
Loans and other monetary Obligations will bear interest at the rate shown on the
Schedule. Interest will be payable monthly, on the date shown on the monthly
billing from Bank. Bank may, in its discretion, charge Borrower's deposit
accounts maintained with Bank for any amounts coming due under this Agreement.
2. Security Interest. As security for all present and future indebtedness,
guarantees, liabilities, and other obligations, of Borrower to Bank
(collectively, the "Obligations"), Borrower hereby grants Bank a continuing
security interest in all of Borrower's right title and interest in and to any
property now or hereafter described in an security agreement executed by
Borrower to Bank as well as the following types of property, whether now owned
or hereafter acquired, and wherever located (collectively, the "Collateral"):
All "accounts", "general intangibles," "chattel paper," "documents," "letters of
credit," "instruments," " deposit accounts," "inventory," "farm products,"
"fixtures" and "equipment," as such terms are defined in Division 9 of the
California Uniform Commercial Code in effect on the date hereof, and all
products, proceeds and insurance proceeds of the foregoing.
3. Representations And Agreements of Borrower. Borrower represents to Bank as
follows, and Borrower agrees that the following representations will continue to
be true, and that Borrower will comply with all of the following agreements
throughout the term of this Agreement:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and will
continue to be, duly authorized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. The execution, delivery and
performance by Borrower of this Agreement, and all other documents contemplated
hereby have been duly and validly authorized, and do not violate any law or any
provision of and are not grounds for acceleration under, any agreement or
instrument which is binding upon Borrower.
3.2 Name: Places of Business. The name of Borrower set forth in this Agreement
is its correct name. Borrower shall give Bank 15 days' prior written notice
before changing its name. The address set forth in the heading to this
Agreement is Borrower's chief executive office. In addition, Borrower has
places of business and Collateral is located only at the locations set forth on
the Schedule. Borrower will give Bank at least 15 days prior written notice
before changing its chief executive office or locating the Collateral at any
other location.
3.3 Collateral. Bank has and will at all times continue to have a first-
priority perfected security interest in all of the Collateral other than
specific equipment identified in existing filed or to be filed Financing
Statements and other than purchase money security interests consented to by
Bank. Borrower will immediately advise Bank in writing of any material loss or
damage to the Collateral.
3.4 Financial Condition and Statements. All financial statements now or in the
future delivered to Bank have been, and will be prepared in conformity with
generally accepted accounting principles. Since the last date
<PAGE>
covered by any such statement, there has been no material adverse change in the
financial condition or business of Borrower. Borrower will provide Bank: (i)
within 30 days after the end of each month, a monthly financial statement
prepared by Borrower, and such other information as Bank shall reasonably
request: (ii) within 120 days following the end of Borrower's fiscal year,
beginning with the fiscal year ending 12/31/98, complete annual financial
statements, certified by independent certified public accountants acceptable to
Bank and accompanied by the unqualified report thereon by said independent
certified public accountants: and (iii) other financial information reasonably
requested by Bank from time to time.
3.5 Taxes: Compliance with Law. Borrower has filed, and will file, when due,
all tax returns and reports required by applicable law, and Borrower has paid,
and will pay, when due, all taxes, assessments, deposits and contributions now
or in the future owed by Borrower. Borrower has complied, and will comply, in
all material respects, with all applicable laws, rules and regulations.
3.6 Insurance. Borrower will at all times adequately insure all of the
tangible personal property Collateral and carry such other business insurance as
is customary in Borrower's industry. Bank will be designated as Loss Payee on
all such insurance.
3.7 Access to Collateral and Books and Records. At reasonable times, on one
business day's notice, Bank, or its agents, shall have the right to inspect the
Collateral, and the right to audit and copy Borrower's books and records.
3.8 Banking Relationship and Operating Accounts. Borrower shall maintain its
primary operating deposit accounts with Bank. Borrower shall at all times
maintain its primary banking relationship with Bank.
3.9 Additional Agreements. Borrower shall not, without Bank's prior written
consent, do any of the following: (i) enter into any transaction outside the
ordinary course of business except for the sale of capital stock to venture
investors or other strategic investors not resulting in change in control,
provided that Borrower promptly delivers written notification to Bank of any
such stock sale; (ii) sell or transfer any Collateral, except in the ordinary
course of business; (iii) pay or declare any dividends on Borrower's stock
(except for dividends payable solely in stock of Borrower); or (iv) redeem,
retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's
stock other than the repurchase of up to five percent (5%) of Borrower's then
issued stock in any fiscal year from Borrower's employees or directors pursuant
to written agreements with Borrower.
4. Term. This Agreement shall continue in effect until the maturity date set
forth on the Schedule (the "Maturity Date"). This Agreement may be terminated,
without penalty, prior to the Maturity Date as follows: (i) by Borrower,
effective three business days after written notice of termination is given to
Bank; or (ii) by Bank at any time after the occurrence of an Event of Default,
without notice, effective immediately. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay all Obligations in full,
whether or not such Obligations are otherwise then due and payable. No
termination shall in any way affect or impair any security interest or other
right or remedy of Bank, nor shall any such termination relieve Borrower of any
Obligation to Bank, until all of the Obligations have been paid and performed in
full.
5. Events of Default and Remedies. The occurrence of any of the following
events shall constitute an "Event of Default" under this Agreement: (a) Any
material representation, statement, report or certificate given to Bank by
Borrower or any of its officers, employees or agents, now or in the future, is
untrue or misleading in a material respect; or (b) Borrower fails to pay when
due any Loan or any interest thereon or any other monetary Obligation: or (c)
the total Obligations outstanding at any time exceed the Credit Limit for a
period of five (5) days: or (d) Borrower fails to perform any other non-monetary
Obligation, which failure is not cured within 5 business days after the date
due; or (e) Dissolution, termination of existence, insolvency or business
failure of Borrower or appointment of a receiver, trustee or custodian, for all
or any part of the property of, assignment for the benefit of creditors by, or
the commencement of any proceeding by or against Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (f) a material adverse change in the business, operations,
or financial or other condition of Borrower. If an Event of Default occurs,
Bank, shall have the right to accelerate and declare all of the Obligations to
be immediately due and payable, increase the interest rate by an additional five
percent per annum, and exercise all rights and remedies recorded by applicable
law. If any interest payment, principal payment or principal balance payment due
from Borrower is delinquent ten or more days, Borrower agrees to pay Bank a late
charge in the amount of 5% of the payment so due and unpaid, in addition to the
payment; but nothing in this provision is to be construed as any obligation on
the part of Bank to accept payment of any payment past due or
<PAGE>
less than the total unpaid principal balance after maturity. All payments shall
be applied first to any late charges owing, then to interest and the remainder,
if any, to principal.
6. General. If any provision of this Agreement is held to be unenforceable,
the remainder of this Agreement shall still continue in full force and effect.
This Agreement and any other written agreements, documents and instruments
executed in connection herewith are the complete agreement between Borrower and
Bank and supersede all prior and contemporaneous negotiations and oral
representations and agreements, all of which are merged and integrated in this
Agreement. There are no oral understandings, representations or agreements
between the parties which are not in this Agreement or in other written
agreements signed by the parties in connection this Agreement. The failure of
Bank at any time to require Borrower to comply strictly with any of the
provisions of this Agreement shall not waive Bank's right later to demand and
receive strict compliance. Any waiver of a default shall not waive any other
default. None of the provisions of this Agreement may be waived except by a
specific written waiver signed by an officer of Bank and delivered to Borrower.
The provisions of this Agreement may not be amended, except in a writing signed
by Borrower and Bank. Borrower shall reimburse Bank for all reasonable
attorney's fees and all other reasonable costs incurred by Bank, in connection
with this Agreement (whether or not a lawsuit is filed) including any post
petition bankruptcy activities. If Bank or Borrower files any lawsuit against
the other predicated on a breach of this Agreement, the prevailing party shall
be entitled to recover its reasonable costs and attorney's fees from the non-
prevailing party. Borrower may not assign any rights under this Agreement
without Bank's prior written consent. This Agreement shall be governed by the
laws of the State of California to the jurisdiction of whose courts Borrower
hereby agrees to submit.
7. Mutual Waiver of Jury Trial. BORROWER AND BANK EACH HEREBY WAIVE THE RIGHT
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN
ANY WAY RELATING TO, THIS AGREEMENT OR ANY CONDUCT, ACT OR OMISSION OF BANK OR
BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR
AFFILIATES.
8. Reference Proceedings. a. Each controversy, dispute or claim ("Claim")
between the parties arising out of or relating to this Agreement, which is not
settled in writing within ten days after the "Claim Date" (defined as the date
on which a party gives written notice to all other parties that a controversy,
dispute or claim exists), will be settled by a reference proceeding in Los
Angeles, California in accordance with the provisions of Section 638 et seq. of
-- ---
the California Code of Civil Procedure, or their successor section ("CCP"),
which shall constitute the exclusive remedy for the settlement of any Claim,
including whether such Claim is subject to the reference proceeding and the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court of Los Angeles (the
"Court"). The referee shall be a retired Judge selected by mutual agreement of
the parties, and if they cannot so agree within thirty days after the Claim
Date, the referee shall be selected by the Presiding Judge of the Court. The
referee shall be appointed to sit as a temporary judge, as authorized by law.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall entered pursuant to CCP 644 in the Court. All
discovery permitted by this Agreement shall be completed no later than fifteen
(15) days before the first hearing date established by the referee. The referee
may extend such period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and, request for production or inspection of documents shall be
responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties.
<PAGE>
b. The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the State of California. The rules
of evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties expressly reserve the right to
findings of fact, conclusions of law, a written statement of decision, and the
right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
Borrower:
ENCODING.COM, INC.
/s/ Martin Tobias
By: _________________________________________________________
President or Vice President
By: _________________________________________________________
(Assistant) Secretary or Chief Financial Officer
Bank:
IMPERIAL BANK
By:_________________________________________________________
Title:______________________________________________________
<PAGE>
[LOGO]
Schedule to
Starter Kit Loan and Security Agreement (Equipment Advances)
BORROWER: Encoding.com, Inc.
DATE: August 4, 1998
This Schedule is an integral part of the Loan and Security Agreement
between Imperial Bank ("Bank") and the above-named Borrower of even date.
Credit Limit (Equipment)
(Section 1): $1,000,000.00 (such amount to be funded under the aggregate
Credit Limit). Equipment Advances will be made only on or
prior to July 31, 1999 (the "Last Advance Date") and only
for the purpose of purchasing equipment reasonably
acceptable to Bank. Borrower must provide invoices for the
equipment to Bank on or before the Last Advance Date.
Interest Rate
(Section 1): The rate equal to Bank's Prime Rate in effect from time to
time. Interest shall be calculated on the basis of a 360 day
year for the actual number of days elapsed. The Prime Rate
shall be the rate announced from time to time by Bank as its
"Prime Rate;" as a base rate upon which other rates charged
by Bank are based, and it is not necessarily the best rate
available at Bank. The interest rate applicable to the
Obligations shall change on each date there is a change in
the Prime Rate.
Maturity Date
(Section 4): After the Last Advance Date, the unpaid principal balance of
the Equipment Advances shall be repaid in 36 equal monthly
installments of principal, plus interest, commencing on
August 30, 1999 and continuing on the same day of each month
thereafter until the entire unpaid principal balance of the
Equipment Advances and all accrued unpaid interest have been
paid (subject to Bank's right to accelerate the Equipment
Advances on an Event of Default).
Borrower:
ENCODING.COM, INC.
/s/ Martin Tobias
By: ________________________________________________
President or Vice President
By: ________________________________________________
(Assistant) Secretary or Chief Financial Officer
Bank:
IMPERIAL BANK
By:_________________________________________________
Title:______________________________________________
<PAGE>
[LOGO]
Resolution Authorizing Credit
Borrower: Encoding.com, Inc., a corporation
organized under the laws of the State of Delaware
Date: August 4, 1998
I, the undersigned, officer of the above-named borrower, a corporation
organized under the laws of the state set forth above, do hereby certify that
the following is a full, true and correct copy of resolutions duly and regularly
adopted by the Board of Directors of said corporation as required by law, and by
the by-laws, of said corporation, and that said resolutions are still in full
force and effect and have not been in any way modified, repealed, rescinded,
amended or revoked.
RESOLVED, that this corporation borrow from Imperial Bank ("Bank"), from
time to time, such sum or sums of money as, in the judgment of the officer
or officers authorized hereby, this corporation may require.
RESOLVED FURTHER, that any officer of this corporation be, and he or she is
hereby authorized, in the name of this corporation, to execute and deliver
to Bank the loan agreements, security agreements, notes financing
statements, and other documents and instruments providing for such loans
and evidencing or securing such loans and said authorized officers are
authorized from time to time to execute renewals, extensions and/or
amendments of said loan agreements, security agreements, and other
documents and instruments.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized, as security for any and all indebtedness of this corporation to
Bank, whether arising pursuant to this resolution or otherwise, to grant to
but not limited to, any and all real property, accounts, inventory,
equipment, general intangibles, instruments documents, chattel paper,
notes, money, deposit accounts, furniture, fixtures, goods and other
property of every kind, and to execute and deliver to Bank any and all
pledge agreements mortgages, deeds of trust, financing statements, security
agreements and other agreements, which said instruments and the note or
notes and other instruments referred to in the proceeding paragraph may
contain such provisions, covenants, recitals and agreements as Bank may
require, and said authorized officers may approve, and the execution
thereof by said authorized officers shall be conclusive evidence of such
approval.
RESOLVED FURTHER, that Bank may conclusively rely on a certified copy of
these resolutions and a certificate of an officer of this corporation as to
the officers of this corporation and their offices and signatures, and
continue to conclusively rely on such certified copy of these resolutions
and said certificate for all past, present and future transactions until
written notice of any change hereto or thereto is given to Bank by this
corporation by certified mail, return receipt requested.
The undersigned further hereby certifies that the following persons are the
fully elected and acting officers of the corporation named above as borrower and
that the following are their actual signatures:
NAMES OFFICE(S) ACTUAL SIGNATURES
- ----- --------- -----------------
_____________________ _________________ _______________________________
Martin Tobias CEO, CFO, Pres. /s/ Martin Tobias
_____________________ _________________ _______________________________
William W. Ericson Secretary /s/ William W. Ericson
_____________________ _________________ _______________________________
IN WITNESS WHEREOF, I have hereunto set my hand as such corporate officer on the
date set forth above.
X /s/ Martin Tobias
____________________________________
Its:_____________________________________
<PAGE>
[LOGO]
Master Schedule to Starter Kit Loan and Security Agreement
BORROWER: Encoding.com, Inc.
DATE: August 4, 1998
This Schedule is incorporated into and an integral part of the Starter Kit
Loan and Security Agreement between Imperial Bank ("Bank") and the above-named
Borrower of even date.
Credit Limit (Aggregate)
(Section 1): $1,000,000.00 (includes, without limitation,
Equipment Advances and the Merchant Services and
Business Bancard Reserve, if any)
Interest Rate (Section 1): The rate equal to Bank's Prime Rate in effect from
time to time. Interest shall be calculated on the
basis of a 360 day year for the actual number of
days elapsed. The Prime Rate shall be the rate
announced from time to time by Bank as its "Prime
Rate;" as a base rate upon which other rates
charged by Bank are based, and it is not
necessarily the best rate available at Bank. The
interest rate applicable to the Obligations shall
change on each date there is a change in the Prime
Rate
Maturity Date (Section 4): January 31, 2000
Other Locations and Addresses
(Section 3.2): __________________________________________________
__________________________________________________
Other Agreements: 1. Loan Fee. None.
2. ______________________________________________
__________________________________________________
Borrower:
ENCODING.COM, INC.
/s/ Martin Tobias
By: ___________________________________________________________
President or Vice President
By: ___________________________________________________________
(Assistant) Secretary or Chief Financial Officer
Bank:
IMPERIAL BANK
By:_________________________________________________
Title:______________________________________________
<PAGE>
EXHIBIT 10.25
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT, dated as of June, 15 1999 is entered by
and between:
(1) ENCODING.COM, a Delaware corporation ("Borrower"); and
(2) DOMINION VENTURE FINANCE L.L.C. ("Lender").
RECITALS
--------
A. Borrower desires to obtain a loan upon the security of certain
equipment owned or to be acquired by Borrower.
B. Lender is willing to make a loan upon the terms and subject to
the conditions set forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing and of the covenants,
conditions and agreements set forth herein, the parties agree as follows:
ARTICLE 1. DEFINITIONS.
For purposes of this Loan Agreement the following capitalized terms shall
have the meanings set forth below:
1.1 "Business Day" shall mean any day on which commercial banks are not
------------
authorized or required to close in San Francisco, California.
1.2 "Closing" shall mean the date, time and place as the parties may agree
-------
for the consummation of the loan contemplated hereby.
1.3 "Collateral" shall have the meaning set forth in Section 3.1 of this
----------
Loan Agreement.
1.4 "Commitment" shall have the meaning set forth in Section 2.1 of this
----------
Loan Agreement.
1.5 "Commitment Termination Date" shall have the meaning set forth in
---------------------------
Section 2.1 of this Loan Agreement.
<PAGE>
1.6 "Contractual Obligation" of any Person shall mean, any indenture,
----------------------
note, security, deed of trust, mortgage, security agreement, lease, guaranty,
instrument, contract, agreement or other form of obligation or undertaking to
which such Person is a party or by which such Person or any of its property is
bound.
1.7 "Default" shall mean any event or circumstance not yet constituting an
-------
Event of Default but which, with the giving of any notice or the lapse of any
period of time or both, would become an Event of Default.
1.8 "Default Rate" shall mean, as of any date of determination, an
------------
interest rate per annum equal to five percent (5%) in excess of the rate per
annum otherwise applicable on such date.
1.9 "Disclosure Schedule" shall have the meaning set forth in Article 5 of
-------------------
this Loan Agreement.
1.10 "Eligible Equipment" shall mean computers, furniture, software and
------------------
office equipment, to the extent acceptable to Lender; provided that the
aggregate value of all software may not exceed ten percent (10%) of the
Commitment. The Aggregate value of Softcosts, defined as software and leasehold
improvements shall not exceed twenty percent (20%) of the total equipment loan.
All New Equipment to be purchased by Borrower and intended to constitute
Collateral must be approved by Lender and shall be valued at cost (net of
freight, taxes, installation and similar costs). All Used Equipment owned by
Borrower as of the date of this Loan Agreement, or acquired by Borrower after
the date of this Loan Agreement in one or more transactions, and which Borrower
intends to constitute Collateral must be approved by Lender and shall be valued
using straight line depreciation from the original cost (net of freight, taxes,
installation and similar costs) over thirty-six (36) months. All appraisal
costs shall be borne by Borrower.
1.11 "Environmental Laws" means all Requirements of Law relating to the
------------------
protection of human health or the environment, including, without limitation,
(a) all Requirements of Law, pertaining to reporting, licensing, permitting,
investigation, and remediation of emissions, discharges, releases, or threatened
releases of hazardous materials, chemical substances, pollutants, contaminants,
or hazardous or toxic substances, materials or wastes whether solid, liquid, or
gaseous in nature, into the air, surface water, groundwater, or land, or
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of chemical substances, pollutants,
contaminants, or hazardous or toxic substances, materials, or wastes, whether
solid, liquid, or gaseous in nature; and (b) all Requirements of Law pertaining
to the protection of the health and safety of employees or the public.
1.12 "Equipment" shall have the meaning set forth in Section 3.1 of this
---------
Loan Agreement.
1.13 "Event of Default" shall have the meaning set forth in Section 10.1
----------------
of this Loan Agreement.
-2-
<PAGE>
1.14 "Financial Statements" shall mean, with respect to any accounting
--------------------
period for any Person, statements of operations, retained earnings and cash flow
of such Person for such period, and balance sheets of such Person as of the end
of such period, setting forth in each case in comparative form figures for the
corresponding period in the preceding fiscal year if such period is less than a
full fiscal year or, if such period is a full fiscal year, corresponding figures
from the preceding fiscal year, all prepared in reasonable detail and in
accordance with generally accepted accounting principles. Unless otherwise
indicated, each reference to Financial Statements of any Person shall be deemed
to refer to Financial Statements prepared on a consolidated basis.
1.15 "Governmental Authority" shall mean any domestic or foreign national,
----------------------
state or local government, any political subdivision thereof, any department,
agency, authority or bureau of any of the foregoing, or any other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
1.16 "Governmental Rule" shall mean any law, rule, regulation, ordinance,
-----------------
order, code interpretation, judgment, decree, directive, guidelines, policy or
similar form of decision of any Governmental Authority.
1.17 "Indebtedness" of any Person shall mean and include the aggregate
------------
amount of, without duplication (a) all obligations of such Person for borrowed
money, (b) all obligations of such Person evidenced by bonds, debentures, notes
or other similar instruments, (c) all obligations of such Person to pay the
deferred purchase price of property or services (other than accounts payable
incurred in the ordinary course of business determined in accordance with
generally accepted accounting principles), (d) all obligations under capital
leases of such Person, (e) all obligations or liabilities of others secured by a
lien on any asset of such Person, whether or not such obligation or liability is
assumed, (f) all guaranties of such Person of the obligations of another Person;
(g) all obligations created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even if
the rights and remedies of the seller or lender under such agreement upon an
event of default are limited to repossession or sale of such property), (h) net
exposure under any interest rate swap, currency swap, forward, cap, floor or
other similar contract that is not entered to in connection with a bona fide
hedging operation that provides offsetting benefits to such Person, which
agreements shall be marked to market on a current basis, (i) all reimbursement
and other payment obligations, contingent or otherwise, in respect of letters of
credit.
1.18 "Lien" shall mean, with respect to any property, any security
----
interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or
on such property or the income therefrom, including, without limitation, the
interest of a vendor or lessor under a conditional sale agreement, capital lease
or other title retention agreement, or any agreement to provide any of the
foregoing, and the filing of any financing statement or similar instrument under
the Uniform Commercial Code or comparable law of any jurisdiction.
1.19 "Loan" shall have the meaning set forth in Section 2.1 of this Loan
----
Agreement.
-3-
<PAGE>
1.20 "Loan Agreement" shall mean this Loan and Security Agreement.
--------------
1.21 [Intentionally Deleted]
1.22 "Material Adverse Effect" shall mean a material adverse effect on (a)
-----------------------
the business, assets, operations, prospects or financial or other condition of
Borrower and its Subsidiaries, taken as a whole; (b) the ability of Borrower and
its Subsidiaries to pay or perform the Obligations in accordance with the terms
of this Loan Agreement and the other Operative Documents and to avoid an Event
of Default under any Operative Document; or (c) the rights and remedies of
Lender under this Loan Agreement, the other Operative Documents or any related
document, instrument or agreement.
1.23 "New Equipment" shall mean Eligible Equipment purchased with the
-------------
proceeds of a Loan or placed in service not more than ninety (90) days prior to
the date of funding of the applicable Loan.
1.24 "Note" shall mean a promissory note or notes of Borrower
----
substantially in the form attached as Exhibit A hereto.
1.25 "Obligations" shall mean and include all loans, advances, debts,
-----------
liabilities, and obligations, including, without limitation, the noncancelable
obligation to make each payment scheduled to be made under Sections 2.2.2, 2.2.3
and 2.2.4, howsoever arising, owed by Borrower to Lender of every kind and
description (whether or not evidenced by any note or instrument and whether or
not for the payment of money), now existing or hereafter arising under or
pursuant to the terms of this Loan Agreement or the other Operative Documents,
including, without limitation, all interest, , fees, charges, expenses,
attorneys' fees and costs and accountants' fees and costs chargeable to and
payable by Debtor hereunder and thereunder, in each case, whether direct or
indirect, absolute or contingent, due or to become due, and whether or not
arising after the commencement of a proceeding under Title 11 of the United
States Code (11 U.S.C. Section 101 et seq.), as amended from time to time
(including post-petition interest) and whether or not allowed or allowable as a
claim in any such proceeding.
1.26 "Operative Documents" shall mean, collectively, the Loan Agreement,
-------------------
the Notes and the other documents executed in connection herewith.
1.27 "Permitted Liens" shall mean and include: (a) Liens for taxes or
---------------
other Governmental Charges not at the time delinquent or thereafter payable
without penalty or being contested in good faith, provided provision is made to
the reasonable satisfaction of Lender for the eventual payment thereof if
subsequently found payable; (b) Liens of carriers, warehousemen, mechanics,
materialmen, vendors, and landlords incurred in the ordinary course of business
for sums not overdue or being contested in good faith, provided provision is
made to the reasonable satisfaction of Lender for the eventual payment thereof
if subsequently found payable; and (c) Liens in favor of Lender.
-4-
<PAGE>
1.28 "Person" shall mean and include an individual, a partnership, a
------
corporation (including a business trust), a joint stock company, a limited
liability company, an unincorporated association, a joint venture or other
entity or a Governmental Authority.
1.29 "Requirement of Law" applicable to any Person shall mean (a) the
------------------
articles or certificate of incorporation, bylaws or other governing documents of
such Person, (b) any Governmental Rule applicable to such Person, (c) any
license, permit, approval or other authorization granted by any Governmental
Authority to or for the benefit of such Person and (d) any judgment, decision or
determination of any Governmental Authority or arbitrator, in each case
applicable to or binding upon such Person or any of its property or to which
such Person or any of its property is subject.
1.30 "Subsidiary" of any Person shall mean (a) any corporation of which
----------
more than fifty percent (50%) of the issued and outstanding equity securities
having ordinary voting power to elect a majority of the Board of Directors of
such corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon the
occurrence of any contingency) is at the time directly or indirectly owned or
controlled by such Person, by such Person and one or more of its other
Subsidiaries or by one or more of such Person's other Subsidiaries, (b) any
partnership, joint venture, or other association of which more than fifty
percent (50%) of the equity interest having the power to vote, direct or control
the management of such partnership, joint venture or other association is at the
time owned and controlled by such Person, by such Person and one or more of the
other Subsidiaries or by one or more of such Person's other subsidiaries and (c)
any other Person included in the financial statements of such Person on a
consolidated basis. Any reference to a Subsidiary without designation of the
ownership of such Subsidiary shall be deemed to refer to a Subsidiary of
Borrower.
1.31 "Used Equipment" shall mean Eligible Equipment which is not New
--------------
Equipment.
ARTICLE 2. THE LOANS.
2.1 Commitment. Subject to the terms and conditions of this Loan
----------
Agreement, from time to time on or prior to June 15, 2000 (the "Commitment
Termination Date), Lender agrees to advance to Borrower term loans (the "Loans")
in an aggregate principal amount of up to Two Million, Six Hundred Thousand
Dollars ($2,600,000) (the "Commitment"). Loans shall be made not more often
than monthly. Borrower may not prepay any amount due with respect to the Loans
2.2 Loan Payments.
-------------
2.2.1 Loan Interest. Borrower shall pay interest in advance on the
-------------
unpaid principal amount of each Loan from the date of such Loan until such Loan
is paid in full, at a rate of interest equal to eight percent (8%) per annum,
based upon a year of 360 days and actual days elapsed. If Borrower pays
interest on such Loan which is determined to be in excess of the then legal
maximum
-5-
<PAGE>
rate, then that portion of each interest payment representing an amount in
excess of the then legal maximum rate shall be deemed a payment of principal and
applied against the principal of the Loan.
2.2.2 Payments of Principal and Interest. Borrower shall make
----------------------------------
thirty-six (36) equal payments of principal and interest (payable in advance),
which payments shall fully amortize the principal and interest due on the Loan
over such thirty-six (36) month period, on the first Business Day of each month
until the Loan is paid in full.
2.2.3 Interim Interest Payment. Concurrently, with the funding of
------------------------
each Loan, Borrower shall make an advance payment of interest for the period
from the date of funding to the first Business Day of the month after the
funding of such Loan.
2.2.4 Final Payment. On the date on which the last payment is due
-------------
under Section 2.2.2 with respect to each Loan, Borrower shall pay to Lender, in
addition to any remaining unpaid principal and accrued interest and all other
amounts previously due with respect to such Loan, an amount equal to fifteen
percent (15 %) of the original principal amount of such Loan.
2.2.5 [Intentionally Deleted.]
2.3 Use of Proceeds; the Loan and the Note; Disbursement.
----------------------------------------------------
2.3.1 Use of Proceeds. The proceeds of the Loan shall be used solely
---------------
for purchasing Eligible Equipment.
2.3.2 The Loan and the Notes. The obligation of Borrower to repay
----------------------
the aggregate unpaid principal amount of and interest on each Loan shall be
evidenced by a Note setting forth the principal amount of such Loan and the
payments due with respect thereto. Any failure by Lender to obtain or retain
such a Note shall not limit or otherwise affect the obligations of Borrower to
pay amounts due hereunder with respect to a Loan.
2.3.3 Disbursement. Subject to the satisfaction of the conditions
------------
set forth in this Agreement, Lender shall disburse each Loan to Borrower as
directed in writing by Borrower.
2.4 Other Payment Terms.
-------------------
2.4.1 Place and Manner. Borrower shall make all payments due to
----------------
Lender in lawful money of the United States, in immediately available funds, at
the address for payments specified in Section 11.5.
2.4.2 Date. Whenever any payment due hereunder shall fall due on a
----
day other than a Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall be included in the computation of
interest or fees, as the case may be.
-6-
<PAGE>
2.4.3 Default Rate. If any amounts required to be paid by Borrower
------------
under this Agreement or the other Operative Documents (including principal or
interest payable on the Loan, any fees or other amounts) remain unpaid after
such amounts are due, Borrower shall pay interest on the aggregate, outstanding
principal balance hereunder from the date due until such past due amounts are
paid in full, at a per annum rate equal to the Default Rate. All computations
of such interest shall be based on a year of 360 days and actual days elapsed.
2.4.4 Commitment Fee. Lender has received a commitment fee from
--------------
Borrower in the amount of $4,000 (the "Commitment Fee"). The Commitment Fee
shall be applied towards last month's rent under this Agreement.
ARTICLE 3. CREATION OF SECURITY INTEREST.
3.1 Grant of Security Interest. As collateral security for the
--------------------------
Obligations, Borrower hereby grants to Lender a continuing security interest in
and to the following property and interests in property of Borrower (the
"Collateral"):
All right, title, interest, claims and demands of Borrower in and to
each and every item of equipment, fixtures or personal property now or
hereafter listed on Schedule I hereto, whether now owned or hereafter
acquired, together with all substitutions, renewals or replacements of and
additions, improvements, accessions, replacement parts and accumulations to
any and all of such equipment, fixtures or personal property (collectively,
the "Equipment"), together with all proceeds thereof, including, without
limitation, insurance, condemnation, requisition or similar payments, and
all proceeds from sales, renewals, releases or other dispositions thereof,
and together with all money delivered to Lender as additional security or
collateral.
Schedule I and Schedule III shall be deemed amended upon the execution of each
- ---------- ------------
Note to identify (i) the items of Equipment financed with the Loan evidenced by
such Note and in which a security interest is granted hereunder and (ii) the
locations of such items of Equipment, and such amendment shall be effective
whether or not a listing of such items or locations is actually appended
thereto.
3.2 Security Deposit. As additional security for the Obligations, Borrower
----------------
shall deposit with Lender upon the Closing an amount equal to the last month's
payment on the amount of the Commitment (the "Security Deposit") which shall be
----------------
held by Lender (without payment of interest thereon). A pro rata portion of the
Security Deposit shall be deemed to prepay as of the date of this Loan Agreement
the last payment due on each Loan. If the Commitment is not fully utilized by
the Commitment Termination Date, Lender shall retain the unutilized portion of
the Security Deposit as compensation for expenses. Borrower hereby grants to
Lender a security interest in such Security Deposit. Lender shall be under no
obligation to segregate the Security Deposit from its other funds.
-7-
<PAGE>
3.3 Liabilities Unconditional. Borrower is and shall remain absolutely
-------------------------
and unconditionally liable for the performance of its obligations under the
Operative Documents, including without limitation any deficiency by reason of
the failure of the Collateral to satisfy all amounts due Lender under the Note
or pursuant to any other Operative Document.
ARTICLE 4. CLOSING.
4.1 Conditions to Closing. The obligation of Lender to fund a Loan shall
---------------------
be subject to the following conditions precedent:
4.1.1 Conditions to Closing. Lender shall have received in
---------------------
connection with the Closing in form and substance satisfactory to Lender:
(a) This Loan Agreement, duly executed by Borrower;
(b) Copies, certified by the Secretary or Assistant Secretary
of Borrower, of: (A) the Certificate of Incorporation and
Bylaws of Borrower (as amended to the date of this Loan
Agreement), (B) the resolutions adopted by Borrower's
board of directors authorizing the transaction and the
documents being executed in connection therewith, and (C)
the incumbency of the officers executing this Loan
Agreement and the other Operative Documents on behalf of
Borrower.
(c) Subject to the restrictions set forth in the definition of
Eligible Equipment, if a Loan includes software which is
intended to become Collateral under such Loan and the
aggregate cost of such software exceeds Thirty Thousand
Dollars ($30,000), then Lender may request that assignment
or sublicensing documentation in form and substance
satisfactory to Lender be executed prior to the inclusion
of the software as Collateral under such Loan and Borrower
shall use its reasonable best efforts to accommodate said
request with the vendor of such software.
(d) Good Standing Certificate(s) (including tax status if
available) with respect to Borrower from Borrower's state
of incorporation and principal place of business, if
different, (each) dated a date reasonably close to the
date of this Loan Agreement.
(e) Evidence of the insurance coverage required by Section 6.6
of this Loan Agreement.
(f) All necessary consents of shareholders and other third
parties with respect to the subject matter of the Loan
Agreement and the other documents being executed in
connection therewith.
-8-
<PAGE>
(h) All other documents as Lender shall have reasonably
requested.
4.1.2 Conditions to Funding of Each Loan. Prior to the funding of
----------------------------------
each Loan, the following conditions with respect to such Loan shall have been
satisfied or waived by Lender:
(a) Borrower shall have executed and delivered a Note prepared
by Lender setting forth the terms of the Loan.
(b) Borrower shall have provided to Lender, with respect to
the Equipment constituting Collateral, such invoices,
bills of sale, receipts, agreements, canceled checks, and
other documents as Lender shall reasonably request to
evidence the ownership by Borrower of, and the payment in
full of the purchase price of such Equipment, each in form
and substance reasonably satisfactory to Lender; and,
except with the prior written consent of Lender which
shall not be unreasonably withheld, all such Equipment
shall be Eligible Equipment and acceptable to Lender as to
value and type.
(c) Borrower shall have taken such actions, if any, as Lender
shall reasonably determine are necessary or desirable to
perfect and protect its security interest in the
Collateral and the priority thereof.
(d) No Event of Default or Default shall have occurred and be
continuing.
(e) In Lender's sole discretion, there shall not have occurred
any Material Adverse Effect.
(f) The representations and warranties contained in this
Agreement and the other Operative Documents to which
Borrower is a party, as modified by any Disclosure
Schedule, shall be true and correct in all material
respects as if made on the date of funding of the Loan and
the items listed on such Disclosure Schedule shall be
reasonably acceptable to Lender.
(g) Each of the Operative Documents remains in full force and
effect.
(h) The requested date of funding the Loan shall not be later
than June 15, 2000.
-9-
<PAGE>
(i) Borrower shall have provided to Lender a Landlord Waiver
in the form of Exhibit B hereto or otherwise in form and
substance satisfactory to Lender, from each owner of
record of real property at which items of Collateral will
be located, setting forth the rights of Lender with
respect to such items of Collateral.
(j) Borrower shall have provided to Lender a UCC-1 financing
statement duly executed by Borrower for each state (and
county, if applicable) in which Equipment financed by the
Loan is or will be located.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF BORROWER.
Except as set forth on Schedule II hereto (the "Disclosure Schedule"),
----------- -------------------
Borrower represents and warrants to Lender:
5.1 Due Incorporation, Qualification, etc. Each of Borrower and its
--------------------------------------
Subsidiaries (i) is a corporation duly organized, validly existing and in good
standing under the laws of its state of incorporation; (ii) has the power and
authority to own, lease and operate its properties and carry on its business as
now conducted; and (iii) is duly qualified, licensed to do business and in good
standing as a foreign corporation in each jurisdiction where the failure to be
so qualified or licensed could reasonably be expected to have a Material Adverse
Effect.
5.2 Authority. The execution, delivery and performance by Borrower of
---------
each Operative Document to be executed by Borrower and the consummation of the
transactions contemplated thereby (i) are within the power of Borrower and (ii)
have been duly authorized by all necessary actions on the part of Borrower.
5.3 Enforceability. Each Operative Document executed, or to be executed,
--------------
by Borrower has been, or will be, duly executed and delivered by Borrower and
constitutes, or will constitute, a legal, valid and binding obligation of
Borrower, enforceable against Borrower in accordance with its terms, except as
limited by bankruptcy, insolvency or other similar laws of general application
relating to or affecting the enforcement of creditors' rights generally and
general principles of equity.
5.4 Non-Contravention. The execution and delivery by Borrower of the
-----------------
Operative Documents executed by Borrower and the performance and consummation of
the transactions contemplated thereby do not and will not (i) violate any
Requirement of Law applicable to Borrower; (ii) violate any provision of, or
result in the breach or the acceleration of, or entitle any other Person to
accelerate (whether after the giving of notice or lapse of time or both), any
Contractual Obligation of Borrower; or (iii) result in the creation or
imposition of any Lien upon any property, asset or revenue of Borrower (except
such Liens as may be created in favor of Lender pursuant to this Loan Agreement
or the other Operative Documents).
-10-
<PAGE>
5.5 Approvals. No consent, approval, order or authorization of, or
---------
registration, declaration or filing with, any Governmental Authority or other
Person (including, without limitation, the shareholders of any Person) is
required in connection with the execution and delivery of the Operative
Documents executed by Borrower and the performance and consummation of the
transactions contemplated thereby.
5.6 No Violation or Default. None of Borrower or Borrower's Subsidiaries
-----------------------
is in violation of or in default with respect to (i) any Requirement of Law;
(ii) any Contractual Obligation (nor is there any waiver in effect which, if not
in effect, would result in such a violation or default), where, in each case,
such violation or default, individually, or together with all such violations or
defaults, could reasonably be expected to have a Material Adverse Effect.
Without limiting the generality of the foregoing, none of Borrower or Borrower's
Subsidiaries (A) has violated any Environmental Laws, (B) has any liability
under any Environmental Laws or (C) has received notice or other communication
of an investigation or is under investigation by any Governmental Authority
having authority to enforce Environmental Laws, where such violation, liability
or investigation could reasonably be expected to have a Material Adverse Effect.
No Event of Default or Default has occurred and is continuing.
5.7 Litigation. No actions (including, without limitation, derivative
----------
actions), suits, proceedings or investigations are pending or, to the knowledge
of Borrower, threatened against Borrower or Borrower's Subsidiaries at law or in
equity in any court or before any other Governmental Authority which if
adversely determined (i) could reasonably be expected (alone or in the
aggregate) to have a Material Adverse Effect or (ii) seeks to enjoin, either
directly or indirectly, the execution, delivery or performance by Borrower of
the Operative Documents or the transactions contemplated thereby.
5.8 Title. Borrower has good and marketable title to all Collateral, free
-----
and clear of all Liens, other than Permitted Liens. Each item of Collateral
constitutes personal property.
5.9 Financial Statements. The Financial Statements of Borrower which have
--------------------
been delivered to Lender (i) are in accordance with the books and records of
Borrower and its Subsidiaries, which have been maintained in accordance with
good business practice; (ii) have been prepared in conformity with generally
accepted accounting principles; and (iii) fairly present the consolidated
financial position of Borrower as of the dates presented therein and the results
of operations, changes in financial positions or cash flows, as the case may be,
for the periods presented therein. As of the date hereof, none of Borrower or
any of Borrower's Subsidiaries has any contingent obligations, liability for
taxes or other outstanding obligations which are material in the aggregate,
except as disclosed in the most recent audited Financial Statements furnished by
Borrower to Lender prior to the date hereof.
5.10 Governmental Charges. Each of Borrower and its Subsidiaries has filed
--------------------
or caused to be filed all tax returns which are required to be filed by it.
Borrower and Borrower's Subsidiaries have paid, or made provision for the
payment of, all taxes and other Governmental Charges which
-11-
<PAGE>
have or may have become due pursuant to said returns or otherwise, except such
Governmental Charges, if any, which are being contested in good faith and as to
which adequate reserves (determined in accordance with generally accepted
accounting principals) have been provided or which could not reasonably be
expected to have a Material Adverse Effect if unpaid.
5.11 Catastrophic Events; Labor Disputes. None of Borrower or Borrower's
-----------------------------------
Subsidiaries and none of their properties is or has been affected by any fire,
explosion, accident, strike, lockout or other labor dispute, drought, storm,
hail, earthquake, embargo, act of God or other casualty that could reasonably be
expected to have a Material Adverse Effect. There are no disputes presently
subject to grievance procedure, arbitration or litigation under any of the
collective bargaining agreements, employment contracts or employee welfare or
incentive plans to which Borrower or Borrower's Subsidiaries is a party, and
there are no strikes, lockouts, work stoppages or slowdowns, or, to the best
knowledge of Borrower, jurisdictional disputes or organizing activity occurring
or threatened which could reasonably be expected to have a Material Adverse
Effect.
5.12 No Material Adverse Effect. No event has occurred and no condition
--------------------------
exists which could reasonably be expected to have a Material Adverse Effect.
5.13 Accuracy of Information Furnished. None of the Operative Documents
---------------------------------
and none of the other certificates, statements or information furnished to
Lender by or on behalf of Borrower or Borrower's Subsidiaries in connection with
the Operative Documents or the transactions contemplated thereby contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
5.14 First Priority. Assuming the timely filing of financing statements
--------------
covering the Collateral, the security interest granted hereby constitutes a
first priority security interest in and Lien on all of the Collateral, subject
only to Permitted Liens.
5.15 Principal Place of Business. The principal place of business and
---------------------------
chief executive office of Borrower, and the office where Borrower will keep all
records and files regarding the Collateral is set forth in Section 11.5.
ARTICLE 6. COVENANTS OF BORROWER.
While any Obligations remain outstanding:
6.1 Financial Statements; Other Information. Borrower shall provide to
---------------------------------------
Lender the financial statements specified in this Section 6.1, prepared in
accordance with generally accepted accounting principles, consistently applied
(except, in the case of unaudited financial statements, for the absence of
footnotes and normal year-end adjustments); provided, however, that after the
effective date of the initial registration statement covering a public offering
of Borrower's securities, Borrower shall only be required to deliver those
financial statements required to be filed by the
-12-
<PAGE>
Securities and Exchange Commission, to be provided as soon as practicable and no
less frequently than quarterly.
6.1.1 As soon as practicable (and in any event within thirty (30)
days after the end of each month), a reasonably detailed balance sheet as of the
end of such month and the related statements of income or loss, cash flow and
capital structure of the Borrower during such month (including notification of
the commencement of any material litigation by or against Borrower), certified
by Borrower's Chief Executive Officer or Chief Financial Officer fairly to
present the data reflected therein.
6.1.2 As soon as practicable (and in any event within ninety (90)
days after the end of each fiscal year), audited balance sheets as of the end of
such year (consolidated if applicable), and related statements of income or
loss, retained earnings or deficit, cash flows and capital structure of Borrower
for such year, setting forth in comparative form the corresponding figures for
the preceding fiscal year, and accompanied by an audit report and opinion of the
independent certified public accountants of recognized national standing
selected by Borrower.
6.2 Other Information. Borrower shall promptly furnish to Lender any
-----------------
additional information (including but not limited to annual and/or quarterly
reports to shareholders, tax returns, income statements, balance sheets, and
names of principal creditors) as Lender shall reasonably request which is
necessary to evaluate Borrower's continuing financial obligations.
6.3 Suits. Borrower shall deliver to Lender, promptly after the
-----
commencement thereof, notice of all actions, suits and proceedings before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which suits or proceedings if decided
adversely to Borrower could reasonably be expected to have a Material Adverse
Effect.
6.4 Financing Statements and Other Actions Regarding Collateral. At the
-----------------------------------------------------------
request of Lender, Borrower shall join Lender in executing and delivering one or
more financing statements or other documents or instruments in form and
substance satisfactory to Lender for filing or recording in any state, county or
other jurisdiction Lender or its legal counsel reasonably deems advisable to
perfect the security interests granted hereunder. Borrower agrees that Lender
may file this Loan Agreement as a Financing Statement in any such jurisdiction.
6.5 Corporate Identity. Borrower shall notify Lender in writing prior to
------------------
any change in Borrower's principal place of business or chief executive office
and any proposed or actual change of Borrower's name, identity or corporate
structure.
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<PAGE>
6.6 Insurance. Borrower shall, at its own expense, maintain the following
---------
types of insurance, with companies with an A-5 Best rating or better, acceptable
to Lender:
6.6.1 Personal property insurance on all property owned by Borrower
(including without limitation all of the Equipment) in an agreed amount based
upon the following:
(a) Standard "all risk" property insurance, including boiler
and machinery insurance, earthquake insurance, if
applicable, and flood insurance if any Equipment is
located in an identified "flood hazard area," in which
flood insurance has been made available pursuant to the
National Flood Insurance Act of 1968;
(b) The amount of such insurance covering the Equipment shall
be not less than the greater of the fair market value or
the full undepreciated replacement value of the Equipment.
The amount of such insurance allocable to loss or damage
or personal property shall not have a deductible in excess
of One Thousand Dollars ($1,000) per occurrence.
(c) Such insurance shall contain an endorsement issued by the
insurer (as opposed to a certificate issued by an agent of
the insurer) in which Lender is named as loss payee with
respect to the Equipment, and shall set aside the amount
stated in Section 6.6.1(b) for the sole benefit of, and
payable directly to, Lender.
6.6.2 Employee dishonesty insurance payable to Lender with respect to
the theft of the Equipment.
6.6.3 Business interruption insurance in an amount at all times equal
to the total payments of principal and interest to become due during the six (6)
months following the date of calculation. In the event of any interruption of
Borrower's business, the amount payable to Lender shall be equal to the actual
loss of payments of principal and interest suffered by Lender as the result of
such interruption, and shall be payable to Lender within thirty (30) days from
the date of loss, and on a month-to-month basis thereafter, until Borrower's
business is returned to a fully operational state, plus ninety (90) days.
6.6.4 Commercial general liability insurance covering bodily injury
(including death) and property damage, naming Lender, its directors, officers,
agents and employees as an Additional Insureds on all policies (evidenced by an
endorsement issued by the insurer (as opposed to a certificate issued by an
agent of the insurer)), and providing total limits in amounts as are at the time
carried by entities engaged in the same or similar business and which are
similarly situated, but in no event less than Two Million Dollars ($2,000,000)
for combined single limit occurrence. All such policies shall cover any injury
or damage occasioned by, or occurring upon, Borrower's premises, products,
operations and, at Lender's option, explosion, collapse and underground hazards.
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<PAGE>
All such policies shall contain contractual liability coverage including all
liability assumed under this agreement, and a cross liability clause providing
that such insurance shall, except with respect to the limits of liability, apply
separately to each insured.
6.6.5 Workers compensation insurance.
6.6.6 All insurance specified in this Section 6.6 shall be primary
over, and in no event shall, any insurance carried by Lender be called upon to
contribute to any loss relating to or arising out of this Loan Agreement. All
insurance shall be in effect, and shall be evidenced by policies and/or
endorsements delivered to Lender no later than twenty (20) days after the date
upon which Borrower executes this Loan Agreement. Notwithstanding anything to
the contrary contained in this Loan Agreement, Lender shall have no obligation
to purchase any Equipment until all policies are in place. All such policies
shall provide for at least thirty (30) days' prior written notice to Lender in
the event of any cancellation, non-renewal or material change in coverage, and
Lender shall receive a copy of any and all endorsements or other documentation
relating to such policies.
6.7 Title. Borrower shall promptly notify Lender in writing of any event
-----
which materially affects the value of the Collateral, the ability of Borrower or
Lender to dispose of the Collateral, or the rights or remedies of Lender in
relation thereto, including, but not limited to, the levy of any legal process
against the Collateral. Borrower shall deliver to Lender any and all evidence of
ownership of, and certificates of title to, any and all of the Equipment.
Borrower shall not grant to any Person (other than Lender or the holder of a
Permitted Lien) a Lien in the Collateral.
6.8 Further Identification of Collateral. Borrower shall furnish to Lender
------------------------------------
from time to time such statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as Lender may reasonably request, all in reasonable detail.
6.9 Good Repair. Borrower shall keep and maintain all Collateral in good
-----------
operating condition and repair, subject to ordinary wear and tear, make all
necessary repairs thereto and replacement of parts thereof so that the value and
operating efficiency thereof shall at all times be maintained and preserved; and
Borrower shall keep complete and accurate books and records with respect to the
Collateral, including maintenance records.
6.10 Loss; Damage; Destruction and Seizure.
-------------------------------------
6.10.1 If while payment Obligations are outstanding any item of
Equipment is lost, stolen, destroyed, damaged or seized by a Governmental
Authority (an "Event of Loss"), then, at Borrower's option, either (i) Lender
shall receive from the proceeds of insurance maintained pursuant to Section 6.6,
from any award paid by the seizing Governmental Authority or, to the extent not
received from the proceeds of insurance or award or both, from Borrower, on or
before the next scheduled payment date succeeding such Event of Loss, an amount
equal to the replacement value of the item of Equipment subject to the Event of
Loss which shall be held as additional Collateral for the Loan, or (ii) if no
Event of Default has occurred and is continuing, Borrower may use any such
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<PAGE>
proceeds to purchase an item of Equipment to replace the item of Equipment which
was subject to the Event of Loss and such replacement Equipment shall become
part of the Collateral. On the date of receipt by Lender of the amount specified
hereinabove with respect to each such item of Collateral subject to an Event of
Loss, the provisions of this Agreement shall terminate as to such Collateral.
Any proceeds of insurance maintained by Borrower with respect to the Collateral
pursuant to Section 6.6 and received by Borrower shall be paid to Lender
promptly upon their receipt by Borrower. If any proceeds of insurance or awards
received from Governmental Authorities are in excess of the amount owed under
this Section 6.10.1, Lender shall promptly remit to Borrower the amount in
excess of the amount to be held by Lender.
6.10.2 So long as no Event of Default has occurred and is
continuing, any proceeds of insurance maintained pursuant to Section 6.6
received by Lender or Borrower with respect to an item of Collateral the repair
of which is practicable shall, at the election of Borrower, be applied either to
the repair or replacement of such Collateral or, upon Lender's receipt of
evidence of the repair or replacement of the Collateral reasonably satisfactory
to Lender, to the reimbursement of Borrower for the cost of such repair or
replacement. All replacement parts and equipment acquired by Borrower in
replacement of Collateral pursuant to this Section 6.10 shall immediately become
part of the Collateral upon acquisition by Borrower. Borrower shall take such
actions and provide such documentation as may be reasonably requested by Lender
to protect and preserve Lender's first priority security interest and otherwise
to avoid any impairment of Lender's rights under the Operative Documents, in
connection with such repair or replacement.
ARTICLE 7. CONFIDENTIALITY.
Lender agrees to hold non-public information received by it in confidence
and shall not disclose or use such information to third parties except to its
partners or the partners of its affiliated investment funds and as Lender may
deem necessary in its reasonable judgment to satisfy its legal obligations or to
enforce Lender's rights under any Operative Document.
ARTICLE 8. PRESERVATION OF COLLATERAL BY LENDER.
Should Borrower fail or refuse to make any payment, perform or observe any
other covenant, condition or obligation, or take any other action which Borrower
is obligated under any Operative Document to make, perform, observe, take or do
at the time or in the manner provided in any Operative Document, then at
Lender's sole and absolute discretion, without notice to or demand upon Borrower
and without releasing Borrower from any obligation, covenant or condition in any
Operative Document, Lender may make, perform, observe, take or do the same in
such manner and to such extent as Lender may deem necessary to protect its
security interest in or the value of the Collateral, and Borrower shall be
liable to Lender for all costs and expenses incurred by Lender in connection
therewith.
ARTICLE 9. INSPECTION RIGHTS; LOCATION.
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<PAGE>
9.1 Inspection. Borrower hereby grants Lender or its agents, from time
----------
to time upon not less than forty-eight (48) hours' notice to Borrower during
Borrower's normal business hours, the right to enter Borrower's premises for the
purposes of inspecting all items of Collateral and ascertaining their location
and condition. Borrower shall make available to Lender or its representative its
personnel knowledgeable in the location, function and condition of such
Collateral and shall reasonably assist Lender and its representatives in their
inspection of such Collateral.
9.2 Location. Borrower shall keep the Collateral at the location
--------
specified in Section 11.5, the locations specified in Schedule III hereto as it
may be amended from time to time and such other locations as Lender shall
consent to in writing, all of which locations shall be in the state of
Washington. Borrower shall not permit any Collateral to be moved to a new
location without the prior written consent of Lender.
ARTICLE 10. EVENTS OF DEFAULT.
10.1 Events of Default. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" under this Loan Agreement and the Notes:
10.1.1 Failure to Pay. Borrower shall fail to pay when due any
--------------
principal, interest or other payment required under the terms of this Loan
Agreement or any other Operative Document on the date due and such payment shall
not have been made within five (5) Business Days of the due date; or
10.1.2 Insurance. Borrower or any of its Subsidiaries shall
---------
fail to observe or perform any covenant set forth in Section 6.6 and such
failure shall continue for a period of five (5) Business Days after notice
thereof is given to Borrower by Lender; or
10.1.3 Breaches of Other Covenants. Borrower or any of its
-----------------------------
Subsidiaries shall fail to observe or perform any other covenant, obligation,
condition or agreement contained in this Loan Agreement or the other Operative
Documents (other than those specified in Sections 10.1.1 and 10.1.2) and such
failure shall continue for ten (10) Business Days; or
10.1.4 Representations and Warranties. Any representation,
------------------------------
warranty, certificate, or other statement (financial or otherwise) made or
furnished by or on behalf of Borrower to Lender in writing in connection with
this Loan Agreement or any of the other Operative Documents, or as an inducement
to Lender to enter into this Loan Agreement, shall be false, incorrect,
incomplete or misleading in any material respect when made or furnished; or
10.1.5 Other Payment Obligations. Borrower or any of its Subsidiaries
-------------------------
shall fail to make any payment when due under the terms of any Indebtedness to
be paid by such Person (excluding this Loan Agreement and the other Operative
Documents but including any other Indebtedness of Borrower or any of its
Subsidiaries to Lender) and such failure shall continue beyond any period of
grace provided with respect thereto, or shall default in the observance or
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<PAGE>
performance of any other agreement, term or condition contained in any such
Indebtedness, and the effect of such failure or default is to cause, or permit
the holder or holders thereof to cause Indebtedness in an aggregate amount of
Fifty Thousand Dollars ($50,000) or more to become due prior to its stated date
of maturity; or
10.1.6 Voluntary Bankruptcy or Insolvency Proceedings. Borrower
----------------------------------------------
or any of its Subsidiaries shall (i) apply for or consent to the appointment of
a receiver, trustee, liquidator or custodian of itself or of all or a
substantial part of its property, (ii) be unable, or admit in writing its
inability, to pay its debts generally as they mature, (iii) make a general
assignment for the benefit of its or any of its creditors, (iv) be dissolved or
liquidated in full or in part, (v) become insolvent (as such term may be defined
or interpreted under any applicable statute), (vi) commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vii) take any
action for the purpose of affecting any of the foregoing; or
10.1.7 Involuntary Bankruptcy or Insolvency Proceedings.
------------------------------------------------
Proceedings for the appointment of a receiver, trustee, liquidator or custodian
of Borrower or any of its Subsidiaries or of all or a substantial part of the
property thereof, or an involuntary case or other proceedings seeking
liquidation, reorganization or other relief with respect to Borrower or any of
its Subsidiaries or the debts thereof under any bankruptcy, insolvency or other
similar law now or hereafter in effect shall be commenced and an order for
relief entered or such proceeding shall not be dismissed or discharged within
thirty (30) days of commencement; or
10.1.8 Judgments. A final judgment or order for the payment of
---------
money in excess of Fifty Thousand Dollars ($50,000) shall be rendered against
Borrower or any of its Subsidiaries and the same shall remain undischarged for a
period of thirty (30) days during which execution shall not be effectively
stayed, or any judgment, writ, assessment, warrant of attachment, or execution
or similar process shall be issued or levied against a substantial part of the
property of Borrower or any of its Subsidiaries and such judgment, writ, or
similar process shall not be released, stayed, vacated or otherwise dismissed
within thirty (30) days after issue or levy; or
10.1.9 Operative Documents. Any Operative Document or any material
-------------------
term thereof shall cease to be, or be asserted by Borrower not to be, a legal,
valid and binding obligation of Borrower enforceable in accordance with its
terms or if the Liens of Lender in the Collateral shall cease to be or shall not
be valid, first priority perfected Liens or Borrower shall assert that such
Liens are not valid, first priority and perfected Liens; or
10.1.10 Material Adverse Effect. One or more conditions exist or
-----------------------
events have occurred which could reasonably be expected to result in a Material
Adverse Effect.
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<PAGE>
10.2 Rights of Lender upon Default. Upon the occurrence or existence
-----------------------------
of any Event of Default (other than an Event of Default referred to in Sections
10.1.6 and 10.1.7) and at any time thereafter during the continuance of such
Event of Default, Lender may, by written notice to Borrower, declare all
outstanding Obligations payable by Borrower hereunder to be immediately due and
payable without presentment, demand, protest or any other notice of any kind,
all of which are hereby expressly waived, anything contained herein or in the
Notes to the contrary notwithstanding. Upon the occurrence or existence of any
Event of Default described in Sections 10.1.6 and 10.1.7, immediately and
without notice, all outstanding Obligations payable by Borrower hereunder shall
automatically become immediately due and payable, without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived, anything contained herein or in the Notes to the contrary
notwithstanding .
10.3 Rights Regarding Collateral. Borrower agrees that when any Event
---------------------------
of Default has occurred and is continuing, Lender shall have the rights,
options, duties and remedies of a secured party as permitted by law and, in
addition to and without limiting the foregoing, Lender may exercise any one or
more or all, and in any order, of the remedies herein set forth, including the
following: (a) Lender, personally or by agents or attorneys, shall have the
right (subject to compliance with any applicable mandatory legal requirements)
to require Borrower to assemble the Collateral and make it available to Lender
at a place to be designated by Lender located within the State of Washington ,or
to take immediate possession of the Collateral, or any portion thereof, and for
that purpose may pursue the same wherever it may be found, and may enter any
premises of Borrower, with or without notice, demand, process of law or legal
procedure, to the extent permitted by applicable law, and search for, take
possession of, remove, keep and store the same, or use and operate or lease the
same until sold; (b) Lender may, if at the time such action may be lawful and
always subject to compliance with any mandatory legal requirements, either with
or without taking possession and either before or after taking possession,
without instituting any legal proceedings whatsoever, having first given notice
of such sale by registered or certified mail to Borrower once at least ten (10)
days prior to the date of such sale, and having first given any other notice
which may be required by law, sell and dispose of the Collateral, or any part
thereof, at a private sale or at public auction, to the highest bidder, in one
lot as an entirety or in separate lots, and either for cash or on credit and on
such terms as Lender may determine, and at any place (whether or not it be the
location of the Collateral or any part thereof) designated in the notice
referred to above. To the extent permitted by applicable law, any such sale or
sales may be adjourned from time to time by announcement at the time and place
appointed for such sale or sales, or for any such adjourned sale or sales,
without further published notice, and Borrower, Lender or the holder or holders
of the Note, or of any interest therein, may bid and become the purchaser at any
such sale; and (c) Lender may proceed to protect and enforce this Agreement and
the other Operative Documents by suit or suits or proceedings in equity, at law
or in bankruptcy, and whether for the specific performance of any covenant or
agreement herein contained or in execution or aid of any power herein granted;
or for foreclosure hereunder, or for the appointment of a receiver or receivers
for any real property security or any part thereof, or for the recovery of
judgment for the Obligations or for the enforcement of any other proper, legal
or equitable remedy available under applicable law.
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<PAGE>
10.4 Waiver by Borrower. Upon the occurrence of an Event of Default, to
------------------
the extent permitted by law, Borrower covenants that it will not at any time
insist upon or plead, or in any manner whatsoever claim or take any benefit or
advantage of, any stay or extension law now or at any time hereafter in force,
nor claim, take nor insist upon any benefit or advantage of or from any law now
or hereafter in force providing for the valuation or appraisement of the
Collateral or any part thereof prior to any sale or sales thereof to be made
pursuant to any provision herein contained, or to the decree, judgment or order
of any court of competent jurisdiction; nor, after such sale or sales, claim or
exercise any right under any statute now or hereafter made or enacted by any
state or otherwise to redeem the property so sold or any part thereof, and, to
the full extent legally permitted, except as to rights expressly provided
herein, hereby expressly waives for itself and on behalf of each and every
Person, except decree or judgment creditors of Borrower, acquiring any interest
in or title to the Collateral or any part thereof subsequent to the date of this
Agreement, all benefit and advantage of any such law or laws, and covenants that
it will not invoke or utilize any such law or laws or otherwise hinder, delay or
impede the execution of any power herein granted and delegated to Lender, but
will suffer and permit the execution of every such power as though no such
power, law or laws had been made or enacted.
10.5 Effect of Sale. Any sale, whether under any power of sale available
--------------
to Lender or by virtue of judicial proceedings, shall operate to divest all
right, title, interest, claim and demand whatsoever, either at law or in equity,
of Borrower in and to the property sold, and shall be a perpetual bar, both at
law and in equity, against Borrower, its successors and assigns, and against any
and all persons claiming the property sold or any part thereof under, by or
through Borrower, its successors or assigns.
10.6 Application of Collateral Proceeds. The proceeds and/or avails of the
----------------------------------
Collateral, or any part thereof, and the proceeds and the avails of any remedy
hereunder (as well as any other amounts of any kind held by Lender at the time
of, or received by Lender after, the occurrence of an Event of Default
hereunder) shall be paid to and applied as follows: (a) First, to the payment of
reasonable costs and expenses, including all amounts expended to preserve the
value of the Collateral, of foreclosure or suit, if any, and of such sale and
the exercise of any other rights or remedies, and of all proper fees, expenses,
liability and advances, including reasonable legal expenses and attorneys' fees,
incurred or made hereunder by Lender; (b) Second, to the payment to Lender of
the amount then owing or unpaid on the Note, and in case such proceeds shall be
insufficient to pay in full the whole amount so due, owing or unpaid upon the
Note, then first, to the unpaid interest thereon, and second, to unpaid
principal thereof; such application to be made upon presentation of the Note,
and the notation thereon of the payment, if partially paid, or the surrender and
cancellation thereof, if fully paid; (c) Third, to the payment of other amounts
then payable to Lender under any of the Operative Documents; and (d) Fourth, to
the payment of the surplus, if any, to Borrower, it successors and assigns, or
to whomsoever may be lawfully entitled to receive the same.
10.7 Reinstatement of Rights. If Lender shall have proceeded to enforce
-----------------------
any right under this Agreement or any other Operative Document by foreclosure,
sale, entry or otherwise, and such
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<PAGE>
proceedings shall have been discontinued or abandoned for any reason or shall
have been determined adversely, then and in every such case (unless otherwise
ordered by a court of competent jurisdiction), Lender shall be restored to its
former position and rights hereunder with respect to the property subject to the
security interest created under this Agreement.
ARTICLE 11. MISCELLANEOUS.
11.1 Modifications, Amendments or Waivers. The provisions of any
-------------------------------------
Operative Document may be modified, amended or waived only by a written
instrument signed by the parties thereto.
11.2 No Implied Waivers; Cumulative Remedies; Writing Required. No delay
---------------------------------------------------------
or failure of Lender in exercising any right, power or remedy hereunder shall
affect or operate as a waiver thereof; nor shall any single or partial exercise
thereof or any abandonment or discontinuance of steps to enforce such a right,
power or remedy preclude any further exercise thereof or of any other right,
power or remedy. The rights and remedies hereunder of Lender are cumulative and
not exclusive of any rights or remedies which it would otherwise have. Any
waiver, permit, consent or approval of any kind or character on the part of
Lender of any breach or default under this Agreement or any such waiver of any
provision or condition of this Agreement must be in writing and shall be
effective only in the specified instance and to the extent specifically set
forth in such writing.
11.3 Expenses; Indemnification. Borrower agrees upon demand to pay or
-------------------------
reimburse Lender for all liabilities, obligations and out-of-pocket expenses,
including reasonable fees and expenses of counsel for Lender, from time to time
arising in connection with the enforcement or collection of sums due under the
Operative Documents. Borrower shall indemnify, reimburse and hold Lender and its
permitted assigns, each of Lender's or its permitted assigns' partners, and each
of their respective successors, assigns, agents, officers, directors,
shareholders, servants, agents and employees harmless from and against all
liabilities, losses, damages, actions, suits, demands, claims of any kind and
nature (including claims relating to environmental discharge, cleanup or
compliance), all costs and expenses whatsoever to the extent they may be
incurred or suffered by such indemnified party in connection therewith
(including reasonable attorneys' fees and expenses), fines, penalties (and other
charges of applicable governmental authorities), licensing fees relating to any
item of Collateral, damage to or loss of use of property (including
consequential or special damages to third parties or damages to Borrower's
property), or bodily injury to or death of any person (including any agent or
employee of Borrower) (each, a "Claim"), directly or indirectly relating to or
arising out of the use of the proceeds of the Loan, including acquisition, use,
ownership, operation, possession, control, storage, return or condition of any
item of Equipment constituting Collateral (regardless of whether such item of
Equipment is at the time in the possession of Borrower), the falsity of any
representation or warranty of Borrower or Borrower's failure to comply with the
terms of this Agreement or any other Operative Document during the Term. The
foregoing indemnity shall cover, without limitation, (i) any Claim in connection
with a design or other defect (latent or patent) in any item of Equipment
constituting Collateral, (ii) any Claim for infringement of any patent,
copyright, trademark or other intellectual property right, (iii) any Claim
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resulting from the presence on or under or the escape, seepage, leakage,
spillage, discharge, emission or release of any Hazardous Materials from any
item of Equipment financed by a Loan or constituting Collateral, including any
Claims asserted or arising under any Environmental Law, or (iv) any Claim for
negligence or strict or absolute liability in tort; provided, however, that
Borrower shall not indemnify Lender for any liability incurred by Lender as a
direct and sole result of Lender's gross negligence or willful misconduct. Such
indemnities shall continue in full force and effect, notwithstanding the
expiration or termination of this Agreement. Upon Lender's written demand,
Borrower shall assume and diligently conduct, at its sole cost and expense, the
entire defense of Lender and its permitted assigns, each of Lender's or its
permitted assigns' partners, and each of their respective successors, assigns,
agents, officers, directors, shareholders, servants, agents and employees
against any indemnified Claim described in this Section 11.3. Borrower shall not
settle or compromise any Claim against or involving Lender without first
obtaining Lender's written consent thereto, which consent shall not be
unreasonably withheld.
11.4 Waivers; Limitation on Damages. (a) Borrower or Lender shall give the
------------------------------
other party written notice within three hundred sixty-five (365) days of
obtaining knowledge of the occurrence of any claim or cause of action it
believes it has, or may seek to assert to allege against the other party,
whether such claim is based in law or equity, arising under or related to this
Agreement or any of the other Operative Documents or to the transactions
contemplated hereby or thereby, or any act or omission to act with respect
hereto or thereto, and that if it shall fail to give such notice with regard to
any such claim or cause of action, the party asserting the claim or cause of
action shall be deemed to have waived, and shall be forever barred from bringing
or asserting such claim or cause of action in any suit, action or proceeding in
any court or before any governmental agency or authority or any arbitrator. (b)
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT OR ANYWHERE
ELSE, BORROWER AGREES THAT IT SHALL NOT SEEK FROM LENDER UNDER ANY THEORY OF
LIABILITY (INCLUDING ANY THEORY IN TORTS), ANY SPECIAL, INDIRECT, CONSEQUENTIAL
OR PUNITIVE DAMAGES.
11.5 Notices; Payments. All notices and other communications given to or
-----------------
made upon any party hereto in connection with this Agreement shall be in writing
(including telexed, telecopied or telegraphic communication) and mailed (by
certified or registered mail), telexed, telegraphed, telecopied or delivered to
the respective parties, as follows:
Borrower: ENCODING.COM
3406 East Union
Seattle, WA 98122
Telephone: (206) 568-2800
Telecopier: (206) 329-3278
Attention: Jerry Goade CFO
Lender: DOMINION VENTURE FINANCE L.L.C.
44 Montgomery Street, Suite 4200
San Francisco, CA 94104
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<PAGE>
Telephone: (415) 362-4890
Telecopier: (415) 394-9245
Attention: Chief Financial Officer
or in accordance with any subsequent written direction from either party to the
other. All such notices and other communications shall, except as otherwise
expressly herein provided, be effective when received; or in the case of
delivery by messenger or overnight delivery service, when left at the
appropriate address.
11.6 Severability. If any provision of any Operative Document is held
------------
invalid or unenforceable to any extent or in any application, the remainder of
such Operative Document and all other Operative Documents, or the application of
such provision to different Persons or circumstances or in different
jurisdictions, shall not be affected thereby.
11.7 Survival. All representations, warranties, covenants and
--------
agreements of Borrower contained herein or made in writing in connection
herewith shall survive the execution and delivery of the Operative Documents,
the making of Loan hereunder, the granting of security and the issuance of the
Note.
11.8 Governing Law. This Agreement, the other Operative Documents and
-------------
the rights and obligations of the parties hereto and thereto together with
matters arising in connection therewith, shall be governed by and construed and
enforced in accordance with the laws of the State of California. Any action to
enforce this Agreement against Borrower may be brought in California or, with
regard to Collateral, may also be brought wherever such Collateral is located.
11.9 Successors and Assigns. This Agreement and the other Operative
----------------------
Documents shall be binding upon and inure to the benefit of Lender, all future
holders of the Note, Borrower and their respective successors and permitted
assigns, except that Borrower may not assign or transfer its rights hereunder or
thereunder or any interest herein or therein without the prior written consent
of Lender. Lender may assign all or any portion of its rights hereunder and
under one or more Notes to any of its affiliated investment funds or to any one
or more banks or an agent or trustee for such bank(s) (an "Assignee") and may
sell such rights to any other financial entity (a "Participant") participation
interests in Lender's rights under this Agreement and the other Operative
Documents. Lender may disclose the Operative Documents and any other financial
or other information relating to Borrower or any Subsidiary to any potential
Assignee or Participant, provided that such Participant agrees to protect the
confidentiality of such documents and information using the same measures that
it uses to protect its own confidential information. Notwithstanding anything
contained in this Paragraph 11.9, a Transfer shall not include a merger or
consolidation where (i) Borrower is the surviving entity, (ii) such merger or
consolidation will not result in an Event of Default and (iii) the Borrower will
have a net worth after giving effect to the merger or consolidation at least as
great as the net worth of the Borrower prior to such merger or consolidation.
-23-
<PAGE>
11.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties hereto on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all such
counterparts shall together constitute one and the same instrument.
11.11 Further Assurances. Borrower will, at its own expense, from time to
------------------
time do, execute, acknowledge and deliver all and every further acts, deeds,
conveyances, transfers and assurances, and all financing and continuation
statements and similar notices, reasonably necessary or proper for the
perfection of the security interest being herein provided for in the Collateral,
whether now owned or hereafter acquired.
11.12 Right of First Offer. So long as any Obligations are outstanding
--------------------
hereunder, Borrower shall provide Lender with all requests for additional debt
or lease financing prior to the time that such requests are provided to other
financing sources. Should Borrower and Lender fail to agree on the terms and
conditions of such financing within ten (3) Business Days of receipt of a
request from Borrower, then Borrower may accept a funding source other than
Lender.
11.13 Power of Attorney in Respect of the Collateral. Borrower does hereby
----------------------------------------------
irrevocably appoint Lender (which appointment is coupled with an interest), the
true and lawful attorney-in-fact of Borrower with full power of substitution,
for it and in its name (a) to perform (but Lender shall not be obligated to and
shall incur no liability to Borrower or any third party for failure to perform)
any act which Borrower is obligated by this Agreement to perform, (b) to ask,
demand, collect, receive, receipt for, sue for, compound and give acquittance
for any and all rents, issues, profits, avails, distributions, income, payment
draws and other sums in which a security interest is granted under Section 3.1
with full power to settle, adjust or compromise any claim thereunder as fully as
if Lender were Borrower itself, (c) to receive payment of and to endorse the
name of Borrower to any items of Collateral (including checks, drafts and other
orders for the payment of money) that come into Lender's possession or under
Lender's control, (d) to make all demands, consents and waivers, or take any
other action with respect to, the Collateral, (e) in Lender's discretion, to
file any claim or take any other action or institute proceedings, either in its
own name or in the name of Borrower or otherwise, which Lender may reasonably
deem necessary or appropriate to protect and preserve the right, title and
interest of Lender in and to the Collateral, and (f) to otherwise act with
respect thereto as though Lender were the outright owner of the Collateral;
provided, however, that the power of attorney herein granted shall be
exercisable only upon the occurrence and during the continuation of an Event of
Default unless in Lender's reasonable opinion immediate action is necessary to
preserve or protect the Collateral. Borrower agrees to reimburse Lender upon
demand for all reasonable costs and expenses, including attorneys' fees and
expenses, which Lender may incur while acting as Borrower's attorney in fact
hereunder, all of which costs and expenses are included within the Obligations.
11.14 Entire Agreement. This Loan Agreement and each of the other
----------------
Operative Documents, taken together, constitute and contain the entire agreement
of Borrower and Lender and supersede any and all prior agreements, negotiations,
correspondence, understandings and communications among the parties, whether
written or oral, respecting the subject matter hereof.
-24-
<PAGE>
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-25-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Loan Agreement as
of the date first written above.
LENDER: BORROWER:
DOMINION VENTURE FINANCE L.L.C., ENCODING.COM,
a Delaware limited liability company a Delaware
corporation
By: DOMINION MANAGEMENT, L.L.C.
a Delaware limited liability By: /s/ Martin Tobias
company, its General Partner _______________________________
Name: Martin Tobias
_____________________________
By: /s/ Renee C. Baker Title: CEO
__________________________________ ____________________________
Name: Renee C. Baker
________________________________
Title: VP
_______________________________
-26-
<PAGE>
EXHIBIT 16.1
December 16,1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read the Change in Independent Accountants section of Form S-1 of
Encoding.com Inc. and are in agreement with the statements contained in
paragraph 2 therein. We have no basis to agree or disagree with other
statements of the registrant contained in the document.
/s/ Ernst & Young LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Seattle, Washington
December 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 DEC-31-1998
<CASH> 6,170,985 1,442,307
<SECURITIES> 0 0
<RECEIVABLES> 778,215 86,687
<ALLOWANCES> 76,000 20,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,556,350 1,556,184
<PP&E> 2,789,647 1,383,174
<DEPRECIATION> 773,193 228,691
<TOTAL-ASSETS> 10,403,071 2,939,358
<CURRENT-LIABILITIES> 2,410,571 797,462
<BONDS> 0 0
0 0
13,058,932 2,981,329
<COMMON> 2,783,587 (133,169)
<OTHER-SE> (9,128,637) (1,606,594)
<TOTAL-LIABILITY-AND-EQUITY> 10,403,071 2,939,358
<SALES> 0 0
<TOTAL-REVENUES> 1,596,917 285,635
<CGS> 1,707,950 504,187
<TOTAL-COSTS> 4,905,489 1,465,469
<OTHER-EXPENSES> (20,464) 33,749
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (5,036,986) (1,650,272)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,036,986) (1,650,272)
<EPS-BASIC> 0.93 0.41
<EPS-DILUTED> 0.93 0.41
</TABLE>
