<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1999
REGISTRATION NO. 333-69211
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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DRAGON SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7372 04-2764754
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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320 NEVADA STREET
NEWTON, MA 02460
(617) 965-5200
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JANET M. BAKER
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
DRAGON SYSTEMS, INC.
320 NEVADA STREET
NEWTON, MA 02460
(617) 965-5200
(NAME, ADDRESS INCLUDING ZIP CODE AND TELEPHONE
NUMBER INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
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PAUL P. BROUNTAS, ESQ. JOHN A. MELTAUS, ESQ.
HALE AND DORR LLP TESTA, HURWITZ & THIBEAULT, LLP
60 STATE STREET 125 HIGH STREET
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110
TELEPHONE: (617) 526-6000 TELEPHONE: (617) 248-7000
TELECOPY: (617) 526-5000 TELECOPY: (617) 248-7100
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
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,
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 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 number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued January 8, 1999
Shares
DRAGON SYSTEMS LOGO
COMMON STOCK
------------------------
DRAGON SYSTEMS, 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 FILED AN APPLICATION FOR THE COMMON STOCK TO BE QUOTED ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "DRGN."
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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PRICE $ A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
-------- ------------- -----------
<S> <C> <C> <C>
Per Share........................... $ $ $
Total............................... $ $ $
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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.
Certain of Dragon's stockholders have granted the underwriters the right to
purchase up to an additional shares to cover over-allotments.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 1999.
------------------------
MORGAN STANLEY DEAN WITTER
HAMBRECHT & QUIST
SG COWEN
, 1999
<PAGE> 3
[gatefold artwork]
Description of Gatefold
Two page insert
Text: Dragon Systems was the first company to introduce general purpose,
large vocabulary continuous speech recognition. The company has a 16
year history of developing and providing advanced speech technologies,
worldwide. These technologies "humanize" the way people communicate
with computers, telephones, industrial systems and mobile devices.
SPEECH, PRODUCTS & TECHNOLOGY
Graphic: Picture of six company products on bottom half of page
Picture depicting various people using Dragon products on right side
of page
Company logo and a collage of international flags on bottom margin of
page.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary................... 3
Risk Factors......................... 4
Use of Proceeds...................... 11
Dividend Policy...................... 11
The Company.......................... 11
Capitalization....................... 12
Dilution............................. 13
Selected Consolidated Financial
Data............................... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 15
Business............................. 25
</TABLE>
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PAGE
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Management........................... 41
Certain Transactions................. 49
Principal Stockholders............... 50
Description of Capital Stock......... 52
Shares Eligible for Future Sale...... 54
Underwriters......................... 56
Legal Matters........................ 58
Experts.............................. 58
Additional Information............... 58
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
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In deciding whether to buy our common stock, you should only rely 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 our common stock
only in jurisdictions where such offers and sales are permitted. The information
in this Prospectus is accurate only as of the date on the cover of this
Prospectus, regardless of the time this Prospectus is delivered to you or any
sale of our common stock is made. In this Prospectus, the "Company," "Dragon,"
"we," "us" and "our" refer to Dragon Systems, Inc. and its subsidiaries.
Until , 1999, (25 days after the date of this Prospectus) all
dealers that buy, sell or trade in our common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
-------------------------
The Dragon logo, DragonDictate, Dragon Systems and PhoneQuery are
registered trademarks of the Company. BestMatch, NaturallyMobile,
NaturallyOrganized, NaturallySpeaking, The Natural Speech Company, Point &
Speak, Select-and-Say, Vocabulary Builder and VoiceTool are trademarks of the
Company. All other trade names and trademarks referred to in this Prospectus are
the property of their respective owners.
------------------------
Except as set forth in the Consolidated Financial Statements or as
otherwise indicated, all information in this Prospectus (i) assumes no exercise
of the underwriters' over-allotment option; (ii) reflects the conversion of all
outstanding shares of the Company's convertible preferred stock into shares of
common stock; (iii) reflects the filing, as of the closing of the offering, of
the Amended and Restated Certificate of Incorporation of the Company (the
"Restated Certificate of Incorporation") and the adoption of the Amended and
Restated By-Laws of the Company (the "Restated By-Laws") implementing certain
provisions described below under "Description of Capital Stock -- Delaware Law
and Certain Charter and By-Law Provisions; Anti-Takeover Effects," and the
receipt of stockholder approval therefor; and (iv) reflects a 5-for-1 stock
split of the Company's common stock effected on December 1, 1998. See
"Description of Capital Stock," "Underwriters" and Note 5 of Notes to
Consolidated Financial Statements.
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PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and
Consolidated Financial Statements and Notes appearing elsewhere in this
Prospectus.
THE COMPANY
We are a leading developer and provider of advanced speech recognition
products and related speech technologies that "humanize" the way people
communicate with computers and other electronic devices. Our products and
technologies enable electronic devices to understand speech, the most natural
and effective means of communication. As a result, users of our products can
interact with electronic devices faster and more intuitively than with other
input methods such as the keyboard or computer mouse, thereby increasing
productivity. We market a variety of speech products worldwide, including our
Dragon NaturallySpeaking family of continuous dictation software products.
Dragon NaturallySpeaking products are currently available in six languages:
American-English, British-English, French, German, Italian and Spanish, with
Japanese and Mandarin versions scheduled for release in 1999. Since 1997, we and
our Dragon NaturallySpeaking products have received over 70 industry awards
worldwide.
We were the first to introduce products incorporating built-in PC speech
recognition (1984), large vocabulary, general purpose, discrete dictation
(1990), and software-only dictation supporting most Windows applications (1993).
In June 1997, we achieved an important milestone by introducing Dragon
NaturallySpeaking 1.0, the world's first large vocabulary, general purpose,
continuous speech dictation product. We are currently applying our technologies
beyond the PC to multiple platforms such as hand-held and mobile devices, and
are developing advanced applications for emerging speech markets such as
consumer electronics and telephony. We are also collaborating with major
corporations and federal agencies to speech-enable existing hardware and
software platforms.
Our end-users include individuals and companies that utilize our
leading-edge speech products and technologies for a wide range of applications,
including general purpose dictation, legal and medical dictation, inventory
management and in-bound customer telephone interactions. These end-users include
Bank of America FSB, The Boeing Company, the Los Angeles Police Department,
Peugeot S.A., and Wells Fargo & Company. We sell our products worldwide
predominantly through major distributors to retail channel accounts and
value-added resellers ("VARs").
THE OFFERING
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Common stock offered by us in this offering................ shares
Common stock to be outstanding after this offering......... shares(1)
Use of proceeds............................................ For general corporate purposes, including working capital,
capital expenditures and potential acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol..................... DRGN
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
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NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1993 1994 1995 1996 1997 1997 1998
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(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue................................................. $13,205 $14,138 $16,887 $17,038 $26,821 $15,428 $49,576
Gross profit................................................ 10,897 9,369 10,207 9,991 16,434 8,962 34,819
Operating income (loss)..................................... 3,552 (1,246) (3,498) (5,335) (4,978) (5,637) 5,280
Income (loss) from continuing operations.................... 2,153 (579) (2,092) (4,251) (2,277) (2,685) 4,033
Net income (loss)........................................... 2,153 (579) (5,162) (5,957) (5,296) (4,991) 8,673
Earnings per share:(2)
Income (loss) from continuing operations:
Basic................................................... $ .24 $ (.06) $ (.18) $ (.36) $ (.18) $ (.22) $ .30
Diluted................................................. $ .11 $ (.06) $ (.18) $ (.36) $ (.18) $ (.22) $ .13
Net income (loss):
Basic................................................... $ .24 $ (.06) $ (.43) $ (.50) $ (.43) $ (.41) $ .64
Diluted................................................. $ .11 $ (.06) $ (.43) $ (.50) $ (.43) $ (.41) $ .27
Weighted average shares outstanding(2):
Basic..................................................... 9,048 9,355 11,897 11,922 12,460 12,116 13,622
Diluted................................................... 19,604 9,355 11,897 11,922 12,460 12,116 31,844
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AS OF SEPTEMBER 30, 1998
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ACTUAL AS ADJUSTED(3)
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(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $12,438
Working capital............................................. 21,430
Total assets................................................ 38,278
Long-term obligations, net of current maturities............ --
Total stockholders' equity.................................. 23,656
</TABLE>
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(1) Based on shares of common stock outstanding as of December 8, 1998. Excludes
shares of common stock issuable upon exercise of stock options outstanding
and reserved for future grant or award under the Company's 1999 Stock
Incentive Plan. See "Capitalization," "Management -- Benefit Plans,"
"Description of Capital Stock," "Shares Eligible for Future
Sale -- Options," and Notes 5 and 6 of Notes to Consolidated Financial
Statements.
(2) Computed on basis described in Note 2(g) of Notes to Consolidated Financial
Statements.
(3) As adjusted to reflect the sale of shares of common stock offered by
us hereby at an assumed initial public offering price of $ per share and
the application of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
3
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RISK FACTORS
You should consider carefully the risks described below before you decide
to buy our common stock. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties that we do not presently
know about or that we currently believe are immaterial may also adversely impact
our business operations. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
such case, the trading price of our common stock could fall, and you may lose
all or part of the money you paid to buy our common stock.
This Prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ significantly from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks we face, as more fully described below in this section and
elsewhere in this Prospectus.
RECENT HISTORY OF OPERATING LOSSES
Although we have been profitable for a majority of our 16 years, as well as
the first nine months of 1998, we incurred losses from continuing operations of
approximately $579,000 in 1994, $2.1 million in 1995, $4.3 million in 1996 and
$2.3 million in 1997. The major portion of our losses for those years was
principally attributable to increased expenses in developing and marketing a
continuous speech recognition product. As prospective investors, you must
consider the risks, expenses and competitive pressures which affect companies
like ours, particularly the risks that:
- the market for our products will not continue to grow rapidly;
- new technological developments may limit demand for our products;
- we may not be able to develop, market and license new products and
technologies while effectively managing our operating expenses; and
- our competitors may market their products more effectively or at lower
prices than we can.
If any of the above risks occur, we may not be able to generate any profit
and the market price of our common stock could decline.
FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
Historically, our operating results have been volatile and hard to predict
and will continue to vary from period to period for a number of reasons. First,
like many other software companies, we typically sell more products during our
fourth quarter because of increased retail consumer spending during the holiday
shopping season. In addition, it is common for our corporate customers to defer
purchase decisions until the end of the year. Second, we ship our products
shortly after we receive orders. Thus, order backlog at the beginning of any
quarter may not represent a significant portion of that quarter's expected
revenue. As a result, product revenue in any given quarter largely depends on
orders booked and shipped through the distribution channel in that quarter. This
makes it difficult for us to predict revenue for any future quarter with any
degree of certainty. Third, if we sell significantly fewer products during any
quarter, our revenue will decline, causing our operating results to fluctuate.
For instance, our sales in Europe have historically declined during the summer
months. If our sales in Europe were to increase as a percentage of net revenue,
this seasonal effect would have a more significant impact on our overall sales.
Fourth, to the extent we sell a significant number of products earlier than we
expect, our operating results for subsequent quarters may be lower than
expected. Any shortfall in our revenue as a result of these factors would
directly impact our results of operations and net income, and such fluctuations
in quarterly results could affect the market price of our common stock in a
manner unrelated to our long term operating performance.
Our operating expenses, which include product development costs, and
selling, marketing, general and administrative expenses, are based on our
expectation of future orders and sales of our products. If we sell fewer
products or otherwise have lower revenue than we expect, we may not be able to
quickly reduce our spending in response. We may also choose to reduce prices or
increase spending in response to competition or to pursue new market
opportunities. In particular, our operating margins in the future may be
adversely
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<PAGE> 7
affected if we invest more money in research and development or sales and
marketing efforts, or pursue more international market opportunities in order to
compete with new products introduced by our competitors.
COMPETITION
The market for speech recognition products is relatively new, intensely
competitive and subject to rapid technological change. To compete effectively we
must, among other things,
- establish favorable brand name recognition for our products,
- develop new products that consumers want to buy,
- introduce new versions of and enhancements to our existing products,
- develop new applications for speech technology,
- price our products at appropriate and competitive levels,
- provide strong marketing support to promote our products,
- gain and maintain access to retail outlets with sufficient shelf space,
and
- establish relationships with prominent distributors, VARs, and original
equipment manufacturers ("OEMs").
In the PC applications market, we compete with companies that are larger
and have greater financial resources, including our primary competitors,
International Business Machines Corporation ("IBM"), Lernout & Hauspie Speech
Products N.V. ("Lernout") and Philips Electronics N.V. ("Philips"). Microsoft
Corporation ("Microsoft") is also a significant potential competitor in this
market. As we expand into the telephony market, we will also face competition
from other large and well-capitalized companies such as AT&T Corp. ("AT&T"), GTE
Internetworking, a division of GTE Corporation ("GTE Internetworking"), Lucent
Technologies Inc. ("Lucent"), Nuance Communications, Inc. ("Nuance") Philips,
SpeechWorks International, Inc. (formerly Applied Language Technologies, Inc.)
("SpeechWorks"), and Voice Control Systems, Inc. ("Voice Control"). If we cannot
compete successfully with these companies, we could lose our share of the market
for PC-based speech applications or may have to increase our expenses or reduce
the price of our products. In addition, we may be unable to penetrate new
markets. Any of these developments could have a material adverse effect on our
future growth or financial condition.
Microsoft Windows is the leading desktop operating system for the PC.
Microsoft defines the various software developer standards that permit
interoperability within the Windows operating system including SAPI, its speech
application interface. Our success depends, in part, on the ability of our
products to run effectively on Windows. Recently, Microsoft publicly stated its
intention to bundle SAPI and its own competitive speech recognition technology,
known as "Whisper," into future releases of Windows. In addition, in September
1998, Microsoft made SAPI 4.0, which contains Whisper, widely available to the
Microsoft Developer Network free of charge. Microsoft also has taken steps to
make the new release of SAPI more restrictive to competitors' speech recognition
technologies. This could make it more difficult for us to market innovative
products. For example, SAPI requires the use of a computer mouse to correct
errors. This feature renders useless our voice-based error correction
capabilities. As a result, if Microsoft bundles Whisper with Windows, is
successful in influencing independent software developers to use Whisper when
speech-enabling their software applications, or continues to make SAPI more
restrictive with respect to non-Microsoft speech recognition technology, we will
sell fewer products and our future financial results will be materially and
adversely affected. Similarly, if other developers of operating systems offer
speech recognition technology embedded in their operating systems, or make their
systems incompatible with our technologies, our business could suffer
significantly.
In addition to being a potential competitor, Microsoft is a significant
stockholder of Lernout, one of our primary competitors, and has a representative
on Lernout's Board of Directors. Although we cannot definitively assess the
degree of current or future cooperation between Microsoft and Lernout, we
believe that a successful coordination of their activities would have an adverse
effect on our future financial results.
5
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DEPENDENCE ON DRAGON NATURALLYSPEAKING
Sales of the Dragon NaturallySpeaking product family accounted for
approximately 42% of our net revenue in 1997 and 80% of our net revenue for the
first nine months of 1998. We anticipate that sales of the Dragon
NaturallySpeaking product family will provide a large percentage of our net
revenue for the foreseeable future. Any decline in demand for these products,
whether as a result of new competitive products, price competition,
technological change or other factors, could materially and adversely affect our
future financial results.
EVOLVING DISTRIBUTION STRATEGY; DEPENDENCE ON DISTRIBUTION CHANNELS
To date, we have sold our products primarily through distributors and VARs
and, to a lesser extent, through OEMs. We plan to increase distribution of our
products by expanding our share of the mass market segment of the retail channel
and increasing sales in the VAR, independent software vendor ("ISV") and OEM
channels. However, we will sell fewer products if we cannot attract or retain
distributors, VARs and OEMs that can market our products effectively or that
will provide timely and cost-effective customer support. In addition, sales of
our products will drop if we fail to manage conflicts which might arise in our
distribution channels. Our two largest distributors are Ingram Micro Inc.
("Ingram Micro") and Tech Data Product Management, Inc. ("Tech Data"). Ingram
Micro accounted for approximately 5% of our net revenue in 1997 and 24% in the
first nine months of 1998. Tech Data accounted for approximately 9% of our net
revenue in 1997 and 39% in the first nine months of 1998.
An increasing number of companies compete for access to the distribution
channels we use, and our arrangements with our distributors and retailers
generally may be terminated by either party at any time. Retailers who carry our
products typically have a limited amount of shelf space and promotional
resources, for which there is intense competition. We cannot guarantee that
distributors and retailers will continue to purchase our products or provide us
with adequate levels of shelf space and promotional support. Any termination or
significant disruption of our relationship with any of our major distributors or
retailers, or a significant reduction in sales volume attributable to any of our
principal resellers, could adversely affect our day-to-day operating performance
and future financial results.
DEVELOPING MARKET AND UNCERTAIN ACCEPTANCE OF SPEECH PRODUCTS
Because the speech industry is relatively new and rapidly evolving, it is
difficult to accurately predict demand and market acceptance for our recently
introduced products. The speech industry currently has a limited number of
proven products and applications. Popular perceptions about the use of speech
recognition products (including reliability, cost, ease-of-use and quality) may
impact the growth of the market for such products, particularly for speech
products other than PC-based applications. While we believe that our speech
recognition technology offers significant advantages over competing products for
a broad range of commercial applications, we cannot guarantee that the market
for speech recognition products will grow significantly or that our products
will become widely accepted. Therefore, it is difficult to predict the size and
future growth rate, if any, of this market. In addition, our existing and future
products may become obsolete and unmarketable if competing products based on new
technologies are introduced to the market. From time to time, we and our
competitors may announce new products, capabilities or technologies that have
the potential to replace or limit the usefulness of our existing product
offerings. As a result, customers may refrain from purchasing any of our
existing products. If the market for our products does not develop as quickly as
we expect, or becomes more competitive, or if our new products do not achieve
market acceptance, our future financial results will be adversely affected.
MANAGEMENT OF GROWTH
Our rapid growth has placed a significant strain on our resources. As of
December 8, 1998, we had approximately 316 employees located in the United
States, England, France and Germany compared to
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<PAGE> 9
approximately 185 employees in three locations on January 1, 1997. To continue
to manage this growth successfully, we must do the following:
- continue to implement and improve our operational and financial systems;
- maintain our research and development activities;
- expand, train and manage our employee base;
- expand our sales and marketing activities;
- implement and manage new distribution channels to penetrate different and
broader markets;
- leverage our core technology for new product applications;
- manage multiple relationships among various customers, suppliers,
resellers, licensors, strategic partners and other third parties; and
- expand our existing facilities or relocate to larger facilities.
We have tried to assess and address the costs and risks associated with our
recent and planned future expansion, but our systems, procedures and controls
may not support our current or future operations. In addition, it may be
difficult to simultaneously manage our planned expansion and successfully
exploit the market opportunity for our products in a timely and cost-effective
manner. If we fail to manage our planned expansion effectively, our business
could suffer significantly.
DEPENDENCE ON KEY PERSONNEL
Our future success depends on the continued services of a number of key
officers, including our co-founder, Chairman and Chief Executive Officer, Dr.
Janet M. Baker, and our President, John D. Shagoury. We do not have an
employment contract with any of our key personnel other than Mr. Shagoury. If
Dr. Janet Baker left our Company, the loss of her technological knowledge and
industry expertise could seriously impede our development of new products.
Moreover, the loss of one or a group of our key employees, particularly to a
competitor, and any resulting loss of customers to any such competitor, could
adversely affect our future financial results. After undergoing back surgery in
October 1998, our other co-founder, Dr. James K. Baker, the former Chairman and
Chief Executive Officer of our Company and the husband of Dr. Janet M. Baker,
resigned as a director, officer and employee of our Company, effective December
1, 1998. During his 16 years with the Company, he and his wife led the
development of our speech technology and current products. Dr. James K. Baker
has agreed to serve as Chairman of our Technical Advisory Board. See
"Management -- Technical Advisory Board."
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL
Our future performance also depends upon our ability to attract and retain
highly-qualified scientific, technical, sales, marketing and managerial
personnel. There is intense competition for such personnel, particularly in the
field of software engineering. If we do not succeed in retaining our personnel
or in attracting new employees, our business could suffer significantly.
DEPENDENCE ON INTELLECTUAL PROPERTY
We believe that our success depends, in large part, on protecting our
intellectual property in the United States and in foreign countries by doing the
following:
- obtaining patent protection for our technology;
- defending our patents against any infringement;
- preserving our trade secrets and trademarks;
- operating without infringing the patents and intellectual property rights
of others; and
- requiring that each employee, consultant or advisor sign a
confidentiality agreement to prevent the unauthorized use or disclosure
of confidential information.
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However, we cannot guarantee that these measures will be adequate to
protect our intellectual property rights. Despite our efforts to protect our
intellectual property, we cannot prevent unauthorized third parties from trying
to copy our products or use our confidential information to develop competing
products.
We may experience additional difficulty in protecting our intellectual
property rights because we derive a major portion of our sales from licensing
our products under standardized "shrink wrap" agreements that our licensees do
not sign. If any of these agreements is deemed to be unenforceable, our
licensees could use our technology free of charge and without appropriate
limitations. Moreover, we have not embedded any copy protection in our software
because we do not believe that these mechanisms are practical or cost-effective.
At the same time, current United States laws that prohibit software copying
provide only limited protection from software "pirates," and the laws of many
other countries provide almost no protection against unauthorized copying.
Policing unauthorized use of our technology is difficult, expensive, and
time-consuming. We expect software piracy to be a persistent problem and
anticipate that our revenue, especially overseas, may be adversely affected as a
result of this problem.
In addition, we may also be subject to litigation to defend our
intellectual property rights from claims of infringement made by third parties.
An adverse legal decision affecting our intellectual property, or the use of
significant resources to defend against such a claim, could adversely affect our
operating results.
RISK OF SOFTWARE DEFECTS
Complex software products like those we develop may contain errors or
defects, especially when first implemented, that may be very costly to correct.
If any of our products contain defects or errors, our business could also suffer
significantly from potential adverse customer reaction, negative publicity
regarding our products and harm to our reputation.
RISKS ASSOCIATED WITH OPERATIONS OUTSIDE NORTH AMERICA
Net revenue from customers located outside North America accounted for
approximately 29% in 1996, 15% in 1997 and 10% in the first nine months of 1998
of our net revenue for such periods. Over time, we expect revenue from
international operations, principally in Europe, to increase as a percentage of
our net revenue. As a result, we are exposed to a number of risks customary for
international operations, including the following:
- difficulties relating to global administration of our business;
- difficulty in staffing and managing our foreign operations;
- currency fluctuations;
- limitations on sending the earnings of our foreign operations back to the
United States;
- the burdens of complying with a wide variety of foreign laws;
- the uncertainty of laws and enforcement in certain countries relating to
the protection of intellectual property rights;
- reductions in business activity during the summer months in Europe and
certain other parts of the world;
- export controls;
- multiple and possibly overlapping tax structures;
- changes in import/export duties and quotas;
- introduction of tariff or nontariff barriers; and
- economic or political changes in international markets.
In addition, a substantial portion of our operating expenses and costs
relating to our international operations are denominated in United States
dollars, while a majority of our international revenue is generated in foreign
currencies. As a result, we are exposed to fluctuations in the foreign exchange
rates between the United States dollar and foreign currencies. To date, we have
not used risk management techniques or
8
<PAGE> 11
"hedged" the risks associated with fluctuations in foreign exchange rates. Our
business could suffer significantly from the realization of any of these risks.
RISKS ASSOCIATED WITH YEAR 2000
We believe we do not have any significant exposure to the Year 2000 issue
because our products and information systems accept four digit entries into
their year code fields. In addition, we believe that the information systems of
our distributors, OEMs, VARs and ISVs (as they relate to our business) comply
with Year 2000 requirements. However, if the information systems of any of our
customers or suppliers fail to comply with Year 2000 requirements, then the
operation of our information systems could be adversely affected. Furthermore,
customers may be forced to allocate greater resources to comply with Year 2000
requirements and as a result purchase fewer products from us, causing a
significant reduction in our net revenue. For additional information addressing
the Company's exposure to the Year 2000 issue, please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
CONTROL BY PRINCIPAL STOCKHOLDERS
Following this offering, Drs. Janet and James Baker, will hold an aggregate
of approximately % of the outstanding shares of our common stock ( % if
the underwriters' over-allotment option is exercised in full), and Seagate
Technology, Inc. ("Seagate") will hold approximately %. As a result, these
three stockholders acting together will be able to take any of the following
actions without the approval of our public stockholders:
- amend our charter in certain respects or approve a merger, sale of assets
or other major corporate transaction;
- defeat any non-negotiated takeover attempt that may be beneficial to our
public stockholders;
- determine the amount and timing of dividends paid to themselves and to
our public stockholders; and
- otherwise control our management and operations and the outcome of all
matters submitted for a stockholder vote, including the election of
directors, that could conflict with the interests of our public
stockholders.
NO PRIOR TRADING MARKET, POTENTIAL VOLATILITY OF STOCK PRICE
Before this offering, there was no public market for our common stock. The
underwriters and we have determined the initial public offering price of our
common stock based on negotiations among us concerning the valuation of our
common stock. Nevertheless, after this offering, you may not be able to resell
your shares at or above the initial public offering price due to a number of
factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in securities analysts' financial estimates;
- changes in expectations as to our future financial performance;
- announcements of new technological innovations and alliances by
competitors; and
- the operating and stock price performance of our competitors and other
comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance. You should read the "Underwriters" section of this Prospectus for a
more complete discussion of the factors that the underwriters and we considered
in determining the initial public offering price.
9
<PAGE> 12
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have shares of common stock
outstanding and will have reserved an additional shares of common
stock for issuance pursuant to our stock option plans and stock purchase plan.
We intend to register for resale the shares of common stock reserved for
issuance under our stock option plans and stock purchase plan after the date of
this Prospectus. The federal securities laws impose certain restrictions on the
ability of stockholders to resell their shares.
We have entered into a registration rights agreement with Seagate which
permits Seagate, subject to certain conditions, to include shares of common
stock it holds in certain offerings of common stock made by us in the future.
Certain stockholders of the Company, including Seagate, and certain holders of
options to purchase our common stock have agreed that, for a period of 180 days
from the date of this Prospectus, they will not sell their shares without the
prior written consent of Morgan Stanley & Co. Incorporated. Accordingly, on
, shares of our common stock held by Seagate will be
available for immediate resale (subject to certain volume restrictions imposed
on Seagate by the federal securities laws).
If a large number of shares of our common stock were traded immediately
following this offering, the price of our common stock could decrease, impairing
our ability to obtain capital through another offering of our equity securities
and decreasing the value of your investment.
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price of our common stock is substantially
higher than the pro forma net tangible book value per share of the outstanding
common stock. Accordingly, if you purchase any shares of common stock in this
offering you will incur immediate dilution of approximately $ in the
pro forma net tangible book value per share of the common stock from the price
you pay for our common stock.
POTENTIAL ADVERSE EFFECTS OF ANTI-TAKEOVER PROVISIONS; AVAILABILITY OF PREFERRED
STOCK FOR ISSUANCE
Our Restated Certificate of Incorporation and Restated By-Laws contain
anti-takeover provisions that could have the effect of delaying or preventing
changes in our management, even if such changes would benefit our public
stockholders. For example, following the closing of this offering, our Board of
Directors may issue up to 5,000,000 shares of preferred stock without any
further stockholder vote or action. The preferred stock could have voting,
liquidation, dividend and other rights superior to those of our common stock,
and, therefore, any issuance of preferred stock could adversely affect your
rights as a common stock holder. These factors could cause the market price of
the common stock to decrease.
NO EXPECTATION OF DIVIDEND PAYMENTS
We do not expect to pay cash dividends on our common stock in the
foreseeable future.
10
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of common stock offered by the Company in this offering are estimated to be
approximately $ at an assumed initial public offering price of $
per share and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company. If the over-allotment
option is exercised, the Company will not receive any proceeds from the sale of
the common stock by the selling stockholders granting the option.
The principal purposes of this offering are to establish a public market
for the Company's common stock, to increase the Company's visibility in the
marketplace, to facilitate future access by the Company to public capital
markets, to provide liquidity to existing stockholders and to obtain additional
working capital.
The Company expects to use the net proceeds for general corporate purposes,
including working capital and capital expenditures. The Company may also use a
portion of the net proceeds to acquire businesses, products or technologies that
are complementary to those of the Company, although no specific acquisitions are
currently planned and no portion of the net proceeds has been allocated for any
acquisition. Pending such uses, the net proceeds to the Company from this
offering will be invested in investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends on its common
stock or other securities and does not anticipate paying cash dividends in the
foreseeable future. The Company currently intends to retain all of its future
earnings, if any, for use in the operation of its business.
THE COMPANY
Our company was incorporated in Delaware in 1982. Our principal executive
offices are located at 320 Nevada Street, Newton, MA 02460. Our telephone number
is (617) 965-5200.
11
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998: (i) on an actual basis, (ii) on a pro forma basis giving
effect to the conversion of all of the Company's outstanding convertible
preferred stock and (iii) on a pro forma basis as adjusted to reflect the
issuance and sale of the shares of common stock offered by the Company
hereby at an assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Stockholders' equity:(1)
Convertible preferred stock, $.04 par value; 5,000,000
shares authorized; 3,238,951 shares issued and
outstanding, actual; none issued and outstanding pro
forma and pro forma as adjusted..................... $ 130 $ -- $ --
Common stock, $.04 par value; 100,000,000 shares
authorized; 13,628,380 shares issued and
outstanding, actual; 29,823,135 shares issued and
outstanding pro forma; shares issued and
outstanding pro forma as adjusted(2)................ 545 1,193
Additional paid-in capital............................. 31,028 30,510
Retained deficit....................................... (8,045) (8,045)
Accumulated other comprehensive income................. (2) (2)
------- ------- -------
Total stockholders' equity.......................... 23,656 23,656
------- ------- -------
Total capitalization.............................. $23,656 $23,656 $
======= ======= =======
</TABLE>
- ------------
(1) Gives effect to the filing of the Restated Certificate of Incorporation of
the Company immediately prior to the closing of the offering authorizing
5,000,000 shares of preferred stock, $.04 par value, and 100,000,000 shares
of common stock, $.04 par value.
(2) Excludes (i) 3,692,310 shares of common stock issuable upon exercise of
stock options outstanding as of December 8, 1998, of which options to
purchase 1,306,740 shares were then exercisable, and (ii) 3,000,000 shares
of common stock reserved for future grant or award under the Company's 1999
Stock Incentive Plan. See "Management -- Benefit Plans" and Notes 5 and 6 of
Notes to Consolidated Financial Statements.
12
<PAGE> 15
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1998, giving effect to the conversion of all shares of convertible preferred
stock outstanding as of September 30, 1998 into common stock on the closing of
this offering, was approximately $23,656,000 or approximately $0.79 per share of
common stock. Pro forma net tangible book value per share represents the
Company's tangible net worth (tangible assets less total liabilities) divided by
the 29,823,135 shares of common stock outstanding after giving effect to the
conversion of the convertible preferred stock outstanding at September 30, 1998
into common stock. After giving effect to the issuance and sale of the
shares of common stock offered by the Company hereby (at an
assumed initial public offering price of $ per share)and the receipt and
application of the net proceeds therefrom, the Company's pro forma net tangible
book value at September 30, 1998 would have been $ , or $ per
share. This represents an immediate increase in pro forma net tangible book
value to existing stockholders of $ per share and an immediate dilution to
new investors of $ per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering............................................... $ .79
Increase in pro forma net tangible book value per share
attributable to new investors..........................
-----
Pro forma net tangible book value per share after this
offering..................................................
-------
Dilution per share to new investors......................... $
=======
</TABLE>
The following table summarizes on a pro forma basis, giving effect to the
conversion of all outstanding shares of convertible preferred stock into common
stock on the closing of this offering, as of December 8, 1998, the difference
between the number of shares of common stock purchased from the Company, the
total consideration paid to the Company, and the average price per share paid by
existing stockholders and by new investors (at an assumed initial public
offering price of $ per share before deduction of estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 29,823,135 % $31,703,000 % $1.06
New investors....................... -- -- -- --
---------- ----- ----------- -----
Total..................... 100.0% 100.0% $
========== ===== =========== =====
</TABLE>
- ------------
(1) If the over-allotment option is exercised in full, sales by selling
stockholders will reduce the number of shares of common stock held by
existing stockholders to shares, or % of the total
number of shares of common stock to be outstanding after this offering and
will increase the number of shares of common stock held by new investors to
shares, or % of the total number of shares to be
outstanding after this offering. See "Principal Stockholders."
The table above assumes no exercise of stock options outstanding at
December 8, 1998. As of December 8, 1998, there were options outstanding to
purchase 3,692,310 shares of common stock at a weighted average exercise price
of $ per share and 3,000,000 shares reserved for future grant or award under
the Company's 1999 Stock Incentive Plan. To the extent any of these options are
exercised, there will be further dilution to new investors. To the extent all of
such outstanding options had been exercised as of December 8, 1998, net tangible
book value per share after this offering would be $ and total dilution
per share to new investors would be $ . See "Management -- Benefit
Plans," Note 6 of Notes to Consolidated Financial Statements, and "Risk
Factors -- Immediate and Substantial Dilution."
13
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto, and with Management's Discussion and Analysis of Financial Condition
and Results of Operations, included elsewhere in this Prospectus. The selected
consolidated statement of operations data set forth below for the three years in
the period ended December 31, 1997 and the selected consolidated balance sheet
data at December 31, 1996 and December 31, 1997 are derived from Consolidated
Financial Statements of the Company audited by Arthur Andersen LLP, independent
public accountants, which are included elsewhere in this Prospectus. The
selected consolidated balance sheet data at December 31, 1995 is derived from
Consolidated Financial Statements of the Company audited by Arthur Andersen LLP,
independent public accountants, which are not included in this Prospectus. The
selected consolidated financial data as of and for the years ended December 31,
1993 and December 31, 1994 are derived from Consolidated Financial Statements of
the Company audited by other independent public accountants, and which are not
included in this Prospectus. The selected consolidated financial data for the
nine months ended September 30, 1997 and as of and for the nine months ended
September 30, 1998 are derived from the Company's unaudited Consolidated
Financial Statements included elsewhere in this Prospectus. In the opinion of
management of the Company, the unaudited Consolidated Financial Statements have
been prepared on the same basis as the audited Consolidated Financial Statements
audited by Arthur Andersen LLP and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for these periods. Results for the nine
months ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998 or any other future
period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net Revenue:
Software licenses......................................... $10,181 $ 7,720 $12,171 $11,479 $19,506 $10,222 $44,766
Development contracts..................................... 3,024 6,418 4,716 5,559 7,315 5,206 4,810
------- ------- ------- ------- ------- ------- -------
Total net revenue....................................... 13,205 14,138 16,887 17,038 26,821 15,428 49,576
------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Cost of software licenses................................. 1,422 2,278 3,365 3,465 5,394 2,806 12,162
Cost of development contracts............................. 886 2,491 3,315 3,582 4,993 3,660 2,595
------- ------- ------- ------- ------- ------- -------
Total cost of revenue................................... 2,308 4,769 6,680 7,047 10,387 6,466 14,757
------- ------- ------- ------- ------- ------- -------
Gross profit............................................ 10,897 9,369 10,207 9,991 16,434 8,962 34,819
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.................................. 4,072 6,311 6,688 7,983 9,577 7,096 10,607
Selling and marketing..................................... 1,940 3,022 4,825 5,403 9,350 5,734 16,025
General and administrative................................ 1,333 1,282 2,192 1,940 2,485 1,769 2,907
------- ------- ------- ------- ------- ------- -------
Total operating expenses................................ 7,345 10,615 13,705 15,326 21,412 14,599 29,539
------- ------- ------- ------- ------- ------- -------
Operating income (loss)..................................... 3,552 (1,246) (3,498) (5,335) (4,978) (5,637) 5,280
Interest income........................................... 23 313 760 520 511 369 452
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations before income
taxes................................................. 3,575 (933) (2,738) (4,815) (4,467) (5,268) 5,732
Provision for (benefit from) income taxes................... 1,422 (354) (646) (564) (2,190) (2,583) 1,699
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations................ 2,153 (579) (2,092) (4,251) (2,277) (2,685) 4,033
------- ------- ------- ------- ------- ------- -------
Gain (loss) on discontinued operations.................. -- -- (3,070) (1,706) (3,019) (2,306) 4,640
------- ------- ------- ------- ------- ------- -------
Net income (loss)....................................... $ 2,153 $ (579) $(5,162) $(5,957) $(5,296) $(4,991) $ 8,673
======= ======= ======= ======= ======= ======= =======
Earnings per share:
Income (loss) from continuing operations:
Basic................................................... $ .24 $ (.06) $ (.18) $ (.36) $ (.18) $ (.22) $ .30
Diluted................................................. $ .11 $ (.06) $ (.18) $ (.36) $ (.18) $ (.22) $ .13
Net income (loss):
Basic................................................... $ .24 $ (.06) $ (.43) $ (.50) $ (.43) $ (.41) $ .64
Diluted................................................. $ .11 $ (.06) $ (.43) $ (.50) $ (.43) $ (.41) $ .27
Weighted average shares outstanding
Basic................................................... 9,048 9,355 11,897 11,922 12,460 12,116 13,622
Diluted................................................. 19,604 9,355 11,897 11,922 12,460 12,116 31,844
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
------ ------- ------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short term investments........... $2,353 $13,310 $ 9,582 $ 6,912 $ 12,321 $12,438
Working capital............................................. 2,763 16,135 11,136 5,936 13,481 21,430
Total assets................................................ 6,286 20,294 16,223 13,113 23,186 38,278
Long-term obligations, net of current maturities............ 64 43 43 -- -- --
Retained earnings (deficit)................................. 3,922 (303) (5,465) (11,422) (16,718) (8,045)
Total stockholders' equity.................................. 4,001 18,402 13,230 7,292 14,854 23,656
</TABLE>
- ------------
(1) For an explanation of the determination of the number of shares used in
computing earnings per share, see Note 2(g) of Notes to Consolidated
Financial Statements.
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and related Notes included
elsewhere in this Prospectus.
OVERVIEW
The Company is a leading developer and provider of advanced speech
recognition products and related speech technologies. In 1997, Dragon became the
first company to develop, produce and market large vocabulary, general purpose,
continuous speech technology for commercial applications through the
introduction of its Dragon NaturallySpeaking dictation product.
The Company was founded in 1982 and has financed its activities through
income from operations and proceeds from the sale of equity securities to
Seagate in 1994 and 1997. At December 8, 1998, Seagate owned approximately 38%
of the Company's outstanding common stock on an as-converted basis. Although the
Company has been profitable for a majority of its 16 years of operation, during
1994, 1995, 1996 and 1997, the Company incurred aggregate losses from continuing
operations of approximately $9.2 million. These losses resulted principally from
a significant increase in operating expenses associated with developing and
marketing the Dragon NaturallySpeaking family of continuous speech products.
In 1995, the Company acquired an ownership interest in Articulate Systems,
Inc. ("Articulate"). In 1998, the Company sold its 38% interest in Articulate to
fonix corporation ("fonix") for cash, notes and fonix common stock valued in the
aggregate at $4.0 million. Accordingly, the results of operations of Articulate
have been included as discontinued operations in Dragon's Consolidated Financial
Statements for all periods presented. See Note 3 of Notes to Consolidated
Financial Statements.
The Company derives its revenue primarily from the sale of software
licenses through distributors to retail channel accounts and VARs, as well as
from royalty fees from OEMs which license the Company's software directly. The
Company also derives revenue from corporate development contracts and
government-funded research. The Company recognizes revenue from software license
sales at the time the products are shipped out of distribution to the retail
channel accounts and VARs. The Company recognizes revenue from OEM royalty fees
upon the shipment of units by the OEM. Revenue from corporate development
contracts and government-funded research is recognized on a
percentage-of-completion basis.
Since its introduction in June 1997, and through September 30, 1998, the
Dragon NaturallySpeaking product family has represented the Company's principal
source of revenue. The Company plans to expand its existing product offerings
through a series of new product introductions over the next twelve months. The
Company believes that its existing products, as well as the new products it
plans to introduce, will constitute the majority of its revenue for the
foreseeable future. The Company's future revenue growth is dependent, in part,
on continued acceptance of its existing products as well as market acceptance of
its new product introductions. Any decline in the market acceptance of the
Company's products, or in speech technology in general, would have a material
adverse effect on the Company's results of operations. In addition, because the
Company's products range from lower-priced, mass merchant software to
higher-priced, professional software and related mobile products (which combine
microphones and recorders with the Company's software), a shift in the revenue
mix of any of these products could have a material impact on the Company's gross
margins in any given period.
The Company sells its products worldwide, with the majority of its net
revenue coming from North America. North American revenue accounted for
approximately 85% of the Company's net revenue during 1997 and 90% of net
revenue during the first nine months of 1998. Revenue derived outside North
America declined as a percentage of net revenue in 1998 primarily due to the
substantial increase in revenue from the Company's Dragon NaturallySpeaking
product family in North America. The Company expects that net revenue derived
outside North America will increase as a percentage of net revenue in 1999.
Sales to the Company's two largest distributors constituted approximately
14% of net revenue in 1997 and 63% of net revenue for the first nine months of
1998. The Company believes that these two distributors
15
<PAGE> 18
will remain among the Company's largest distributors. For the nine months ended
September 30, 1998, approximately 72% of the Company's net revenue was
attributable to sales to retail channel accounts through distribution. The
Company plans to expand its OEM relationships in 1999 and therefore expects that
its 1999 OEM-related revenue will increase significantly as a percentage of net
revenue as compared to 1998 levels.
At the time of sale, the Company provides for its expected sales returns,
sales commissions and post-sales support expense. In addition, the Company
creates reserves for the collectability of accounts receivable. While the
Company believes its provisions for sales returns, sales commissions, post-sales
support, and the collectability of accounts receivable are adequate, actual
results could differ from those estimates.
The Company's cost of software licenses primarily consists of expenses
incurred by the Company to manufacture, package and distribute its products and
related documentation. These costs include expenses for hardware, literature and
packaging, technical support, fulfillment and shipping, and shrinkage. Any
significant change in material component prices, increase or decrease in bundled
hardware component prices, or increase or decrease in fulfillment and shipping
costs could have a material effect on the Company's cost of software licenses.
The Company's cost of development contracts consists primarily of labor costs,
other direct expenses and related overhead associated with the performance of
these contracts. Since the beginning of 1997, the Company has not capitalized
any software development costs as such costs were immaterial. In addition, all
research and development costs have been charged to operations as incurred.
The Company has experienced seasonal fluctuations in its results of
operations. The Company began selling its products at retail in August 1997 and
based on its 1997 experience and software industry trends, the Company expects
sales to increase during the fourth quarter as a result of the holiday shopping
season. In addition, certain corporate customers tend to enter into sales
contracts at or near year-end resulting in higher demand during the fourth
quarter. Due to this seasonality, the Company expects to incur increased sales
and marketing expense (principally advertising costs, promotional expenses and
sales commission payouts) during the fourth quarter and any shortfall from
anticipated revenue in that quarter would have a disproportionately greater
adverse effect on the Company's operating results. In addition, sales in Europe
have historically declined during the summer months. If the Company's European
sales increase as a percentage of net revenue, this seasonal effect will have a
more significant impact on the Company's results from operations.
The Company employed 316 people at December 8, 1998, compared to 185 at
January 1, 1997. This increase in headcount resulted primarily from an increase
in sales and marketing personnel associated with the Company's efforts to market
and sell its Dragon NaturallySpeaking family of products. The Company expects to
continue to increase expenses associated with its sales and marketing
infrastructure in anticipation of continued sales growth. Additionally, the
Company expects to increase its headcount in research and development to support
its new product development efforts. Given the expected increase in headcount,
the Company anticipates that it will need to either expand its existing offices
or relocate to a larger facility within the next 12 to 18 months. The Company
believes that this expansion or relocation will result in an increase in total
facilities costs.
The Company's ability to grow will depend, in part, on its success in
adding sales, marketing and research and development personnel during 1999 and
in future periods. In addition, the Company's future success will depend in part
on its ability to attract, retain and motivate highly qualified technical and
management personnel, for whom competition is intense. The Company expects that
future expansion will continue to challenge the Company's ability to hire,
train, motivate, and manage its employees, and to attract and retain qualified
senior managers and technical staff, such as programmers and software engineers.
If the Company's revenue does not increase relative to its operating expenses,
the Company's management systems do not expand to meet increasing demands, the
Company fails to attract, assimilate and retain qualified personnel, or the
Company's management otherwise fails to manage the Company's expansion
effectively, the Company's business, financial condition and operating results
could be materially and adversely affected.
16
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth selected consolidated financial information
included in the Company's consolidated statements of operations expressed as a
percentage of net revenue for the periods indicated and certain gross profit
data expressed as a percentage of software license revenue or development
contract revenue.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Revenue:
Software licenses............................... 72.1% 67.4% 72.7% 66.3% 90.3%
Development contracts........................... 27.9 32.6 27.3 33.7 9.7
------ ------ ------ ------ ------
Total net revenue....................... 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------
Cost of revenue:
Cost of software licenses....................... 19.9 20.3 20.1 18.2 24.5
Cost of development contracts................... 19.6 21.0 18.6 23.7 5.2
------ ------ ------ ------ ------
Total cost of revenue................... 39.5 41.3 38.7 41.9 29.7
------ ------ ------ ------ ------
Gross profit............................ 60.5 58.7 61.3 58.1 70.3
------ ------ ------ ------ ------
Operating expenses:
Research and development........................ 39.6 46.9 35.7 46.0 21.4
Selling and marketing........................... 28.6 31.7 34.9 37.2 32.3
General and administrative...................... 13.0 11.4 9.3 11.5 5.9
------ ------ ------ ------ ------
Total operating expenses................ 81.2 90.0 79.9 94.7 59.6
------ ------ ------ ------ ------
Operating income (loss)........................... (20.7) (31.3) (18.6) (36.6) 10.7
Interest income................................. 4.5 3.1 1.9 2.6 0.9
------ ------ ------ ------ ------
Income (loss) before income taxes....... (16.2) (28.2) (16.7) (34.2) 11.6
Provision for (benefit from) income taxes......... (3.8) (3.3) (8.2) (16.7) 3.4
------ ------ ------ ------ ------
Income (loss) from continuing
operations............................ (12.4) (24.9) (8.5) (17.5) 8.2
------ ------ ------ ------ ------
Gain (loss) on discontinued operations:
Loss from operations.................... (18.2) (10.0) (11.3) (14.9) (4.3)
Gain on sale............................ -- -- -- -- 13.7
------ ------ ------ ------ ------
Gain (loss) on discontinued
operations....................... (18.2) (10.0) (11.3) (14.9) 9.4
------ ------ ------ ------ ------
Net income (loss)............................... (30.6%) (34.9%) (19.8%) (32.4%) 17.6%
====== ====== ====== ====== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET REVENUE
Net revenue for the nine months ended September 30, 1998 was $49.6 million,
an increase of 221% over the $15.4 million of revenue generated for the nine
months ended September 30, 1997. The increase in net revenue during 1998 was
primarily attributable to higher sales of the Company's Dragon NaturallySpeaking
continuous speech product family, the first version of which was first released
in June 1997 and did not begin to generate revenue until the third quarter of
1997.
Software Licenses. Software license revenue for the nine months ended
September 30, 1998 was $44.8 million, an increase of 338% over the $10.2 million
reported in the comparable period in 1997. Growth in software license revenue
was primarily attributable to the introduction of the Company's Dragon
NaturallySpeaking product family. Since the introduction of Dragon
NaturallySpeaking, the Company has continued to increase its product offerings,
including products for multiple languages and telephony
17
<PAGE> 20
applications, and developed several new versions of its core dictation product
designed to meet the needs of consumers, mobile users and medical, legal and
other professional and corporate users. Sales from software licenses accounted
for approximately 90% of net revenue for the nine month period ended September
30, 1998, compared to approximately 66% of net revenue for the comparable period
in 1997.
During 1998 and the latter part of 1997, the Company significantly expanded
its sales channels, both inside and outside North America, to respond to the
market demand for its software products. While the Company believes that its
revenue will continue to grow as it introduces new products with enhanced
capabilities and expands its penetration in the retail markets both domestically
and abroad, it expects to face significant product and price competition in the
future which could adversely impact revenue growth and profit margins.
Development Contracts. Development contract revenue for the nine months
ended September 30, 1998 was $4.8 million, a decrease of 7.6% from the $5.2
million reported in the comparable prior year. This decrease resulted from a
decline in government-funded research projects, partially offset by an increase
in commercial contracts. Development contract revenue accounted for
approximately 10% of net revenue for the nine month period ended September 30,
1998, compared to approximately 34% of net revenue for the comparable period in
1997. The Company expects development contract revenue to decrease as a
percentage of net revenue during future periods.
COST OF REVENUE
Software Licenses. Software license costs increased by $9.4 million, or
333%, from $2.8 million for the nine months ended September 30, 1997 to $12.2
million during the comparable period of 1998. As a percentage of software
license revenue, these costs were 27.2% for the nine months ended September 30,
1998 and 27.5% for the comparable period in 1997.
The absolute dollar increase in software license costs was due primarily to
increased materials costs associated with higher sales volumes, partially offset
by decreasing materials costs per unit. As a percentage of software license
revenue, cost of materials costs increased by 4.6% in 1998 primarily due to
revenue mix changes year to year, and, to a lesser degree, a reduction in the
selling prices of some products as the Company entered the competitive retail
channel in August 1997. In addition, the Company increased its investment in
technical support by $1.4 million, or 209%, from $644,000 for the nine months
ended September 30, 1997 to $2.0 million during the comparable period in 1998.
This increase was primarily due to increased unit sales and the resulting
increase in demand for technical support. The increase in shipping and receiving
costs of approximately $682,000 during the first nine months of 1998 was
primarily attributable to increased freight expense incurred as a result of
entering into contracts with two major national distributors.
Development Contracts. Costs of development contracts decreased by $1.1
million, or 29.1%, from $3.7 million for the nine months ended September 30,
1997 to $2.6 million in the comparable period in 1998. The decrease was
primarily due to a decline in government contracts, partially offset by an
increase in commercial contract work. Costs of development contracts were 70.3%
of development contract revenue for the nine months ended September 30, 1997 and
54% for the nine months ended September 30, 1998.
OPERATING EXPENSES
Research & Development. Research and development expenses consist
primarily of personnel costs, as well as travel and facilities and
equipment-related expenses associated with the Company's research and
development efforts. Research and development expenses increased by $3.5
million, or 49.5%, from $7.1 million during the nine months ended September 30,
1997 to $10.6 million in the comparable period in 1998. As a percentage of net
revenue, Company-funded research and development expenses were 46.0% of net
revenue for the nine months ended September 30, 1997 compared to 21.4% in the
same period in 1998. The absolute dollar increase in these periods was due
primarily to increases in research and development personnel.
In addition to Company-funded research and development, the Company incurs
research and development expenses relating to government and customer-funded
projects. These expenses are included in the cost of development contracts. For
the nine months ended September 30, 1998, research and development
18
<PAGE> 21
costs, including government and customer-funded expenses, totaled $13.2 million
compared to $10.8 million in the comparable period of 1997, an increase of
22.7%.
The Company believes that continued investment in research and development
is critical to attaining its strategic objectives, and, as a result, expects
research and development costs to increase in absolute dollars in future
periods.
Selling and Marketing. Selling and marketing expenses consist primarily of
advertising and promotional expenses, compensation and related costs for sales
and marketing personnel, and tradeshow and travel expenses. Selling and
marketing expenses increased by $10.3 million, or 179%, from $5.7 million in the
nine months ended September 30, 1997 to $16.0 million in the comparable period
in 1998. These costs represented 32.3% of net revenue during the first nine
months of 1998 compared to 37.2% in the comparable period in 1997. The absolute
dollar increase in selling and marketing expenses was primarily due to increased
costs related to retail advertising and promotional campaigns which the Company
incurred in the first nine months of 1998 as part of its efforts to distribute
its products to retail channel accounts which began in August 1997.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for administrative employees,
professional fees and other general corporate expenses. General and
administrative costs increased by $1.1 million, or 64.3%, from $1.8 million in
the nine months ended September 30, 1997 to $2.9 million in the comparable
period in 1998. These costs represented 5.9% of net revenue for the first nine
months of 1998 compared to 11.5% in the comparable period in 1997. The absolute
dollar increase was primarily due to the addition of senior executive staff as
well as accounting and finance personnel needed to support the Company's
business expansion and, to a lesser extent, the increase in the Company's bad
debt reserve to support the increase in accounts receivable attributable to
increased software license revenue.
Interest Income. Interest income increased by $83,000, or 22.5%, from
$369,000 for the nine months ended September 30, 1997 to $452,000 in the
comparable period of 1998. The absolute dollar increase was due to higher cash
balances in investment accounts.
Provision for (Benefit from) Income Taxes. The Company had an income tax
benefit for the nine months ended September 30, 1997 of $2.6 million as a result
of the Company recognizing the benefit of its deferred tax assets. For the nine
months ended September 30, 1998, the Company had an income tax provision of $1.7
million based on an estimated effective tax rate of 29.6%.
Discontinued Operations. For the period through September 2, 1998, the
Company incurred an operating loss from discontinued operations of $2.1 million
compared to an operating loss of $2.3 million for the nine month period ending
September 30, 1997. On September 2, 1998, the Company sold its interest in
Articulate. This sale resulted in a gain of $6.8 million net of taxes of $1.4
million. See Note 3 of Notes to Consolidated Financial Statements.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NET REVENUE
Net revenue increased slightly from 1995 to 1996 from approximately $16.9
million in 1995 to $17.0 million in 1996 and increased by $9.8 million, or
57.4%, to $26.8 million in 1997.
Software Licenses. Software license revenue decreased by $692,000, or
5.7%, from $12.2 million in 1995 to $11.5 million in 1996 and increased by $8.0
million, or 69.9%, to $19.5 million in 1997. The increase in software license
revenue for 1997 was primarily due to significant sales in the fourth quarter of
1997 of the Company's Dragon NaturallySpeaking dictation software product which
was first shipped to customers in June 1997.
Development Contracts. Development contract revenue increased by $843,000,
or 17.9%, from $4.7 million in 1995 to $5.6 million in 1996 and increased by
$1.8 million, or 31.6%, to $7.3 million in 1997. These increases were primarily
attributable to a combination of increased funding for existing projects and the
commencement of additional projects.
19
<PAGE> 22
COSTS OF REVENUE
Software Licenses. Software license costs increased by $100,000, or 3.0%,
from $3.4 million in 1995 to $3.5 million in 1996 and increased $1.9 million, or
55.7%, to $5.4 million in 1997. As a percentage of software license revenue,
these costs were 27.6% in 1995, 30.2% in 1996, and 27.7% in 1997. The absolute
dollar increase from 1996 to 1997 was due primarily to increased materials costs
associated with higher product sales resulting from the introduction of the
Dragon NaturallySpeaking product family. Increased software license costs in
1997 were offset by an $833,000 decrease in amortization costs.
Development Contracts. Development contract costs increased by $267,000,
or 8.1%, from $3.3 million in 1995 to $3.6 million in 1996 and increased by $1.4
million, or 39.4%, to $5.0 million in 1997. As a percentage of development
contract revenue, these costs were 70.3% in 1995, 64.4% in 1996, and 68.3% in
1997. The absolute increase was due principally to increased labor expense
associated with two large United States government projects.
OPERATING EXPENSES
Research and Development. Research and development expenses increased by
$1.3 million, or 19.4%, from $6.7 million in 1995 to $8.0 million in 1996 and
increased by $1.6 million, or 20.0%, to $9.6 million in 1997. As a percentage of
net revenue, these expenses represented 39.6% in 1995, 46.9% in 1996 and 35.7%
in 1997. The absolute dollar increases in each year were principally
attributable to costs associated with increased headcount, primarily product
development personnel, associated with the commercialization of the Company's
Dragon NaturallySpeaking product family. The Company had 135 employees engaged
in research and development activities on December 31, 1997 compared to 125 on
December 31, 1996 and 96 on December 31, 1995.
Total research and development costs, including government and
customer-funded efforts, was $10.0 million in 1995, $11.6 million in 1996 and
$14.6 million in 1997. As a percentage of net revenue, these expenses
represented 59.2% for 1995, 67.9% for 1996 and 54.3% for 1997.
Selling and Marketing. Selling and marketing expenses increased by
$578,000, or 12.0%, from $4.8 million in 1995 to $5.4 million in 1996 and
increased by $3.9 million, or 73.1%, to $9.4 million in 1997. As a percentage of
net revenue, these expenses represented 28.6% in 1995, 31.7% in 1996 and 34.9%
in 1997. The absolute dollar increase in selling and marketing expense from 1995
to 1996 was primarily due to incremental expenses associated with the first full
year of operation of the Company's German sales office which was established in
August 1995. The increase in selling and marketing expense in absolute dollars
between 1996 and 1997 was primarily due to the costs associated with increased
retail advertising and promotions in connection with the release of the
Company's Dragon NaturallySpeaking product family, increased sales personnel and
increased sales commissions.
General and Administrative. General and administrative expenses decreased
by $252,000, or 11.5%, from $2.2 million in 1995 to $1.9 million in 1996 and
increased by $545,000, or 28.1%, to $2.5 million in 1997. As a percentage of net
revenue, these expenses represented 13.0% in 1995, 11.4% in 1996 and 9.3% in
1997. The absolute dollar decrease from 1995 compared to 1996 was primarily
related to the decrease in bad debt expense. The absolute dollar increase from
1996 compared to 1997 was primarily due to increased expenses associated with
additional finance and administrative staff and infrastructure necessary to
support increased sales.
Interest Income. Interest income decreased by $240,000, or 31.6%, from
$760,000 in 1995 to $520,000 in 1996 and remained relatively constant between
1996 and 1997. The absolute dollar decrease from 1995 to 1996 was primarily due
to lower average cash balances.
Provision for (Benefit from) Income Taxes. As a result of the Company's
ability to utilize its net operating losses, the Company had an income tax
benefit of $646,000 in 1995, $564,000 in 1996 and $2.2 million in 1997.
Discontinued Operations. The Company incurred an operating loss from
discontinued operations of $3.1 million in 1995, $1.7 million in 1996 and $3.0
million in 1997. On September 2, 1998, the Company sold its interest in
Articulate. See Note 3 of Notes to Consolidated Financial Statements.
20
<PAGE> 23
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial
information both in absolute dollars and as a percentage of net revenue for the
each of the Company's last seven quarters. This information is derived from the
Company's unaudited consolidated financial statements and has been prepared on
the same basis as the Company's annual consolidated financial statements which
appear elsewhere in this Prospectus. In the opinion of the Company's management,
this information reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information. These
unaudited quarterly results should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes appearing elsewhere in this
Prospectus. The results for any quarter are not necessarily indicative of future
quarterly results of operations, and the Company believes that period-to-period
comparisons should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
--------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue:
Software licenses............................... $ 3,309 $ 3,187 $ 3,726 $ 9,284 $12,262 $13,754 $18,750
Development contracts........................... 1,920 1,607 1,679 2,109 1,350 1,503 1,957
------- ------- ------- ------- ------- ------- -------
Total net revenue............................. 5,229 4,794 5,405 11,393 13,612 15,257 20,707
------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Cost of software licenses....................... 854 1,134 818 2,588 3,216 3,330 5,616
Cost of development contracts................... 1,171 1,087 1,402 1,333 801 827 967
------- ------- ------- ------- ------- ------- -------
Total cost of revenue......................... 2,025 2,221 2,220 3,921 4,017 4,157 6,583
------- ------- ------- ------- ------- ------- -------
Gross profit.................................. 3,204 2,573 3,185 7,472 9,595 11,100 14,124
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development........................ 2,127 2,469 2,500 2,481 3,247 3,475 3,885
Selling and marketing........................... 1,546 1,860 2,328 3,616 3,853 4,953 7,219
General and administrative...................... 558 549 662 716 941 924 1,042
------- ------- ------- ------- ------- ------- -------
Total operating expenses...................... 4,231 4,878 5,490 6,813 8,041 9,352 12,146
------- ------- ------- ------- ------- ------- -------
Operating income (loss).......................... (1,027) (2,305) (2,305) 659 1,554 1,748 1,978
Interest income................................. 104 100 165 142 156 149 147
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes............. (923) (2,205) (2,140) 801 1,710 1,897 2,125
Provision for (benefit from) income taxes........ (453) (1,081) (1,049) 393 507 562 630
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations........ (470) (1,124) (1,091) 408 1,203 1,335 1,495
------- ------- ------- ------- ------- ------- -------
Gain (loss) on discontinued operations:
Loss from operations............................ (599) (907) (800) (713) (851) (675) (616)
Gain on sale, net of taxes of $1,420............ -- -- -- -- -- -- 6,782
------- ------- ------- ------- ------- ------- -------
Gain (loss) on discontinued operations........ (599) (907) (800) (713) (851) (675) 6,166
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................. $(1,069) $(2,031) $(1,891) $ (305) $ 352 $ 660 $ 7,661
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUE:
Net revenue:
Software licenses............................... 63.3% 66.5% 68.9% 81.5% 90.1% 90.1% 90.5%
Development contracts........................... 36.7 33.5 31.1 18.5 9.9 9.9 9.5
------- ------- ------- ------- ------- ------- -------
Total net revenue............................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of software licenses....................... 16.3 23.7 15.1 22.7 23.6 21.8 27.1
Cost of development contracts................... 22.4 22.7 25.9 11.7 5.9 5.4 4.7
------- ------- ------- ------- ------- ------- -------
Total cost of revenue......................... 38.7 46.4 41.0 34.4 29.5 27.2 31.8
------- ------- ------- ------- ------- ------- -------
Gross profit.................................. 61.3 53.6 59.0 65.6 70.5 72.8 68.2
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development........................ 40.7 51.5 46.3 21.8 23.9 22.8 18.8
Selling and marketing........................... 29.6 38.8 43.1 31.7 28.3 32.5 34.9
General and administrative...................... 10.7 11.5 12.2 6.3 6.9 6.1 5.0
------- ------- ------- ------- ------- ------- -------
Total operating expenses...................... 81.0 101.8 101.6 59.8 59.1 61.4 58.7
------- ------- ------- ------- ------- ------- -------
Operating income (loss).......................... (19.7) (48.2) (42.6) 5.8 11.4 11.4 9.5
Interest income................................. 2.0 2.1 3.1 1.2 1.1 1.0 0.7
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes............. (17.7) (46.1) (39.5) 7.0 12.5 12.4 10.2
Provision for (benefit from) income taxes........ (8.7) (22.5) (19.4) 3.4 3.7 3.7 3.0
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations........ (9.0) (23.6) (20.1) 3.6 8.8 8.7 7.2
------- ------- ------- ------- ------- ------- -------
Gain (loss) on discontinued operations:
Loss from operations............................ (11.5) (18.9) (14.8) (6.3) (6.3) (4.4) (3.0)
Gain on sale, net of taxes of $1,420............ -- -- -- -- -- -- 32.8
------- ------- ------- ------- ------- ------- -------
Gain (loss) on discontinued operations........ (11.5) (18.9) (14.8) (6.3) (6.3) (4.4) 29.8
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................. (20.5)% (42.5)% (34.9)% (2.7)% 2.5% 4.3% 37.0%
======= ======= ======= ======= ======= ======= =======
</TABLE>
21
<PAGE> 24
In the last seven quarters, expenses and operating income as a percentage
of net revenue have varied primarily due to increased revenue from the Company's
Dragon NaturallySpeaking family of products. During the quarter ended September
30, 1998, selling and marketing expense increased in absolute dollars, as the
Company spent $2.1 million to advertise with an Internet content provider. In
addition, cost of software licenses increased as a percentage of net revenue in
the quarter ended September 30, 1998 primarily as a result of the introduction
of and increased sales of Dragon Point & Speak, a lower-priced, mass market
consumer product.
The Company's quarterly operating results have fluctuated in the past, and
will likely continue to fluctuate in the future, as a result of a number of
factors, many of which are outside the Company's control. These factors include:
- the demand for the Company's software products and services;
- the level of product and price competition that the Company encounters,
including the frequency of changes in pricing policies;
- the timing of new product introductions and product enhancements by the
Company or its competitors;
- market acceptance of new products;
- the Company's ability to retain and hire research and development and
sales personnel;
- the mix of products and services sold;
- seasonality of purchasers;
- expansion of the Company's international operations; and
- budgeting cycles of the Company's customers.
The Company's software products are typically shipped when orders are
received and consequently, backlog at the beginning of any quarter has in the
past represented only a small portion of that quarter's expected revenue. Since
the Company's operating expenses are based on anticipated revenue levels and
because a high percentage of the Company's expenses are relatively fixed in the
near term, any shortfall from anticipated revenue could result in significant
variations in operating results from quarter to quarter.
Based on these factors, the Company believes that future revenue, expenses
and results of operations could vary significantly from quarter-to-quarter. As a
result, quarter-to-quarter comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Due to all of the foregoing factors, it is possible that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the market price of the
Company's common stock could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
From its inception until 1994, the Company funded its operating activities
primarily through cash provided from operations. The Company received $14.5
million in July 1994 and $12.0 million in September 1997 of net cash from the
sale of common and convertible preferred stock to Seagate. In January 1995, the
Company purchased an interest in Articulate for $1.9 million. In September 1998,
the Company sold its 38% interest in Articulate to fonix for cash, notes and
fonix common stock valued in the aggregate at $4.0 million.
Cash used in operating activities totaled $2.3 million during 1995, $1.6
million during 1996, $6.5 million during 1997 and $2.2 million for the nine
month period ended September 30, 1998. The increase in cash used in 1997 was
primarily attributable to an increase in the Company's operating loss related to
its investment in its product development and infrastructure.
Net cash used in investing activities was $3.3 million during 1995, $2.5
million during 1996 and $5.1 million during 1997 and net cash provided by
investing activities was $3.8 million for the nine months ended September 30,
1998. Net cash used in investing activities in all fiscal periods was primarily
related to purchases of property and equipment needed to support the Company's
expansion and short-term investment activity. The net cash provided by investing
activities for the nine month period ended September 30, 1998 was primarily a
result of the cash received from the sale of the Company's interest in
Articulate.
22
<PAGE> 25
Net cash provided by financing activities was $12.9 million for 1997 and
$61,000 for the nine months ended September 30, 1998. Net cash provided by
financing activities in 1997 was primarily related to the sale of common and
convertible preferred stock to Seagate.
The Company has no debt. In December 1998, the Company entered into an
agreement with Fleet National Bank providing for a domestic credit facility of
up to $6 million, which includes $4 million for revolving loans and $2 million
for letters of credit. The actual amounts available under this credit facility
will be determined by an accounts receivable based borrowing formula. This
credit facility is secured by the United States inventory and accounts
receivable of the Company and bears interest at Fleet's prime rate of interest.
The Company's cash and cash equivalent balances were $4.9 million at
December 31, 1997 and $6.6 million at September 30, 1998. Working capital
increased to approximately $21.4 million at September 30, 1998 compared to $13.5
million at December 31, 1997. This increase in working capital was due primarily
to an increase in accounts receivable and inventory, partially offset by
increases in accounts payable and accrued expenses. While management believes
that the risks associated with collection of accounts receivable have been
adequately addressed in the Company's reserves and credit and collection
policies, there can be no assurance that the Company's reserves will be
adequate.
The Company expects that its requirements for facilities, equipment and
other capital expenditures will grow as demand for the Company's products
increases. The Company plans to hire additional researchers and development
engineers in the future to accelerate its new product offerings. Additionally,
the Company plans to hire additional sales and marketing personnel to support
anticipated sales growth. As a result of this planned growth, the Company
anticipates incurring additional capital and other expenditures during future
periods.
The Company believes that the net proceeds from this offering, together
with its current cash balances and income from operations, will be sufficient to
fund its working capital and capital expenditures for at least the next 12
months. To the extent that the Company is unable to fund its operations from
cash flows, the Company may need to obtain financing from external sources in
the form of additional equity, indebtedness, or both. There can be no assurance
that additional financing will be available at all, or that, if available, such
financing will be obtainable on terms favorable to the Company.
To date, inflation has not had a significant impact on the Company's
results of operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the year code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century from 20th century dates. As a result, computer systems
and/or software used by many companies and governmental agencies may need to be
upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions to normal business activities.
State of Readiness. The Company has completed its assessment of its
products and information technology systems. The Company believes that its
software products are Year 2000 compliant. The Company has begun its assessment
of the information technology systems of its principal vendors, suppliers and
customers as well as its own non-information technology systems (such as
microcontrollers embedded in machinery and equipment). Based on representations
of the Company's principal vendors, suppliers and customers, the Company
believes that the information technology systems of such third parties, as they
relate to the Company, do not pose significant operational issues. In addition,
the Company does not believe its embedded systems pose Year 2000 concerns
because the Company believes it has identified all of its software and hardware
that require Year 2000 updates or modifications. Dragon has no proprietary
systems.
Costs. To date, the Company has not spent material sums in connection with
its Year 2000 risk assessment and remediation activities. The Company's costs
associated with replacing or modifying its information systems to address Year
2000 concerns have not been material. The Company believes that an additional
$100,000 will be required to complete the replacement or modification of its
information systems. The Company has funded these activities principally through
income from operations.
23
<PAGE> 26
Risks. The Company believes that the principal Year 2000 risks it faces
relate to potential disruptions in materials or component supply and in order
processing and fulfillment by third parties in the event that the information
systems of third parties are materially and adversely affected by Year 2000
related software failures.
Contingency Plan. To date, the Company has not formulated contingency
plans relating to third-party Year 2000 disruptions because it believes the
probability of such disruptions to be relatively remote. As discussed above, the
Company is engaged in ongoing assessment and remediation activities and the
responses received from third-party vendors and suppliers will be taken into
account in determining the nature and extent of any contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In March, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is
effective for the year ended December 31, 1999 and provides guidance for the
accounting treatment of costs of computer software developed or obtained for
internal use. The Company does not expect adoption of this statement to have a
material impact on its consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The statement is effective for the year
ending December 31, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The Company does not expect adoption of this statement to
have a material impact on its consolidated financial position or results of
operations.
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<PAGE> 27
BUSINESS
Dragon is a leading developer and provider of advanced speech recognition
products and related speech technologies that "humanize" the way people
communicate with computers and other electronic devices. The Company's products
and technologies enable electronic devices to understand speech, the most
natural and effective means of communication. As a result, users of the
Company's products can interact with electronic devices faster and more
intuitively than with other input methods, such as the keyboard or computer
mouse, thereby increasing productivity. The Company markets a variety of speech
products worldwide, including its Dragon NaturallySpeaking family of continuous
dictation products. Dragon NaturallySpeaking products are currently available in
six languages: American-English, British-English, French, German, Italian and
Spanish, with Japanese and Mandarin versions scheduled for release in 1999. In
addition, third parties have used the Company's speech technology to develop
small vocabulary products in other languages, including Hebrew and Swedish.
Since 1997, the Company and its Dragon NaturallySpeaking products have received
over 70 industry awards and citations including:
- BYTE, Best of COMDEX: Best of Show (Spring 1997)
- PC/Computing, 1997 MVP Winner: Input Device (January 1998)
- Innovation 98 Info PC, iT/COMDEX France: Best Development Tool (February
1998)
- BYTE Espana, 1997 Award of Excellence, Spain (February 1998)
- PC Professional, Innovation of the Year 1997-1998: Best of CeBIT Software
Category, Germany (April 1998)
- PC World, World Class Award: Best Voice Recognition Software (June 1998)
- PC World, World Class Award: Most Promising Software Newcomer (June 1998)
- Retail Vision: Six awards including Best Vendor and Best Retail Strategy
(August 1998)
- PC Magazine, Editor's Choice: Best Speech Dictation Product (October
1998)
- SMAU, 31st Premio Industrial Design Award: Business Software Category,
Italy (October 1998)
- PC World, Best New Handheld Device (November 1998)
- PC Magazine Australia, Editor's Choice, Australia (December 1998)
Since its founding in 1982, the Company has developed and commercialized
successive versions of high-quality speech products and technologies and has
been the first to market a number of innovative products. The Company was the
first to introduce products incorporating built-in PC speech recognition (1984),
large vocabulary, general purpose, discrete dictation (1990), and software-only
dictation supporting most Windows applications (1993). In June 1997, the Company
achieved an important milestone by introducing Dragon NaturallySpeaking 1.0, the
world's first large vocabulary, general purpose, continuous speech dictation
product. From its inception, the Company has funded its research and development
and other activities primarily through funds generated from operations. In
addition, its financial resources have been supplemented by Seagate, which made
significant equity investments in the Company in 1994 and 1997.
The Company is applying its technologies beyond the PC to multiple
platforms such as hand-held and mobile devices and developing advanced
applications for emerging speech markets such as consumer electronics and
telephony. The Company is also collaborating with major corporations and federal
agencies to voice-enable existing hardware and software platforms. For example,
the Company led the development of a speech recognition system for a global
package company that increases worker productivity by allowing package handlers
to enter data using speech instead of the keyboard.
Dragon's end-users include individuals and companies which utilize the
Company's leading-edge speech products and technologies for a wide range of
applications, including general purpose dictation, legal and medical dictation,
inventory management and in-bound customer telephone interactions. These
end-users include Bank of America, Boeing, the Los Angeles Police Department,
Peugeot and Wells Fargo. The Company sells its products worldwide predominantly
through major distributors to retail channel accounts and VARs, and directly to
OEMs and ISVs.
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INDUSTRY OVERVIEW
Although speech is the most natural and effective means of human
communication, historically it has not been used as a primary means of
interaction between people and machines. Basic speech recognition technology has
existed for a number of years and effectively addressed certain specialized
applications, such as limited data entry and retrieval. However, its widespread
use has been constrained by technical limitations and inadequate PC processing
power. For example, until recently, speech recognition products had limited
vocabularies and required users to speak discretely, pausing after each word,
rather than naturally and continuously. These technical constraints limited the
widespread use of speech technology. As a result, the development of speech
technology capable of recognizing natural and continuous speech and suitable for
widespread commercial application has been an attractive but, until recently,
elusive goal.
In June 1997, Dragon became the first company to develop, produce and
market large vocabulary, general purpose, continuous speech recognition
technology for commercial applications. The introduction of this technology
represented the culmination of a series of technological breakthroughs by Dragon
over the past two decades. The Company believes that the advent of continuous
speech recognition technology and the increased availability of powerful,
low-cost microprocessors and memory are creating a wide range of commercial
applications for speech-based products. As hardware platforms shrink and devices
become more portable, sacrificing keyboard space, the Company believes that
speech will become the preferred and most efficient interface for operating
electronic devices.
Currently available speech recognition products allow PC users to use
speech in addition to the keyboard to significantly increase the speed with
which they can generate, edit and format text in popular word processing,
contact management and e-mail programs. Until the introduction of Dragon
NaturallySpeaking, commercially available speech technology required users to
speak discretely, and was unable to recognize natural and continuous speech. As
a result, early speech recognition products did not provide the accuracy, speed,
ease-of-use and functionality required for widespread market acceptance.
According to a Voice Information Associates report, the market for continuous
speech dictation products alone is expected to reach $3.0 billion by the year
2001 as manufacturers incorporate such speech technology into PCs and other
electronic devices.
The increasing use and growing complexity of computers and sophisticated
electronic devices, along with the broad deployment of software applications,
has created a need for a faster, easier to use and more intuitive method of
interacting with machines. This need is driving the development of an increasing
number of applications for speech recognition technology, ranging from consumer
electronics to enterprise-wide applications, that will enable individuals to
interact with machines more productively. For instance, as speech recognition
technology has become more prevalent, speech-enabled applications and systems
have been deployed to enhance productivity in a variety of commercial
environments beyond PC-based dictation applications, including package handling,
order taking and call center management.
In addition, the Company believes there is increasing demand for a broad
range of speech-enabled products that will not be dependent on end-user PC
platforms. Although the personal computer will remain an important speech
technology platform, the Company believes that speech recognition technology
will lead to the development of a broad market of mobile, networked and consumer
"information appliances," including hand-held computers and wireless
communication devices that will transmit information quickly and effectively in
response to speech. Some of these appliances will provide telephone and Internet
access as well. The Company expects strong growth in the demand for a range of
platforms from hand-held personal organizers and wireless communicators to
multi-user, server-based systems with vertical and enterprise-wide applications.
The Company also expects strong growth in the demand for embedded systems such
as automobile command/control and navigation devices and server-based platforms
which will support customized transcription and audio indexing devices. However,
to exploit successfully the opportunity that these platforms represent for the
speech industry, speech recognition products and technologies operating on these
platforms must continue to offer high levels of accuracy, speed and ease-of-use.
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<PAGE> 29
THE DRAGON SOLUTION
The Company is a leading developer and provider of advanced speech
recognition technologies and products that are highly accurate, easy to use and
operate on a variety of platforms. The Company believes that its award-winning
products and technologies offer the following benefits which will promote the
adoption of speech as a standard user interface between people and machines and
expand the market for speech technology and products:
Increased Productivity. The Company's products significantly increase
productivity by allowing users to generate, edit and format documents, e-mail
messages and other text faster and with greater accuracy than existing data
entry methods, such as typing. Several published product comparisons have
identified the Dragon NaturallySpeaking product family as an industry leader in
speech recognition accuracy and have awarded these products their highest
ratings on a words-per-minute basis. In addition, the Company's mobile products
enable users to record text, documents and e-mail messages while away from the
workplace for later processing and transcription by the users' PCs. The Company
expects to continue to introduce new speech products and technologies which will
enhance productivity including: (i) an enterprise-wide speech application
integrated with word processing and time and contact management software, and
(ii) audio file search products, which will permit rapid search and retrieval of
spoken words contained in audio and multimedia recordings. See "-- Products" and
"-- Research and Development."
Ease-of-Use. The Company's products are designed to enable people to
interact intuitively and easily with a variety of PCs, server platforms,
telephones and other electronic devices. Included in Dragon's patent portfolio
are patents covering usability features which are incorporated into the design
of each of the Company's products and applications. For example, the Company's
natural language commands and text editing features permit the correction of
entire phrases, as well as individual words, by issuing a single intuitive
verbal command instead of carrying out a series of manual steps using a keyboard
or computer mouse. The Company believes that as consumers become more aware of
the benefits of speech technology and its ease-of-use attributes, demand for
speech-enabled products and applications will continue to grow substantially.
Product Design that Facilitates Product Family Expansion. The Company's
speech recognition technology is based on a modular architecture that permits
rapid product family expansion to additional targeted markets after a product is
initially released. For example, soon after introducing Dragon NaturallySpeaking
for general dictation use, the Company modified the product by integrating
specialized vocabularies and language models to create both Dragon
NaturallySpeaking Legal Suite and Medical Suite. In addition, the Company's core
speech recognition technology is not dependent on any specific language. This
feature has enabled the Company to release British-English, French, German,
Italian and Spanish language versions of products shortly after the commercial
release of the American-English version.
Superior Technological Capabilities. The Company's products offer users
leading-edge speech technology. The Company employs a highly qualified staff of
scientific and technical personnel in its research and development organization.
More than 91 of the Company's employees hold either doctorates or masters
degrees and the majority of the Company's personnel have significant technical
expertise in speech technologies. In addition, the Company's co-founder, Dr.
Janet Baker, has more than 25 years of experience in the field of speech
technology and is recognized as a pioneer in the industry. The Company believes
it has assembled a team of professionals with superior technical knowledge in a
number of computer and linguistic fields which will enable the Company to
maintain its position as an innovative industry leader.
Product and Application Versatility. The Company's speech technology can
be easily adapted to operate on multiple operating systems and hardware
platforms. In an effort to increase the commercial appeal of its products, the
Company seeks to make its products compatible with widely-used software products
from Corel Corporation ("Corel"), Microsoft, Symantec Corporation ("Symantec")
and other leading software developers. The Company's products currently operate
on Windows 3.1, Windows 95, Windows 98, Windows NT, UNIX and other operating
systems, and on hardware platforms including PCs and workstations for certain
custom applications.
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Sophisticated Application Development Tools. In an effort to increase
product license revenue and to establish the Company's speech technology as the
industry standard, the Company markets a suite of sophisticated application
development tools (NaturallySpeaking Developer Tools Suite). These tools allow
software developers to easily integrate advanced speech recognition and output
capabilities into their software applications and to create a wide variety of
continuous dictation, data entry, and command and control applications. In
addition, the Company markets Dragon PhoneQuery SDK which enables developers to
create caller-friendly, interactive telephony systems that allow callers to
access information using natural and continuous speech without wading through
more complex discrete speech and push-button menus.
STRATEGY
The Company's objective is to enhance its position as a leading worldwide
developer and provider of advanced speech products and technologies. The key
elements of the Company's strategy are:
Extend Technological Leadership. The Company believes that its core speech
recognition technology is the world's most accurate and highest performing and
positions the Company as a world leader in speech technology for current and
emerging applications. The Company plans to continue to develop and enhance its
speech recognition and related technologies, including its comprehensive,
high-quality acoustic and language data to extend its technological leadership.
The Company also intends to continue to build on its patent portfolio to protect
its future innovations in speech and related technologies. In addition, the
Company intends to continue to attract superior technical personnel and may seek
to acquire complementary technologies and businesses. The Company believes that
this strategy is essential to the development and delivery of leading-edge
speech recognition and related technologies for emerging applications.
Identify and Develop Emerging Markets for Speech Technology. The Company
continually analyzes emerging market opportunities for speech technology. The
Company focuses its product development efforts on products and applications
that, among other things,
- address a large or rapidly growing market,
- represent a technically viable extension of the Company's technology,
- can be marketed cost-effectively through the Company's current and future
distribution channels, and
- operate within the computational and memory capabilities of commonly used
electronic devices.
The Company has identified, and is in the process of applying its core
speech recognition technology to, a number of existing and emerging applications
in the following areas:
- consumer electronics (mobile computing and dictation products);
- embedded systems, including automotive products;
- industrial machinery products;
- large scale business enterprises (server-based speech products);
- telephony applications;
- broadcast media (transcription and audio indexing products); and
- vertical market applications (enhanced dictation products for targeted
markets).
Maintain Reputation for Being First to Market With Quality Speech
Products. The Company believes that it has earned a reputation for consistently
being first to develop and market innovative, high-quality speech products. By
being first to market with high-quality products, the Company increases its
brand-name recognition, reinforces its market leadership position and captures
additional market share. In addition, the Company believes that its market
position facilitates the formation of cooperative product development
relationships with other technology leaders and co-marketing agreements with
well-known software and consumer product companies. These relationships enable
the Company to share technical and industry knowledge and to co-develop, and
generate demand for, a variety of speech-enabled applications.
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Increase Market Penetration Through Multiple Distribution Channels. A key
component of the Company's strategy is to expand market penetration of its
speech technology by increasing its multi-channel sales effort. To achieve this
objective, the Company plans to expand its direct sales operations, leverage its
position of market leadership to add additional distributors and VARs, and
increase its use of e-commerce. These efforts will be supplemented with targeted
marketing campaigns, preferred training programs and in-store product
demonstrations. To increase demand for its technology, the Company also will
continue to provide software development tools to OEMs, VARs and ISVs to
encourage them to speech-enable their products. The Company also expects to
enter into additional joint marketing relationships and product bundling
arrangements with leading ISVs and OEMs which offer complementary products or
services. The Company believes that a multi-channel sales effort will broaden
customer awareness of the Company's products and will allow it to effectively
target a wide variety of industries that would benefit from the Company's
solutions.
Expand Global Presence through Product Introductions and Increased
Worldwide Marketing. The Company intends to capitalize on its products'
adaptability and language independence to introduce product family extensions
for international markets. In addition, through increased worldwide marketing
and sales programs, coupled with increased use by international consumers of PCs
with sufficient computational and memory capabilities, the Company believes that
global acceptance of its products will increase significantly. The Company
currently has subsidiaries in the United Kingdom and Germany and a sales office
in France. Dragon NaturallySpeaking products are currently available in six
languages: American-English, British-English, French, German, Italian and
Spanish, with Japanese and Mandarin language versions scheduled for release in
1999.
Expand Strategic Alliances. The Company believes that it can rapidly
expand and penetrate markets by collaborating with industry-leading hardware and
software companies. By integrating its technology with leading products
manufactured or developed in cooperation with third parties, the Company can
provide solutions offering enhanced capabilities that are targeted to customers
in existing and new markets. The Company has such relationships with Corel,
Genie Telecommunication, Inc., GoldMine Software Corporation ("GoldMine"), Intel
Corporation, Seagate, Sony Corporation and others. Products and technologies
arising from these relationships are typically made available by one or both
parties through multiple distribution channels.
TECHNOLOGY
Since its founding in 1982, the Company has been recognized as a pioneer
and leader in speech recognition technology. The Company's core speech
recognition technology uses complex models that represent crucial underlying
patterns found in speech and language. The Company believes that Dr. James
Baker, co-founder of the Company, in 1971 became one of the first to use Hidden
Markov models, now the speech industry standard, as the basis for his research
in the field of speech recognition. This technique and other sophisticated
methods, when combined with the Company's extensive collection of high-quality
acoustic and language data, form the basis for the development of the Company's
proprietary high-performance speech recognition technology. In addition to its
proprietary technology, the Company licenses third-party technology such as
text-to-speech capabilities in developing its products.
Dragon's speech recognition technology is based on the use of three kinds
of information: a lexicon (the set of words to be recognized together with their
pronunciations), a language model (which specifies the relative likelihood of a
sequence of words), and an acoustic model (which specifies the acoustic
correlates of a given pronunciation). Dragon has derived its lexicon and
language and acoustic models from its extensive internal data resources which
include: hundreds of hours of recordings of the speech of many different
speakers in a variety of languages, hundreds of millions of words of computer
readable text in those languages, and lengthy human-edited lists of words and
their pronunciations. Furthermore, Dragon's software and algorithms have been
designed to be task and language independent, permitting easy development of
products in new languages or for new applications.
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Automatic speech recognition algorithms must evaluate a large number of
hypotheses in order to determine the most plausible transcription of a given
utterance. This evaluation is a computationally intensive task. For this reason,
most of the Company's research and engineering has been directed specifically
towards issues of computational efficiency and recognition accuracy.
The following chart depicts Dragon's core speech recognition technologies
and illustrates their operation:
[CHART]
[Pick Up EDGAR information from PCN 950]
The Company's core speech recognition technology enables its products to
recognize naturally spoken continuous speech, as opposed to isolated words or
discrete speech. The Company's technology is capable of high-quality speaker
independent recognition. However, it is capable of achieving even higher
performance through the use of speaker dependent recognition, whereby the
technology automatically customizes its language and acoustic models and lexicon
to a particular speaker using sample speech or text that the speaker provides.
Using Dragon's speaker adaptation techniques, it is possible for the recognition
performance to continually improve with usage.
The Company is also using its core speech recognition technology to develop
future applications beyond the PC platform. These include applications which
will permit users to operate speech-based products outdoors or in commercial
environments presenting significant technological challenges such as poor signal
quality, high background noise and reduced signal bandwidth. In addition, the
Company is adapting its core technology to create speech-enabled mobile
dictation devices, speech-enabled telephony solutions and audio indexing
products. The Company is continuing to develop software that is capable of
recognizing informal or spontaneous speech transmitted over diverse signal
channels, such as radio or television broadcasts (where there may be background
music or noise) or the telephone, including wireless transmissions (where there
is reduced audio signal bandwidth). For some applications, such as the Company's
new audio indexing products, the resulting text can be very useful even if not
perfectly transcribed because it allows accurate and rapid location of specified
words and topics in audio recordings.
PRODUCTS
The Company has marketed various generations of speech products since 1983.
The Company currently offers products that address demand in six principal
markets: consumer, professional/corporate, mobile, telephony, OEM and developer
tools. The following table lists certain information relating to the Company's
principal current products:
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT KEY FEATURES FIRST RELEASE DATE LANGUAGES AVAILABLE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSUMER PRODUCTS
Dragon Point & Continuous speech recognition; May 1998 - American-English
Speak dictate text into most Windows - British-English
applications; vocabulary
building to easily add
thousands of new words, names
and specialized terms
Dragon All Dragon Point & Speak November 1997 - American-English
NaturallySpeaking features, plus dictate, - British-English
Standard NaturallySpeaking edit and
format words and phrases by
voice, Standard using
Select-and-Say technology,
BestMatch tech-
nology, Natural Language
Commands
Dragon All Dragon NaturallySpeaking November 1997 - American-English
NaturallySpeaking Standard features, plus Dragon - British-English
Preferred NaturallyMobile software to - French
transcribe dictation from a - German
specialized recorder including - Italian
additional mobile software; - Spanish
dictation playback;
text-to-speech
Dragon All Dragon NaturallySpeaking October 1998 - American-English
NaturallySpeaking Standard features in a package
for Teens specifically designed for
teenage voices and
vocabularies. Includes an
updated user interface
DragonDictate Discrete speech recognition; March 1990 - American-English
hands-free PC & mouse - British-English
operation; voice macros; - French
specialty vocabularies - German
available for legal, medical, - Italian
journalism, technology and - Spanish
business professionals - Swedish
- ---------------------------------------------------------------------------------------------------------
PROFESSIONAL/
CORPORATE PRODUCTS
Dragon All Dragon NaturallySpeaking October 1997 - American-English
NaturallySpeaking Preferred features, plus macro - British-English
Professional language capability for - French
sophisticated speech commands; - German
targeted for serious business - Italian
users - Spanish
Dragon All Dragon NaturallySpeaking May 1998 - American-English
NaturallySpeaking Professional features, plus - British-English
Legal Suite extensive legal vocabulary; - German
targeted for attorneys and
other legal professionals
Dragon All Dragon NaturallySpeaking May 1998 - American-English
NaturallySpeaking Professional features, plus - British-English
Medical Suite extensive medical vocabulary;
targeted for doctors and other
medical professionals
- ---------------------------------------------------------------------------------------------------------
MOBILE PRODUCTS
Dragon All Dragon NaturallySpeaking October 1998 - American-English
NaturallySpeaking Preferred features, packaged - British-English
Mobile with specialized mobile - French
software and hand-held digital - German
recorder; targeted for serious - Italian
business users - Spanish
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT KEY FEATURES FIRST RELEASE DATE LANGUAGES AVAILABLE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dragon All Dragon NaturallySpeaking September 1998 - American-English
NaturallySpeaking Legal Suite features, packaged - British-English
Mobile Legal Suite with specialized mobile
software and a customized
recorder; targeted for
attorneys and other legal
professionals
Dragon All Dragon NaturallySpeaking September 1998 - American-English
NaturallySpeaking Medical Suite features, - British-English
Mobile Medical Suite packaged with specialized
mobile software plus a
customized recorder; targeted
for doctors and other medical
professionals
- ---------------------------------------------------------------------------------------------------------
TELEPHONY PRODUCT
Dragon All Dragon NaturallySpeaking March 1998 - American-English
NaturallySpeaking Professional features, plus a
Call Center switch box designed to allow
the speaker to talk over the
telephone or into the dictation
system
- ---------------------------------------------------------------------------------------------------------
OEM PRODUCTS
Dragon All Dragon Point & Speak June 1997 - American-English
NaturallySpeaking features, plus dictate, edit - British-English
Personal and format words and phrases by - French
voice - German
- Italian
- Spanish
Dragon Dragon NaturallySpeaking June 1998 - American-English
NaturallySpeaking Personal designed for use with - British-English
WordPerfect Edition Corel WordPerfect 8; vocabulary - French
building to easily add - German
thousands of new words, names - Italian
and specialized terms - Spanish
- ---------------------------------------------------------------------------------------------------------
DEVELOPER TOOLS
Dragon All Dragon NaturallySpeaking August 1998 - American-English
NaturallySpeaking Professional features, plus
Developer Tools Suite software tools that allow for
the integration of speech into
custom applications
Dragon VoiceTool Software tools that allow for April 1995 - American-English
the integration of speech - British-English
commands and discrete dictation - French
into custom applications - German
- Italian
- Spanish
Dragon Phone Query SDK Speech recognition for building February 1998 - American-English
interactive voice response
systems over the telephone;
natural voice response; speaker
independence, multi-port
telephony server support
- ---------------------------------------------------------------------------------------------------------
</TABLE>
In addition, the Company plans to introduce the following products during
the first quarter of 1999:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT KEY FEATURES LANGUAGES AVAILABLE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dragon Permits network-based administration of Dragon - American-English
NaturallySpeaking NaturallySpeaking application software user files
Network Edition and data for enterprise-wide application
Dragon Voice-enables various personal information - American-English
NaturallyOrganized management software programs such as ACT
- ------------------------------------------------------------------------------------------------------
</TABLE>
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AWARDS AND CITATIONS
Set forth below is a partial list of selected major industry awards and
citations of recognition received by Dragon NaturallySpeaking products during
the last two years:
1999
PC World, Best Buy (January 1999)
PC World New Zealand, Readers Choice
Business Software: Speech
Recognition Category, New Zealand (December 1998/January 1999)
1998
Fortune, Annual Product Review/Technology Buyer's Guide-Product to Watch:
Software/ Cool Stuff Category (Winter 1998)
BusinessWeek, The Best New Products: Software to Watch in 1998 (January 1998)
PC/Computing, Usability Hall of Fame (January 1998)
PC/Computing, 1997 MVP Winner: Usability Achievement of the Year (January 1998)
PC/Computing, 1997 MVP Winner: Input Device (January 1998)
Time, The Best Cybertech of 1997
(January 1998)
BYTE Espana, 1997 Award of Excellence, Spain (February 1998)
Innovation 98 Info PC, iT/COMDEX France: Best Development Tool (February 1998)
CTI, 1997 Product of the Year: Speech Recognition Category (February 1998)
CallCenter Magazine, Best of CT EXPO 98 (March 1998)
PC Professional, Innovation of the Year 1997-1998: Best of CeBIT Software
Category, Germany (April 1998)
Telebusiness, 1998 Awards for Excellence: The Philip Shipman Award for
Innovative Technology, United Kingdom (June 1998)
PC World, World Class Award: Most
Promising Software Newcomer (June 1998)
PC World, World Class Award: Best Voice Recognition Software (June 1998)
PC/Computing, Time Capsule -- The 12 Best PC Products on the Planet: Input
Device Category (August 1998)
Retail Vision: Six awards including Best Vendor and Best Retail Strategy (August
1998)
PC Magazine, Editor's Choice: Best Speech Dictation Product (October 1998)
SMAU, 31st Premio Industrial Design Award: Business Software Category, Italy
(October 1998)
PC World, Best New Handheld Device (November 1998)
WIN, Top Product, Germany (November 1998)
Home Office Computing, The HOC 100 Gold Award Winner-Software: Business
Productivity Category (December 1998)
Newsweek, The Top 50 CD-ROMs of 1998 (Winter 1998)
PC Magazine Australia, Editor's Choice, Australia (December 1998)
1997
BYTE, Best of COMDEX: Best of Show (Spring 1997)
PC IT 97, Best Pro Award: Best Personal
Computing Product, Australia
(September 1997)
PC Magazine, Technical Excellence Award: Software Category (December 1997)
Popular Science Magazine, The Best of What's New: 1997 Grand Winner for
Computers & Software (December 1997)
PC Magazine Middle & Near East, 1997 Award of Excellence: Most Innovative
Software Product of the Year, United Arab Emirates (October 1997)
PC Week, Best of COMDEX Fall 1997: Best Utility Software (November 1997)
BYTE, 1997 Editors' Choice Award: Award of Excellence (December 1997)
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END-USERS
Dragon's end-users range from individuals using the products for a wide
range of personal and professional purposes to companies and government agencies
using the Company's products and technologies for a particular function or
department. Some of the companies and government agencies that use Dragon's
products or technology for significant applications include:
<TABLE>
<CAPTION>
CORPORATE/INDUSTRIAL GOVERNMENT HEALTH CARE/PHARMACEUTICAL
<S> <C> <C>
Abbott Laboratories Parliament of Australia Georgetown University
Allianz AG Holding French Ministry of School of Medicine
The Boeing Company Education Kaiser Permanente
Canadian Pacific Railway Los Angeles Police Michigan Rehabilitation
Deere & Company Department Services
Peugeot S.A Shaw Air Force Base, S.C. Princess Alexandra
Seiko Epson Corporation The United States Navy Hospital
Teradyne, Inc. Victoria Board of V.A. Medical Centers,
Workman's over 10 locations in
Compensation 7 states
</TABLE>
<TABLE>
<CAPTION>
LEGAL BANKING/FINANCIAL SERVICES
<S> <C> <C>
Hourigans Kluger & Bank of America, FSB
Quinn, P.C. Citibank Privatkunden AG
Kilpatrick Stockton LLP Deutsche Bank AG
Long, Weinberg, Ansley Seafirst Bank
and Wheeler, LLP Wells Fargo, Ltd.
</TABLE>
The following case studies describe the manner in which certain of the
Company's end-users employ its products and technologies:
- A global package delivery company is using Dragon voice recognition
technology for timely and accurate package sorting. The voice-driven
system allows that company's package handlers to sort packages by
speaking city, state and zip code data instead of using the keyboard.
- A cancer specialist uses Dragon NaturallySpeaking together with a
hand-held digital recorder to dictate patient visit notes, grant
proposals, textbook chapters and medical journal manuscripts. After
dictating into the recorder, he connects the recorder to his computer
which transcribes his dictation. This process reduces the time required
for transcription, improves first-draft accuracy and reduces the cost of
transcription services. As a result of this physician's experience, the
cancer center at which he practices plans to deploy Dragon
NaturallySpeaking to additional doctors on staff.
- An attorney in New York City uses Dragon NaturallySpeaking to document
client conversations and to generate legal documents and correspondence
associated with his law practice. He has advised Dragon that he has
significantly reduced, and in some cases eliminated, transcription costs
and document review cycles. In addition, Dragon NaturallySpeaking allows
him to create many of his own documents quickly and accurately, thereby
freeing his assistant to work on other projects and administrative
duties.
- Police officers at a division of a large urban police department
typically spent as much as 60% of their time preparing reports and other
paperwork. Using Dragon NaturallySpeaking speech recognition software,
officers now dictate their reports into their computers and their words
are immediately transcribed into typed police reports, freeing up time
for patrols and other police duties. According to this police department,
some officers using everyday speech, achieve dictation rates up to 100
words per minute with an accuracy rating of 99%.
- An internationally known Italian designer, manufacturer and distributor
of knitwear uses Dragon dictation products to manage stock and control
inventory in approximately one-third the time required
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by the manual methods. Productivity is further enhanced because of the
software's short training time and multi-user support.
- To automate receipt of inventory and shipment of production, an Italian
newspaper distributor adopted a robotic system, consisting of two mobile
industrial robots enabled with Dragon discrete speech recognition
technology which communicates with the newspaper's servers. One robot
accompanies warehouse workers and responds to their dictated commands
with very high accuracy. The second robot provides billing or materials
information to clerical personnel, and can answer inquiries such as,
"Tell me the price," or "Tell me the stock quantity."
- Dragon and a federal government agency have developed a portable
translation device called the Multilingual Interview System ("MIS"). The
MIS allows English-speaking users to conduct basic interviews and give
instructions to non-English-speakers. It employs over 7,000 common
phrases and combines voice recognition and digital voice recording of
translations with a wearable computer. The MIS has been deployed in
Bosnia to aid U.S. forces in performing a number of important tasks
requiring communication with locals, including medical care, landmine
management, force protection and refugee resettlement.
SALES, MARKETING AND DISTRIBUTION
The Company's marketing organization uses a variety of marketing programs
to promote its advanced products and technologies and to increase demand
worldwide. The Company has teams of dedicated sales professionals assigned to
each of its channel markets. The Company's marketing efforts support its direct
sales and indirect distribution channels through participation in trade shows,
targeted advertising, channel sales programs, public relations campaigns, retail
promotions, product bundles, customer surveys and profiles and product promotion
through its website.
The Company markets and sells its products worldwide indirectly through
distributors, retailers, catalogs, e-commerce, VARs and ISVs and directly
through its website and telesales organization. Over 50 major retail channel
accounts worldwide sell the Company's products. In addition, the Company
licenses its technology to OEMs. The Company's OEM agreements generally license
the OEMs to incorporate the Company's speech recognition and related
technologies into their products and applications in exchange for royalty
payments to the Company. As of December 8, 1998, the Company's indirect
distribution channel was composed of approximately 35 distributors, 729 VARs,
and 19 ISVs and OEM licensees. In the fourth quarter of 1998, the Company
started using volume license agreements to sell and market the Dragon
NaturallySpeaking family of continuous dictation products.
The following table lists the Company's principal North American and
international distributors, retail channel accounts, VARs and ISVs/OEMs:
NORTH AMERICA
<TABLE>
<CAPTION>
DISTRIBUTORS RETAIL CHANNELS VARS ISVS/OEMS
<S> <C> <C> <C>
GT Interactive America Online Compaq Services Corel
Software CompUSA Division of Compaq MetroBook Computer
Ingram Micro Fry's Electronics Computer Corporation Micron Technology
Merisel Americas OfficeMax Government Technology Syracuse Language Systems
Tech Data Staples Services
Pomeroy Computer Resources
Softmart
Software House
International
Software Spectrum
</TABLE>
35
<PAGE> 38
INTERNATIONAL
<TABLE>
<CAPTION>
DISTRIBUTORS RETAIL CHANNELS VARS ISVS/OEMS
<S> <C> <C> <C>
CHS Electronics CDC Point Mysoft G DATA Software
Holding Dixon's Store Group Talk Write Limited Hexaglot Holding
HCL Infosystems Groupe FNAC Voelter EDV-Beratung Jurasoft Microcomputer
Ingram Micro Harvey Norman Voice Perfect Systems TerraTec Electronic
Innelec France Mediamarket
Marketing Results
Northamber
Tech Data
Tech Pacific
</TABLE>
The Company's two largest distributors are Ingram Micro and Tech Data.
Ingram Micro accounted for approximately 5% of the Company's net revenue for
1997 and 24% of the Company's net revenue for the nine months ended September
30, 1998. Tech Data accounted for approximately 9% of the Company's net revenue
for 1997 and 39% of the Company's net revenue for the nine months ended
September 30, 1998. The Company's agreements with its distributors typically are
not exclusive, have no stated minimum purchase obligations and may be terminated
by either party without cause. The Company believes that in the event of
termination of its relationship with one or more of its distributors, the
Company could enter into replacement agreements with new distributors. However,
failure to replace these distributors with distributors of equal marketing
capabilities and reputation could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company intends to penetrate the international retail market indirectly
through distributors, increase the VAR business targeted at corporate accounts
and expand its OEM business. The Company has sales professionals at each of its
European subsidiaries in Germany, France and England. Sales outside North
America accounted for 15% of the Company's net revenue in 1997 and 10% of net
revenue for the nine months ended September 30, 1998.
PRODUCTION AND FULFILLMENT
Production of the Company's products involves the purchase of microphones
and digital recorders, duplication of CD-ROMs (outsourced) and assembly of
product components, user manuals and product books. The Company seeks to
minimize production costs by outsourcing production requirements, improving
process efficiencies and realizing economies of scale. The Company subjects all
of the components of its products purchased from outside vendors to high
certification standards designed to ensure product compatibility.
The Company outsources the production, packaging, and order fulfillment of
its products, both domestically and internationally, to third parties when it is
cost effective to do so. To the extent possible, the Company limits its internal
production activities to such tasks as quality inspection and testing. The
Company currently has production arrangements with ZBR Publications Inc., Omnet
Technology Corp., The Media Farm, Inc. and Modus Media International N.V.
("Modus Media") and order fulfillment agreements with Digital River, Inc. and
Modus Media. The Company believes that its existing production capacity is
sufficient to accommodate potential increases in sales volume for the
foreseeable future.
RESEARCH AND DEVELOPMENT
The Company's success will depend on its ability to develop and introduce
on a timely basis new products and enhancements to its existing products. The
Company has invested and intends to continue to invest significant resources in
product and technology development. The Company focuses and modifies its
extensive product development efforts based on customers' needs and changes in
the marketplace. The Company's research and development organizations are
principally responsible for enhancing the Company's core speech recognition
engine, as well as the acoustic and language models and noise-handling
algorithms. The Company
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<PAGE> 39
currently focuses its development efforts on commercializing its research
innovations into new products and product enhancements that are more accurate
and easier to use, as well as the development of additional speech-related
applications.
The Company's strategic long-term research has been greatly aided by a
succession of competitively-awarded federal government contracts involving
several federal agencies. As a result of this government-subsidized research,
the Company has been able to further develop its leading technology in
technically challenging areas, including high noise, limited channel
communication, automatic information retrieval and automatic speaker, language
and topic identification. The Company delivers specialized systems to various
federal government agencies and regularly participates in government-sponsored
performance evaluations. However, the Company retains commercial rights to its
government-sponsored research. In addition to government-funded research and
development, Dragon conducts speech research and development and custom
engineering for a number of major industrial customers in such areas as
industrial automation, automotive engineering and telecommunications. The
Company has successfully commercialized various elements of speech technology
developed in collaboration with the federal government and third parties.
As of December 8, 1998, the Company employed 175 individuals in its
research and development organizations, 77 of whom hold doctorates or masters
degrees in a number of diverse fields, including mathematics, physics,
electrical engineering, and linguistics. The Company believes that this team and
its expertise in speech technology provides the Company with a significant
competitive advantage. The Company's ability to attract and retain highly
qualified employees will be a major determinant of its success in maintaining
its technological leadership.
Company-funded research and development expenses were approximately $8.0
million in 1996, $9.6 million in 1997 and $10.6 million in the first nine months
of 1998.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company outsources its technical support and customer service
operations and provides in-house backup capabilities. In this way, Dragon
manages service call volumes cost-effectively and minimizes fixed costs and
overhead, while maintaining a high level of customer service.
The Company's in-house technical support organization responds to support
questions arising from its website, writes and posts technical tips, publishes
answers to frequently asked questions and provides other pertinent technical
information. This organization also supplies patches and free updates that users
or VARs may need. In addition, this department provides backup support to the
Company's outsourced support providers in North America and Europe, including
handling time-sensitive support problems and providing training for new
products. This organization also provides support directly to the Company's VARs
and key corporate customers.
The Company's present support policy provides all registered users with 90
days of free telephone support via a standard toll-free number (30 days for
Dragon Point & Speak). Electronic support is provided free to registered users
for a period ending six months after the Company discontinues a product.
The Company's customer service department handles non-technical incoming
calls from both its registered users and potential customers interested in
learning more about Dragon products. This group provides information consumers
may need in deciding whether to purchase Dragon products. Customers may purchase
or return Dragon products or product upgrades through the customer service
department either via telephone or the Company's website.
COMPETITION
The emerging market for speech recognition products is relatively new,
intensely competitive and subject to rapid technological change. The Company
expects competition to persist and intensify in the future. The Company's
principal current competitors for PC applications include IBM, Lernout and
Philips. In addition, the Company faces significant potential competition for PC
applications from Microsoft. As the Company
37
<PAGE> 40
expands its presence in the telephony market, it will also face competition from
various companies including AT&T, GTE Internetworking, Lucent, Nuance, Philips,
SpeechWorks and Voice Control.
The Company believes that its products compete favorably on the basis of
performance, quality and ease-of-use. However, many of the Company's current and
potential competitors have significantly greater financial, technical,
marketing, public relations and distribution resources than the Company.
Increased competition from these companies or new competitors, including the
introduction of new or enhanced versions of competitive products or changes in
competitors' pricing policies, could materially adversely affect the Company's
business, results of operations and financial condition. See "Risk
Factors -- Competition."
INTELLECTUAL PROPERTY
As of December 8, 1998, the Company owned 11 United States patents and had
31 United States patent applications pending, most of which cover various
aspects of its speech recognition technology. In addition, the Company holds 25
registered trademarks in the United States and abroad, including the Dragon
logo. As of December 8, 1998, the Company also owned one UK patent and one
European patent granted by the European Patent Office and had 12 patent
applications pending at the European Patent Office, as well as a patent
application pending in each of France, Canada and the UK.
In September 1993, the Company and Kurzweil Applied Intelligence
("Kurzweil") settled pending litigation by entering into two settlement and
cross-license agreements. Pursuant to one of these agreements, each party
granted the other an irrevocable, worldwide, non-exclusive, non-transferable
license to use patents and patent applications of the other party. Kurzweil was
subsequently acquired by Lernout in 1997. As a result of this acquisition, no
license grants were made under the agreement after the date of such acquisition;
however, each party maintains its rights in the patents and applications
previously granted under the agreement.
The Company relies primarily on a combination of patent, copyright and
trademark laws to establish and protect its proprietary rights. The Company also
relies on trade secret laws, confidentiality procedures and licensing
arrangements to establish and protect its technology rights. There can be no
assurance that such measures will be adequate to protect the Company's
proprietary rights. In addition, the Company seeks to protect its proprietary
rights through the use of confidentiality agreements with employees,
consultants, advisors and others. There can be no assurance that these
agreements will provide adequate protection for the Company's proprietary rights
in the event of any unauthorized use or disclosure, that employees of the
Company, consultants, advisors or others will maintain the confidentiality of
such proprietary information, or that such proprietary information will not
otherwise become known, or be independently developed, by competitors.
Despite the Company's efforts to protect its intellectual property,
unauthorized third parties may attempt to copy aspects of the Company's
products, to violate Company patents or to obtain and use the Company's
proprietary information. A substantial portion of the Company's sales are
derived from the licensing of Company products under "shrink wrap" license
agreements that are not signed by licensees and therefore may be unenforceable
under the laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect the Company's intellectual property to the same extent
as do the laws of the United States. In addition, the Company does not generally
incorporate copy-protection mechanisms in its software because it does not
believe they are practical or cost-effective. Current United States laws that
prohibit software copying give the Company only limited practical protection
from software "pirates," and the laws or law enforcement practices of many other
countries provide almost no protection for its intellectual property. Policing
unauthorized use of the Company's products is difficult, expensive and
time-consuming and the Company expects that software piracy will be a persistent
problem for its desktop software products. The loss of any material trademark,
trade name, trade secret or copyright could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company does not believe that its products infringe the rights of third
parties. However, there can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such assertion
will not result in costly litigation or require the Company to obtain a license
to third party
38
<PAGE> 41
intellectual property. In addition, there can be no assurance that such licenses
will be available on reasonable terms or at all, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company's business also includes funded research and development for
certain commercial customers and governmental agencies pursuant to which the
Company typically retains copyrights and other intellectual property rights
associated with the software developed. Although the Company's contracts with
those customers provide that it retains the rights to intellectual property
employed or developed by the Company, there can be no assurance that customers
will not assert rights in, or seek to limit the Company's use of, such
intellectual property.
EMPLOYEES
As of December 8, 1998, the Company employed 316 people including 175
employees in research and development and 88 employees in sales and marketing.
None of the Company's employees is represented by a labor union, and the Company
has never experienced a work stoppage. The Company considers its relations with
its employees to be good.
The Company's future performance depends largely upon its continuing
ability to attract and retain highly qualified scientific, technical, sales and
managerial personnel. Competition for such personnel is intense, particularly in
the fields of software engineering and research, and there can be no assurance
that the Company can attract, motivate and retain key scientific, technical,
sales and managerial employees. If the Company cannot retain or is unable to
attract such key personnel, the Company's business, results of operations and
financial condition would be materially adversely affected.
The Company believes that its dynamic, entrepreneurial and creative culture
is particularly attractive to technologists seeking new, non-traditional work
environments. The Company strives to maintain its competitive and creative
leadership by employing professionals with a variety of academic backgrounds
including mathematics, engineering, linguistics, physics and other disciplines.
More than 91 of the Company's employees hold either doctorates or masters
degrees.
FACILITIES
The Company leases approximately 81,000 square feet of office and
distribution facilities in Newton, Massachusetts under two leases that expire on
November 30, 2001. The Company has the right to purchase its Newton,
Massachusetts location under certain circumstances. The aggregate rental expense
under these leases was approximately $1,172,000 during 1998. The Company also
leases office space for its employees in California, England, France and
Germany. The aggregate rental expense for such office space was approximately
$31,000 during 1998. The Company believes that additional space may be required
as its business expands and will be available as required on acceptable terms.
LEGAL PROCEEDINGS
In February 1996, Articulate sued Apple Computer, Inc. ("Apple") for patent
infringement in Massachusetts. Apple then sued Articulate in May 1996 in
California alleging that Articulate's PowerSecretary product infringed four
Apple patents. In September 1996, Apple added Dragon, which then owned a
minority interest in Articulate and distributed PowerSecretary, as a defendant
to its suit in California. In a separate proceeding in October 1997, Apple sued
Dragon and one of its customers, MetroBook Computer Corporation ("MetroBook"),
in Virginia alleging that the Company's Dragon NaturallySpeaking product
infringed three Apple patents.
Articulate's initial suit in Massachusetts is still pending. In Apple's
California suit, the court has granted a summary judgment motion in favor of
Articulate and the Company on all claims. Apple has filed an appeal with the
U.S. Court of Appeals for the Federal Circuit. Apple's Virginia suit has been
transferred to California, and the court has granted summary judgment in favor
of the Company and MetroBook with respect to one of Apple's patents. The
remainder of the case (with respect to the final two Apple patents) is
39
<PAGE> 42
still in discovery. The Company believes that its Dragon PowerSecretary and
Dragon NaturallySpeaking products do not infringe any of Apple's patents, but
there can be no assurance that the Company will prevail in these matters. The
Company's patent counsel, Fish & Richardson P.C., based on information known to
it as of the date of this Prospectus, has advised the Company it has substantial
defenses in each case, but the outcome cannot be predicted.
The Company is not a party to any other material legal proceedings.
40
<PAGE> 43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages and
positions as of December 8, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Janet M. Baker....................... 51 Chairman of the Board of Directors and Chief Executive
Officer
John D. Shagoury..................... 40 President and Director
Diane M. Hudson...................... 45 Chief Financial Officer, Vice President, Finance,
Treasurer and Assistant Secretary
Kim B. Edwards(1)(2)................. 51 Director
Stephen J. Luczo(1)(2)............... 40 Director
Robert Roth.......................... 47 Principal Research Scientist and Director
Paul G. Bamberg...................... 55 Vice President
Laurence S. Gillick.................. 47 Vice President, Research
Roger Matus.......................... 44 Vice President, Marketing, North America
Jeanne F. McCann..................... 47 Vice President, Development
Tamah Solomon Rosker................. 35 Vice President, Human Resources and Secretary
Steven Semenzato..................... 35 Vice President, Channel Sales, North America
Andreas E. Widmer-Schultz............ 32 Director, International Sales and Marketing
</TABLE>
- ------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Janet M. Baker co-founded the Company and has served as Chairman of the
Board and Chief Executive Officer since December 1998. Dr. Baker served as
President and Secretary from June 1982 until December 1998 and has served as a
director since June 1982. Prior to co-founding Dragon, Dr. Baker was a research
staff member at IBM, where she was a contributor to the Continuous Speech
Research Project, from June 1974 to January 1979, and was also Vice President of
Research at the Verbex Division of Exxon Enterprises, where she worked from
January 1979 to May 1982. Dr. Baker received her B.S. and B.A. degrees from
Tufts University and her Ph.D. in Computer Science from Carnegie Mellon
University.
John D. Shagoury joined the Company in June 1998 as Chief Operating
Officer, and was promoted to President and elected Director in December 1998.
Mr. Shagoury has over 17 years of management experience in the PC software
industry. From January 1993 to June 1998 Mr. Shagoury held various senior
executive positions, most recently as President, North America, at Corporate
Software & Technology, Inc. Prior to that he held various management positions
including Vice President of Sales and Marketing for ON Technology and Director
of Sales Support and Distribution Channels at Lotus Development Corp. Mr.
Shagoury received his B.S. in Marketing and M.B.A. from Babson College.
Diane M. Hudson joined the Company in April 1995 as Vice President,
Finance, was elected Treasurer in September 1995 and became Chief Financial
Officer in April 1998 and Assistant Secretary in August 1998. From December 1988
to April 1995, Ms. Hudson was Controller and Director of Financial Planning at
MicroTouch Systems, Inc., a leading manufacturer and distributor of touch screen
systems. Ms. Hudson received her A.S. in accounting from Becker Junior College,
studied business administration at Northeastern University, and received her
M.B.A. from Simmons Graduate School of Management.
Kim B. Edwards was elected as a Director of the Company in December 1998.
From January 1994 to March 1998, Mr. Edwards served as President and Chief
Executive Officer of Iomega Corporation. From
41
<PAGE> 44
March 1993 to December 1993, he was President and Chief Executive Officer of
Gates Energy Products, Inc., a manufacturer of rechargeable batteries and the
successor of General Electric Battery Division. From January 1987 until March
1993, Mr. Edwards served in various other executive positions for Gates Energy
Products, Inc. Prior to that, Mr. Edwards was employed for 18 years at General
Electric Company in various sales and marketing positions. He earned his B.S. in
Mechanical Engineering from Lafayette College.
Stephen J. Luczo has served as a Director of the Company since July 1994.
Since October 1993, Mr. Luczo has held various executive positions with Seagate,
where he currently serves as President and Chief Executive Officer and as a
member of the Board of Directors. Prior to joining Seagate, Mr. Luczo was Senior
Managing Director of the Global Technology Group of Bear, Stearns & Co., an
investment banking firm, from February 1992 to October 1993. Mr. Luczo received
his A.B. from Stanford University and his M.B.A. from the Stanford University
Graduate School of Business.
Robert Roth has been employed as a Principal Research Scientist at the
Company, and has served as a Director since June 1982. He received his S.B. from
the Massachusetts Institute of Technology, and his M.S. and Ph.D. from the
University of California, Berkeley.
Paul G. Bamberg joined the Company in June 1982 as a Principal Research
Scientist and has served as Vice President since January 1994. He served as a
Director from January 1994 until December 1998. From 1967 to June 1995, Dr.
Bamberg was a faculty member of Harvard University in the physics department and
division of continuing education. He received his A.B. from Harvard College and
his D.Phil. from Oxford University, where he studied as a Rhodes Scholar.
Laurence S. Gillick joined the Company in January 1985 as a researcher and
has served as Vice President, Research, since October 1996. Dr. Gillick taught
on the mathematics faculty of Northeastern University from 1979 and then was
Visiting Assistant Professor of Applied Mathematics at the Massachusetts
Institute of Technology from September 1981 to May 1983. Dr. Gillick received
his B.A. from Swarthmore College, his M.A. in Chemistry from Columbia
University, and his Ph.D. in Mathematics from the Massachusetts Institute of
Technology.
Roger Matus joined the Company as Director of Marketing in May 1995 and was
promoted to Vice President, Marketing, North America, in July 1997. From January
1994 to April 1995 he was Director of Product Marketing at ATI Technologies,
Inc., a producer of personal computer boards, components, and multimedia
software. From February 1982 to December 1993 he held various positions,
including Director of Marketing, Personal Computer Business Unit at Digital
Equipment Corporation. Mr. Matus received his B.A. from Syracuse University,
M.B.A. from the University of Chicago, and his M.Sc. in Engineering from Boston
University.
Jeanne F. McCann joined the Company in July 1998 as Vice President,
Development. From March 1997 to July 1998 she was Vice President, Development at
Eastman Software, Inc. and held various positions, including Vice President,
Development at Wang Laboratories, Inc. from February 1979 to March 1997. Ms.
McCann received her B.A. from Simmons College and her M.B.A. from Babson
College.
Tamah Solomon Rosker joined the Company in October 1994 as Director, Human
Resources and was promoted to Vice President, Human Resources in October 1998.
From June 1994 to September 1994 she was Manager, Human Resources at PerSeptive
Biosystems, Inc. and was Director, Human Resources at Kendall Square Research
from February 1992 to June 1994. She received her B.S. from Tufts University and
her J.D. from Boston College Law School.
Steven Semenzato joined the Company as Director, North American Sales, in
February 1996 and was promoted to Vice President, Channel Sales, North America
in October 1998. From September 1992 to February 1996, Mr. Semenzato held
various positions, including North American Desktop Channel Sales Manager, from
April 1995 to February 1996, at Avid Technology, Inc. Mr. Semenzato received an
engineering degree from Staffordshire University in England.
Andreas E. Widmer-Schultz joined the Company as Director, International
Sales and Marketing in August 1996. From July 1990 to August 1996, Mr.
Widmer-Schultz held several positions at FTP Software
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<PAGE> 45
Worldwide, Inc., including vice president in the sales and marketing area. Mr.
Widmer-Schultz received his B.S. in International Business from Merrimack
College, studied finance and accounting at the Benedict School in Lucerne,
Switzerland, and received his B.S. in Sales Management from Kaufmaennische
Schule Luzern in Lucerne, Switzerland.
See "Certain Transactions" and "Principal Stockholders" for certain
information concerning the Company's directors and executive officers.
ELECTION OF DIRECTORS
Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. Mr.
Luczo and Dr. Roth will serve in the class whose term expires in 2000; Messrs.
Edwards and Shagoury will serve in the class whose term expires in 2001; and Dr.
Janet Baker will serve in the class whose term expires in 2002. Upon the
expiration of the term of a class of directors, directors in such class will be
elected for three-year terms at the annual meeting of stockholders in the year
in which such term expires.
COMPENSATION OF DIRECTORS
The Company reimburses non-employee directors for reasonable out-of-pocket
expenses incurred in attending meetings of the Board of Directors. The Company
may, in its discretion, grant stock options and other equity awards to its
non-employee directors from time to time pursuant to its 1999 Stock Incentive
Plan. The Company has not yet determined the amount and timing of such grants or
awards.
BOARD COMMITTEES
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee, which consists of Messrs. Edwards
and Luczo, reviews executive salaries, administers any bonus, incentive
compensation and stock option plans of the Company, and approves the salaries
and other benefits of the executive officers of the Company. In addition, the
Compensation Committee consults with the Company's management regarding pension
and other benefit plans and compensation policies and practices of the Company.
The Audit Committee, which consists of Messrs. Edwards and Luczo, reviews the
professional services provided by the Company's independent accountants, the
independence of such accountants from management of the Company, the annual
financial statements of the Company and the Company's system of internal
accounting controls. The Audit Committee also reviews such other matters with
respect to the accounting, auditing and financial reporting practices and
procedures of the Company as it may find appropriate or may be brought to its
attention.
TECHNICAL ADVISORY BOARD
The Company plans to establish a Technical Advisory Board whose membership
is expected to include experts in basic fields of science and technology which
are relevant to the Company's future products, such as linguistics, statistics,
acoustics, phonetics and mathematics. Dr. James K. Baker, a co-founder of the
Company, has agreed to serve as Chairman of the Technical Advisory Board without
compensation. The other members of the Board are expected to be appointed during
the first half of 1999. It is expected that the Technical Advisory Board will
meet with the Company's key research and development personnel at least
quarterly and will provide advice regarding future trends in technology and
basic sciences.
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<PAGE> 46
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1997, the
cash compensation paid and shares underlying options granted to (i) the
Company's Chief Executive Officer and (ii) each of the four other most highly
compensated other executive officers who received annual compensation in excess
of $100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
---------------------------------- -------------
OTHER ANNUAL SHARES ALL OTHER
NAME AND SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION ($) ($) ($) OPTIONS(#)(6) ($)
- ------------------------------------- -------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
James K. Baker(2).................... $199,493 $10,000 -- 105,000 $10,098(7)
Janet M. Baker....................... 198,135 10,000 -- 123,750 10,098(7)
Chairman of the Board of Directors
and Chief Executive Officer(3)
Steven Semenzato..................... 185,722(4) -- -- 72,500 4,722(8)
Vice President, Channel Sales, North
America
Andreas E. Widmer-Schultz............ 149,968(5) -- -- 65,000 2,953(9)
Director, International Sales and
Marketing
Paul G. Bamberg...................... 140,834 1,000 -- -- 7,901(10)
Vice President
</TABLE>
- ------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation set forth in the table does not include
medical, group life or other benefits which are available to all salaried
employees of the Company, and certain perquisites and other benefits,
securities or property which do not exceed the lesser of $50,000 or 10% of
the person's salary and bonus shown in the table.
(2) Dr. James K. Baker served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company during the fiscal year
ended December 31, 1997 and resigned from such capacities effective
December 1, 1998. John D. Shagoury became President of the Company on
December 1, 1998.
(3) Dr. Janet M. Baker has served as Chairman of the Board of Directors and
Chief Executive Officer since December 1, 1998.
(4) Consists of $87,403 base salary and $98,319 sales commission.
(5) Consists of $116,965 base salary and $33,003 sales commission.
(6) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1998 to its executive officers. Options granted to the Named Executive
Officers were granted at fair market value as determined by the Board of
Directors based on all factors available to them on the grant date.
(7) Comprised of $9,500 of 401(k) matching payments made by the Company and
$598 of disability insurance premiums paid by the Company.
(8) Comprised of $4,673 of 401(k) matching payments made by the Company and $49
of disability insurance premiums paid by the Company.
(9) Comprised of $2,875 of 401(k) matching payments made by the Company and $78
of disability insurance premiums paid by the Company.
(10) Comprised of $7,051 of 401(k) matching payments made by the Company and
$850 of disability insurance premiums paid by the Company.
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<PAGE> 47
In the table above, columns required by the Regulations of the Commission
have been omitted where no information was required to be disclosed under those
columns.
STOCK OPTIONS
The following table contains information concerning the grant of options to
purchase shares of the Company's common stock to each of the Named Executive
Officers of the Company during the fiscal year ended December 31, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OF OPTION TERM(3)
GRANTED FISCAL BASE PRICE EXPIRATION ---------------------
NAME (#) YEAR(1) ($/SH)(2) DATE 5%($) 10%($)
- ---- ---------- ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
James K. Baker..................... 12,500 1.43% $3.50 9/30/07 $27,514 $69,726
Janet M. Baker..................... 12,500 1.43 3.50 9/30/07 27,514 69,726
Steven Semenzato................... 5,000 0.57 3.18 9/30/07 9,999 25,341
Andreas E. Widmer-Schultz.......... 10,000 1.15 3.18 9/30/07 19,999 50,681
Paul G. Bamberg.................... -- -- -- -- -- --
</TABLE>
- ------------
(1) Based on an aggregate of 871,250 shares subject to options granted to
employees of the Company in 1997.
(2) All options were granted at or above fair market value as determined by the
Board of Directors on the date of grant.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Company's common stock over the term of the options. The potential
realizable values set forth above do not take into account applicable tax
and expense payments that may be associated with such option exercises.
Actual realizable value, if any, will be dependent on the future price of
the common stock on the actual date of exercise, which may be earlier than
the stated expiration date. The 5% and 10% assumed annualized rates of stock
price appreciation over the exercise period of the options used in the table
above are mandated by the rules of the Commission and do not represent the
Company's estimate or projection of the future price of the common stock on
any date. There is no representation either express or implied that the
stock price appreciation rates for the common stock assumed for purposes of
this table will actually be achieved.
45
<PAGE> 48
FISCAL YEAR-END OPTION VALUES
The following table sets forth information for each of the Named Executive
Officers with respect to the value of options outstanding as of December 31,
1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT
ON VALUE (#) FISCAL YEAR-END($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James K. Baker................... -- -- 43,750 61,250 $ 79,690 $ 88,590
Janet M. Baker................... -- -- 46,250 63,750 84,250 93,150
Steven Semenzato................. -- -- 15,625 51,875 27,563 82,688
Andreas E. Widmer-Schultz........ -- -- 13,750 51,250 24,225 72,675
Paul G. Bamberg.................. -- -- -- -- -- --
</TABLE>
- ------------
(1) There was no public trading market for the common stock as of December 31,
1997. Accordingly, as permitted by the rules of the Commission, these values
have been calculated on the basis of the fair market value of the Company's
common stock as of December 31, 1997, of $3.18 per share, as determined by
the Board of Directors, less the aggregate exercise price.
EMPLOYMENT AGREEMENTS
The Company and John D. Shagoury entered into a letter agreement dated May
14, 1998 that sets forth the terms of Mr. Shagoury's employment with the
Company. Under the agreement, Mr. Shagoury's annual base salary through July 1,
1999 is fixed at $250,000, provided, however that this amount may thereafter be
increased in accordance with normal business practice. Under the agreement, Mr.
Shagoury is also eligible for a performance bonus of up to $75,000 in calendar
1998 and up to $150,000 for calendar 1999 and thereafter, if certain performance
criteria are met. In addition, the Company granted Mr. Shagoury stock options to
purchase an aggregate of 561,000 shares of the Company's common stock, of which
330,000 shares are subject to incentive stock options and 231,000 shares are
subject to non-statutory options. The exercise price of these options is $16.00
per share. The incentive stock options will vest in four equal, annual
installments. The non-statutory stock options are exercisable at the end of
seven years from the date of the agreement, provided that, if certain
performance-based criteria are met, a percentage of such options will vest prior
to the end of the seven-year vesting period. These criteria include certain
specified revenue, after-tax profit, and market capitalization targets for the
Company. Also, Mr. Shagoury is entitled to severance pay if the Company
terminates his employment without cause on or before December 31, 2000, as
follows: $250,000 if such termination occurs before December 31, 1999 and
one-half of his base salary as of the date of termination if such termination
occurs on or after January 1, 2000 and prior to December 31, 2000. The severance
payments are subject to Mr. Shagoury's full compliance with the non-disclosure
and non-competition agreements between himself and the Company.
BENEFIT PLANS
1994 Stock Option Plan. In July 1994, the Company's Board of Directors
approved the 1994 Stock Option Plan (the "1994 Stock Option Plan"), which
provides for the grant of incentive stock options and non-qualified stock
options. An aggregate of 4,033,545 shares of common stock (less the number of
shares issuable under options granted pursuant to the Dragon Systems UK Company
Share Option Plan (the "UK Plan")) are authorized to be issued pursuant to the
1994 Stock Option Plan. As of December 8, 1998, an aggregate number of 3,692,310
shares of common stock at a weighted average exercise price of $6.29 per share
were
46
<PAGE> 49
outstanding under the 1994 Stock Option Plan. No additional option grants will
be made under the 1994 Stock Option Plan.
1999 Stock Incentive Plan. In December 1998, the Company's Board of
Directors approved the 1999 Stock Incentive Plan (the "Incentive Plan"). The
Incentive Plan provides for the grant of restricted stock and other stock-based
awards and stock options (collectively, "Awards") for an aggregate of 3,000,000
shares of the Company's common stock. The grant of incentive stock options under
the Incentive Plan is intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
Officers, employees, directors, consultants and advisors of the Company and
its subsidiaries are eligible to receive Awards under the Incentive Plan;
however, incentive stock options may only be granted to employees. The maximum
number of shares with respect to which Awards may be granted to any participant
under the Incentive Plan may not exceed shares in any calendar year.
Options may be granted at an exercise price which may be less than, equal
to or greater than the fair market value of the common stock on the date of
grant. Under present law, incentive stock options and options intended to
qualify as performance-based compensation under Section 162(m) of the Code may
not be granted at an exercise price less than the fair market value of the
common stock on the date of grant (or less than 110% of the fair market value in
the case of incentive stock options granted to optionees holding more than 10%
of the voting power of the Company). The Incentive Plan permits the Board of
Directors to determine the manner of payment of the exercise price of options,
including through payment by cash, check or in connection with a "cashless
exercise" through a broker, by surrender to the Company of shares of common
stock, by delivery to the Company of a promissory note, or by an combination of
the permitted forms of payment.
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors. The Compensation Committee has the authority to adopt, amend
and repeal the administrative rules, guidelines and practices relating to the
Incentive Plan and to interpret the provisions thereof. Pursuant to the terms of
the Incentive Plan, the Board of Directors may delegate authority under the
Incentive Plan to one or more committees of the Board of Directors and, subject
to certain limitations, to one or more executive officers of the Company.
Subject to any applicable limitations contained in the Incentive Plan, the Board
of Directors, the Compensation Committee or any other committee or executive
officer to whom the Board of Directors delegates authority, as the case may be,
selects the recipients of Awards and determines (i) the number of shares of
common stock covered by options and the dates upon which such options become
exercisable, (ii) the exercise price of options, (iii) the duration of options,
and (iv) the number of shares of common stock subject to any restricted stock or
other stock-based Awards and the terms and conditions of such Awards, including
the conditions for repurchase, issue price and repurchase price.
In the event of a merger, liquidation or other Acquisition Event (as
defined in the Incentive Plan), the Board of Directors is authorized to provide
for outstanding options or other stock-based awards to be assumed or substituted
for by the acquiror. If the Acquisition Event also constitutes a Change in
Control (as defined in the Incentive Plan), (i) each outstanding option shall
become exercisable for one-half of the shares subject to each such option with
the remaining half vesting in accordance with the original vesting schedule, and
(ii) restrictions on one-half of each other outstanding stock-based award shall
lapse. In addition, following an Acquisition Event, an assumed or substituted
Award will accelerate if the employment of its holder with the acquiror is
terminated prior to the first anniversary of the Acquisition Event other than
"for cause" or if the holder terminates his or her employment for "good reason,"
each as defined in the Incentive Plan.
No Award may be granted under the Incentive Plan after December 2008, but
the vesting and effectiveness of Awards previously granted may extend beyond
that date. The Board of Directors may at any time amend, suspend or terminate
the Incentive Plan, except that no Award granted after an amendment of the
Incentive Plan and designated as subject to Section 162(m) of the Code by the
Board of Directors shall become exercisable, realizable or vested (to the extent
such amendment was required to grant such Award) unless and until such amendment
is approved by the Company's stockholders.
47
<PAGE> 50
Dragon Systems UK Company Share Option Plan. In 1997, the Company's Board
of Directors approved the UK Plan. The UK Plan provides for the grant of stock
options in compliance with the laws of England and Wales. The maximum number of
shares of common stock issuable upon the exercise of options granted under the
UK Plan is limited to 200,000 shares.
1999 Employee Stock Purchase Plan. The Company's 1999 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
December 1998. The Purchase Plan authorizes the issuance of up to a total of
500,000 shares of common stock to participating employees. The Company intends
to make the Purchase Plan effective at or about the time of this offering.
All employees of the Company, including the Company's employee-directors,
who have been employed for more than six months are eligible to participate in
the Purchase Plan. Employees who would immediately after the grant own 5% or
more of the total combined voting power or value of the stock of the Company or
any subsidiary are not eligible to participate.
The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 10% of an employee's
compensation, subject to certain limitations. On the first day of a designated
payroll deduction period (the "Offering Period"), the Company will grant to each
eligible employee who has elected to participate in the Purchase Plan the right
to purchase shares of common stock. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the purchase price, to the
extent of accumulated payroll deductions. Under the terms of the Purchase Plan,
the purchase price is an amount equal to 85% of the fair market value per share
of the common stock on either the first day or the last day of the Offering
Period, whichever is lower. The Compensation Committee may, in its discretion,
choose an Offering Period of 12 months or less for each of the Offerings and
choose a different Offering Period for each Offering.
An employee who is not a participant on the last day of the Offering Period
is not entitled to exercise his purchase right, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's rights
under the Purchase Plan terminate upon voluntary withdrawal from the Purchase
Plan at any time, or when such employee ceases employment for any reason, except
that upon termination of employment because of death, the employee's beneficiary
has certain rights to elect to exercise the option to purchase the shares which
the accumulated payroll deductions in the participant's account would purchase
at the date of death.
401(k) Plan. The Company's 401(k) Profit Sharing Plan (the "401(k) Plan")
is a tax-qualified plan covering all full-time employees of the Company who have
met the minimum age and service requirements. Under the 401(k) Plan,
participants may elect to defer a portion of their eligible compensation,
subject to certain limitations. In addition, at the discretion of the Board of
Directors, the Company may make matching contributions to the 401(k) Plan for
all eligible employees. The Company currently matches 100% of each employee's
pre-tax contribution to the plan, with such matching subject to a limit of 5% of
such employee's eligible compensation. The 401(k) Plan provides that, at the
discretion of the Board of Directors, the Company may make profit sharing
contributions for all eligible employees. Profit sharing contributions and
matching contributions currently vest in increments over a two-year period,
beginning on an employee's date of employment. The Company contributed
approximately $409,000 during 1995, $398,000 during 1996 and $419,000 during
1997 to the 401(k) Plan. The Company contributed approximately $355,000 to the
Plan during the nine months ended September 30, 1998.
48
<PAGE> 51
CERTAIN TRANSACTIONS
The Company is a party to a Development and Marketing Agreement dated as of
October 25, 1996 with Articulate and Medifax, Inc. This Agreement was superseded
by a Technology License Agreement, dated July 7, 1998, between the Company and
Articulate pursuant to which Dragon has granted Articulate an exclusive license
to certain of its speech technology in one field of use (radiology, emergency
medicine and cardiology) and a non-exclusive license in another (the remainder
of the healthcare market). At the time it entered into the Technology License
Agreement, the Company owned 49.7% of the outstanding voting securities of
Articulate. The Company sold its minority interest in Articulate to fonix
corporation on September 2, 1998.
The Company received approximately $655,000 in 1997 and $345,000 in 1996
under a commercial development contract with Seagate, which owns approximately
38% of the Company's outstanding capital stock prior to this offering. The
Company believes that this agreement was entered into on an arm's-length basis
on terms that were no less favorable to the Company than could have been
obtained from an unaffiliated third party. Mr. Luczo, Seagate's President and
Chief Executive Officer, has been a member of the Board of Directors of the
Company since July 1994.
49
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of December 8, 1998 and as adjusted
to reflect the sale of the shares in this offering by (i) each person who is
known by the Company to own beneficially more than 5% of the outstanding shares
of common stock, (ii) each director and Named Executive Officer of the Company,
and (iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1)(2)
------------------------- -------------------------
NAME NUMBER PERCENT NUMBER PERCENT
- ---- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C>
James K. Baker(3).............................. 15,592,060 52.0%
Janet M. Baker(4).............................. 15,592,060 52.0
Seagate Technology, Inc.(5).................... 11,466,130 38.4
Paul G. Bamberg................................ 1,761,340 5.9
John D. Shagoury............................... -- *
Robert Roth(6)................................. 849,650 2.8
Kim B. Edwards................................. -- *
Stephen J. Luczo(7)............................ 11,466,130 38.4
Steven Semenzato(8)............................ 32,500 *
Andreas E. Widmer-Schultz(9)................... 30,000 *
All executive officers and directors as a group
(13 persons)(10)............................. 30,100,740 99.6
</TABLE>
- ------------
* Less than 1% of the outstanding common stock.
(1) The number of shares of common stock deemed outstanding prior to this
offering includes: (i) 13,628,380 shares of common stock outstanding as of
December 8, 1998; and (ii) shares issuable pursuant to options held by each
person included in this table which may be exercised within 60 days after
December 8, 1998, as set forth below. The number of shares of common stock
deemed outstanding after this offering includes the shares that are
being offered for sale by the Company in this offering. Beneficial
ownership is determined in accordance with the rules of the Commission, and
includes voting and investment power with respect to shares. Unless
otherwise indicated below, to the knowledge of the Company, all persons
named in the table have sole voting and investment power with respect to
their shares of common stock, except to the extent authority is shared by
spouses under applicable law. Unless otherwise indicated, the address of
each person below owning more than 5% of the outstanding shares of common
stock is c/o Dragon Systems, Inc., 320 Nevada Street, Newton, MA 02460.
(2) The above table assumes no exercise of the over-allotment option to
purchase up to an aggregate of shares of common stock. If the
underwriters exercise their over-allotment option in full, the following
stockholders (the "Selling Stockholders") will sell such number of
additional shares of common stock pursuant to such option and, after such
sale, will beneficially own such number of shares of common stock, that is
set forth below opposite their respective names:
<TABLE>
<CAPTION>
SHARES TO BE BENEFICIALLY
SHARES OWNED AFTER OFFERING
BEING --------------------------
NAME OFFERED NUMBER PERCENTAGE
---- ----------- ----------- -----------
<S> <C> <C> <C>
</TABLE>
(3) Includes 70,000 shares issuable pursuant to options held by Dr. James Baker
that may be exercised within 60 days after December 8, 1998. Also includes
an aggregate of 7,797,905 shares held by Dr. Janet Baker.
50
<PAGE> 53
(4) Includes 73,750 shares issuable pursuant to options held by Dr. Janet Baker
that may be exercised within 60 days after December 8, 1998. Also includes
an aggregate of 7,794,155 shares held by Dr. James Baker.
(5) The address of Seagate Technology, Inc. is 920 Disk Drive, Scotts Valley,
CA 95066.
(6) Includes 11,875 shares issuable pursuant to options held by Dr. Roth that
may be exercised within 60 days after December 8, 1998.
(7) Includes 11,466,130 shares held by Seagate as to which Mr. Luczo disclaims
beneficial ownership.
(8) Includes 32,500 shares issuable pursuant to options held by Mr. Semenzato
that may be exercised within 60 days after December 8, 1998.
(9) Includes 30,000 shares issuable pursuant to options held by Mr.
Widmer-Schultz that may be exercised within 60 days after December 8, 1998.
(10) Includes 411,250 shares of common stock issuable upon the exercise of stock
options that vest within 60 days after December 8, 1998. See notes (3)
through (9).
51
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the authorized capital stock
of the Company will consist of 100,000,000 shares of common stock, $.04 par
value per share, and 5,000,000 shares of preferred stock, $.04 par value per
share.
The following summary description of the Company's capital stock is not
intended to be complete and is qualified in its entirety by reference to the
provisions of applicable law and to the Company's Restated Certificate of
Incorporation and Restated By-Laws, filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
As of December 8, 1998, there were 29,823,135 shares of common stock
outstanding held by 16 stockholders of record. Based upon the number of shares
outstanding as of that date, and giving effect to the issuance of the
shares of common stock offered by the Company in this offering, there will be
shares of common stock outstanding upon the closing of this offering. In
addition, as of December 8, 1998, there were outstanding stock options for the
purchase of a total of 3,692,310 shares of common stock.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in such election.
Holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding preferred
stock. Upon the liquidation, dissolution or winding up of the Company, the
holders of common stock are entitled to receive ratably the net assets of the
Company available after the payment of all debts and other liabilities of the
Company, subject to the prior rights of any outstanding preferred stock. Holders
of the common stock have no preemptive, subscription, redemption or conversion
rights, nor are they entitled to the benefit of any sinking fund. The
outstanding shares of common stock are, and the shares offered by the Company in
this offering will be, when issued and paid for, validly issued, fully paid and
nonassessable. The rights, powers, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Board of Directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 5,000,000 shares of preferred stock, in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption provisions,
liquidation preferences, conversion rights and preemptive rights. The rights of
the holders of common stock will be subject to the rights of holders of any
preferred stock issued in the future.
The stockholders of the Company have granted the Board of Directors
authority to issue the preferred stock in order to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could adversely affect the voting power or other
rights of the holders of common stock, and could make it more difficult for a
third party to acquire, or discourage a third party from attempting to acquire,
a majority of the outstanding voting stock of the Company.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, consolidations, asset sales and other transactions involving
the Company and an interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person
52
<PAGE> 55
who, together with affiliates and associates, owns, or within three years did
own, 15% or more of the corporation's voting stock.
The Restated Certificate of Incorporation and Restated By-Laws provide for
the division of the Board of Directors into three classes, as nearly equal in
size as possible, with staggered three-year terms. See "Management -- Election
of Directors." In addition, the Restated Certificate of Incorporation and
Restated By-Laws provide that directors may be removed only for cause by the
affirmative vote of the holders of at least 75% of the shares of capital stock
of the Company entitled to vote. The Restated Certificate of Incorporation and
Restated By-Laws provide that any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
only be filled by vote of a majority of the directors then in office. The
classification of the Board of Directors and the limitations on the removal of
directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Restated Certificate of Incorporation and Restated By-Laws also provide
that, after the closing of this offering, (i) any action required or permitted
to be taken by the stockholders of the Company at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before such
meeting and may not be taken by written action in lieu of a meeting, and (ii)
special meetings of the stockholders may only be called by the Chairman of the
Board of Directors, the President of the Company, or by the Board of Directors.
The Restated By-Laws provide that, in order for any matter to be considered
"properly brought" before a meeting, a stockholder must comply with certain
requirements regarding advance notice to the Company. The foregoing provisions
could have the effect of delaying until the next stockholders' meeting
stockholder actions which are favored by the holders of a majority of the
outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Company's
common stock, because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Restated Certificate of Incorporation
requires the affirmative vote of the holders of at least 75% of the shares of
capital stock of the Company entitled to vote to amend or repeal any of the
foregoing provisions of the Restated Certificate of Incorporation. The Restated
By-Laws may be amended or repealed by a majority vote of the Board of Directors
or the holders of a majority of the shares of the capital stock of the Company
issued and outstanding and entitled to vote, subject to certain limitations
concerning special meetings of stockholders, written actions of stockholders in
lieu of a meeting, and the election, removal and classification of members of
the Board of Directors which require the affirmative vote of the holders of at
least 75% of the shares of capital stock of the Company entitled to vote. The
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any series preferred stock that
might be outstanding at the time any such amendments are submitted to
stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Restated Certificate of Incorporation provides that the directors and
officers of the Company shall be indemnified by the Company to the fullest
extent authorized by Delaware law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with the service for or on behalf of the Company. In addition, the Restated
Certificate of Incorporation provides that the directors of the Company will not
be personally liable for monetary damages to the Company for breaches of their
fiduciary duty as directors, unless they violated their duty of loyalty to the
Company or its stockholders, acted in bad faith, knowingly or intentionally
violated the law, authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Boston EquiServe
L.P.
53
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have shares of
common stock outstanding (assuming no exercise of outstanding options). Of these
shares, the shares ( shares if the over-allotment option is
exercised in full) to be sold in this offering will be freely tradable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), except that any shares purchased by affiliates of the
Company, as that term is defined in Rule 144 ("Rule 144") under the Securities
Act ("Affiliates"), may generally only be sold in compliance with the
limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 29,823,135 shares of common stock outstanding upon completion
of this offering are deemed "Restricted Shares" under Rule 144 or Rule 701 under
the Securities Act. Subject to the lock-up agreements described below (the
"Lock-up Agreements"), 133,650 of such Restricted Shares will be eligible for
sale in the public market, pursuant to Rule 701, 90 days after the date of this
Prospectus. Upon expiration of the Lock-up Agreements, 180 days after the date
of this Prospectus, an additional 1,875 shares of common stock will be eligible
for sale in the public market pursuant to Rule 144(k) under the Securities Act.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an Affiliate, who has beneficially owned Restricted
Shares for at least one year is entitled to sell, within any three-month period,
a number of such shares that does not exceed the greater of (i) one percent of
the then outstanding shares of common stock (approximately shares
immediately after this offering) or (ii) the average weekly trading volume in
the common stock in the over-the-counter market during the four calendar weeks
preceding the date on which notice of such sale is filed, provided certain
requirements concerning availability of public information, manner of sale and
notice of sale are satisfied. In addition, Affiliates must comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of common stock which are not
restricted securities. Under Rule 144(k), a person who is not an Affiliate and
has not been an Affiliate for at least three months prior to the sale and who
has beneficially owned Restricted Shares for at least two years may resell such
shares without compliance with the foregoing requirements. In meeting the one-
and two-year holding periods described above, a holder of Restricted Shares can
include the holding periods of a prior owner who was not an Affiliate. The one-
and two-year holding periods described above do not begin to run until the full
purchase price or other consideration is paid by the person acquiring the
Restricted Shares from the issuer or an Affiliate. Rule 701 provides that
currently outstanding shares of common stock acquired under the Company's
employee compensation plans may be resold beginning 90 days after the date of
this Prospectus (i) by persons, other than Affiliates, subject only to the
manner of sale provisions of Rule 144, and (ii) by Affiliates under Rule 144,
and by Affiliates under Rule 144 without compliance with its one-year minimum
holding period, subject to certain limitations.
STOCK OPTIONS
At December 8, 1998, approximately 1,306,740 shares of common stock were
issuable pursuant to vested options or pursuant to other rights granted under
the Company's 1994 Stock Option Plan of which approximately 308,835 shares are
not subject to Lock-up Agreements with the Underwriters and will be eligible for
sale in the public market in accordance with Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act following the date of this Prospectus, to register up
to 3,692,310 shares of common stock subject to outstanding stock options or
other rights granted pursuant to the Company's 1994 Stock Option Plan as of
December 8, 1998, including the 1,306,740 shares of common stock subject to
options vested as of December 8, 1998, and 2,385,570 shares of common stock
issuable pursuant to the Company's 1994 Stock Option Plan. Such registration
statements are expected to become effective upon filing. At such time,
approximately 1,306,740 shares of common stock issuable upon the exercise of
options granted as of December 8, 1998 and covered by these registration
statements will be vested and eligible for sale in the public market upon the
exercise of underlying options to the extent not previously sold pursuant to
Rule 701.
54
<PAGE> 57
LOCK-UP AGREEMENTS
Subject to certain exceptions, the Company and the executive officers,
directors, Selling Stockholders and other securityholders of the Company have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated, they will not, during the period ending 180 days after the date of
this Prospectus, (a) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock (regardless of whether such
shares or any such securities are then owned by such person or are thereafter
acquired), or (b) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the common stock, regardless of whether any such transactions described in
clauses (a) or (b) of this paragraph are to be settled by delivery of such
common stock or such other securities, in cash or otherwise. In addition, for a
period of 180 days from the date of this Prospectus, except as required by law,
the Company has agreed that its Board of Directors will not consent to any offer
for sale, sale or other disposition, or any transaction which is designed or
could be expected, to result in, the disposition by any person, directly or
indirectly, of any shares of common stock without the prior written consent of
Morgan Stanley & Co. Incorporated. See "Underwriters."
REGISTRATION RIGHTS
The Company and Seagate are parties to an Amended and Restated Registration
Rights Agreement dated September 4, 1997. Under the terms of this agreement,
Seagate is entitled to certain demand registration rights regarding the
registration of its shares under the Securities Act after the closing of this
offering, subject to certain limitations and restrictions. Under the terms of
the agreement, the Company is not required to effect any additional
registrations upon demand after it has effected two such registrations and such
registrations have been declared or ordered effective and, further, is not
required to effect a registration within six months after the closing of this
offering. In addition, under the terms of the Agreement, the Company is not
required to effect more than one such registration upon demand in any six-month
period. The agreement also grants Seagate piggyback registration rights, subject
to conditions, with respect to the registration of its shares under the
Securities Act. In the event that the Company proposes to register any shares of
common stock under the Securities Act, either for its own account or for the
account of other security holders, the agreement provides that Seagate pursuant
to its piggyback registration rights is entitled to receive notice thereof, and
has the right to include its shares in that registration, subject to certain
limitations. Under the terms of the Agreement, the Company is not required to
effect more than one such piggyback registration in any six-month period.
Further, the agreement provides that Seagate may require the Company to file up
to an aggregate of three registration statements under the Securities Act on
Form S-3 with respect to its shares, subject to certain limitations. The Company
is not required to effect such a registration on Form S-3 within one year of the
closing of this offering or for a period 60 days prior to or six months
following the effective date of certain registration statements regarding the
Company's securities. Further, under the terms of the Agreement, the Company is
not required to effect more than one such registration on Form S-3 in any six
month period. The various registration rights provided under the agreement are
subject to conditions and limitations, including the right of the underwriters
of an offering to limit the number of shares of common stock held by security
holders with registration rights to be included in such registration. Other than
registrations on Form S-3 requested to be filed by Seagate, the Company is
generally required to bear all of the expenses of all registrations, except
underwriting discounts, commissions, and stock transfer taxes. Seagate shall
bear all of the expenses of any demand registration on Form S-3 requested to be
filed by Seagate. Registration of any of the shares of common stock held by
securityholders with registration rights would result in such shares becoming
freely tradable without restriction under the Securities Act upon effectiveness
of such registration.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock of the Company, and no predictions can be made as to the effect, if any,
that market sales of shares of common stock from time to time, or the
availability of shares for future sale, may have on the market price for the
common stock. Sales of substantial amounts of common stock, or the perception
that such sales could occur, could adversely effect prevailing market prices for
the common stock and could impair the Company's future ability to obtain capital
through an offering of equity securities.
55
<PAGE> 58
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this Prospectus (the "underwriting agreement"), the
underwriters named below, for whom Morgan Stanley & Co. Incorporated, Hambrecht
& Quist LLC and SG Cowen Securities Corporation are acting as representatives,
have severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective number of shares of common stock set forth opposite
the names of such underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Hambrecht & Quist LLC.......................................
SG Cowen Securities Corporation.............................
--------
Total..................................................
========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from the Company and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of common stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all the
shares of common stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other underwriters or to certain dealers. After the initial offering of
the shares of common stock, the offering price and other selling terms may from
time to time be varied by the representatives.
The Selling Stockholders have granted the underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of additional shares of common stock at the public offering
price set forth on the cover page hereof, less underwriting discounts and
commissions. The underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of common stock offered hereby. To the extent such option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of common
stock as the number set forth next to such underwriter's name in the preceding
table bears to the total number of shares of common stock set forth next to the
names of all underwriters in the preceding table. If the underwriters' option is
exercised in full, the total price to the public would be $ , the total
underwriters' discounts and commissions would be $ , and total proceeds
to the Company would be $ .
At the request of the Company, the underwriters have reserved up to
shares of the common stock offered hereby for sale at the initial
public offering price to certain employees, consultants, business associates and
other persons associated with the Company. The number of shares of common stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any
56
<PAGE> 59
reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered hereby.
The underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
The common stock has been approved for quotation, subject to official
notice of issuance, on the Nasdaq National Market under the symbol "DRGN."
Subject to certain limited exceptions, the Company and the executive
officers, directors, the Selling Stockholders and certain other securityholders
of the Company have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, they will not, during the period ending 180 days
after the date of this Prospectus, (a) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock
(regardless of whether such shares or any such securities are then owned by such
person or are thereafter acquired), or (b) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the common stock, regardless of whether any such
transactions described in clauses (a) or (b) of this paragraph are to be settled
by delivery of such common stock or such other securities, in cash or otherwise.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
From time to time, certain of the underwriters have provided, and may
continue to provide, investment banking services to the Company.
The Company, the Selling Stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between the Company and the representatives of the underwriters. Among the
factors to be considered in determining the initial public offering price will
be the future prospects of the Company and its industry in general, net sales,
earnings and certain other financial and operating information of the Company in
recent periods, and the price-earnings ratios, certain other ratios, and market
prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. The estimated
initial public offering price range set forth on the cover page of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
57
<PAGE> 60
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for the Company by Hale and Dorr LLP, Boston, Massachusetts. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The Consolidated Financial Statements and Financial Statement Schedule of
the Company as of December 31, 1996 and December 31, 1997 and for the three
years in the period ended December 31, 1997 included in this Prospectus and
elsewhere included in the Registration Statement 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.
The statements in the Prospectus in the first two paragraphs under the
caption "Business -- Intellectual Property" and the first two paragraphs under
the caption "Business -- Legal Proceedings" have been reviewed and approved by
Fish & Richardson P.C., patent counsel of the Company, as experts on patent
matters, and are included herein in reliance upon that review and approval and
the authority of such counsel as experts in patent law.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
S-1 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the common
stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the common stock offered hereby, reference is made to
the Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement may be inspected without charge at
the principal office of the Commission in Washington, D.C. and copies of all or
any part of which may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Room
1024, Washington, D.C. 20549, and at the Commission's regional offices located
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can also be obtained at prescribed rates by mail from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
58
<PAGE> 61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public
Accountants......................... F-2
Consolidated Balance Sheets........... F-3
Consolidated Statements of
Operations.......................... F-4
Consolidated Statements of
Stockholders' Equity................ F-5
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Cash
Flows............................... F-6
Notes to Consolidated Financial
Statements.......................... F-7
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dragon Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Dragon
Systems, Inc. and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dragon
Systems, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
December 1, 1998 (except for the matter
discussed in Note 6, as to which the date is
December 17, 1998)
F-2
<PAGE> 63
DRAGON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,616 $ 4,894 $ 6,598
Investments, available for sale........................... 3,296 7,427 5,840
Accounts receivable, net of allowance for bad debt of
$381, $813 and $1,024................................... 998 2,501 9,351
Unbilled revenues......................................... 1,301 968 1,658
Inventories............................................... 481 2,162 5,561
Refundable income taxes................................... 1,406 570 588
Prepaid expenses and other current assets................. 444 482 909
Deferred tax assets....................................... 215 2,809 5,547
------- ------- -------
Total current assets.................................... 11,757 21,813 36,052
------- ------- -------
Property and equipment, net................................. 1,165 1,373 1,976
Other assets................................................ 191 -- 250
------- ------- -------
Total assets............................................ $13,113 $23,186 $38,278
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 713 $ 2,615 $ 6,562
Accrued expenses.......................................... 2,438 2,745 6,311
Income taxes payable...................................... 35 453 1,421
Deferred revenue.......................................... -- 24 328
Net liabilities of a discontinued operation............... 2,635 2,495 --
------- ------- -------
Total current liabilities............................... 5,821 8,332 14,622
------- ------- -------
Commitments and contingencies (Note 8)
Stockholders' equity:
Convertible preferred stock, $.04 par value; 5,000,000
shares authorized; 2,847,349; 3,207,598 and 3,238,951
shares issued and outstanding (preference in
liquidation: $64,779)................................... 114 128 130
Common stock, $.04 par value; 45,000,000 shares
authorized; 11,966,120; 13,483,120 and 13,628,380 shares
issued and outstanding (preference in liquidation:
$18,480)................................................ 479 539 545
Additional paid-in capital................................ 18,135 30,975 31,028
Retained deficit.......................................... (11,422) (16,718) (8,045)
Accumulated other comprehensive income.................... (14) (70) (2)
------- ------- -------
Total stockholders' equity.............................. 7,292 14,854 23,656
------- ------- -------
Total liabilities and stockholders' equity.............. $13,113 $23,186 $38,278
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 64
DRAGON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
Software licenses.................................... $12,171 $11,479 $19,506 $10,222 $44,766
Development contracts................................ 4,716 5,559 7,315 5,206 4,810
------- ------- ------- ------- -------
Total net revenue.................................. 16,887 17,038 26,821 15,428 49,576
------- ------- ------- ------- -------
Cost of revenue:
Cost of software licenses............................ 3,365 3,465 5,394 2,806 12,162
Cost of development contracts........................ 3,315 3,582 4,993 3,660 2,595
------- ------- ------- ------- -------
Total cost of revenue.............................. 6,680 7,047 10,387 6,466 14,757
------- ------- ------- ------- -------
Gross profit....................................... 10,207 9,991 16,434 8,962 34,819
------- ------- ------- ------- -------
Operating expenses:
Research and development............................. 6,688 7,983 9,577 7,096 10,607
Selling and marketing................................ 4,825 5,403 9,350 5,734 16,025
General and administrative........................... 2,192 1,940 2,485 1,769 2,907
------- ------- ------- ------- -------
Total operating expenses........................... 13,705 15,326 21,412 14,599 29,539
------- ------- ------- ------- -------
Operating income (loss)................................ (3,498) (5,335) (4,978) (5,637) 5,280
Interest income...................................... 760 520 511 369 452
------- ------- ------- ------- -------
Income (loss) from continuing operations before
income taxes..................................... (2,738) (4,815) (4,467) (5,268) 5,732
Provision for (benefit from) income taxes.............. (646) (564) (2,190) (2,583) 1,699
------- ------- ------- ------- -------
Income (loss) from continuing operations........... (2,092) (4,251) (2,277) (2,685) 4,033
------- ------- ------- ------- -------
Gain (loss) on discontinued operations:
Loss from operations............................... (3,070) (1,706) (3,019) (2,306) (2,142)
Gain on sale, net of taxes of $1,420............... -- -- -- -- 6,782
------- ------- ------- ------- -------
Gain (loss) on discontinued operations............. (3,070) (1,706) (3,019) (2,306) 4,640
------- ------- ------- ------- -------
Net income (loss).................................. $(5,162) $(5,957) $(5,296) $(4,991) $ 8,673
======= ======= ======= ======= =======
Earnings per share:
Income (loss) from continuing operations:
Basic.............................................. $ (.18) $ (.36) $ (.18) $ (.22) $ .30
Diluted............................................ $ (.18) $ (.36) $ (.18) $ (.22) $ .13
Gain (loss) from discontinued operations:
Basic.............................................. $ (.26) $ (.14) $ (.24) $ (.19) $ .34
Diluted............................................ $ (.26) $ (.14) $ (.24) $ (.19) $ .15
Net income (loss):
Basic.............................................. $ (.43) $ (.50) $ (.43) $ (.41) $ .64
Diluted............................................ $ (.43) $ (.50) $ (.43) $ (.41) $ .27
Weighted average shares outstanding:
Basic.............................................. 11,897 11,922 12,460 12,116 13,622
Diluted............................................ 11,897 11,922 12,460 12,116 31,844
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 65
DRAGON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ACCUMULATED
----------------- ------------------ ADDITIONAL OTHER TOTAL
NUMBER OF PAR NUMBER OF PAR PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL DEFICIT INCOME EQUITY
--------- ----- ---------- ----- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994..................... 2,830,962 $113 11,897,225 $476 $18,115 $ (303) $ -- $18,401
Net loss................. (5,162) (5,162)
Foreign currency
translation
adjustment............. (9) (9)
--------- ---- ---------- ---- ------- -------- ---- -------
Comprehensive income.....
Balance, December 31,
1995..................... 2,830,962 113 11,897,225 476 18,115 (5,465) (9) 13,230
Exercise of stock options
and units.............. 16,387 1 68,895 3 20 24
Net loss................. (5,957) (5,957)
Foreign currency
translation
adjustment............. (5) (5)
--------- ---- ---------- ---- ------- -------- ---- -------
Comprehensive income.....
Balance, December 31,
1996..................... 2,847,349 114 11,966,120 479 18,135 (11,422) (14) 7,292
Exercise of stock options
and units.............. 510 -- 5,010 -- 4 4
Issuance of convertible
preferred stock and
common stock........... 359,739 14 1,511,990 60 11,926 12,000
Issuance of subsidiary
stock.................. 910 910
Net loss................. (5,296) (5,296)
Foreign currency
translation
adjustment............. (56) (56)
--------- ---- ---------- ---- ------- -------- ---- -------
Comprehensive income.....
Balance, December 31,
1997..................... 3,207,598 128 13,483,120 539 30,975 (16,718) (70) 14,854
Exercise of stock options
and units.............. 31,353 2 145,260 6 53 61
Net income............... 8,673 8,673
Unrealized gain on
investments available
for sale............... 50 50
Foreign currency
translation
adjustment............. 18 18
--------- ---- ---------- ---- ------- -------- ---- -------
Comprehensive income.....
Balance, September 30, 1998
(unaudited).............. 3,238,951 $130 13,628,380 $545 $31,028 $(8,045) $ (2) $23,656
========= ==== ========== ==== ======= ======== ==== =======
<CAPTION>
COMPREHENSIVE
INCOME
-------------
<S> <C>
Balance, December 31,
1994..................... $ --
Net loss................. (5,162)
Foreign currency
translation
adjustment............. (9)
-------
Comprehensive income..... (5,171)
Balance, December 31,
1995.....................
Exercise of stock options
and units..............
Net loss................. (5,957)
Foreign currency
translation
adjustment............. (5)
-------
Comprehensive income..... (5,962)
Balance, December 31,
1996.....................
Exercise of stock options
and units..............
Issuance of convertible
preferred stock and
common stock...........
Issuance of subsidiary
stock..................
Net loss................. (5,296)
Foreign currency
translation
adjustment............. (56)
-------
Comprehensive income..... (5,352)
Balance, December 31,
1997.....................
Exercise of stock options
and units..............
Net income............... 8,673
Unrealized gain on
investments available
for sale............... 50
Foreign currency
translation
adjustment............. 18
-------
Comprehensive income..... 8,741
Balance, September 30, 1998
(unaudited)..............
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 66
DRAGON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------------
1995 1996 1997 1997 1998
-------- ------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (5,162) $(5,957) $ (5,296) $(4,991) $ 8,673
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization...................... 1,788 1,919 970 739 776
Gain on sale of discontinued operations............ -- -- -- (6,782)
Deferred income taxes.............................. -- -- (2,594) (1,399) (2,738)
Changes in operating assets and liabilities:
Accounts receivable.............................. (358) 1,119 (1,503) (325) (6,850)
Unbilled receivables............................. 525 (563) 333 453 (690)
Inventories...................................... (59) (58) (1,681) (1,957) (3,399)
Refundable income taxes.......................... (201) (697) 836 (941) (18)
Prepaid expenses and other current assets........ 26 (143) (38) (34) (427)
Accounts payable................................. (85) 285 1,902 1,897 3,947
Accrued expenses................................. 204 742 307 137 3,566
Deferred revenues................................ (203) (52) 24 877 304
Income taxes payable............................. 56 347 418 (403) (453)
Discontinued operations.......................... 1,129 1,506 (140) 393 1,912
-------- ------- -------- ------- -------
Net cash used in operating activities............ (2,340) (1,552) (6,462) (5,554) (2,179)
-------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets............................ (677) (660) (1,003) (602) (1,379)
Purchases of investments............................. (1,963) (3,296) (8,418) (3,539) (2,383)
Maturities and sales of investments.................. -- 1,963 4,287 3,296 5,586
Cash from sale of discontinued operations............ -- -- -- 2,230
Additions to capitalized software costs.............. (962) (538) -- -- --
Other assets......................................... 261 60 17 (12) (250)
-------- ------- -------- ------- -------
Net cash provided by (used in) investing
activities..................................... (3,341) (2,471) (5,117) (857) 3,804
-------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock
and common stock................................... -- 24 12,004 11,988 61
Proceeds from issuance of subsidiary preferred
stock.............................................. -- -- 910 800 --
-------- ------- -------- ------- -------
Total cash provided by financing activities...... -- 24 12,914 12,788 61
-------- ------- -------- ------- -------
Foreign exchange impact on cash and cash
equivalents........................................ (10) (4) (57) (14) 18
-------- ------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ (5,691) (4,003) 1,278 6,363 1,704
Cash and cash equivalents, beginning of period....... 13,310 7,619 3,616 3,616 4,894
-------- ------- -------- ------- -------
Cash and cash equivalents, end of period............. $ 7,619 $ 3,616 $ 4,894 $ 9,979 $ 6,598
======== ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Cash paid for (refunds received from) income
taxes............................................ $ (444) $ (68) $ (872) $ (65) $ 2,177
======== ======= ======== ======= =======
Cash paid for interest............................. $ -- $ -- $ -- $ -- $ --
======== ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING
ACTIVITIES:
fonix stock received from sale of discontinued
operations....................................... $ -- $ -- $ -- $ -- $ 1,566
======== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 67
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. THE COMPANY
The Company is a leading developer and provider of advanced speech
recognition products and related speech technologies that humanize the way
people communicate with computers and other electronic devices. The Company's
products and technologies enable electronic devices to understand speech.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Through September 2, 1998, the Company owned approximately 38% of the
outstanding voting shares of Articulate Systems, Inc. ("Articulate"). The
financial statements of Articulate have been reflected in the consolidated
financial statements of the Company as discontinued operations (see Note 3).
(b) 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
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions.
(c) Foreign Currency
Assets and liabilities of the Company's foreign operations are translated
into U.S. dollars at the exchange rate in effect as of the balance sheet date,
and revenue and expenses are translated at average exchange rates during the
period. The resultant translation adjustment is reflected as a separate
component of accumulated other comprehensive income. Net gains and losses
resulting from foreign exchange transactions are reflected in the consolidated
statements of operations and were not material in all periods presented.
(d) Revenue Recognition
The Company sells its products predominantly through major distributors to
retail channel accounts and VARs and directly to OEMs and ISVs. The Company
recognizes revenue and the related receivable from software license revenue to
distributors at the time the products are shipped out of distribution into the
retail accounts and VARs. The Company recognizes revenue from product sold
directly to end users at the time of shipment. An allowance for estimated future
returns is recorded at the time revenue is recognized. Revenue from royalty fees
is recognized upon the shipment of units by the OEM.
Revenue received under development contracts and government funded
research, is recognized using the percentage-of-completion method. Losses, if
any, are provided for at the time that management determines that development
costs will exceed related fees. Payments received under development contracts
prior to completion of the related work and attainment of milestones are
recorded as deferred revenue. Unbilled revenue represents revenue recognized in
excess of amounts billed.
The Company has historically provided customers with free technical support
services for a ninety-day period, which it is not contractually obligated to
provide. A provision is made at the time of sale for the cost of such free
services. Accrued product support expenses are included in accrued expenses in
the accompanying financial statements.
(e) Research and Development and Software Development Costs
Software development costs for new software and for enhancements to
existing software are charged to operations as incurred until the establishment
of technological feasibility. Software development costs
F-7
<PAGE> 68
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
incurred subsequent to the establishment of technological feasibility and prior
to general release of the product are capitalized and amortized to cost of
software licenses on a straight-line basis over the estimated useful life of the
related products, generally from one to two years.
For the year ended December 31, 1997 and for the nine months ended
September 30, 1998, no software development costs were capitalized as the
amounts expended subsequent to reaching technological feasibility were
immaterial. In 1995 and 1996, approximately $962 and $538, respectively, of
software development costs were capitalized. Amortization expense for the years
ended 1995, 1996 and 1997 and for the nine month periods ended September 30,
1997 and 1998 were $1,068, $1,007, $174, $174 and $0, respectively. Net
capitalized software costs are included in other assets in the accompanying
balance sheet.
(f) Income Taxes
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, SFAS No. 109 generally considers all
expected future events other than enactments of changes in the tax law or rates.
Deferred tax assets are recognized, net of any valuation allowance, for
deductible temporary differences and operating loss and credit carryforwards, if
any. Deferred tax expense represents the change in the deferred tax asset or
liability balances.
(g) Net Income (Loss) per Share
All earnings per share information presented has been calculated in
accordance with SFAS No. 128, "Earnings Per Share." Under SFAS 128, basic net
income (loss) per common share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted income (loss) per common share is computed
using the weighted average number of common shares and common stock equivalent
shares outstanding during the periods in accordance with the treasury stock
method.
A reconciliation between basic and diluted earnings per share is as
follows:
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
SEPTEMBER 30,
-------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)............... $ (5,162) $ (5,957) $ (5,296) $ (4,991) $ 8,673
Basic EPS:
Basic common shares........... 11,897,225 11,922,261 12,460,192 12,116,276 13,622,493
----------- ----------- ----------- ----------- -----------
Basic EPS..................... $ (.43) $ (.50) $ (.43) $ (.41) $ .64
Diluted EPS:
Basic common shares........... 11,897,225 11,922,261 12,460,192 12,116,276 13,622,493
Plus: convertible preferred
stock...................... -- -- -- -- 16,187,396
Plus: impact of stock
options.................... -- -- -- -- 2,034,507
----------- ----------- ----------- ----------- -----------
Diluted common shares......... 11,897,225 11,922,261 12,460,192 12,116,276 31,844,396
----------- ----------- ----------- ----------- -----------
Diluted EPS................... $ (.43) $ (.50) $ (.43) $ (.41) $ .27
----------- ----------- ----------- ----------- -----------
</TABLE>
F-8
<PAGE> 69
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the years ended 1995, 1996, 1997 and for the nine months ended
September 30, 1997, convertible preferred stock which is convertible into
14,154,810; 14,184,585; 14,823,265 and 14,414,640 weighted average shares of
common stock, respectively, was outstanding but not included in the calculation
of dilutive net income (loss) per share because their effect would be
anti-dilutive. In addition, options to purchase 1,673,125; 2,125,875; 2,883,385;
2,881,445 and 713,500 shares of common stock were outstanding in the years ended
1995, 1996, 1997 and in the nine months ended September 30, 1997 and 1998,
respectively, but were not included in the calculation of dilutive net income
(loss) per share because their effect would be anti-dilutive.
(h) Financial Instruments
The Company considers all highly liquid investments that are readily
convertible to cash and that have original maturity dates of three months or
less to be cash equivalents. Cash equivalents consist primarily of money market
funds. In accordance with the SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," investments in securities are classified as
trading, available-for-sale or held-to-maturity. The Company's investments are
classified as available-for-sale and are carried at fair market value on the
accompanying balance sheets. The investments available-for-sale are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------
1996 1997 1998
--------------- --------------- ---------------
COST MARKET COST MARKET COST MARKET
------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and government agency
securities........................... $3,296 $3,296 $6,891 $6,891 $4,224 $4,224
Corporate securities................... -- -- 536 536 -- --
fonix Class A common stock............. -- -- -- -- 1,566 1,616
------ ------ ------ ------ ------ ------
Total investments...................... $3,296 $3,296 $7,427 $7,427 $5,790 $5,840
====== ====== ====== ====== ====== ======
</TABLE>
Investments in U.S. government and government agency and corporate
securities mature within one year.
(i) Fair Value and Concentration of Credit Risks
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that disclosure be made of estimates of the fair value of financial
instruments. The Company's financial instruments consist primarily of cash and
cash equivalents, letters of credit, accounts receivable and accounts payable.
The carrying amount of these instruments approximates fair value due to their
short-term nature.
The Company sells its products primarily to distributors, resellers,
government agencies, and large corporate customers. The Company performs ongoing
evaluations of customers' financial condition and, generally, does not require
collateral. In addition, the Company maintains reserves for potential credit
losses, and such losses, in the aggregate, have not exceeded management's
expectations.
(j) Major Customers
The Company's sales to the United States government under contracts were
approximately 22%, 25% and 27%, of net revenue for the years ended December 31,
1995, 1996 and 1997 and 30% and 7.5% of net revenue for the nine months ended
September 30, 1997 and 1998, respectively. At December 31, 1996 and 1997 and at
September 30, 1998, total amounts due from the United States government were
approximately $1,199, $943 and $2,270, respectively (including unbilled amounts
of approximately $832, $916 and $1,656, respectively).
F-9
<PAGE> 70
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company's sales to its two largest distributors were approximately 39%
and 24%, respectively, of net revenue for the nine months ended September 30,
1998. At September 30, 1998, total amounts included in accounts receivable from
the two distributors were approximately $5,537 and $1,970, net of allowances.
For the years ended December 31, 1996 and 1997, no customer accounted for 10% or
more of net revenues. For the year ended December 31, 1995, revenue from a
customer was 10% of net revenue.
(k) Inventories
Inventories primarily include finished goods and are stated at the lower of
cost or market, cost being determined on the first-in, first-out method.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
---- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Component parts....................................... $326 $ 756 $2,221
Finished goods........................................ 155 1,406 3,340
---- ------ ------
$481 $2,162 $5,561
==== ====== ======
</TABLE>
(l) Property and Equipment
Property and equipment is recorded at cost. The Company provides for
depreciation and amortization on the straight-line method. Charges are made to
operating expenses in amounts that are sufficient to amortize the cost of the
assets over their estimated useful lives. Property and equipment are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30, DEPRECIABLE
1996 1997 1998 LIFE IN YEARS
------ ------ ------------- ---------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and fixtures............... $ 588 $ 580 $ 686 3-5
Office and computer equipment........ 3,626 4,262 5,496 3-5
Leasehold improvements and other..... 309 613 652 3-10 or term of lease
------ ------ ------
4,523 5,455 6,834
Less: accumulated depreciation and
amortization....................... 3,358 4,082 4,858
------ ------ ------
$1,165 $1,373 $1,976
====== ====== ======
</TABLE>
(m) Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Compensation................................................ $ 733 $ 840 $3,330
Marketing costs............................................. 44 356 995
Other....................................................... 1,661 1,549 1,986
------ ------ ------
$2,438 $2,745 $6,311
====== ====== ======
</TABLE>
F-10
<PAGE> 71
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(n) Recent Accounting Pronouncements
In March, 1998 the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP") "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for the
year ended December 31, 1999. SOP 98-1 provides guidance for the costs of
computer software developed or obtained for internal use. The Company does not
expect adoption of SOP 98-1 to have a material impact on its consolidated
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The statement is
effective for the year ended December 31, 2001. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company does not expect adoption of
this statement to have a material impact on its consolidated financial position
or results of operations.
(o) Stock-Based Compensation
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue to account for stock options at intrinsic value under Accounting
Principles Board Opinion (APB) No. 25 with disclosure of the effects of fair
value accounting on the net income and earnings per share on a pro forma basis
(see Note 6).
(p) Unaudited Third Quarter Information
The unaudited financial statements as of and for the nine month periods
ended September 30, 1997 and 1998 reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly present the financial position, results of operations and cash flows as
of and for the periods presented. The results for the interim periods presented
are not necessarily indicative of results to be expected for the full year.
3. DISCONTINUED OPERATIONS
Effective September 2, 1998, the Company sold its interest in Articulate to
fonix corporation ("fonix"). The Company owned approximately 38% of the voting
interest in Articulate at the time of the sale. The results of Articulate are
reflected in the Company's consolidated financial statements as discontinued
operations for all periods presented. As consideration for the sale, the Company
received $2,230 of cash, $4,035 of demand notes from fonix, 1,260,988 shares of
unregistered Class A common stock of fonix and 779,093 shares of unregistered
Class B common stock of fonix. In November 1998, the Company called the demand
notes but payment of the notes has not been made by fonix. Due to the
significant uncertainty regarding collectibility of these notes, the Company has
fully reserved the value of the notes as part of the gain on sale. To the extent
that the notes are collected in the future, the Company would recognize a gain.
See also Note 8 for discussion of the Company's agreement with fonix related to
certain outstanding litigation.
F-11
<PAGE> 72
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following is a summary of the results of discontinued operations for
the three years ended December 31, 1995, 1996 and 1997 and for the nine months
ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 1,704 $ 1,829 $ 770 $ 368 $ 329
Loss before income taxes.................. (3,070) (1,706) (3,019) (2,306) (2,142)
Loss from discontinued operations......... (3,070) (1,706) (3,019) (2,306) (2,142)
</TABLE>
4. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -------
<S> <C> <C> <C>
Current provision:
Federal................................................... $(596) $(599) $ 341
State..................................................... (105) -- 35
Foreign................................................... 55 35 28
----- ----- -------
Total current............................................. $(646) $(564) $ 404
----- ----- -------
Deferred provision:
Federal................................................... $ -- $ -- $(2,205)
State..................................................... -- -- (389)
Foreign................................................... -- -- --
----- ----- -------
Total deferred............................................ $ -- $ -- $(2,594)
----- ----- -------
Total tax provision......................................... $(646) $(564) $(2,190)
===== ===== =======
</TABLE>
Reconciliations of the U.S. federal statutory rate to the Company's
effective tax rate are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
U.S. federal statutory rate................................. 34.0% 34.0% 34.0%
State income taxes, net of federal income tax effect........ 6.0 6.0 6.0
Change in valuation allowance............................... (16.4) (27.8) --
Tax credits generated....................................... -- -- 7.6
Other, net.................................................. -- (.5) 1.4
----- ----- ----
Effective tax rate.......................................... 23.6% 11.7% 49.0%
===== ===== ====
</TABLE>
F-12
<PAGE> 73
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The temporary differences and carryforwards that created the deferred tax
assets and liabilities as of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforward................ $ 1,342 $ 755
Deferred revenues......................................... -- 2,813
Non deductible reserves and accruals...................... 835 1,186
Capitalized software...................................... (70) --
Other..................................................... 92 39
------- -------
Total deferred tax assets......................... 2,199 4,793
Valuation allowance....................................... (1,984) (1,984)
------- -------
Net deferred taxes.......................................... $ 215 $ 2,809
------- -------
</TABLE>
The net tax benefits have been reduced by a valuation allowance as they do
not satisfy the recognition criteria set forth in SFAS 109. Of the valuation
allowance at December 31, 1997, approximately $84 will be reduced directly to
equity when realized related to stock option benefits.
As of December 31, 1997, the Company had available, subject to review and
possible adjustment, net operating loss carryforwards of approximately $2,139
for state income taxes, which expire through the year 2010. In addition the
Company had credit carryforwards of approximately $160 and $467 for federal and
state income taxes, respectively. No net operating loss carryforwards are
available for federal income taxes. The Internal Revenue Code contains
provisions that may limit the net operating loss carryforwards available to be
used in any given year, in the event of significant changes in ownership
interest.
5. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
At September 30, 1998, the Company had issued and outstanding a total of
3,238,951 shares of Convertible Preferred Stock, convertible into a total of
16,194,755 shares of common stock. All shares of Convertible Preferred Stock are
required to be converted into common stock upon the closing of an initial public
offering of the Company's common stock yielding aggregate gross proceeds to the
Company of at least $10,000.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Convertible Preferred Stock shall be entitled to receive $20 per
share plus any declared and unpaid dividends. After such payment to the holders
of Convertible Preferred Stock, the remaining assets available for distribution
shall first be distributed to the holders of the common stock at a rate of $1.36
per share plus all declared and unpaid dividends and the remaining assets, if
any, shall be distributed pro rata among the holders of common stock and the
holders of Convertible Preferred Stock (on an as converted basis). The holders
of Convertible Preferred Stock are entitled to the number of votes equal to the
number of shares of common stock into which the shares of Convertible Preferred
Stock could be converted.
Convertible Preferred Stock is entitled to receive a noncumulative, annual
dividend of $1.60 per share, when and if declared by the Board of Directors. No
cash dividends may be paid on common stock during any year unless the annual
dividend on Convertible Preferred Stock has been paid or declared during such
year.
During 1997, the Company recorded $910 of additional paid in capital
resulting from Articulate's issuance of preferred stock.
F-13
<PAGE> 74
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Common Stock
At December 31, 1997 and September 30, 1998, the Company has 19,623,560 and
20,228,300 shares of its common stock reserved for issuance upon conversion of
Preferred Stock and the exercise of all stock options available under the
Company's stock option plans.
On December 1, 1998, the Company effected a five for one stock split of its
common stock in the form of a stock dividend of four shares for each share then
outstanding. In addition, the Company increased the number of Common Stock
authorized to 45,000,000 shares. The accompanying consolidated financial
statements and notes thereto, have been retroactively adjusted to reflect the
stock split.
6. EMPLOYEE BENEFIT PLANS
Stock Option Plans
In June 1984, the Company adopted the 1984 Stock Option Plan (the "1984
Plan") and upon its expiration in 1994, the Company adopted the 1994 Stock
Option Plan (the "1994 Plan"). Each plan provides for the granting of incentive
stock options and nonqualified stock options to employees, consultants and
directors of the Company. In June 1997, the Company adopted the 1997 Dragon
Systems UK Company Share Option Plan (the "1997 Plan"), which provides for the
granting of options for UK employees. At September 30, 1998, the total number of
shares available under all of the Company's stock option plans is 4,033,545.
Under the plans, the Board of Directors determines the term of each option,
option price, number of shares for which options are granted and the vesting
period, which ranges from three to four years. The exercise price per share for
incentive stock options and nonqualified options granted may not be less than
100% and 90%, respectively, of the fair market value per share of the underlying
common stock on the date granted. The term of the options granted cannot exceed
ten years. No options have been granted under the 1984 Plan since its expiration
in 1994.
The activity under the Company's stock option for plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
WEIGHTED
RESERVED AVERAGE
SHARES NUMBER EXERCISE PRICE
--------- --------- --------------
<S> <C> <C> <C>
Outstanding, December 31, 1995.......................... 3,299,910 1,229,250 $1.36
Granted............................................... -- 832,500 1.40
Exercised............................................. -- --
Terminated............................................ -- (229,000) 1.36
--------- --------- -----
Outstanding, December 31, 1996.......................... 3,299,910 1,832,750 1.38
Granted............................................... -- 871,250 3.03
Exercised............................................. (2,865) (2,865) 1.35
Terminated............................................ -- (106,185) 1.55
--------- --------- -----
Outstanding, December 31, 1997.......................... 3,297,045 2,594,950 1.91
Increase in plan size................................. 750,000 --
Granted............................................... -- 755,000 15.24
Exercised............................................. (13,500) (13,500) .20
Terminated............................................ -- (40,250) 2.87
--------- --------- -----
Outstanding, September 30, 1998 (unaudited)............. 4,033,545 3,296,200 $5.00
========= ========= =====
</TABLE>
The above table reflects options exercised for common stock. In addition,
at December 31, 1995 the Company had 6,625 options which allowed the holder to
acquire units. Each unit consisted of approximately
F-14
<PAGE> 75
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
six shares of common stock and seven shares of preferred stock, at an exercise
price of $10. The number of shares issued relating to the units was 16,387
preferred shares and 68,895 common shares in 1996; 510 preferred shares and
2,145 shares in 1997; and 31,353 preferred shares and 131,760 common shares in
1998. At September 30, 1998, all units had been exercised.
As of September 30, 1998, the status of the Company's outstanding and
exercisable options was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.36 - $ 1.50 1,763,950 7.46 $ 1.38 1,112,340 $ 1.37
$ 2.30 - $ 2.55 25,000 8.50 $ 2.35 6,250 $ 2.35
$ 3.18 - $ 3.50 752,250 9.00 $ 3.19 187,210 $ 3.19
$ 7.20 - $ 7.20 41,500 9.50 $ 7.20 -- $ --
$10.00 - $10.00 35,000 9.58 $10.00 -- $ --
$16.00 - $16.00 678,500 9.76 $16.00 -- $ --
- --------------- --------- ---- ------ --------- ------
$ 1.36 - $16.00 3,296,200 8.34 $ 5.00 1,305,800 $ 1.63
</TABLE>
Had compensation costs for the stock option plan been determined using the
fair value method, the Company's net loss would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net loss --
As reported........................................... $(5,162) $(5,957) $(5,296)
Pro forma............................................. (5,193) (6,081) (5,524)
</TABLE>
Consistent with SFAS 123, pro forma net loss has not been calculated for
options granted prior to January 1, 1995. Pro forma compensation may not be
representative of that to be expected in future years.
The weighted average fair value of options granted was $.40, $.45, and $.90
for options granted during 1995, 1996 and 1997, respectively. The values were
estimated on the date of grant using the minimum value method and the following
weighted average assumptions for grants:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate................................. 6.07% 6.58% 6.09%
Expected life........................................... 6 years 6 years 6 years
Volatility factor....................................... 0% 0% 0%
Expected dividend yield................................. 0% 0% 0%
</TABLE>
F-15
<PAGE> 76
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1999 Plans
Employee Stock Purchase Plan
The Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in December 1998. The Purchase Plan authorizes
the issuance of up to a total of 500,000 shares of common stock to participating
employees.
All employees of the Company, including the Company's employee-directors,
who have been employed for more than six months are eligible to participate in
the Purchase Plan. Employees who would immediately after the grant own 5% or
more of the total combined voting power or value of the stock of the Company or
any subsidiary are not eligible to participate.
The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 10% of an employee's
compensation, subject to certain limitations. On the first day of a designated
payroll deduction period (the "Offering Period"), the Company will grant to each
eligible employee who has elected to participate in the Purchase Plan an option
to purchase shares of common stock. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the Purchase
Plan, the option price is an amount equal to 85% of the fair market value per
share of the common stock on either the first day or the last day of the
Offering Period, whichever is lower. The Compensation Committee may, in its
discretion, choose an Offering Period of 12 months or less for each of the
Offerings and choose a different Offering Period for each Offering.
1999 Stock Incentive Plan
In December 1998, the Company approved the 1999 Stock Incentive Plan
(Incentive Plan). The plan provides for the granting of an aggregate of
3,000,000 shares issuable pursuant to incentive stock options, non qualified
stock options, restricted stock awards and other stock based awards. As of
December 17, 1998, no awards were granted under the Incentive Plan.
Other Compensation Plans
The Company has a Profit Sharing and Bonus Plan, which provides for the
distribution of a percentage of pretax profits to Company employees. The Company
also has a 401(k) plan for its employees. Eligible employees may make voluntary
contributions to the 401(k) plan through a salary reduction contract up to the
statutory limit or 12% of their annual compensation. The Company matches
employees' voluntary contributions to the plan, up to certain prescribed limits.
These Company contributions vest over a two year period commencing upon
enrollment in the Plan. The total charge to expense under these plans was $575,
$789, $762, $472 and $2,291 in fiscal 1995, 1996, 1997 and for the nine months
ended September 30, 1997 and 1998, respectively.
7. REPORTABLE SEGMENTS
The Company's reportable segments include its software licensing segment
and development contract segment. The software licensing segment produces voice
recognition software products for sale to end users through distributors, OEMs
and resellers. The development contract segment provides contractual software
development services to commercial and government entities.
Each reportable segment is a strategic business unit that offers different
products and services to end users. Each segment is separately managed because
its end users are very different, thus requiring different technology and
marketing strategies.
F-16
<PAGE> 77
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Measurement of Reportable Segments
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates the
performance of each reportable segment based on the segment's contribution
towards selling, marketing, general and administrative costs. Intersegment sales
or transfers are immaterial as each segment has different products and services.
Financial Information
The following table reflects certain financial information relating to each
reportable segment:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
SEGMENT DATA: 1995 1996 1997 1998
------- ------- ------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue from external customers:
Software licensing............................ $12,171 $11,479 $19,506 $44,766
Development contracts......................... 4,716 5,559 7,315 4,810
------- ------- ------- -------
Total net revenue............................. $16,887 $17,038 $26,821 $49,576
Contribution towards selling, marketing, general
and administrative:
Software licensing............................ $ 2,118 $ 31 $ 4,535 $21,997
Development contracts......................... 1,401 1,977 2,322 2,215
------- ------- ------- -------
Total contribution............................ $ 3,519 $ 2,008 $ 6,857 $24,212
</TABLE>
Segment assets are not included in the determination of segment assets
reviewed by the chief operating decision maker.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
GEOGRAPHIC DATA: 1995 1996 1997 1998
------- ------- ------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue from external customers:
United States................................. $12,433 $12,148 $22,750 $44,596
Rest of world................................. 4,454 4,890 4,071 4,980
------- ------- ------- -------
Total net revenue............................. $16,887 $17,038 $26,821 $49,576
Total assets:
United States................................. $15,674 $12,752 $22,816 $37,944
Rest of world................................. 549 361 370 334
------- ------- ------- -------
Total assets.................................. $16,223 $13,113 $23,186 $38,278
</TABLE>
F-17
<PAGE> 78
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company has operating lease commitments for certain facilities and
equipment. The Company's minimum lease payments as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ $1,133
1999........................................................ 1,136
2000........................................................ 1,120
2001........................................................ 1,122
------
Total minimum lease payments................................ $4,511
======
</TABLE>
Total rental expense for years ended 1995, 1996, and 1997 and for the nine
months ended September 30, 1997 and 1998 was $574, $731, $1,053, $786 and $851,
respectively.
(b) Contingencies
In February 1996, Articulate sued Apple Computer, Inc. ("Apple") for patent
infringement in Massachusetts. Apple then sued Articulate in May 1996 in
California alleging that Articulate's PowerSecretary product infringed four
Apple patents. In September 1996, Apple added Dragon, which then owned a
minority interest in Articulate and distributed PowerSecretary, as a defendant
to its suit in California. In a separate proceeding in October 1997, Apple sued
Dragon and one of its customers, MetroBook, in Virginia alleging that the
Company's Dragon NaturallySpeaking product infringed three Apple patents.
Articulate's initial suit in Massachusetts is still pending. In Apple's
California suit, the court has granted a summary judgment motion in favor of
Articulate and the Company on all claims. Apple has filed an appeal with the
U.S. Court of Appeals for the Federal Circuit. Apple's Virginia suit has been
transferred to California, and the court has granted summary judgment in favor
of the Company and MetroBook with respect to one of Apple's patents. The
remainder of the case (with respect to the final two Apple patents) is still in
discovery. The Company believes that its Dragon PowerSecretary and Dragon
NaturallySpeaking products do not infringe any of Apple's patents, but there can
be no assurance that the Company will prevail in these matters. The Company
believes it has substantial defenses in each case, but the outcome cannot be
predicted.
In connection with the Articulate sale to fonix, the Company has agreed to
jointly defend the pending lawsuit in Massachusetts against the Company and
Articulate. This agreement commits the Company to pay one half of the legal cost
incurred to defend the lawsuit and one half of any settlement.
9. PATENT SETTLEMENT
In September 1993, the Company and Kurzweil Applied Intelligence
("Kurzweil") settled pending litigation by entering into two settlement and
cross-license agreements. Pursuant to one of these agreements, each party
granted the other an irrevocable, worldwide, non-exclusive, non-transferable
license to use patents and patent applications of the other party. Kurzweil was
subsequently acquired by Lernout in 1997. As a result of this acquisition, no
license grants were made under the agreement after the date of such acquisition;
however, each party maintains its rights in the patents and applications
previously granted under the agreement.
F-18
<PAGE> 79
DRAGON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In consideration for the license, the Company recorded software license
revenue in the amounts of $798, $902, $1,019, $765 and $863 during the years
ended December 31, 1995, 1996 and 1997, and for the nine months ended September
30, 1997 and 1998, respectively. In addition, Kurzweil is required to pay $1,301
and $1,470 during the years ended December 31, 1999 and 2000.
Kurzweil has the option to continue its license by continuing to make such
payments to the Company through June 1, 2006, at which time its license would be
fully paid. If Kurzweil were to elect to renew its license each year, the
settlement agreement provides that the Company would receive approximately
$13,539 from 1999 through 2006.
10. RELATED PARTY
Approximately $345 and $655 of net revenue for the years ended 1996 and
1997, respectively, represent amounts earned under a commercial development
contract with the holder of 39% of the Company's outstanding common stock as of
December 31, 1997. Management believes that the contract represents fair value
to the Company and was negotiated on an arm's-length basis.
F-19
<PAGE> 80
[Description for Inside Back Cover]
Text: Dragon Systems
The National Speech Company [TM]
Graphic: Picture of a sample of awards won
by Dragon Systems products.
Text: Internationally recognized as a leader
in speech technology.
<PAGE> 81
DRAGON SYSTEMS LOGO
<PAGE> 82
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 the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $27,800.00
NASD filing fee............................................. 10,500.00
Nasdaq National Market listing fee..........................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue Sky fees and expenses (including legal fees)...........
Transfer agent and registrar fees and expenses..............
Miscellaneous...............................................
Total..................................................
</TABLE>
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") provides that, except to the extent prohibited by the
Delaware General Corporation Law (the "DGCL"), the Registrant's directors shall
not be personally liable to the Registrant or its stockholders for monetary
damages for any breach of fiduciary duty as directors of the Registrant. Under
the DGCL, the directors have a fiduciary duty to the Registrant which is not
eliminated by this provision of the Restated Certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by the DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the federal securities laws or state or federal environmental laws. The
Registrant has obtained liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL including
for an unlawful payment of dividend or unlawful stock purchase or redemption, or
(iv) for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's by-laws, any agreement, a vote
of stockholders or otherwise. The Restated Certificate eliminates the personal
liability of directors to the fullest extent permitted by the DGCL and, together
with the Registrant's Amended and Restated By-Laws (the "Restated By-Laws"),
provides that the Registrant shall fully indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the
II-1
<PAGE> 83
Registrant, or is or was serving at the request of the Registrant as a director
or officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding. Reference is
made to the Registrant's Form of Amended and Restated Certificate of
Incorporation and Form of Amended and Restated By-Laws filed as Exhibits 3.2 and
3.4 hereto, respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Restated Certificate. The Registrant is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act as summarized below. The share information provided below
reflects a 5-for-1 split of the common stock effected on December 1, 1998:
(a) Issuances of Capital Stock. On September 4, 1997 the Company sold to
Seagate Technology, Inc. (i) an aggregate of 1,511,990 shares of the Company's
common stock for $4,805,104 and (ii) an aggregate of 359,739 shares of the
Company's preferred stock for $7,194,780 (convertible into 1,798,695 shares of
common stock).
(b) Certain Grants and Exercises of Stock Options. The Company's 1994 Stock
Option Plan was adopted by the Board of Directors and approved by the
stockholders of the Company on July 6, 1994. The Company's 1999 Stock Incentive
Plan was approved by the Board of Directors in December 1999, subject to
stockholder approval. As of December 8, 1998, options to purchase 16,455 shares
of common stock had been exercised for a consideration of approximately $51,000
under the Company's 1994 Stock Option Plan and options to purchase 3,628,933
shares of common stock were outstanding under the Company's 1994 Stock Option
Plan. As of December 8, 1998, no options under the Company's UK Plan and options
to purchase 63,377 shares of common stock were outstanding under the UK Plan. No
options to purchase shares of common stock are outstanding under the 1999 Stock
Incentive Plan.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of the
Securities Act. All of the foregoing securities are deemed restricted securities
for the purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <S> <C>
1.1* -- Form of Underwriting Agreement
3.1** -- Restated Certificate of Incorporation of the Registrant, as
amended
3.2** -- Form of Amended and Restated Certificate of Incorporation of
the Registrant, to be filed prior to the closing of this
offering
3.3** -- Amended and Restated By-Laws of the Registrant
3.4** -- Form of Amended and Restated By-Laws of the Registrant, to
be effective upon the closing of this offering
</TABLE>
II-2
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <S> <C>
4.1* -- Specimen common stock certificate
4.2** -- See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Restated Certificate of Incorporation and Amended and
Restated By-Laws of the Registrant defining the rights of
holders of common stock of the Registrant
5.1* -- Opinion of Hale and Dorr LLP
10.1** -- 1994 Stock Option Plan
10.2** -- Dragon Systems UK Company Share Option Plan
10.3** -- 1999 Employee Stock Purchase Plan
10.4** -- 1999 Stock Incentive Plan
10.5 -- 401(k) Plan
10.6** -- Lease dated February 1, 1991 between Joseph Biotti, Jr.,
Trustee of One Nevada Realty Trust and the Registrant, as
amended
10.7** -- Lease dated September 15, 1994 between Joseph Biotti, Jr.,
Trustee of One Nevada Realty Trust and the Registrant, as
amended
10.8+ -- Corel Reciprocal License Agreement dated effective January
25, 1998 between and among Corel Corporation, Corel
Corporation Limited, and the Registrant
10.9+ -- Dragon Reciprocal License Agreement dated effective January
25, 1998 between and among the Registrant and Corel
Corporation and Corel Corporation Limited
10.10+ -- Technology License Agreement dated effective July 7, 1998
between Articulate Systems, Inc. and the Registrant
10.11+ -- Development and License Agreement dated effective June 28,
1996 between Seagate Technology, Inc. and the Registrant
10.12+ -- Distribution Agreement dated effective December 15, 1997
between Ingram Micro Inc. and the Registrant, as amended
10.13+ -- Distribution Agreement dated effective April 30, 1998
between Ingram European Coordination Center N.V./S.A. and
the Registrant
10.14+ -- Distributor Agreement executed January 7, 1998 between
Merisel Americas, Inc. and the Registrant
10.15+ -- Authorized Distributor Agreement dated March 18, 1998
between MultiMicro, Inc. and the Registrant
10.16+ -- Software Distribution Agreement dated June 16, 1997 between
Tech Data Product Management, Inc. and the Registrant, as
amended
10.17+ -- Outsourcing Agreement dated January 19, 1998 between Modus
Media International N.V. and the Registrant
10.18+ -- Reseller Agreement dated May 15, 1998 between Sony
Electronics Inc. and the Registrant
10.19** -- Employment Agreement with John D. Shagoury
10.20 -- Agreement dated as of December 24, 1998 between the
Registrant and Fleet Bank N.A.
19 -- Subsidiaries of the Registrant
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Hale and Dorr LLP (included in Exhibit 5.1)
23.3** -- Consent of Fish & Richardson P.C.
24.1 -- Powers of Attorney (see page II-5)
27.1** -- Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
II-3
<PAGE> 85
(b) Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Restated Certificate of the registrant, the Underwriting
Agreement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purpose 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 a 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 part of this Registration
Statement as of the time it was declared effective.
(2) For 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 the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Newton, Massachusetts, on this 7th
day of January, 1999.
DRAGON SYSTEMS, INC.
By: /s/ JANET M. BAKER
---------------------------------------
Janet M. Baker
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers, directors and authorized representatives of
Dragon Systems, Inc. hereby severally constitute and appoint Dr. Janet M. Baker,
Mr. John D. Shagoury, and Ms. Diane M. Hudson, and each of them singly, our true
and lawful attorneys with full power to them, and each of them singly, with full
powers of substitution and resubstitution, to sign for us and in our names in
the capacities indicated below, the Registration Statement on Form S-1 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable Dragon Systems, Inc. to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys, or any of them, or their substitute or
substitutes, to said Registration Statement and any and all amendments thereto
or to any subsequent Registration Statement for the same offering which may be
filed under Rule 462(b).
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of Directors and January 7, 1999
- ------------------------------------------ Chief Executive Officer (Principal
Janet M. Baker Executive Officer)
* President and Director January 7, 1999
- ------------------------------------------
John D. Shagoury
* Chief Financial Officer, Vice President, January 7, 1999
- ------------------------------------------ Finance, Treasurer, and Assistant
Diane M. Hudson Secretary (Principal Financial Officer
and Principal Accounting Officer)
* Principal Research Scientist and January 7, 1999
- ------------------------------------------ Director
Robert Roth
* Director January 7, 1999
- ------------------------------------------
Kim B. Edwards
* Director January 7, 1999
- ------------------------------------------
Stephen J. Luczo
</TABLE>
*By: /s/ JANET M. BAKER
-------------------------
Janet M. Baker
Attorney-in-Fact
II-5
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Dragon Systems, Inc. and subsidiaries
included in this Registration Statement and have issued our report thereon dated
December 1, 1998 (except for the matter discussed in Note 6, as to which the
date is December 17, 1998). Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
schedule listed in the accompanying index is the responsibility of the company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 1, 1998
S-1
<PAGE> 88
DRAGON SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
PERIOD EXPENSE DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
For the nine months ended
September 30, 1998....................... $ 813 $ 394 $ (183) $1,024
For the years ended December 31,
1997..................................... 381 533 (101) 813
1996..................................... 410 60 (89) 381
1995..................................... 211 252 (53) 410
Reserve for returns, allowances and other:
For the nine months ended
September 30, 1998....................... 5,500 360 (1,360) 4,500
For the years ended December 31,
1997..................................... 360 5,140 -- 5,500
1996..................................... 240 120 -- 360
1995..................................... -- 240 -- 240
</TABLE>
S-2
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <S> <C>
1.1* -- Form of Underwriting Agreement
3.1** -- Restated Certificate of Incorporation of the Registrant, as
amended
3.2** -- Form of Amended and Restated Certificate of Incorporation of
the Registrant, to be filed prior to the closing of this
offering
3.3** -- Amended and Restated By-Laws of the Registrant
3.4** -- Form of Amended and Restated By-Laws of the Registrant, to
be effective upon the closing of this offering
4.1* -- Specimen common stock certificate
4.2** -- See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Restated Certificate of Incorporation and Amended and
Restated By-Laws of the Registrant defining the rights of
holders of common stock of the Registrant
5.1* -- Opinion of Hale and Dorr LLP
10.1** -- 1994 Stock Option Plan
10.2** -- Dragon Systems UK Company Share Option Plan
10.3** -- 1999 Employee Stock Purchase Plan
10.4** -- 1999 Stock Incentive Plan
10.5 -- 401(k) Plan
10.6** -- Lease dated February 1, 1991 between Joseph Biotti, Jr.,
Trustee of One Nevada Realty Trust and the Registrant, as
amended
10.7** -- Lease dated September 15, 1994 between Joseph Biotti, Jr.,
Trustee of One Nevada Realty Trust and the Registrant, as
amended
10.8+ -- Corel Reciprocal License Agreement dated effective January
25, 1998 between and among Corel Corporation, Corel
Corporation Limited, and the Registrant
10.9+ -- Dragon Reciprocal License Agreement dated effective January
25, 1998 between and among the Registrant and Corel
Corporation and Corel Corporation Limited
10.10+ -- Technology License Agreement dated effective July 7, 1998
between Articulate Systems, Inc. and the Registrant
10.11+ -- Development and License Agreement dated effective June 28,
1996 between Seagate Technology, Inc. and the Registrant
10.12+ -- Distribution Agreement dated effective December 15, 1997
between Ingram Micro Inc. and the Registrant, as amended
10.13+ -- Distribution Agreement dated effective April 30, 1998
between Ingram European Coordination Center N.V./S.A. and
the Registrant
10.14+ -- Distributor Agreement executed January 7, 1998 between
Merisel Americas, Inc. and the Registrant
10.15+ -- Authorized Distributor Agreement dated March 18, 1998
between MultiMicro, Inc. and the Registrant
10.16+ -- Software Distribution Agreement dated June 16, 1997 between
Tech Data Product Management, Inc. and the Registrant, as
amended
10.17+ -- Outsourcing Agreement dated January 19, 1998 between Modus
Media International N.V. and the Registrant
10.18+ -- Reseller Agreement dated May 15, 1998 between Sony
Electronics Inc. and the Registrant
10.19** -- Employment Agreement with John D. Shagoury
10.20 -- Agreement dated as of December 24, 1998 between the
Registrant and Fleet Bank N.A.
19 -- Subsidiaries of the Registrant
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Hale and Dorr LLP (included in Exhibit 5.1)
23.3** -- Consent of Fish & Richardson P.C.
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <S> <C>
24.1 -- Powers of Attorney (see page II-5)
27.1** -- Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE> 1
THE CORPORATEPLAN FOR RETIREMENT"
(PROFIT SHARING/401(K) PLAN)
A FIDELITY PROTOTYPE PLAN
NON-STANDARDIZED ADOPTION AGREEMENT 002
BASIC PLAN NO. 07
<PAGE> 2
ADOPTION AGREEMENT
ARTICLE 1
NON-STANDARDIZED PROFIT SHARING PLAN
1.01 PLAN INFORMATION
(a) Name of Plan:
This is the Dragon Systems, Inc. 401-K Plan (the "Plan").
(b) Type of Plan:
(1) [X] 401(k) and Profit Sharing
(2) [ ] Profit Sharing Only
(3) [ ] 401(k) Only
(c) Name of Plan Administrator, if not the Employer:
SAME
---------------------------------------------------------------------
Address:
------------------------------------------------------------
Phone Number:
-------------------------------------------------------
The Plan Administrator is the agent for service of legal process for
the Plan.
(d) Limitation Year (check one):
(1) [X] Calendar Year
(2) [ ] Plan Year
(3) [ ] Other:
(e) Three Digit Plan Number: 001
(f) Plan Year End (month/day): 12/31
(g) Plan Status (check one):
(1) [ ] Effective Date of new Plan:
-------------------------------
<PAGE> 3
(2) [ ] Amendment Effective Date: 1/1/95. This is (check one):
(A) [ ] an amendment of The CORPORATEplan for Retirement
Adoption Agreement previously executed by the
Employer; or
(B) [ ] a conversion from another plan document into The
CORPORATEplan for Retirement.
The original effective date of the Plan:
------------------
The substantive provisions of the Plan shall apply prior to
the Effective Date to the extent required by the Tax Reform
Act of 1986 or other applicable laws.
1.02 EMPLOYER
(a) The Employer is: Dragon Systems, Inc.
Address: 320 Nevada Street
Newton, MA 02160
Contact's Name: Diane Hudson, Tamah Rosker
Telephone Number: (617) 965-5200
(1) Employer's Tax Identification Number: 04-2764754
(2) Business form of Employer (check one):
(A) Corporation (D) [ ] Governmental
(B) [ ] Sole proprietor or (E) [ ] Tax-exempt
partnership organization
(C) [ ] Subchapter S (F) [ ] Rural Electric
Corporation Cooperative
(3) Employer's fiscal year end: 12/31
(4) Date business commenced: 6/24/82
(b) The term "Employer" includes the following Related Employer(s) (as
defined in Section 2.01(A)(26)):
---------------------------------------------------------------------
2
<PAGE> 4
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
1.03 COVERAGE
(a) All Employees who meet the conditions specified below will be
eligible to participate in the Plan:
(1) Service requirement (check one):
(A) [ ] no service requirement
(B) [ ] three consecutive months of service (no minimum number
Hours of Service can be required).
(C) [X] six consecutive months of service (no minimum number
Hours of Service can be required).
(D) [ ] one Year of Service (1,000 Hours of Service is
required during the Eligibility Computation Period).
(2) Age requirement (check one):
(A) [ ] no age requirement
(B) [X] must have attained age 21 (not to exceed 21).
3
<PAGE> 5
(3) The class of Employees eligible to participate in the Plan (check
one):
(A) [ ] includes all Employees of the Employer.
(B) [X] includes all Employees of the Employer except for
(check the appropriate box(es)):
(i) [ ] Employees covered by a collective bargaining
agreement
(ii) [ ] Highly Compensated Employees as defined in Code
Section 414(q).
(iii) [ ] Leased Employees as defined in Section
2.01(a)(18).
(iv) [ ] Nonresident aliens who do not receive any earned
income from the Employer which constitutes
United States source income.
(v) [X] Other
See Attachment A
Note: No exclusion in this section may create a
discriminatory class of employees. An Employer's
plan must still pass the Internal Revenue Code
coverage and participation requirements if one
or more of the above groups of Employees have
been excluded from the Plan.
(b) The Entry Date(s) shall be (check one):
(1) [ ] the first day of each Plan Year (not if Section
1.03(a)(1)(D) is elected).
(2) [ ] the first day of each Plan Year and the date six months
later.
(3) [ ] the first day of each Plan Year and the first day of the
fourth, seventh, and tenth months
(4) [X] the first day of each month.
4
<PAGE> 6
(c) Date of Initial Participation -- An Employee will become a
Participant unless excluded by Section 1.03(a)(3) above on the Entry
Date immediately following the date the Employee completes the
service and age requirement(s) in Section 1.03(a), if any,
except (check one):
(1) [X] No exceptions.
(2) [ ] Employees employed on the Effective Date in Section
1.01(g) will become Participants on that date.
(3) [ ] Employees who meet the age and service requirement(s) of
Section 1.03(a) on the Effective Date in Section 1.01(g)
will become Participants on that date.
1.04 COMPENSATION
(a) For purposes of determining Contributions under the Plan,
Compensation shall be as defined in Section 2.01(a)(7), but excluding
(check the appropriate box(es)):
(1) [X] Overtime Pay.
(2) [X] Bonuses.
(3) [X] Commissions.
(4) [ ] The value of a qualified or a non-qualified stock option
granted to an Employee by the Employer to the extent such
value is includable in the Employee's taxable income.
Note: These exclusions shall not apply for purposes of the "Top
Heavy" requirements in Section 9.03, or allocating
Discretionary Employer Contributions if an Integrated
Formula is elected in Section 1.05(a)(2)(B).
(5) [ ] No exclusions.
5
<PAGE> 7
30
(b) Compensation for the First Year of Participation
Contributions for the Plan Year in which an Employee first becomes a
Participant shall be determined based on the Employee's Compensation
(check one):
(1) [X] For the entire Plan Year.
(2) [ ] For the portion of the Plan Year in which the Employee is
eligible to participate in the Plan.
1.05 CONTRIBUTIONS
(a) Employer Contributions:
(1) [ ] Fixed Formula - Nonintegrated Formula (check (A) or (B)):
(A) [ ] Fixed Percentage Employer Contribution: For each Plan
Year, the Employer will contribute for each eligible
Participant an amount equal to _____% (not to exceed
15%) of such Participant's Compensation.
(B) [ ] Fixed Flat Dollar Employer Contribution: For each Plan
Year, the Employer will contribute for each eligible
Participant an amount equal to $________________.
(2) [X] Discretionary Formula
The Employer may decide each Plan Year whether to make a
Discretionary Employer Contribution on behalf of eligible
Participants in accordance with Section 4.05. Such contributions
may only be funded by the Employer AFTER the Plan Year ends and
shall be allocated to eligible Participants based upon the
following (check (A) or (B)):
(A) [X] Nonintegrated Allocation Formula: In the ratio that
each eligible Participant's Compensation bears to the
total Compensation paid to all eligible Participants for
the Plan Year.
(B) [ ] Integrated Allocation Formula: In accordance with
Section 4.06.
Note: An Employer who maintains any other plan that provides
for Social Security Integration (permitted disparity)
may not elect (2)(B).
6
<PAGE> 8
(3) Eligibility Requirement(s)
A Participant shall be entitled to Employer Contributions for a
Plan Year under this Subsection (a) if the Participant satisfies
the following requirement(s) (Check the appropriate box(es) --
Options (B) and (C) may not be elected together):
(A) [ ] is employed by the Employer on the last day of the
Plan Year.
(B) [ ] earns at least 500 Hours of Service during the Plan
Year.
(C) [X] earns at least 1,000 Hours of Service during the Plan
Year.
(D) [ ] no requirements.
Note: If option (A), (B) or (C) above is selected then
Employer Contributions can only be funded by the
Employer after Plan Year end.
(b) [X] Deferral Contributions
(1) Regular Contributions
The Employer shall make a Deferral Contribution in accordance
with Section 4.01 on behalf of each Participant who has an
executed salary reduction agreement in effect with the Employer
for the payroll period in question, not to exceed 12% (nor more
than 15%) of Compensation for that period.
(A) A Participant may increase or decrease, on a prospective
basis, his salary reduction agreement percentage (check
one):
(i) [ ] As of the beginning of each payroll period.
(ii) [ ] As of the first day of each month.
(iii) [ ] As of the next Entry Date.
(iv) [ ] (Specify, but must be at least once per Plan Year)
FOUR TIMES PER YEAR; JANUARY 1, APRIL 1, JULY 1
AND OCTOBER 1.
(B) A Participant may revoke, on a prospective basis, a salary
reduction agreement at any time upon proper notice to the
Administrator but in such case may not file a new salary
reduction agreement until (check one):
(i) [ ] The first day of next Plan Year.
(ii) [X] Any subsequent Plan Entry Date.
(iii) [ ] Specify, but must be at least once per Plan Year)
------------------------------------------------------
------------------------------------------------------
7
<PAGE> 9
(2) [ ] Catch-Up Contributions
The Employer may allow Participants upon proper notice and approval
to enter into a special salary reduction agreement to make additional
Deferral Contributions in an amount up to 100% of their Compensation
for the payroll period(s) in the final month of the Plan Year.
(3) [ ] Bonus Contributions
The Employer may allow Participants upon proper notice and approval
to enter into a special salary reduction agreement to make Deferral
Contributions in an amount up to 100% of any Employer paid cash
bonuses made for such Participants during the Plan Year. The
Compensation definition elected by the Employer in Section 1.04(a)
must include bonuses if bonus contributions are permitted.
Note: A Participant's Contributions under (2) and/or (3) may not
cause the Participant to exceed the percentage limit
specified by the Employer in (1) after the Plan Year. The
Employer has the right to restrict a Participant's right to
make Deferral Contributions if they will adversely effect
the Plan's ability to pass the Actual Deferral Percentage
and/or the Actual Contribution Percentage test.
(4) [X] Qualified Discretionary Contributions
The Employer may contribute an amount which it designates as a
Qualified Discretionary Contribution to be included in the Actual
Deferral Percentage or Actual Contribution Percentage test. Qualified
Discretionary Contributions shall be allocated to Non-highly
Compensated Employees (check one):
(A) [X] in the ratio which each such Participant's Compensation
for the Plan Year bears to the total of all such
Participants' Compensation for the Plan Year.
(B) [ ] as a flat dollar amount for each such Participant for the
Plan Year.
8
<PAGE> 10
(c) [X] Matching Contributions (only if Section 1.05(b) is checked)
(1) The Employer shall make a Matching Contribution on behalf of each
Participant in an amount equal to the following percentage of a
Participant's Deferral Contributions during
the Plan Year (check one):
(A) [ ] 50%
(B) [X] 100%
(C) [ ] _____%
(D) [ ] (Tiered Match) ____% of the first ____% of the
Participant's Compensation contributed to the Plan,
_____% of the next _____% of the Participant's
Compensation contributed to the Plan,
____% of the next ____% of the Participant's
Compensation contributed to the Plan.
NOTE: THE PERCENTAGES SPECIFIED ABOVE FOR MATCHING
CONTRIBUTIONS MAY NOT INCREASE AS THE PERCENTAGE OF
COMPENSATION CONTRIBUTED INCREASES.
(E) [ ] The percentage declared for the year, if any, by a
Board of Directors' resolution.
(2) [ ] The Employer may at Plan Year end make an additional Matching
Contribution equal to a percentage declared by the Employer,
through a Board of Directors' resolution, of the Deferral
Contributions made by each Participant during the Plan Year
(only if an option is checked under Section 1.05(c)(1)).
(3) [X] Matching Contribution Limits (check the appropriate box(es)):
(A) [X] Deferral Contributions in excess of 5% of the
Participant's Compensation for the period in question shall
not be considered for Matching Contributions.
Note: If the Employer elects a percentage limit in (A) above
and requests the Trustee to account separately for
matched and unmatched Deferral Contributions, the
Matching Contributions allocated to each Participant
must be computed, and the percentage limit applied,
based upon each payroll period.
(B) [ ] Matching Contributions for each Participant for each Plan
Year shall be limited to $_________.
9
<PAGE> 11
(4) Eligibility Requirement(s)
A Participant who makes Deferral Contributions during the Plan
Year under Section 1.05(b) shall be entitled to Matching
Contributions for that Plan Year if the Participant satisfies the
following requirement(s) (Check the appropriate box(es). Options
(B) and (C) may not be elected together):
(A) [ ] Is employed by the Employer on the last day of the
Plan Year.
(B) [ ] Earns at least 500 Hours of Service during the Plan
Year.
(C) [X] Earns at least 1,000 Hours of Service during the Plan
Year.
(D) [ ] Is not a Highly Compensated Employee for the Plan
Year.
(E) [ ] Is not a Partner of the Employer, if the Employer is a
partnership.
(F) [ ] No requirements.
Note: If option (A), (B) or (C) above is selected then
Matching Contributions can only be funded by the
Employer after the Plan Year ends. Any Matching
Contribution funded before Plan Year end shall not be
subject to the eligibility requirements of this Section
1.05(c)(4)). If option (A), (B), or (C) is adopted
during a Plan Year, such option shall not become
effective until the first day of the next Plan Year.
(d) [ ] Employee After-Tax Contributions (check one):
(1) [ ] Future Contributions
Participants may make voluntary non-deductible Employee
Contributions pursuant to Section 4.09 of the Plan. This option
may only be elected if the Employer has elected to permit
Deferral Contributions under Section 1.05(b). Matching
Contributions by the Employer are not allowed on any voluntary
non-deductible Employee Contributions. Withdrawals are limited to
one per year unless Employee Contributions were allowed under a
previous plan document which authorized more frequent
withdrawals.
(2) [ ] Frozen Contributions
Participants may not make voluntary non-deductible Employee
Contributions but the Employer does maintain frozen Participant
voluntary non-deductible Employee Contribution accounts.
10
<PAGE> 12
1.06 RETIREMENT AGE(S)
(a) The Normal Retirement Age under the Plan is (check one):
(1) [X] age 65.
(2) [ ] age ___ (specify between 55 and 64).
(3) [ ] late of the age ___ (can not exceed 65) or the fifth
anniversary of the Participant's Commencement Date.
(b) [X] The Early Retirement Age is the first day of the month after
the Participant attains age 55 (specify 55 or greater) and
completes 2 Years of Service for Vesting.
(c) [X] A Participant is eligible for Disability Retirement if he/she
(check the appropriate box(es)):
(1) [ ] satisfies the requirements for benefits under the
Employer's Long-Term Disability Plan.
(2) [X] satisfies the requirements for Social Security disability
benefits.
(3) [ ] is determined to be disabled by a physician approved by
the Employer.
11
<PAGE> 13
1.07 VESTING SCHEDULE
(a) The Participant's vested percentage in Employer Contributions
(Fixed or Discretionary) elected in Section 1.05(a) and/or
Matching Contributions elected in Section 1.05(c) shall be based
upon the schedule(s) selected below, except with respect to any
Plan Year during which the Plan is Top-Heavy. The schedule
elected in Section 1.12(d) shall automatically apply for a
Top-Heavy Plan Year and all Plan Years thereafter unless the
Employer has already elected a more favorable vesting schedule
below.
<TABLE>
<S> <C>
(1) Employer Contributions (2) Matching Contributions
(check one) (check one)
(A) [ ] N/A - No Employer Contributions (A) N/A - No Employer Contributions
(B) [ ] 100% Vesting immediately (B) [ ] 100% Vesting immediately
(C) [ ] 3 year cliff (see C below) (C) [ ] 3 year cliff (see C below)
(D) [ ] 5 year cliff (see D below) (D) [ ] 5 year cliff (see D below)
(E) [ ] 6 year graduated (see E below) (E) [ ] 6 year graduated (see E below)
(F) [ ] 7 year graduated (see F below) (F) [ ] 7 year graduated (see F below)
(G) [X] Other vesting (complete G1 below) (G) [X] Other vesting (complete G1 below)
</TABLE>
VESTING SCHEDULE
<TABLE>
<CAPTION>
Years of
Service
for
Vesting C D E F G1 G2
------- - - - - -- --
<S> <C> <C> <C> <C> <C> <C>
0 0% 0% 0% 0% 0% 0%
1 0% 0% 0% 0% 0% 0%
2 0% 0% 20% 0% 100% 100%
3 100% 100% 40% 20% 100% 100%
4 100% 100% 60% 40% 100% 100%
5 100% 100% 80% 60% 100% 100%
6 100% 100% 100% 80% 100% 100%
7 100% 100% 100% 100% 100% 100%
</TABLE>
Note: A schedule elected under G1 or G2 above must be at least as
favorable as one of the schedules in C, D, E or F above.
(b) [ ] Years of Service for Vesting shall exclude (check one):
(1) [ ] for new plans, service prior to the Effective Date as
defined in Section 1.01(g)(1).
(2) [ ] for existing plans converting from another plan
document, service prior to the original Effective Date
as defined in Section 1.01(g)(2).
Employees hired on or after January 1, 1995 are subject to the
vesting schedule indicated above. Employees hired before January
1, 1995 are fully vested immediately.
12
<PAGE> 14
1.08 PREDECESSOR EMPLOYER SERVICE
[ ] Service for purposes of eligibility in Section 1.03(a)(1) and
vesting in Section 1.07(a) of this Plan shall include service
with the following employer(s):
(a) ________________________________________________________________
(b) ________________________________________________________________
(c) ________________________________________________________________
(d) ________________________________________________________________
1.09 PARTICIPANT LOANS
Participant loans (check (a) or (b)):
(a) [X] will be allowed in accordance with Section 7.09, subject
to a $1,000 minimum amount and will be granted (check (1)
or (2)):
(1) [X] for any purpose.
(2) [ ] for hardship withdrawal (as defined in
Section 7.10) purposes only.
(b) [ ] will NOT be allowed.
1.10 HARDSHIP WITHDRAWALS
Participant withdrawals for hardship prior to termination of employment
(check one):
(a) [X] will be allowed in accordance with Section 7.10, subject
to a $1,000 minimum amount.
(b) [ ] will NOT be allowed.
13
<PAGE> 15
1.11 DISTRIBUTIONS
(a) Subject to Articles 7 and 8 and (b) below, distributions under
the Plan will be paid (check the appropriate box(es)):
(1) [X] as a lump sum
(2) [ ] under a systematic withdrawal plan (installments).
(b) [X] Check if a Participant will be entitled to receive a
distribution of all or any portion of the following
Accounts without terminating employment upon attainment of
age 59 1/2 (check one):
(1) [ ] Deferral Contribution Account
(2) [X] All Accounts
(c) [ ] Check if the Plan was converted (by plan amendment) from
another defined contribution plan, and the benefits were
payable as (check the appropriate box(es)):
(1) [ ] a form of single or joint and survivor life annuity.
(2) [ ] an in-service withdrawal of vested Employer
Contributions maintained in a Participant's Account
(check (A) and/or (B)):
(A) [ ] for at least ______ (24 or more) months.
(B) [ ] after the Participant has at least 60
months of participation.
(3) [ ] another distribution option that is a "protected
benefit" under Section 411(d)(6) of the Internal
Revenue Code. Please attach a separate page
identifying the distribution option(s).
These additional forms of benefit may be provided for such plans
under Articles 7 or 8.
Note: Under Federal Law, distributions to Participants must
generally begin no later than April 1 following the
year in which the Participant attains age 70 1/2.
14
<PAGE> 16
1.12 TOP HEAVY STATUS
(a) The Plan shall be subject to the Top-Heavy Plan requirements of
Article 9 (check one):
(1) [ ] for each Plan Year.
(2) [X] for each Plan Year, if any, for which the Plan is
Top-Heavy as defined in Section 9.02.
(3) [ ] Not applicable. (This option is available for plans
covering only employees subject to a collective
bargaining agreement and there are no Employer or
Matching Contributions elected in Section 1.05.)
(b) In determining Top-Heavy status, if necessary, for an employer
with at least one defined benefit plan, the following
assumptions shall apply:
(1) Interest rate: _____% per annum
(2) Mortality table: __________
(3) [X] Not Applicable.
(c) In the event that the Plan is treated as Top-Heavy for a Plan
Year, each non-key Employee shall receive an Employer
Contribution of at least ___________ (3, 4, 5 or 7 1/2)% of
Compensation for the Plan Year in accordance with Section 9.03
(check one):
(1) [X] under this Plan in any event.
(2) [ ] under this Plan only if the Participant is not
entitled to such contribution under another
qualified plan of the Employer.
(3) [ ] Not applicable. (This option is available for plans
covering only employees subject to a collective
bargaining agreement and there are no Employer or
Matching Contributions elected in Section 1.05.)
Note: Such minimum Employer contribution may be less
than the percentage indicated in (c) above to the
extent provided in Section 9.03(a).
15
<PAGE> 17
(d) In the event that the Plan is treated as Top-Heavy for a Plan
Year, the following vesting schedule shall apply instead of the
schedule(s) elected in Section 1.07(a) for such Plan Year and
each Plan Year thereafter (check one):
(1) [X] 100% vested after 2 (not in excess of 3) Years of
Service for Vesting.
(2) [ ] Years of Vesting Must be
Service for Vesting Percentage at Least
------------------- ---------- --------
0 __________ 0%
1 __________ 0%
2 __________ 20%
3 __________ 40%
4 __________ 60%
5 __________ 80%
6 __________ 100%
Note: If one or both schedules elected in
Section 1.07(a) is (are) more favorable in all
cases than the schedules elected in (d) above
then such schedule(s) will continue to apply even
in Plan Years in which the Plan is Top-Heavy.
1.13 TWO OR MORE PLANS - Code Section 415 limitation on annual additions
If the Employer maintains or ever maintained another qualified plan in
which any Participant in this Plan is (or was) a participant or could
become a participant, the Employer must complete this section. The
Employer must also complete this section if it maintains a welfare
benefit fund, as defined in Section 419(e) of the Code, or an
individual medical account, as defined in Section 415(1)(2) of the
Code, under which amounts are treated as annual additions with respect
to any Participant in this Plan.
(a) If the Employer maintains, or had maintained, any other defined
contribution plan or plans which are not Master or Prototype
Plans, Annual Additions for any Limitation Year to this Plan
will be limited (check one):
(1) [ ] in accordance with Section 5.03 of this Plan.
(2) [ ] in accordance with another method set forth on an
attached separate sheet.
(3) [X] Not applicable.
16
<PAGE> 18
(b) If the Employer maintains, or had maintained, a defined benefit
plan or plans, the sum of the Defined Contribution Fraction and
Defined Benefit Fraction for a Limitation Year may not exceed
the limitation specified in Code Section 415(e), modified by
section 416(h)(1) of the Code. This combined plan limit will be
met as follows (check one):
(1) [ ] Annual Additions to this Plan are limited so that the sum
of the Defined Contribution Fraction and the Defined
Benefit Fraction does not exceed 1.0.
(2) [ ] another method of limiting Annual Additions or reducing
projected annual benefits is set forth on an attached
schedule.
(3) [X] Not applicable.
1.14 ESTABLISHMENT OF TRUST AND INVESTMENT DECISIONS
(a) Investment Directions
Participant Accounts will be invested (check one):
(1) [ ] in accordance with investment directions provided to
the Trustee by the EMPLOYER for allocating all
Participant Accounts among the options listed in (b)
below.
(2) [X] in accordance with investment directions provided to
the Trustee by each PARTICIPANT for allocating his
entire Account among the options listed in (b) below.
(3) [ ] in accordance with investment directions provided to
the Trustee by each Participant for all contribution
sources in a Participant's Account except the
following sources shall be invested as directed by the
Employer (check (A) and/or (B)):
(A) [ ] Fixed or Discretionary Employer Contributions
(B) [ ] Employer Matching Contributions
The Employer must direct the applicable sources among the
same investment options made available for Participant
directed sources listed in (b) below.
17
<PAGE> 19
(b) Plan Investment Options
The Employer hereby establishes a Trust under the plan in
accordance with the provisions of Article 14, and the Trustee
signifies acceptance of its duties under Article 14 by its
signature below. Participant Accounts under the Trust will be
invested among the Fidelity Funds listed below pursuant to
Participant and/or Employer directions.
Fund Name Fund Number
--------- -----------
(1) FIDELITY PURITAN
------------------------------------- ---------------
(2) FIDELITY CONTRA
------------------------------------- ---------------
(3) FIDELITY BLUE CHIP GROWTH FUND
------------------------------------- ---------------
(4) FIDELITY INVESTMENT GRADE BOND
------------------------------------- ---------------
(5) FIDELITY MONEY MARKET
------------------------------------- ---------------
(6)
------------------------------------- ---------------
(7)
------------------------------------- ---------------
(8)
------------------------------------- ---------------
(9)
------------------------------------- ---------------
(10)
------------------------------------- ---------------
Note: An additional annual recordkeeping fee will be charged
for each fund in excess of five funds.
To the extent that the Employer selects as an investment
option the Managed Income Portfolio of the Fidelity
Group Trust for Employee Benefit Plans (the "Group
Trust"), the Employer hereby (A) agrees to the terms of
the Group Trust and adopts said terms as a part of this
Agreement and (B) acknowledges that it has received from
the Trustee a copy of the Group Trust, the Declaration
of Separate Fund for the Managed Income Portfolio of the
Group Trust, and the Circular for the Managed Income
Portfolio.
Note: The method and frequency for change of investments will
be determined under the rules applicable to the selected
funds or, if applicable, the rules of the Employer
adopted in accordance with Section 6.03. Information
will be provided regarding expenses, if any, for changes
in investment options.
18
<PAGE> 20
1.15 RELIANCE ON OPINION LETTER
An adopting Employer may not rely on the opinion letter issued by the
National Office of the Internal Revenue Service as evidence that this
Plan is qualified under Section 401 of the Code. If the Employer wishes
to obtain reliance that his or her plan(s) are qualified, application
for a determination letter should be made to the appropriate Key
District Director of the Internal Revenue Service. Failure to properly
fill out the Adoption Agreement may result in disqualification of the
Plan.
This Adoption Agreement may be used only in conjunction with Fidelity
Prototype Plan Basic Plan Document No. 07. The Prototype Sponsor shall
inform the adopting Employer of any amendments made to the Plan or of
the discontinuance or abandonment of the prototype plan document.
1.16 PROTOTYPE INFORMATION:
----------------------
Name of Prototype Sponsor: Fidelity Management & Research Co.
Address of Prototype Sponsor: 82 Devonshire Street
Boston, MA 02109
Questions regarding this prototype document may be directed to the
following telephone number:
1-(800) 343-9184
19
<PAGE> 21
EXECUTION PAGE
(Fidelity's Copy)
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be
executed this _______ day of ___________________, 19___.
Employer: _____________________________
By: _____________________________
Title: _____________________________
Employer: _____________________________
By: _____________________________
Title: Director of Human Resources
-----------------------------
Accepted by
Fidelity Management Trust Company, as Trustee
By: ___________________________ Date: ___________________
Title: ________________________
20
<PAGE> 22
EXECUTION PAGE
(Employer's Copy)
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be
executed this _______ day of ___________________, 19___.
Employer: _____________________________
By: _____________________________
Title: _____________________________
Employer: _____________________________
By: _____________________________
Title: _____________________________
Accepted by
Fidelity Management Trust Company, as Trustee
By: ___________________________ Date: ___________________
Title: ________________________
21
<PAGE> 23
AMENDMENT TO NON-STANDARDIZED ADOPTION AGREEMENT 002 DATED DECEMBER 18, 1995
ATTACHMENT TO SECTION 1.03(a)(3)(b)(v) -- OTHER
ATTACHMENT A
IN THE CASE OF EMPLOYEES HIRED PRIOR TO JANUARY 1, 1996, THOSE WHO HAVE NOT
COMPLETED TWO CONSECUTIVE MONTHS OF SERVICE ARE EXCLUDED. IN THE CASE OF
EMPLOYEES HIRED ON AND AFTER JANUARY 1, 1996, THOSE WHO HAVE NOT COMPLETED SIX
CONSECUTIVE MONTHS OF SERVICE ARE EXCLUDED.
- -----------------------------------------
TAMAH ROSKER
DIRECTOR, HUMAN RESOURCES DECEMBER 19, 1995
- -----------------------------------------
DIANE HUDSON
CONTROLLER DECEMBER 19, 1995
22
<PAGE> 24
- --------------------------------------------------------------------------------
PLAN HIGHLIGHTS
- --------------------------------------------------------------------------------
DRAGON SYSTEMS, INC. 401(k) PLAN
The Dragon Systems, Inc. 401(k) Plan is designed to help you save for your
retirement, share in company profits and at the same time reduce your current
taxes.
ELIGIBILITY
- Employees hired prior to January 1, 1996, must complete two
consecutive months of service. Employees hired on and after
January 1, 1996, must complete six consecutive months of
service.
- All employees age 21 or older are eligible to participate
immediately.
ENROLLMENT DATES
The first day of the following month after you have met the age and
service requirement.
To begin participating, complete the enrollment and designation of beneficiary
forms and send them to your Human Resources Dept.
CONTRIBUTIONS
- EMPLOYEE CONTRIBUTIONS on a pretax basis between 1 and 12% of
eligible compensation of each applicable payroll up to a maximum
of $9,500 (adjusted annually) for the 1996 calendar year. You
may change your deferral percentage as of January 1, April 1,
July 1, and October 1.
- EMPLOYER MATCHING CONTRIBUTIONS in an amount equal to 100% of
your pretax employee contributions, up to 5% of your eligible
compensation contributed into the plan. You must earn at least
1,000 hours of service.
- EMPLOYER DISCRETIONARY PROFIT SHARING CONTRIBUTIONS if any, in
an amount to be determined annually by a Board of Directors
resolution. You must earn at least 1,000 hours of service to be
eligible for any employer profit sharing contributions made for
that Plan Year.
NOTE: Eligible compensation is your total compensation
excluding overtime pay, bonuses, and commissions.
23
<PAGE> 25
INVESTMENTS
You may choose among the following funds, managed by Fidelity
Investments*. The employer's plan is subject to Section 404(c)
of the Employee Retirement Income Security Act (ERISA) of 1974.
You will be responsible for the investment of your own account.
Fidelity Retirement Money Market Portfolio (0630)
Fidelity Investment Grade Bond Fund (0026)
Fidelity Puritan Fund (0004)
Fidelity Blue Chip Growth Fund (0312)
Fidelity Contrafund (0022)
NOTE: The Fidelity Fund Number assigned to each fund is
identified in parentheses.
You may redirect your future contributions simply by calling the toll-free
number that will be provided by Fidelity. You may also call the same number to
make exchanges among the plan's investment options. You may contact a Fidelity
telephone representative between 8:30 AM (ET) and 8:00 PM (ET) on any business
day. Exchanges requested before 4:00 PM (ET) will be posted on that business day
based upon the closing price of the affected mutual fund(s). Exchanges requested
after 4:00 PM (ET) will be processed on the next business day. The minimum
exchange is the lesser of $250 or 100% of your account balance in the mutual
fund. If your exchange is less than $250 then it may only be exchanged into one
mutual fund.
You may contact a Fidelity representative at 1-800-544-8888 to obtain a
prospectus or information about a mutual fund. You will have the right to vote
any mutual fund proxies based upon the number of shares you own in that mutual
fund. To protect its shareholders, each fund reserves the right to modify its
exchange privileges as outlined in the fund prospectus with sixty days' advanced
notice.
VESTING
The term "vesting" refers to your nonforfeitable right to own the contributions
in your account. You are always 100% vested in your employee contributions.
24
<PAGE> 26
Employer contributions and earnings will be vested in accordance with the
following schedule:
YEARS OF SERVICE FOR VESTING PERCENTAGE
less than 2* 0
2 100
*All employees hired on or before January 1, 1995 will be
granted 100% vesting
ACCESS TO YOUR MONEY
- You may take a lump sum distribution from the plan in the event
of termination of employment, retirement, disability or death.
You may take a distribution of your 401(k) employee contribution
account upon the attainment of age 59 1/2. You will pay income
tax on any distribution you receive. Taxable distributions
payable to you will be subject to the 20% Federal Income Tax
withholding requirement unless directly transferred to an IRA or
a new Employer's qualified plan.
- You may make a hardship withdrawal, if you qualify, from your
employee contributions and rollover contributions to purchase a
principal residence, to prevent eviction from your principal
residence, to pay for college tuition expenses for you or your
immediate family or for unreimbursed medical expenses. The
minimum hardship withdrawal is $1,000. Amounts withdrawn will be
subject to the 20% Federal Income Tax withholding requirement.
An Internal Revenue Service 10% premature distribution penalty
tax may apply for certain distributions.
- Loans from the Plan are also available, if you qualify, on
amounts you have contributed as well as on your vested Employer
contributions subject to IRS maximums. The maximum loan you may
receive is the lesser of 50% of your vested account balance or
$50,000. The minimum loan is $1,000. You may only have one loan
outstanding at any given time. All loans must be paid back
within 5 years unless it is for the purchase of your principal
residence.
STATEMENT SCHEDULE
You will receive a statement four times a year within 20 days after January 31,
April 30, July 31 and October 31 disclosing the value of your account balances
and any benefits to which you may become entitled.
25
<PAGE> 27
For more details on the Plan, read the Summary Plan Description which will be
provided by your Human Resources Department. This Plan Highlights sheet
summarizes the main features of the Dragon Systems, Inc. 401(k) Plan, but it is
not a comprehensive description. The official Plan Document will govern in the
case of any question.
* Fidelity Management & Research Company (FMR) is the investment advisor to
Fidelity mutual funds.
Fidelity Distributors Corporation
(General Distribution Agent)
82 Devonshire Street
Boston, MA 02109
26
<PAGE> 1
Exhibit 10.8
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
COREL RECIPROCAL LICENSE AGREEMENT
This Agreement made as of the 25th day of January, 1998 by and between
COREL CORPORATION ("COREL") having its principal place of business at 1600
Carling Avenue, Ottawa, Ontario K1Z 8R7 and DRAGON SYSTEMS, INC. ("DRAGON")
having its principal place of business at 320 Nevada Street, Newton, MA 02160.
BACKGROUND:
1. DRAGON designs, manufactures and markets speech recognition software
among other things.
2. COREL has developed and markets certain productivity software.
3. DRAGON desires to license such productivity software for distribution
together with its speech recognition software and COREL is willing to
grant DRAGON a license to such productivity software for distribution
together with DRAGON's speech recognition software subject to the terms
and conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual promises, covenants and
obligations contained herein, the parties agree as follows:
1. INTERPRETATION
1.1 Definitions. As used herein:
1.1.1 "Agreement" means this Corel Reciprocal License Agreement,
including any schedules and exhibits attached hereto.
1.1.2 "Customer" means any Distributor or End User.
1.1.3 "DRAGON Product" means any version of DRAGON's speech
recognition software product entitled "Naturally Speaking"
now or hereafter marketed and distributed by DRAGON.
1.1.4 "Distributor" means any third party which acquires
possession of an Integrated DRAGON Product for
distribution to an End User, sub-distributor, or reseller.
<PAGE> 2
1.1.5 "Documentation" means the user manuals, handbooks and
other written materials relating to the COREL Software
provided by COREL to DRAGON hereunder.
1.1.6 "Effective Date" means the date first set out above.
1.1.7 "End User" means any third party licensed by COREL or any
of its subsidiaries to use the Software pursuant to the
terms of an End User License.
1.1.8 "End User License" means COREL's End User License
Agreement as modified by COREL from time to time.
1.1.9 "Integrated DRAGON Product" means any DRAGON Product that
incorporates or is bundled with the COREL Software.
1.1.10 "OEM" means an original equipment manufacturer and refers
to hardware vendors that hard-bundle Integrated DRAGON
Products with computer hardware for resale to
sub-distributors, resellers or End Users. For clarity,
"hard-bundle" means that the software application must be
sold as part of the complete system being sold at the time
of its original sale and not merely as one among other
software applications from which the consumer may choose
to have included as part of the system (ie.
"soft-bundle").
1.1.11 "Person" means any an individual, corporation,
partnership, a trust, an unincorporated organization, the
government of a country or any political subdivision
thereof, or any agency or department of any such
government, and the executors, administrators or other
legal representatives of an individual in such capacity.
1.1.12 "Dragon Reciprocal License Agreement" shall have the
meaning set out in Section 6. 1.
1.1.13 "COREL Software" means the object code version of the
computer software described in Schedule "A" hereto, along
with accompanying Documentation.
1.1.14 "Term" means the period of time from the Effective Date
through to the conclusion of this Agreement as provided in
Section 12.1.
1.1.15 "Trade-marks" means the trade names, trade-marks and logos
related to the Software.
2. GRANT OF LICENSE
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<PAGE> 3
2.1 License. Subject to the terms and conditions hereof, COREL hereby
grants to DRAGON and DRAGON accepts from COREL a world-wide, non-exclusive,
non-transferable license to reproduce and distribute the COREL Software in
object code format incorporated in or bundled only as part of an Integrated
DRAGON Product. In addition to any other restrictions set out in this Agreement,
the foregoing license shall be subject to the bundling and distribution
restrictions set out in Schedule "A" hereto.
2.2 Distributors. DRAGON shall have the right to appoint Distributors and
sublicense to them the right to distribute the Integrated DRAGON Product;
provided that DRAGON shall ensure that any such distribution of the Integrated
DRAGON Product by its Distributors is in compliance with and in accordance with
the terms of this Agreement.
2.3 OEM. DRAGON shall have the right to appoint OEMs and sublicense to them
the right to reproduce distribute the English (U.S.) version of the Integrated
DRAGON Product in the United States and Canada only; provided that DRAGON shall
ensure that any such reproduction and distribution of the Integrated DRAGON
Product by OEMs is in compliance with and in accordance with the terms of this
Agreement and, in particular, shall be restricted to hard-bundled distribution
as described in Section 1.1.10. No version of the Integrated DRAGON Product
other than the English (U.S.) version may be distributed by an OEM without the
written approval of an authorized representative of COREL.
2.4 Trade-marks. Subject to the terms and conditions hereof, COREL hereby
grants to DRAGON and DRAGON accepts from COREL, a world-wide, royalty-free,
non-exclusive license to use the Trade-marks solely in the form provided by
COREL to DRAGON and only in connection with the reproduction, manufacturing,
marketing and distribution of any Integrated DRAGON Product.
2.4.1 Non-alteration. DRAGON agrees not to obstruct, remove,
interfere with, or in any way alter the Trade-marks.
DRAGON acknowledges and agrees that COREL retains all of
its right, title and interest in the Trade-marks, and all
use of the Trade-marks by DRAGON shall enure to the
benefit of COREL.
2.4.2 Mark Policies and Standards. DRAGON shall display the
Trade-marks in accordance with COREL's guidelines for
using trade-marks as set out in Schedule "B" hereto or as
otherwise in effect from time to time and as provided to
DRAGON. Notwithstanding the foregoing, any change by COREL
to its trade-mark guidelines which affects DRAGON's usage
shall not apply retroactively to DRAGON's past usage which
conformed with the then current guidelines and COREL shall
permit DRAGON a reasonable period of time in which to
conform with the
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<PAGE> 4
new guidelines. COREL retains the right to specify and
approve the quality and standards of all materials on
which the Trade-marks are displayed and to inspect from
time to time samples of such materials. Failure of DRAGON
to adhere to such standards of quality shall be grounds
for COREL to terminate DRAGON's rights to use such
Trade-marks.
2.4.3 Validity and Enforceability of Marks. DRAGON shall not at
any time during or after this Agreement assert any claims
or interest in or to anything which may adversely affect
the validity or enforceability of any of the Trade-marks.
DRAGON shall not register, seek to register, or cause to
be registered any of the Trade-marks without COREL's prior
written consent.
2.4.4 Infringement and Further Assurances. DRAGON agrees to
promptly notify COREL of any claim, action, suit,
proceeding, or litigation that is instituted by any Person
against it involving the Trade-marks. DRAGON agrees to
report all infringement or improper or unauthorized use of
the Trade-marks which come to the attention of DRAGON, and
to reasonably assist COREL in protecting same, but DRAGON
acknowledges and agrees that only COREL shall have the
right to bring any action, claim or suit in connection
with any such infringement. DRAGON agrees to execute all
reasonable documents and further assurances required by
COREL to register or protect COREL's rights in the
Trade-marks.
2.4.5 Term. The license to use the Trade-marks herein shall be
contemporaneous and coterminous with this Agreement and is
granted solely for the purposes of this Agreement. Subject
to DRAGON's right to sell off inventory of DRAGON Product
in which the COREL Software is incorporated as set out in
Section 12.1.1, if this Agreement is terminated or is
assigned otherwise than as is provided herein, the rights
to use the Trademarks granted herein shall immediately end
and be of no further force or effect and DRAGON shall not
thereafter use, advertise or display any name, trademark,
trade name, designation or logo which is, or any part of
which is, to any extent similar to, or confusing with any
of the Trade-marks.
3. OWNERSHIP
3.1 COREL Software. Except for the rights and licenses granted to DRAGON
under this Agreement, COREL shall retain all right, title and interest,
including intellectual property rights in the COREL Software.
-4-
<PAGE> 5
3.2 Proprietary Rights Notices. DRAGON agrees not to obstruct, remove,
interfere with, or in any way alter any proprietary rights notices that appear
in the COREL Software and to reproduce any such notices in all copies of the
COREL Software that are bundled with Integrated DRAGON Products.
4. RESPONSIBILITIES OF DRAGON
4.1 End User License. DRAGON shall ensure that each copy of the COREL
Software is distributed with a copy of the End User License. DRAGON shall not
alter the End User License.
4.2 Restrictions. DRAGON shall reproduce the COREL Software only in the
form provided by COREL and shall not alter the COREL Software or any part
thereof. DRAGON shall not reverse engineer, decompile or disassemble the COREL
Software and agrees not to permit anyone else to do so.
4.3 Stand Alone Distribution. DRAGON shall not, nor shall DRAGON permit
any of its Distributors, to distribute the COREL Software other than
incorporated into or bundled as part of an Integrated DRAGON Product.
4.4 Support for Customers. DRAGON shall be solely responsible for
providing maintenance and technical support to End Users regarding the DRAGON
Software portion of Integrated DRAGON Product distributed through the retail
sales channel. Such maintenance and support shall be provided by DRAGON in
accordance with DRAGON's standard policies and procedures as they may be changed
by DRAGON from time to time. DRAGON shall have no maintenance or technical
support obligation regarding the DRAGON Software portion of the Integrated COREL
Product or the Integrated DRAGON Product distributed through the OEM sales
channel; provided that DRAGON shall provide COREL and OEMs with second-level
technical support in order to assist OEM in providing technical support to End
Users of Integrated DRAGON Product distributed through the OEM sales channel.
4.5 Packaging and Marketing Materials. DRAGON shall be solely responsible
for the design, production and reproduction of all packaging and marketing
material for the Integrated DRAGON Products. Any packaging or marketing
materials prepared by or for DRAGON shall advertise the COREL Software as being
available only as a bundled product within an Integrated DRAGON Product, shall
quote only the bundled price, without disclosing a separate price for the COREL
Software, unless required by law. In addition, the front panel of any packaging
for the Integrated DRAGON Product shall prominently display the Trade-marks of
COREL.
4.6 Joint-Marketing Efforts. The parties shall cooperate in joint-marketing
opportunities regarding the Integrated DRAGON Products.
-5-
<PAGE> 6
4.7 Registered User Base. DRAGON shall provide COREL with access to its
database of registered End Users of DRAGON Products for the purpose of a mailing
for the marketing of any COREL products which are not substantially competitive
to the core functionality of any speech recognition product marketed by DRAGON.
For clarity, the COREL Software and upgrades thereto shall not be considered to
be competitive to the Integrated DRAGON Product. Such access shall be indirect
only, through DRAGON or it's third party mailing house. COREL shall bear all
costs associated with producing the insert and mailing such insert to DRAGON's
registered users, except for the access fee, if any, generally charged by DRAGON
to third parties and shall be restricted to one mailing per calendar quarter.
COREL shall not be entitled to use the information relating to DRAGON's
registered End Users for any other purpose. DRAGON shall be entitled to approve
all materials sent to its registered user base; such approval not to be
unreasonably withheld.
4.8 Compliance with Laws. DRAGON shall comply with all laws, rules, and
regulations existing with respect to the Integrated DRAGON Product and the
performance by DRAGON of its obligations hereunder existing in the jurisdictions
where DRAGON carries on activities under this Agreement and where the Integrated
DRAGON Product is resold or distributed from time to time. DRAGON shall not
export the Integrated DRAGON Product unless such export complies with any
applicable export laws and regulations as they apply to the Integrated DRAGON
Product. In particular, DRAGON shall not export or re-export the Integrated
DRAGON Product, either directly or indirectly, to countries which the United
States has prohibited export, including, but not limited to Cuba, Iran, Iraq,
Libya and North Korea. DRAGON shall impose the same obligation on its
Distributors.
4.9 Quality Assurance. DRAGON agrees to implement and maintain quality
assurance programs in keeping with industry standards and practices with respect
to its reproduction and distribution of the Integrated DRAGON Products.
5. RESPONSIBILITIES OF COREL
5.1 Gold Masters. To enable DRAGON to exercise the licenses granted
under Section 2.1 hereof, COREL shall deliver the gold masters of the media for
the COREL Software to DRAGON in accordance with the delivery schedule set out in
Schedule "A" hereto.
5.2 Support for Customers. COREL shall be responsible for providing
maintenance and technical support to End Users of the COREL Software portion of
Integrated DRAGON Product distributed through the retail sales channel. All such
support shall be provided in accordance with COREL's standard policies and
procedures as they may be changed by COREL from time to time.
5.3 Support to DRAGON. During the term of this Agreement, COREL shall
provide free of charge bug fixes, and reasonable telephone and facsimile support
in respect of
-6-
<PAGE> 7
the COREL Software to assist DRAGON in the implementation of the COREL Software
for DRAGON's purposes.
6. CONSIDERATION
6.1 Payment. In consideration of the grant to DRAGON of the licenses to
the COREL Software hereunder, DRAGON agrees to pay COREL the amounts set out in
Schedule "C" hereto ("Royalty Schedule"). Except as set out in the Royalty
Schedule, DRAGON shall not be obligated to pay any license fee, royalties or
other payments to COREL in consideration of the licenses to the COREL Software
granted hereunder.
6.2 Reciprocal License Agreement. As further consideration of the grant
to DRAGON of the licenses to the COREL Software hereunder, DRAGON has entered
into a software license and distribution agreement which is attached hereto as
Exhibit 1 ("Dragon Reciprocal License Agreement") under which DRAGON has granted
to COREL a license to distribute certain versions of its speech recognition
software together with certain of COREL's productivity software products.
6.3 Taxes. DRAGON shall pay, in addition to all amounts specified in
this Agreement, all duties and foreign, federal, state, county, local income
taxes, value added taxes and other taxes, or amounts in lieu thereof, and
interest thereon, paid or payable or collectible by COREL (exclusive of taxes
based on COREL's net income) levied or based on amounts chargeable to or payable
by DRAGON pursuant to this Agreement. In the event any payments required to be
made by DRAGON under this Agreement are subject to applicable withholding tax
that DRAGON is required to deduct from such payments, DRAGON shall promptly
deliver to COREL receipts issued by appropriate government authorities for all
such taxes withheld or paid by DRAGON and DRAGON shall fully and promptly
cooperate with COREL to provide such information and records as COREL may
require in connection with any application by COREL to obtain available tax
credits.
6.4 Reports. DRAGON will provide to COREL quarterly reports within
forty (45) days of the end of each quarter specifying the number of
reproductions of the Integrated DRAGON Products released for distribution by
DRAGON and its Distributors. Such reports shall include a breakdown of the
number of Integrated DRAGON Products by version, language and sales channel (ie.
retail or OEM).
6.5 Audits. DRAGON agrees to maintain complete and accurate records
relating to its promotion, marketing, use and distribution of Integrated DRAGON
Product. COREL shall have the right no more often than once per twelve month
period to appoint an independent third party to examine DRAGON's relevant books
and records in order to verify DRAGON's compliance with the terms of this
Agreement. Any such audit shall be at the expense of COREL unless the audit
reveals a non-compliance by DRAGON
-7-
<PAGE> 8
with the terms of this Agreement of greater than five percent (5%) in which case
the audit shall be at the expense of DRAGON.
7. WARRANTIES, REPRESENTATIONS AND COVENANTS
COREL warrants, represents and covenants to DRAGON as follows and
acknowledges that DRAGON is relying on such warranties, representations and
covenants in entering into this Agreement and the transactions contemplated in
this Agreement:
7.1 Storage Medium. The COREL Software storage medium for the golden
masters is warranted against defects in workmanship and materials for a period
of ninety (90) days from the date it is delivered to Distributor. In the event
that the storage medium is defective COREL will replace it free of charge with
another copy of the COREL Software. Replacement of the storage medium shall be
COREL's sole obligation and Distributor's sole remedy for a breach of the
warranty in this section.
7.2 Limitation. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, THE COREL
SOFTWARE AND STORAGE MEDIA ARE PROVIDED AND LICENSED "AS IS" AND THERE ARE NO
WARRANTIES, REPRESENTATIONS OR CONDITIONS, EXPRESS OR IMPLIED, WRITTEN OR ORAL,
ARISING BY STATUTE, OPERATION OF LAW OR OTHERWISE, REGARDING THEM, OR ANY OTHER
PRODUCT OR SERVICE PROVIDED HEREUNDER OR IN CONNECTION HEREWITH. COREL DISCLAIMS
ANY IMPLIED WARRANTY OR CONDITION OF MERCHANTABLE QUALITY, MERCHANTABILITY,
DURABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NO REPRESENTATION OR OTHER
AFFIRMATION OF FACT, INCLUDING BUT NOT LIMITED TO STATEMENTS REGARDING
PERFORMANCE OF THE COREL SOFTWARE OR STORAGE MEDIA, WHICH IS NOT CONTAINED IN
THIS AGREEMENT, SHALL BE DEEMED TO BE A WARRANTY BY COREL. THERE IS NO IMPLIED
WARRANTY OF NONINFRINGEMENT; THE SOLE REMEDY FOR INFRINGEMENT IS PROVIDED IN
SECTION 8.
7.3 No Variation. NO AGREEMENTS VARYING OR EXTENDING THE FOREGOING
WARRANTIES OR LIMITATIONS WILL BE BINDING ON EITHER PARTY UNLESS IN WRITING AND
SIGNED BY AN AUTHORIZED REPRESENTATIVE OF BOTH PARTIES.
7.4 DRAGON not to Bind. DRAGON will give and make no warranties or
representations on behalf of COREL as to quality, merchantable quality, fitness
for a particular use or purpose or any other features of the COREL Software; and
DRAGON shall not incur any liabilities, obligations or commitments on behalf of
COREL, including, without limitation, a variation of the End User License.
-8-
<PAGE> 9
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
8. INFRINGEMENT
8.1 Defense and Settlement. If notified promptly in writing of any
action (and all prior related claims) brought against DRAGON alleging that
DRAGON's distribution or other disposition of the COREL Software under this
Agreement infringes any valid Canadian or United States copyright, COREL will
defend that action at its expense and will pay the costs and damages awarded
against DRAGON in the action, provided: that COREL shall have sole control of
the defense of any such action and all negotiations for its settlement or
compromise; that DRAGON, and where applicable, those for whom DRAGON is in law
responsible, cooperate fully with COREL in its defense of the action; and that
COREL shall have no liability if the action results from the use of the COREL
Software for purposes or in an environment for which it was not designed or
modification of the COREL Software by anyone other than COREL.
8.2 Options Where Claim. If a final injunction is obtained in such
action against DRAGON's resale of the COREL Software or if in COREL's opinion
the COREL Software is likely to become the subject of a claim of infringement,
COREL shall at its sole option and expense either procure for DRAGON the right
to resell the COREL Software or replace or modify the COREL Software so that it
becomes non-infringing or terminate this Agreement. In the event COREL
terminates this Agreement pursuant to this Section 8.2, DRAGON shall be entitled
to terminate the Reciprocal License Agreement.
9. LIMITATION OF LIABILITY
9.1 Limitation. EXCEPT IN CASE OF A CLAIM FOR WHICH COREL IS OBLIGATED
TO DEFEND AND SETTLE PURSUANT TO SECTION 8.1 AND THE INDEMNITY PROVIDED BY
DRAGON PURSUANT TO SECTION 10.1, IN NO EVENT WILL EITHER PARTY BE LIABLE FOR
INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES
WHATSOEVER RESULTING FROM LOSS OF USE, DATA OR PROFITS, ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF THE COREL SOFTWARE
OR STORAGE MEDIA, OR OTHER COREL PROVIDED MATERIAL WHETHER IN AN ACTION IN
CONTRACT OR TORT INCLUDING BUT NOT LIMITED TO NEGLIGENCE AND WHETHER OR NOT SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR SUCH DAMAGES ARE
FORESEEABLE.
9.2 Aggregate Liability. Other than as provided in Section 8, COREL's
aggregate liability to DRAGON whether for negligence, breach of contract,
misrepresentation or otherwise shall in respect of a single occurrence or a
series of occurrences in no circumstances exceed the amount of [**].
-9-
<PAGE> 10
10. DRAGON INDEMNIFICATION
10.1 Indemnification. Except as set forth in Section 8, DRAGON agrees to
indemnify and save COREL harmless from and against any and all claims, demands,
costs and liabilities (including all reasonable legal and attorney fees and
expenses) of any kind whatsoever, arising directly or indirectly: (i) out of
claims by DRAGON's Customers relating to DRAGON Products; (ii) out of DRAGON's,
or its authorized Distributor's reproductions of the COREL Software; or (iii)
out of DRAGON's performance or non-performance of its obligations hereunder.
11. CONFIDENTIALITY
11.1 Proprietary Information. All information (regardless of its form,
manifestation or how it is known to the other party) concerning either party to
this Agreement, including without limitation the source code for the COREL
Software, technology, data, business, financial affairs, and operations of each
respective party hereto, is hereby deemed to be for the purposes of this Section
11 as confidential and proprietary to each such respective party ("Confidential
Information"). Confidential Information shall not include information defined as
Confidential Information above which the receiving party can establish before a
court of competent jurisdiction: (i) was in the possession of the receiving
party at the time of disclosure; (ii) prior to or after the time of disclosure
becomes part of the public domain without the act or omission of the party to
whom it was disclosed; (iii) is disclosed to the receiving party by a third
party under no legal obligation to maintain the confidentiality of such
information; or (iv) was independently developed by the receiving party. All
such Confidential Information shall be treated as strictly confidential by the
receiving party and its employees, contractors and agents and shall not be
disclosed by the receiving party without the disclosing party's prior written
consent. However, the receiving party may disclose Confidential Information of
the disclosing party in accordance with judicial or other governmental order,
provided the receiving party shall give the disclosing party reasonable notice
prior to such disclosure and shall comply with any applicable protective order
or equivalent.
11.2 Treatment of Confidential Information. Neither party shall in any
way duplicate all or any part of the other party's Confidential Information,
except in accordance with the terms and conditions of this Agreement. Each party
shall have an appropriate agreement with each of its employees, contractors and
agents having access to the other party's Confidential Information sufficient to
enable that party to comply with all the terms of this Agreement. Each party
agrees to protect the other's Confidential Information with a fiduciary duty and
shall adopt or maintain procedures to protect such Confidential Information
commensurate with such duty.
11.3 Further Treatment of Proprietary Information. Each party agrees
not to disclose any such Confidential Information without the prior written
consent of the other, to anyone other than that party's employees, contractors
and agents who have a need to
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<PAGE> 11
know same to carry out the rights granted hereunder. Each party shall use its
reasonable efforts to protect all such Confidential Information from material
harm, damage, theft, tampering, sabotage, interference or unauthorized use,
during the term of this Agreement and during such time as such Confidential
Information remains in the possession of the other party.
11.4 Action to Protect. Each party shall promptly report to the other
any actual or suspected violation of the terms of this Section 11, and shall
take all reasonable steps to prevent, control or remedy such violation.
11.5 Equitable Relief. In recognition of the unique and proprietary
nature of the information disclosed by the parties, it is agreed that each
party's remedies for a breach by the other of its obligations under this Section
11 shall be inadequate and the disclosing party shall, in the event of such
breach and be entitled to seek equitable relief, including without limitation,
injunctive relief and specific performance, in addition to any other remedies
provided hereunder or available at law.
12. TERMINATION
12.1 Term. Subject to Section 6.1, this Agreement shall commence on the
Effective Date and, subject to Section 8.2, shall continue for a period of two
(2) years unless it is terminated in accordance with the provisions of this
Section. Unless either party notifies the other a minimum of sixty (60) days
prior to the end of the Term of this Agreement or any renewal Term thereof, it
shall automatically renew for successive one (1) year terms thereafter. This
Agreement may be terminated by either party in the event of any material breach
by the other party hereto which continues after thirty (30) days written notice
of said breach (which notice shall, in reasonable detail, specify the nature of
the breach) by the non-defaulting party to the defaulting party.
12.1.1 Upon termination of this Agreement the licenses granted to
DRAGON pursuant to Section 2 shall terminate immediately
and DRAGON shall immediately discontinue distribution of
and return or destroy Gold Masters of the COREL Software
within its possession or control within thirty (30) days
of termination. Notwithstanding the foregoing, DRAGON
shall be entitled to distribute for a period of six (6)
months after the date of termination all inventory of
Integrated DRAGON Products existing at the date of
termination and DRAGON may retain such copies of the COREL
Software as are required to maintain and support its End
Users.
No termination of this Agreement by either DRAGON or COREL shall affect
sublicenses of the COREL Software granted to End Users under the terms of the
End User License.
-11-
<PAGE> 12
13. NOTICES
13.1 Notices. Any notice or other communication to the parties shall be
sent to the attention of the persons and at the addresses set out below, or such
other persons and/or places as they may from time to time specify by notice in
writing to the other party. Any such notice or other communication shall be in
writing, and shall be given by registered mail, facsimile or telex and shall be
deemed to have been given when such notice should have reached the addressee in
the ordinary course, provided there is no strike by postal employees in effect
or other circumstances delaying mail delivery, in which case notice shall be
delivered or given by facsimile or telex.
In the case of COREL: In the case of DRAGON:
Corel Corporation Dragon Systems, Inc.
1600 Carling Ave. 320 Nevada St.
Ottawa, ON Newton, MA
Canada K1Z 8R7 U.S.A. 02160
Fax: 613-725-2691 Fax: 617-332-9575
Attention: Carey Stanton Attention: Janet Baker
Vice-President of President
Business Development
CC: Corporate Counsel CC: Hale & Dorr
Legal Department 60 State Street
Boston, MA 02109
Attention: Michael Bevilacqua
14. GENERAL
14.1 Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the Province of Ontario, Canada, excluding that
body of law applicable to choice of law and excluding the United Nations
Convention on Contracts for the International Sale of Goods and any legislation
implementing such Convention, if otherwise applicable.
14.2 Survival. The provisions of sections 2.4.5, 3, 4.4, 5.2, 7, 8, 9,
10 and 11 shall survive any termination of this Agreement until expressly waived
in writing by the party for whom they are of benefit or terminated by a further
written agreement of the parties.
14.3 Enforceability. If any provision of this Agreement is declared by
a court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision or part thereof which is necessary to render the provision valid,
legal and enforceable, shall be
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<PAGE> 13
severed from the agreement and the other provisions and the remaining part
thereof of that provision shall remain in full force and effect.
14.4 Further Assurances. The parties agree to do all such things and to
execute such further documents as may reasonably be required to give full effect
to this Agreement.
14.5 Entire Agreement. This Agreement, together with the Reciprocal
License Agreement, constitutes the entire agreement between the parties
concerning the subject matter hereof and cancels and supersedes any prior
understandings and agreements between the parties hereto with respect thereto.
There are no representations, warranties, terms, conditions, undertakings or
collateral agreements, expressed, implied or statutory, between the parties
other than as expressly set forth in this Agreement or the Reciprocal License
Agreement.
14.6 Remedies. The remedies expressly stated in this Agreement shall be
in addition to and not in substitution for those generally available at law or
in equity.
14.7 Waiver. No waiver or any provision of this agreement by a party
shall be enforceable against that party unless it is in writing and signed by an
authorized officer of that party.
14.8 Assignment. Neither party may assign this Agreement or the rights
granted hereunder without the prior written consent of the other which shall not
be unreasonably withheld; provided that either may assign this Agreement to a
purchaser of all or substantially all of the assets related to the product line
which utilizes the COREL Software or to a successor corporation in the event of
a merger or other reorganization in which it is not the surviving entity and
provided further that either party may assign all or any part of its rights
under this Agreement to a wholly-owned subsidiary of such party.
14.9 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed to be an original and all of
which together shall constitute but one and the same instrument.
14.10 Publicity. Upon the Effective Date or shortly thereafter, the
parties shall co-operate to make a public announcement about the execution of
this Agreement. Each party must approve the final form and content of that
announcement. After the initial announcement is made under this Section 14.11,
COREL and DRAGON shall communicate and co-operate with respect to advertising
and publicity regarding this Agreement and their relationship, and, subject to
section 2.3, shall obtain the consent of the other party before publishing or
releasing any public statements or announcements relating to this Agreement,
other than advertising and marketing materials.
-13-
<PAGE> 14
14.11 Independent Contractors. The parties to this Agreement are independent
contractors. No relationship of principal to agent, master to servant, employer
to employee or franchisor to franchisee is established hereby between the
parties. Neither party has the authority to bind the other or incur any
obligation on its behalf.
14.12 No Benefit No Director, Officer or employee of Corel Corporation
(and/or its subsidiaries and affiliates) shall be admitted to any share or part
of this Agreement or to any benefit arising therefrom.
14.13 Purpose of Agreement. This Agreement, together with the Dragon
Reciprocal Agreement, enables COREL, royalty-free, to license and distribute
DRAGON's current and next major version of DNS Personal Edition incorporated
into or bundled with its current and next major version of Corel WordPerfect
Suite, including its Legal Edition of the Suite. DRAGON may, also on a
royalty-free basis, license and distribute COREL's previous version and current
version of Corel WordPerfect Suite incorporated into or bundled with DRAGON's
speech recognition products. Both parties will engage in a variety of joint
marketing activities. Since it is understood that integrated products
incorporating or bundled with the current version of DRAGON's DNS software are
more salable than those incorporating or bundled with the previous version of
Corel WordPerfect Suite, COREL agrees further to actively promote DRAGON's
visibility with its products, and to engage in additional activities
facilitating DRAGON's activities to realize timely revenues through the
licensing and distribution of DRAGON products and product upgrades to COREL's
target market and customer base. These additional activities, actively under
discussion and therefor not detailed in the agreements here, are essential to
the success of DRAGON, as well as to COREL.
Also included in these agreements are terms and conditions under which each of
the parties may, for royalty, sublicense specific integrated products to
hardware OEMs for purchasers of new equipment. Additionally, certain other
designated COREL products incorporating Corel WordPerfect Suite may be licensed
and distributed by DRAGON for fees to be determined by the parties. These
include, but are not limited to COREL's 32-bit Legal Edition and 32-bit Medical
Edition Suites.
[signature page follows]
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<PAGE> 15
IN WITNESS WHEREOF the parties hereto have executed this Agreement as
of the date first above written.
COREL CORPORATION
PER: \s\ Michael O'Reilly
---------------------------
Name:
Title:
PER: \s\ Mitch Desrochers
---------------------------
Name:
Title:
DRAGON SYSTEMS, INC.
PER: \s\ Janet M. Baker
---------------------------
Name: Janet M. Baker
Title: President
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<PAGE> 16
SCHEDULE "A"
COREL SOFTWARE
1. Corel WordPerfect Suite 7 OEM (object code) ("WPS7")
DLL to enable integration of WPS7 with DRAGON Product (object code)
("DLL")
Platforms: Windows 95 & Windows NT4.0
Languages: English (US)
English (UK)
French
Italian
German
Spanish
Estimated Delivery Date: COREL shall deliver a gold master of WPS7
together with DLL to Dragon within four (4)
weeks of the Effective Date.
Bundled with: DRAGON may bundle WPS7 together with DLL with any
version of DRAGON Product
2. Corel WordPerfect Suite 8 OEM (object code) ("WPS8") (object code)
DLL to enable integration of WPS8 with DRAGON Product (object code)
("DLL")
Platforms: Windows 95 & Windows NT4.0
Languages: English (US)
English (UK)
French
Italian
German
Spanish
Estimated Delivery Date: February/98
Bundled with: DRAGON may bundle WPS8 with any version of DRAGON Product
Distribution
Restriction: DRAGON shall not be permitted to distribute WPS8 with the
Deluxe version of DRAGON Product until thirty (30) days
following the first
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<PAGE> 17
commercial shipment of the relevant language version of
Corel WordPerfect Suite 9 by Corel.
DRAGON shall not be permitted to distribute WPS8 with the
Preferred version of DRAGON Product until sixty (60) days
following the first commercial shipment of the relevant
language version of Corel WordPerfect Suite 9 by Corel.
DRAGON shall not be permitted to distribute WPS8 with the
Personal version of DRAGON Product until ninety (90) days
following the first commercial shipment of the relevant
language version of Corel WordPerfect Suite 9 by Corel.
DRAGON shall not be permitted to distribute the English
(US) language OEM version of WPS8 with the English (US)
language version of DRAGON Product until ninety (90) days
following the first commercial shipment of Corel
WordPerfect Suite 9 by Corel.
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<PAGE> 18
SCHEDULE "B"
TRADE-MARK USAGE GUIDELINES
[see attached]
-18-
<PAGE> 19
GUIDELINES FOR USING COREL LOGOS
Corel logos or trademarks in stylized form (the "Marks") are valuable assets and
may be used publicly with permission only from Corel. In order to protect the
value of these assets, Corel must maintain control over the manner in which the
Marks are used. Corel has established the following set of guidelines for
properly using the Marks. If these guidelines are not followed, Corel may
terminate your right to use the Marks.
- - Upon request, COREL will provide authorized users with camera ready
artwork of the Marks. This artwork may not be altered in any way.
- - You may not display the Marks on packaging, documentation, collateral
or advertising in a manner which suggests that your product is a COREL
product, or in a manner which suggests that COREL or any of the Marks
are a part of your product name.
- - When displayed, the Marks cannot be larger than or more prominent than
your product name, trade-mark, logo or trade name.
- - When displayed, the Marks must stand alone. A minimum amount of empty
space must be left between the Marks and any other object such as type,
photography, borders, edges, etc. The required border of empty space
around the Marks must be 1/2x wide, where x is the height of the Mark.
- - You may not combine the Marks with any other feature including, but not
limited to, other logos, words, graphics, photos, slogans, numbers,
design features, or symbols.
- - [Strike-through Text]. \s\ MOR \s\ JB
COREL LOGOS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING:
1. COREL LOGO
The word COREL is used in association with Corel's stylized "C" in two different
forms as follows:
COREL (Form A) COREL (Form B)
The logo is approved for use in black or colour. If used in colour, the C must
be reproduced in red (PMS 186) and the word COREL must be reproduced in blue
(PMS 293). The logo should be used only in the forms depicted above. The logo
should be identified with the (R) symbol in the following countries:
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<PAGE> 20
Canada, Germany, United Kingdom, United States, Austria, Benelux,
France, Columbia, Finland, Poland, Norway, South Korea, Switzerland and
Taiwan.
The logo should be identified with the symbol (TM) in all other countries. The
(R) or (TM) symbol must appear at the top-right comer of the graphic. When using
the Marks in some countries where the symbol (TM) should be used as well as
other countries where the symbol (R) should be used, the symbol (TM) may be used
in all cases.
2. CORELDRAW! LOGO
This logo is used in the following design form:
CORELDRAW!
The logo is approved for use in black or with a coloured line in PMS Magenta.
The logo should be identified with the (R) symbol in Canada only.
The logo should be identified with the (TM) symbol in all other countries.
When used in text, the trade-mark must be depicted in the form CorelDRAW.
3. BALLOON DESIGN LOGO
This logo is used in the following form:
The logo should be identified with the (TM) symbol at the top right corner of
the graphic in all countries. Note that either the CorelDRAW logo or the Corel
trademark may be used on the balloon, provided properly identified.
4. COREL VENTURA LOGO
This logo is used in the following form:
COREL VENTURA
The logo should be identified with the TM symbol at the top right comer of the
graphic in all countries.
5. COREL PROFESSIONAL CD-ROM PHOTOS LOGO
This logo is used in the following form:
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<PAGE> 21
COREL
The logo should be identified with the (TM) symbol at the top right comer of the
graphic in all countries.
TRADEMARK NOTICE
All products sold and all advertisements or other printed materials distributed
displaying any of the Marks must, in an appropriate place, bear the following
notice:
IS A TRADE-MARK OF
COREL CORPORATION OR COREL CORPORATION LIMITED, USED
UNDER LICENSE.
Corel reserves the right to review your use of the Marks. Any specimens or
examples which are required to be delivered to Corel under the terms of your
license should be sent to one of the following:
COREL CORPORATION
THE COREL BUILDING
1600 CARLING AVENUE
OTTAWA, ONTARIO
K1Z 8R7
ATTENTION: PUBLISHING PROGRAMS (RELATING TO BOOKS/MAGAZINES)
ATTENTION: EDUCATION DEPARTMENT (TRAINING MATERIALS)
ATTENTION: MEDIA RELATIONS (ARTICLES/REVIEWS)
ATTENTION: LEGAL DEPARTMENT (IF NONE OF THE ABOVE APPLIES)
Corel reserves the right to conduct spot checks and will periodically request
samples. Corel may also conduct spot checks in the marketplace of advertising
and related printed materials. Failure to comply with standards of quality
specified by Corel, failure to adhere to these guidelines or failure to comply
with a request for samples is grounds for termination of your license.
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<PAGE> 22
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SCHEDULE"C"
ROYALTY SCHEDULE
1. Retail Sales
DRAGON shall pay to COREL a royalty of [**] per unit on sales of
Integrated DRAGON Product in which WPS8 is incorporated or bundled sold through
the retail sales channel.
2. OEM Sales
DRAGON shall pay COREL the following per unit royalties on sales of
Integrated DRAGON Product sold through the OEM sales channel. Only the English
(U.S.) version of the Integrated DRAGON Product may be sold through the OEM
sales channel and is restricted to distribution in the United States and Canada.
<TABLE>
<CAPTION>
UNITS/MONTH* INTEGRATED DRAGON INTEGRATED DRAGON
PRODUCT IN WHICH WPS8 IS PRODUCT IN WHICH WPS7 IS
INCORPORATED** INCORPORATED**
- ----------------------------- ------------------------- -------------------------
<S> <C> <C>
[**] [**] [**]
[**] [**] [**]
[**] [**] [**]
[**] [**] [**]
[**] [**] [**]
</TABLE>
*The unit amounts refer to the average number of units distributed by each OEM
distributer in any particular month. They do not refer to total OEM sales by
DRAGON.
**May only be distributed on PCs with RAM equal to or greater than 48MB and that
use DRAGON certified audio channels.
All dollar amounts are in U.S. currency.
3. The foregoing amounts shall be paid by DRAGON to COREL on a quarterly
basis within [**] days of the end of each quarter.
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<PAGE> 23
ADDENDUM NO.1 TO
THE COREL RECIPROCAL LICENSE AGREEMENT
THIS ADDENDUM made as of the 17th day of September, 1998, by and
between Corel Corporation and Corel Corporation Limited (collectively "COREL")
and Dragon Systems, Inc. ("DRAGON").
BACKGROUND:
1. COREL and DRAGON have entered into the Corel Reciprocal License
Agreement made as of the 25th day of January, 1998 ("License
Agreement"), under which COREL granted to DRAGON a license to its Corel
WordPerfect software product.
2. COREL and Dragon wish to amend the License Agreement as set out below.
NOW THEREFORE, in consideration of the mutual promises, covenants and
obligations contained herein, the parties agree as follows:
1. AGREEMENT TERMS
1.1 Except as specifically amended in this Addendum, the terms and
conditions of the License Agreement shall continue in full force and
effect and govern this Addendum as if repeated herein in full.
2. SCHEDULE "A" - COREL SOFTWARE
2.1 Schedule "A" to the License Agreement shall be deleted and replaced by
Schedule "A-1" attached hereto.
3. SCHEDULE "C"- ROYALTY SCHEDULE
3.1 The pricing matrix for Integrated DRAGON Product sold through the OEM
sales channel as set out in Schedule "C" shall be deleted and replaced
with the following:
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<PAGE> 24
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
<TABLE>
<CAPTION>
UNITS/MONTH INTEGRATED DRAGON PRODUCT
IN WHICH WPS8 IS INCORPORATED
- ------------------------ -----------------------------
<S> <C>
[**] [**]
[**] [**]
[**] [**]
[**] [**]
[**] [**]
</TABLE>
Note: Prices are for the U.S. and Canada only
4. SUPPORT
4.1 Section 5.2 to the License Agreement shall be amended by adding the
following:
"Notwithstanding the foregoing, COREL shall have no obligation to
provide maintenance or technical support to End Users of the COREL
Software products "Corel PrintHouse Magic" or "Corel WEB.DESIGNER"."
4.2 Section 5.3 to the License Agreement shall be amended by adding the
following:
"Notwithstanding the foregoing, COREL shall have no obligation to
provide any support to DRAGON, including those items listed above, for
the COREL Software products "Corel PrintHouse Magic" and "Corel
WEB.DESIGNER"."
5. REGISTERED USER BASE
5.1 Dual Registration. The following shall be added to Section 4.7 of
the License Agreement:
"Notwithstanding the foregoing, DRAGON agrees that it shall institute a
process whereby End Users of the Integrated DRAGON Product may elect to
register as users of the COREL Software at the same time that they
register as users of the DRAGON Product. Where an End User elects to
register as a user of the COREL Software, such user information shall
be provided to COREL by DRAGON. COREL agrees that it shall comply with
all laws regarding the use of the registered user names and shall
defend or settle, and indemnify DRAGON from
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<PAGE> 25
any claim, action or demand arising from COREL's use of the registered
names. COREL also agrees that it shall not use the register user
information that it receives from DRAGON hereunder for the purposes of
marketing products that are competitive with the DRAGON Software."
6. EFFECTIVE DATE
6.1 This Addendum shall be effective as of the first date set out above.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as
of the date first above written.
COREL CORPORATION
PER: \s\ Michael P. O'Reilly
----------------------------
Name: Michael P. O'Reilly
Title: Vice-President Finance
C.F.O. and Treasurer
PER: \s\ Mitch Desrochers
----------------------------
Name: Mitch Desrochers
Title: Controller
COREL CORPORATION LIMITED
PER: \s\ Anthony O Dowd
----------------------------
Name: Anthony O Dowd
Title: General Mgr.
DRAGON SYSTEMS, INC.
PER: \s\ John Shagoury
----------------------------
Name: John Shagoury
Title C.O.O.
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<PAGE> 26
SCHEDULE "A-1"
COREL SOFTWARE
1. Corel WordPerfect Suite 8 OEM (object code) ("WPS8")
DLL to enable integration of WPS8 with DRAGON Product (object code)
("DLL")
Platforms: Windows 95 & Windows NT4.0
Languages: English (US)
English (UK)
French
Italian
German
Spanish
Estimated Delivery Date: February/98
Bundled with: DRAGON may bundle WPS8 with any version of DRAGON
Product
2. Corel PrintHouse Magic 3.0 - OEM (object code)("PH")
Platforms: Windows 95/NT
Languages: English (US)
English (UK)
French
Italian
German
Spanish
Estimated Delivery Date: two weeks
Bundled with: DRAGON may bundle PH with any version of DRAGON
Product sold in the retail sales channel (ie. no OEM
bundling).
3. Corel WEB.DESIGNER 1.0 - OEM (object code) ("WD")
Platforms: Windows 3.1
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<PAGE> 27
Windows 95
Windows NT
Languages: English (US)
English (UK)
French
Italian
German
Spanish
Estimated Delivery Date: three weeks
Bundled with: DRAGON may bundle WD with any version of DRAGON
Product sold in the retail sales channel (ie. no OEM
bundling).
4. Corel WordPerfect Suite 9 OEM (object code) (WPS9")
Platforms: Windows 95, Windows 98 & Windows NT4.0
Languages: English (US)
English (UK)
French
Italian
German
Spanish
Dutch
Estimated Delivery Date: when available
Bundled with: DRAGON may bundle WPS9 with any version of DRAGON
Naturally Speaking - Professional that has a suggested
retail price of $695.00USD or above.
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<PAGE> 28
EXHIBIT 1
DRAGON RECIPROCAL LICENSE AGREEMENT
-28-
<PAGE> 1
EXHIBIT 10.9
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
DRAGON RECIPROCAL LICENSE AGREEMENT
This Agreement made as of the 25th day of January, 1998 by and between
DRAGON SYSTEMS, INC. ("DRAGON") having its principal place of business at 320
Nevada Street, Newton, MA 02160 and COREL CORPORATION having its principal place
of business at 1600 Carling Avenue, Ottawa, Ontario K1Z 8R7, and its
wholly-owned subsidiary COREL CORPORATION LIMITED (collectively "COREL") having
its principal place of business at Europa House, 3rd Floor, Harcourt Street,
Dublin 2, Ireland.
BACKGROUND:
1. COREL designs, manufactures and markets productivity software among
other things.
2. DRAGON has developed and markets certain speech recognition software.
3. COREL desires to license such speech recognition software for
distribution together with its productivity software and DRAGON is
willing to grant COREL a license to such speech recognition software
for distribution together with COREL's productivity software subject to
the terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual promises, covenants and
obligations contained herein, the parties agree as follows:
1. INTERPRETATION
1.1 Definitions. As used herein:
1.1.1 "Agreement" means this Dragon Reciprocal License Agreement,
including any schedules and exhibits attached hereto.
1.1.2 "Customer" means any Distributor or End User.
1.1.3 "COREL Product" means the versions of COREL's business
application software product entitled "Corel WordPerfect" as
set out in Schedule "A" hereto.
1.1.4 "Distributor" means any third party which acquires possession
of an Integrated COREL Product for distribution to an End
User, sub-distributor, or reseller.
<PAGE> 2
1.1.5 "Documentation" means the user manuals, handbooks and other
written materials relating to the DRAGON Software provided by
DRAGON to COREL hereunder.
1.1.6 "Effective Date" means the date first set out above.
1.1.7 "End User" means any third party licensed by DRAGON or any of
its subsidiaries to use the Software pursuant to the terms of
an End User License.
1.1.8 "End User License" means DRAGON's End User License Agreement
as modified by DRAGON from time to time.
1.1.9 "Integrated COREL Product" means any COREL Product that
incorporates or is bundled with the DRAGON Software.
1.1.10 "OEM" means an original equipment manufacturer and refers to
hardware vendors that hard-bundle Integrated COREL Products
with computer hardware for resale to sub-distributors,
resellers or End Users. For clarity, "hard-bundle" means that
the software application must be sold as part of the complete
system being sold at the time of its original sale and not
merely as one among other software applications from which the
consumer may choose to have included as part of the system
(ie. "soft-bundle").
1.1.11 "Person" means any an individual, corporation, partnership, a
trust, an unincorporated organization, the government of a
country or any political subdivision thereof, or any agency or
department of any such government, and the executors,
administrators or other legal representatives of an individual
in such capacity.
1.1.12 "Corel Reciprocal License Agreement" shall have the meaning
set out in Section 6.2.
1.1.13 "DRAGON Software" means the object code version of the
computer software described in Schedule "A" hereto, along with
accompanying Documentation.
1.1.14 "Term" means the period of time from the Effective Date
through to the conclusion of this Agreement as provided in
Section 12.1.
1.1.15 "Trade-marks" means the trade names, trade-marks and logos
related to the DRAGON Software.
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2. GRANT OF LICENSE
2.1 License. Subject to the terms and conditions hereof, DRAGON hereby
grants to COREL and COREL accepts from DRAGON a world-wide, non-exclusive,
non-transferable license to reproduce and distribute the DRAGON Software in
object code format incorporated in or bundled only as part of an Integrated
COREL Product. In addition to any other restrictions set out in this Agreement,
the foregoing license shall be subject to the bundling and distribution
restrictions set out in Schedule "A" hereto.
2.2 Distributors. COREL shall have the right to appoint Distributors and
sublicense to them the right to distribute the Integrated COREL Product;
provided that COREL shall ensure that any such distribution of the Integrated
COREL Product by its Distributors is in compliance with and in accordance with
the terms of this Agreement.
2.3 OEM. COREL shall have the right to appoint OEMs and sublicense to them
the right to reproduce and distribute the English (U.S.) version of the
Integrated COREL Product in the United States and Canada only; provided that
COREL shall ensure that any such reproduction and distribution of the Integrated
COREL Product by OEMs is in compliance with and in accordance with the terms of
this Agreement and, in particular, shall be restricted to hard-bundled
distribution as described in Section 1.1.10. No version of the Integrated COREL
Product other than the English (U.S.) version may be distributed by an OEM
without the written approval of an authorized representative of DRAGON.
2.4 Trade-marks. Subject to the terms and conditions hereof, DRAGON hereby
grants to COREL and COREL accepts from DRAGON, a world-wide, royalty-free,
non-exclusive license to use the Trade-marks solely in the form provided by
DRAGON to COREL and only in connection with the reproduction, manufacturing,
marketing and distribution of any Integrated COREL Product.
2.4.1 Non-alteration. COREL agrees not to obstruct, remove,
interfere with, or in any way alter the Trade-marks. COREL
acknowledges and agrees that DRAGON retains all of its right,
title and interest in the Trade-marks, and all use of the
Trade-marks by COREL shall enure to the benefit of DRAGON.
2.4.2 Mark Policies and Standards. COREL shall display the
Trade-marks in accordance with DRAGON's guidelines for using
trade-marks as set out in Schedule "B" hereto or as otherwise
in effect from time to time and as provided to COREL.
Notwithstanding the foregoing, any change by DRAGON to its
trade-mark guidelines which affects
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COREL's usage shall not apply retroactively to COREL's past
usage which conformed with the then current guidelines and
DRAGON shall permit COREL a reasonable period of time in which
to conform with the new guidelines. DRAGON retains the right
to specify and approve the quality and standards of all
materials on which the Trade-marks are displayed and to
inspect from time to time samples of such materials. Failure
of COREL to adhere to such standards of quality shall be
grounds for DRAGON to terminate COREL's rights to use such
Trademarks.
2.4.3 Validity and Enforceability of Marks. COREL shall not at any
time during or after this Agreement assert any claims or
interest in or to anything which may adversely affect the
validity or enforceability of any of the Trade-marks. COREL
shall not register, seek to register, or cause to be
registered any of the Trade-marks without DRAGON's prior
written consent.
2.4.4 Infringement and Further Assurances. COREL agrees to promptly
notify DRAGON of any claim, action, suit, proceeding, or
litigation that is instituted by any Person against it
involving the Trade-marks. COREL agrees to report all
infringement or improper or unauthorized use of the
Trade-marks which come to the attention of COREL, and to
reasonably assist DRAGON in protecting same, but COREL
acknowledges and agrees that only DRAGON shall have the right
to bring any action, claim or suit in connection with any such
infringement. COREL agrees to execute all reasonable documents
and further assurances required by DRAGON to register or
protect DRAGON's rights in the Trademarks.
2.4.5 Term. The license to use the Trade-marks herein shall be
contemporaneous and coterminous with this Agreement and is
granted solely for the purposes of this Agreement. Subject to
COREL's right to sell off inventory of COREL Product in which
the DRAGON Software is incorporated as set out in Section
12.1.1, if this Agreement is terminated or is assigned
otherwise than as is provided herein, the rights to use the
Trade-marks granted herein shall immediately end and be of no
further force or effect and COREL shall not thereafter use,
advertise or display any name, trademark, trade name,
designation or logo which is, or any part of which is, to any
extent similar to, or confusing with any of the Trade-marks.
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3. OWNERSHIP
3.1 DRAGON Software. Except for the rights granted to COREL under this
Agreement, DRAGON shall retain all right, title and interest, including
intellectual property rights in the DRAGON Software.
3.2 Proprietary Rights Notices. COREL agrees not to obstruct, remove,
interfere with, or in any way alter any proprietary rights notices that appear
in the DRAGON Software and to reproduce any such notices in all copies of the
DRAGON Software that are bundled with Integrated COREL Products.
4. RESPONSIBILITIES OF COREL
4.1 End User License. COREL shall ensure that each copy of the DRAGON
Software is distributed with a copy of the End User License. COREL shall not
alter the End User License.
4.2 Restrictions. COREL shall reproduce the DRAGON Software only in the
form provided by DRAGON and shall not alter the DRAGON Software or any part
thereof. COREL shall not reverse engineer, decompile or disassemble the DRAGON
Software and agrees not to permit anyone else to do so.
4.3 Stand Alone Distribution. COREL shall not, nor shall COREL permit any
of its Distributors, to distribute the DRAGON Software other than incorporated
into or bundled as part of an Integrated COREL Product.
4.4 Support for Customers. COREL shall be solely responsible for providing
all maintenance and technical support to End Users of Integrated COREL Product
distributed through the retail sales channel. COREL shall be solely responsible
for providing all maintenance and technical support to End Users regarding the
COREL Product portion of Integrated COREL Product distributed through the OEM
sales channel. All such maintenance and technical support shall be provided by
COREL in accordance with COREL's standard procedures as they may be changed by
COREL from time to time. COREL shall have no maintenance or technical support
obligations regarding the DRAGON Software portion of the Integrated COREL
Product distributed through the OEM sales channel. DRAGON shall have no
maintenance or technical support obligations regarding the DRAGON Software
portion of the Integrated COREL Product distributed through the retail and OEM
sales channels.
4.5 Packaging and Marketing Materials. COREL shall be solely responsible
for the design, production and reproduction of all packaging and marketing
material for the Integrated COREL Products; provided that any such packaging or
marketing materials prepared by or for COREL shall advertise the DRAGON Software
as being available only as a bundled product within an Integrated COREL Product
and shall
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quote only the bundled price, without disclosing a separate price for the DRAGON
Software, unless required by law. In addition, the front panel of any packaging
for the Integrated COREL Products shall prominently display the Trademarks of
DRAGON.
4.6 Up-Sell Piece. COREL shall include in each copy of Integrated COREL
Product a coupon or other marketing insert that provides End Users with
information regarding other products marketed and distributed by DRAGON. The
form and content of such coupon or insert shall be as agreed upon by the parties
from time to time.
4.7 Joint-marketing Efforts. The parties shall cooperate in joint-marketing
opportunities regarding the Integrated COREL Product.
4.8 Registered User Base. COREL shall provide DRAGON with access to its
database of registered End Users of COREL WordPerfect products for the purpose
of a mailing for the marketing of any products which are not substantially
competitive to the core functionality of any product marketed by COREL
("Competitive Products"). For clarity, only wordprocessing, spreadsheet,
presentation and database products marketed and distributed by Microsoft
Corporation, Lotus/IBM Corporation, and Star Software shall be considered to be
Competitive Products. Dragon products which only include macro level support or
other features which support Competitive Products shall not be considered
Competitive Products. Such access shall be indirect only, through DRAGON or it's
third party mailing house. DRAGON shall bear all costs associated with producing
the insert and mailing such insert to COREL's registered users, except for the
access fee generally changed by COREL to third parties, which is hereby waived
by COREL, and shall be restricted to one mailing per calendar quarter. DRAGON
shall not be entitled to use the information relating to COREL's registered End
Users for any other purpose. COREL shall be entitled to approve all materials
sent to its registered user base; such approval not to be unreasonably withheld.
4.9 Compliance with Laws. COREL shall comply with all laws, rules, and
regulations existing with respect to the Integrated COREL Product and the
performance by COREL of its obligations hereunder existing in the jurisdictions
where COREL carries on activities under this Agreement and where the Integrated
COREL Product is resold or distributed from time to time. COREL shall not export
the Integrated COREL Product unless such export complies with any applicable
export laws and regulations as they apply to the Integrated COREL Product. In
particular, COREL shall not export or re-export the Integrated COREL Product,
either directly or indirectly, to countries which the United States has
prohibited export, including, but not limited to Cuba, Iran, Iraq, Libya and
North Korea. COREL shall impose the same obligation on its Distributors.
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4.10 Quality Assurance. COREL agrees to implement and maintain quality
assurance programs in keeping with industry standards and practices with respect
to its reproduction and distribution of the Integrated COREL Products.
4.11 Microphone. Each copy of Integrated COREL Product shall be distributed
by COREL, its Distributors or its OEMs together with a microphone certified by
DRAGON for use with the DRAGON Software.
5. RESPONSIBILITIES OF DRAGON
5.1 Gold Masters. To enable COREL to exercise the licenses granted under
Section 2.1 hereof, DRAGON shall deliver the gold masters of the media for the
DRAGON Software to COREL in accordance with the delivery schedule set out in
Schedule "A" hereto.
5.2 Support for Customers. DRAGON shall have no responsibility for
providing maintenance and technical support to End Users regarding the DRAGON
Software portion of Integrated COREL Product distributed by COREL through the
retail and OEM sales channel; provided that DRAGON shall provide COREL and OEMs
with second-level technical support in order to assist COREL or OEM in providing
technical support to End Users of Integrated COREL Product distributed through
the OEM sales channel.
5.3 Support to COREL. During the term of this Agreement, DRAGON shall
provide free of charge bug fixes, and reasonable telephone and facsimile support
in respect of the DRAGON Software to assist COREL in the implementation of the
DRAGON Software for COREL's purposes.
6. CONSIDERATION
6.1 Payment. In consideration of the grant to COREL of the licenses to the
DRAGON Software hereunder, COREL agrees to pay DRAGON the amounts set out in
Schedule "C" hereto ("Royalty Schedule"). Except as set out in the Royalty
Schedule, COREL shall not be obligated to pay any license fee, royalties or
other payments to DRAGON in consideration of the licenses to the DRAGON Software
granted hereunder.
6.2 Reciprocal License Agreement. As further consideration of the grant to
COREL of the licenses to the DRAGON Software hereunder, COREL has entered into a
software license and distribution agreement which is attached hereto as Exhibit
1 ("Corel Reciprocal License Agreement") under which COREL has granted to DRAGON
a license to distribute certain versions of its productivity software together
with certain of DRAGON's speech recognition software products.
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6.3 Taxes. COREL shall pay, in addition to all amounts specified in this
Agreement, all duties and foreign, federal, state, county, local income taxes,
value added taxes and other taxes, or amounts in lieu thereof, and interest
thereon, paid or payable or collectible by DRAGON (exclusive of taxes based on
DRAGON's net income) levied or based on amounts chargeable to or payable by
COREL pursuant to this Agreement. In the event any payments required to be made
by COREL under this Agreement are subject to applicable withholding tax that
COREL is required to deduct from such payments, COREL shall promptly deliver to
DRAGON receipts issued by appropriate government authorities for all such taxes
withheld or paid by COREL and COREL shall fully and promptly cooperate with
DRAGON to provide such information and records as DRAGON may require in
connection with any application by DRAGON to obtain available tax credits.
6.4 Reports. COREL will provide to DRAGON quarterly reports within forty
(45) days of the end of each quarter specifying the number of reproductions of
the Integrated COREL Products released for distribution by COREL and its
Distributors. Such reports shall include a breakdown of the number of Integrated
COREL Products by version, language and sales channel (ie. retail or OEM).
6.5 Audits. COREL agrees to maintain complete and accurate records relating
to its promotion, marketing, use and distribution of Integrated COREL Product.
DRAGON shall have the right no more often than once per twelve month period to
appoint an independent third party to examine COREL's relevant books and records
in order to verify COREL's compliance with the terms of this Agreement. Any such
audit shall be at the expense of DRAGON unless the audit reveals a
non-compliance by COREL with the terms of this Agreement of greater than five
percent (5%) in which case the audit shall be at the expense of COREL.
7. WARRANTIES, REPRESENTATIONS AND COVENANTS
DRAGON warrants, represents and covenants to COREL as follows and
acknowledges that COREL is relying on such warranties, representations and
covenants in entering into this Agreement and the transactions contemplated in
this Agreement:
7.1 Storage Medium. The DRAGON Software storage medium for the golden
masters is warranted against defects in workmanship and materials for a period
of ninety (90) days from the date it is delivered to Distributor. In the event
that the storage medium is defective DRAGON will replace it free of charge with
another copy of the DRAGON Software. Replacement of the storage medium shall be
DRAGON's sole obligation and COREL's sole remedy for a breach of the warranty in
this section.
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<PAGE> 9
7.2 Limitation. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, THE DRAGON
SOFTWARE AND STORAGE MEDIA ARE PROVIDED AND LICENSED "AS IS" AND THERE ARE NO
WARRANTIES, REPRESENTATIONS OR CONDITIONS, EXPRESS OR IMPLIED, WRITTEN OR ORAL,
ARISING BY STATUTE, OPERATION OF LAW OR OTHERWISE, REGARDING THEM, OR ANY OTHER
PRODUCT OR SERVICE PROVIDED HEREUNDER OR IN CONNECTION HEREWITH. DRAGON
DISCLAIMS ANY IMPLIED WARRANTY OR CONDITION OF MERCHANTABLE QUALITY,
MERCHANTABILITY, DURABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NO
REPRESENTATION OR OTHER AFFIRMATION OF FACT, INCLUDING BUT NOT LIMITED TO
STATEMENTS REGARDING PERFORMANCE OF THE DRAGON SOFTWARE OR STORAGE MEDIA, WHICH
IS NOT CONTAINED IN THIS AGREEMENT, SHALL BE DEEMED TO BE A WARRANTY BY DRAGON.
THERE IS NO IMPLIED WARRANTY OF NONINFRINGEMENT; THE SOLE REMEDY FOR
INFRINGEMENT IS PROVIDED IN SECTION 8.
IT IS UNDERSTOOD BY BOTH PARTIES TO THIS AGREEMENT THAT SPEECH RECOGNITION IS A
STATISTICAL PROCESS, THAT RECOGNITION ERRORS ARE INHERENT IN THE PROCESS OF
SPEECH RECOGNITION, AND THAT SPEECH RECOGNITION APPLICATIONS MUST BE DESIGNED TO
ALLOW FOR SUCH ERRORS IN THE RECOGNITION PROCESS. BOTH PARTIES UNDERSTAND THAT
SUCH ERRORS ARE INEVITABLE AND THAT IS THE USER OF THE DRAGON SOFTWARE'S
RESPONSIBILITY TO CORRECT RECOGNITION ERRORS BEFORE USING THE RESULTS OF THE
RECOGNITION.
7.3 No Variation. NO AGREEMENTS VARYING OR EXTENDING THE FOREGOING
WARRANTIES OR LIMITATIONS WILL BE BINDING ON EITHER PARTY UNLESS IN WRITING AND
SIGNED BY AN AUTHORIZED REPRESENTATIVE OF BOTH PARTIES.
7.4 COREL not to Bind. COREL will give and make no warranties or
representations on behalf of DRAGON as to quality, merchantable quality, fitness
for a particular use or purpose or any other features of the DRAGON Software;
and COREL shall not incur any liabilities, obligations or commitments on behalf
of DRAGON, including, without limitation, a variation of the End User License.
8. INFRINGEMENT
8.1 Defense and Settlement. If notified promptly in writing of any action
(and all prior related claims) brought against COREL alleging that COREL's
distribution or other disposition of the DRAGON Software under this Agreement
infringes any valid Canadian or United States copyright, DRAGON will defend that
action at its expense
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
and will pay the costs and damages awarded against COREL in the action,
provided: that DRAGON shall have sole control of the defense of any such action
and all negotiations for its settlement or compromise; that COREL, and where
applicable, those for whom COREL is in law responsible, cooperate fully with
DRAGON in its defense of the action; and that DRAGON shall have no liability if
the action results from the use of the DRAGON Software for purposes or in an
environment for which it was not designed or modification of the DRAGON Software
by anyone other than COREL.
8.2 Options Where Claim. If a final injunction is obtained in such action
against COREL's resale of the DRAGON Software or if in DRAGON's opinion the
DRAGON Software is likely to become the subject of a claim of infringement,
DRAGON shall at its sole option and expense either procure for COREL the right
to resell the DRAGON Software or replace or modify the DRAGON Software so that
it becomes non-infringing or terminate this Agreement. In the event DRAGON
terminates this Agreement pursuant to this Section 8.2, COREL shall be entitled
to terminate the Corel Reciprocal License Agreement.
9. LIMITATION OF LIABILITY
9.1 Limitation. EXCEPT IN CASE OF A CLAIM FOR WHICH DRAGON IS OBLIGATED TO
DEFEND AND SETTLE PURSUANT TO SECTION 8.1 AND THE INDEMNITY PROVIDED BY COREL
PURSUANT TO SECTION 10.1, IN NO EVENT WILL EITHER PARTY BE LIABLE FOR
INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES WHATSOEVER
RESULTING FROM LOSS OF USE, DATA OR PROFITS, ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF THE DRAGON SOFTWARE OR STORAGE
MEDIA, OR OTHER DRAGON PROVIDED MATERIAL WHETHER IN AN ACTION IN CONTRACT OR
TORT INCLUDING BUT NOT LIMITED TO NEGLIGENCE AND WHETHER OR NOT SUCH PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR SUCH DAMAGES ARE FORESEEABLE.
9.2 Aggregate Liability. Other than as provided in Section 8, DRAGON's
aggregate liability to COREL whether for negligence, breach of contract,
misrepresentation or otherwise shall in respect of a single occurrence or a
series of occurrences in no circumstances exceed the amount of [**]
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10. COREL INDEMNIFICATION
10.1 Indemnification. Except as set forth in Section 8, COREL agrees to
indemnify and save DRAGON harmless from and against any and all claims, demands,
costs and liabilities (including all reasonable legal and attorney fees and
expenses) of any kind whatsoever, arising directly or indirectly: (i) out of
claims by COREL's Customers relating to COREL Products; (ii) out of COREL's, or
its authorized Distributor's reproductions of the DRAGON Software; or (iii) out
of COREL's performance or non-performance of its obligations hereunder.
11. CONFIDENTIALITY
11.1 Proprietary Information. All information (regardless of its form,
manifestation or how it is known to the other party) concerning either party to
this Agreement, including without limitation the source code for the DRAGON
Software, technology, data, business, financial affairs, and operations of each
respective party hereto, is hereby deemed to be for the purposes of this Section
11 as confidential and proprietary to each such respective party ("Confidential
Information"). Confidential Information shall not include information defined as
Confidential Information above which the receiving party can establish before a
court of competent jurisdiction: (i) was in the possession of the receiving
party at the time of disclosure; (ii) prior to or after the time of disclosure
becomes part of the public domain without the act or omission of the party to
whom it was disclosed; (iii) is disclosed to the receiving party by a third
party under no legal obligation to maintain the confidentiality of such
information; or (iv) was independently developed by the receiving party. All
such confidential Information shall be treated as strictly confidential by the
receiving party and its employees, contractors and agents and shall not be
disclosed by the receiving party without the disclosing party's prior written
consent. However, the receiving party may disclose Confidential Information of
the disclosing party in accordance with judicial or other governmental order,
provided the receiving party shall give the disclosing party reasonable notice
prior to such disclosure and shall comply with any applicable protective order
or equivalent.
11.2 Treatment of Confidential Information. Neither party shall in any way
duplicate all or any part of the other party's Confidential Information, except
in accordance with the terms and conditions of this Agreement. Each party shall
have an appropriate agreement with each of its employees, contractors and agents
having access to the other party's confidential Information sufficient to enable
that party to comply with all the terms of this Agreement. Each party agrees to
protect the other's Confidential Information with a fiduciary duty and shall
adopt or maintain procedures to protect such Confidential Information
commensurate with such duty.
11.3 Further Treatment of Proprietary Information. Each party agrees not to
disclose any such Confidential Information without the prior written consent of
the
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other, to anyone other than that party's employees, contractors and agents who
have a need to know same to carry out the rights granted hereunder. Each party
shall use its reasonable efforts to protect all such Confidential Information
from material harm, damage, theft, tampering, sabotage, interference or
unauthorized use, during the term of this Agreement and during such time as such
Confidential Information remains in the possession of the other party.
11.4 Action to Protect. Each party shall promptly report to the other any
actual or suspected violation of the terms of this Section 11, and shall take
all reasonable steps to prevent, control or remedy such violation.
11.5 Equitable Relief. In recognition of the unique and proprietary nature
of the information disclosed by the parties, it is agreed that each party's
remedies for a breach by the other of its obligations under this Section 11
shall be inadequate and the disclosing party shall, in the event of such breach
be entitled to seek equitable relief, including without limitation, injunctive
relief and specific performance, in addition to any other remedies provided
hereunder or available at law.
12. TERMINATION
12.1 Term. Subject to Section 6.1, this Agreement shall commence on the
Effective Date and, subject to Section 8.2, shall continue for a period of two
(2) years unless it is terminated in accordance with the provisions of this
Section. Unless either party notifies the other a minimum of sixty (60) days
prior to the end of the Term of this Agreement or any renewal Term thereof, it
shall automatically renew for successive one (1) year terms thereafter. This
Agreement may be terminated by either party in the event of any material breach
by the other party hereto which continues after thirty (30) days written notice
of said breach (which notice shall, in reasonable detail, specify the nature of
the breach) by the non-defaulting party to the defaulting party.
12.1.1 Upon termination of this Agreement the licenses granted to
COREL pursuant to Section 2 shall terminate immediately and
COREL shall immediately discontinue distribution of and return
or destroy Gold Masters of the DRAGON Software within its
possession or control within thirty (30) days of termination.
Notwithstanding the foregoing, COREL shall be entitled to
distribute for a period of up to six (6) months after the date
of termination all inventory of Integrated COREL Products
existing at the date of termination and COREL may retain such
copies of the DRAGON Software as are required to maintain and
support its End Users.
No termination of this Agreement by either COREL or DRAGON shall affect
sublicenses of the DRAGON Software granted to End Users under the terms of the
End User License.
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13. NOTICES
13.1 Notices. Any notice or other communication to the parties shall be sent
to the attention of the persons and at the addresses set out below, or such
other persons and/or places as they may from time to time specify by notice in
writing to the other party. Any such notice or other communication shall be in
writing, and shall be given by registered mail, facsimile or telex and shall be
deemed to have been given when such notice should have reached the addressee in
the ordinary course, provided there is no strike by postal employees in effect
or other circumstances delaying mail delivery, in which case notice shall be
delivered or given by facsimile or telex.
In the case of COREL: In the case of DRAGON:
Corel Corporation Dragon Systems, Inc.
1600 Carling Ave. 320 Nevada St.
Ottawa, ON Newton, MA
Canada K1Z 8R7 U.S.A. 02160
Fax: 613-725-2691 Fax: 617-332-9575
Attention: Carey Stanton Attention: Janet Baker
Vice-President of President
Business Development
CC: Hale & Dorr
CC: Corporate Counsel 60 State Street
Legal Department Boston, MA 02109
Attention: Michael Bevilacqua
14. GENERAL
14.1 Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts, excluding that
body of law applicable to choice of law and excluding the United Nations
convention on contracts for the International Sale of Goods and any legislation
implementing such convention, if otherwise applicable.
14.2 Survival. The provisions of sections 2.4.5, 3, 4.4, 5.2, 7, 8, 9, 10
and 11 shall survive any termination of this Agreement until expressly waived in
writing by the party for whom they are of benefit or terminated by a further
written agreement of the parties.
14.3 Enforceability. If any provision of this Agreement is declared by a
court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision or part thereof which is necessary to render the provision valid,
legal and enforceable, shall
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be severed from the agreement and the other provisions and the remaining part
thereof of that provision shall remain in full force and effect.
14.4 Further Assurances. The parties agree to do all such things and to
execute such further documents as may reasonably be required to give full effect
to this Agreement.
14.5 Entire Agreement. This Agreement, together with the Reciprocal License
Agreement, constitutes the entire agreement between the parties concerning the
subject matter hereof and cancels and supersedes any prior understandings and
agreements between the parties hereto with respect thereto. There are no
representations, warranties, terms, conditions, undertakings or collateral
agreements, expressed, implied or statutory, between the parties other than as
expressly set forth in this Agreement or the Reciprocal License Agreement.
14.6 Remedies. The remedies expressly stated in this Agreement shall be in
addition to and not in substitution for those generally available at law or in
equity.
14.7 Waiver. No waiver or any provision of this agreement by a party shall
be enforceable against that party unless it is in writing and signed by an
authorized officer of that party.
14.8 Assignment. Neither party may assign this Agreement or the rights
granted hereunder without the prior written consent of the other which shall not
be unreasonably withheld; provided that either may assign this Agreement to a
purchaser of all or substantially all of the assets related to the product line
which utilizes the DRAGON Software or to a successor corporation in the event of
a merger or other reorganization in which it is not the surviving entity and
provided further that either party may assign all or any part of its rights
under this Agreement to a wholly-owned subsidiary of such party.
14.9 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed to be an original and all of
which together shall constitute but one and the same instrument.
14.10 Publicity. Upon the Effective Date or shortly thereafter, the parties
shall co-operate to make a public announcement about the execution of this
Agreement. Each party must approve the final form and content of that
announcement. After the initial announcement is made under this Section 14.10,
DRAGON and COREL shall communicate and cooperate with respect to advertising and
publicity regarding this Agreement and their relationship, and, subject to
section 2.3, shall obtain the consent of the other party before publishing or
releasing any public statements or announcements relating to this Agreement,
other than advertising and marketing materials.
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14.11 Independent Contractors. The parties to this Agreement are independent
contractors. No relationship of principal to agent, master to servant, employer
to employee or franchisor to franchisee is established hereby between the
parties. Neither party has the authority to bind the other or incur any
obligation on its behalf.
14.12 Purpose of Agreement. This Agreement, together with the Dragon
Reciprocal Agreement, enables COREL, royalty-free, to license and distribute
DRAGON's current and next major version of DNS Personal Edition incorporated
into or bundled with its current and next major version of Corel WordPerfect
Suite, including its Legal Edition of the Suite. DRAGON may, also on a
royalty-free basis, license and distribute COREL's previous version and current
version of Corel WordPerfect Suite incorporated into or bundled with DRAGON's
speech recognition products. Both parties will engage in a variety of joint
marketing activities. Since it is understood that integrated products
incorporating or bundled with the current version of DRAGON's DNS software are
more salable than those incorporating or bundled with the previous version of
Corel WordPerfect Suite, COREL agrees further to actively promote DRAGON's
visibility with its products, and to engage in additional activities
facilitating DRAGON's activities to realize timely revenues through the
licensing and distribution of DRAGON products and product upgrades to COREL's
target market and customer base. These additional activities, actively under
discussion and therefor not detailed in the agreements here, are essential to
the success of DRAGON, as well as to COREL.
Also included in these agreements are terms and conditions under which each of
the parties may, for royalty, sublicense specific integrated products to
hardware OEMs for purchasers of new equipment. Additionally, certain other
designated COREL products incorporating Corel WordPerfect Suite may be licensed
and distributed by DRAGON for fees to be determined by the parties. These
include, but are not limited to COREL's 32-bit Legal Edition and 32-bit Medical
Edition Suites.
[signature page follows]
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/s/ EJS
IN WITNESS WHEREOF the parties hereto have executed this Agreement as
of the date first above written.
COREL CORPORATION
PER: /s/ Michael O'Reilly
-----------------------------------
Name: Michael P. O'Reilly
Title: Vice-President Finance
C.F.O. and Treasurer
PER: /s/ Mitch Desrochers
-----------------------------------
Name: Mitch Desrochers
Title: Controller
COREL CORPORATION LIMITED
PER: /s/ Anthony O Dowd
-----------------------------------
Name: Anthony O Dowd
Title: General Mgr.
DRAGON SYSTEMS, INC.
PER: /s/ Janet M. Baker
-----------------------------------
Name: Janet M. Baker
Title: President
-16-
<PAGE> 17
SCHEDULE "A"
DRAGON SOFTWARE
1. The DRAGON designated versions of DRAGON Naturally Speaking version 2.0
to 2.4x Personal Edition (object code) ("DNS2.0") DLL to enable
integration of DNS2.0 with COREL Product (object code) ("DLL")
Platforms: Windows 95 & Windows NT 4.0
Languages: English (US)
English (UK)
German
Estimated Delivery Date: English (U.S.) and English (U.K.) -
February/98
German - March/98
The parties acknowledge that the delivery of
DNS 2.0 is contingent upon both the operation
of the DLL and the d1l provided to DRAGON by
COREL and the successful completion of the
quality assurance process.
Bundled with: COREL may bundle DNS2.0 together with any version of
Corel WordPerfect Suite version 8.x.
2. The DRAGON designated versions of DRAGON Naturally Speaking version 2.5
to 2.9x Personal Edition (object code) ("DNS2.5") DLL to enable
integration of DNS2.5 with COREL Product (object code) ("DLL")
Platforms: Windows 95 & Windows NT 4.0
Languages: English (US)
English (UK)
French
Italian
German
Spanish
Estimated Delivery Date: May/98
-17-
<PAGE> 18
Bundled with: COREL may bundle DNS2.5 together with any version of
Corel WordPerfect Suite version 8.x and/or 9.x.
In the event DNS2.5 is not available in time to integrate
it with Corel WordPerfect Suite 9.x, COREL may bundle
DNS2.0 together with any version of Corel WordPerfect
Suite 9.x; provided that DNS2.0 and the associated DLL
are compatible with Corel WordPerfect Suite 9.x.
3. DRAGON Naturally Speaking version 3.0 Personal Edition (object code)
("DNS3.0")
DLL to enable integration of DNS3.0 with COREL Product (object code)
("DLL")
Platforms: Windows 95 & Windows NT 4.0
Languages: English (US)
English (UK)
French
Italian
German
Spanish
Delivery Date: November/98
Bundled with: COREL may bundle DNS3.0 together with any version of
Corel WordPerfect Suite version 9.x; provided the
associated DLL is compatible with Corel WordPerfect
Suite 9.x.
Distribution
Restriction: COREL shall not be entitled to distribute DNS3.0 with the
Legal Edition of Corel WordPerfect Suite 9.0 until thirty
(30) days after the first commercial shipment of the
relevant language version of DNS 3.0.
COREL shall not be entitled to distribute DNS3.0 with the
Professional Edition of Corel WordPerfect Suite 9.0 until
sixty (60) days after the first commercial shipment of
the relevant language version of DNS 3.0.
COREL shall not be entitled to distribute DNS3.0 with the
Standard Edition of Corel WordPerfect Suite 9.0 until
-18-
<PAGE> 19
ninety (90) days after the first commercial shipment of
the relevant language version of DNS 3.0.
4. Command and control speech recognition software ("Command and Control")
Platforms: Windows 95 & NT 4.0
Languages: English (US)
English (UK)
French
Italian
German
Spanish
Estimated Delivery Date: This software has not yet been developed and
will be delivered to COREL if and when
available.
Bundled with: COREL may bundle Command and Control with any OEM version
of Corel WordPefect Suite 8.x and/or 9.x.
-19-
<PAGE> 20
SCHEDULE "B"
TRADE-MARK USAGE GUIDELINES
[SEE ATTACHED]
-20-
<PAGE> 21
DRAGON SYSTEMS, INC.
IDENTITY MARK
The following guidelines specify usage of the Dragon Systems, Inc. identity
mark. Any individuals (whether Dragon Systems employees, consultants, outside
vendors or third parties) involved in developing communications, documentation,
or packaging related to Dragon Systems products must understand and comply with
the following guidelines. Please contact Becky Squier at Dragon System,
1-617-965-5200, with any questions or issues.
DRAGON SYSTEMS, INC.
IDENTITY MARK USAGE
Size: The Dragon identity mark must be reproduced with a minimum vertical
dimension of 1 inch.
Color: Whenever possible, the mark should be reproduced in color as follows:
the dragon image, the horizontal rule, and the words "The Natural
Speech Company(TM)" print 100% PMS 185 Red (or process match-91
magenta, 76 yellow). The words "Dragon Systems, Inc." print in 100%
black.
ACKNOWLEDGMENT
Use of the Dragon Systems, Inc. identity mark should be accompanied by an
acknowledgment line (when required), as follows:
"An authorized reseller of Dragon Systems' speech products and services."
TRADEMARKS
Dragon Systems and the Dragon image are registered trademarks of Dragon Systems,
Inc.
DRAGON SYSTEMS, INC. LOGOS
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<PAGE> 22
DRAGON SYSTEMS LOGOS
-22-
<PAGE> 23
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SCHEDULE "C"
ROYALTY SCHEDULE
1. Retail Sales
There shall be [**] owed by COREL to DRAGON on sales of Integrated
COREL Product sold through the retail sales channel.
2. OEM Sales
COREL shall pay DRAGON the following per unit royalties on sales of
Integrated COREL Product sold through the OEM sales channel. Only the English
(U.S.) version of the Integrated COREL Product may be sold through the OEM sales
channel and is restricted to distribution in the United States and Canada.
UNITS/MONTH* INTEGRATED COREL INTEGRATED COREL PRODUCT
PRODUCT IN WHICH D.NS IS IN WHICH COMMAND AND
INCORPORATED** CONTROL IS INCORPORATED***
- ----------------------- ------------------------- ----------------------------
[**] [**] [**]
- ----------------------- ------------------------- ----------------------------
[**] [**] [**]
- ----------------------- ------------------------- ----------------------------
[**] [**] [**]
- ----------------------- ------------------------- ----------------------------
[**] [**] [**]
- ----------------------- ------------------------- ----------------------------
[**] [**] [**]
- ----------------------- ------------------------- ----------------------------
* The unit amounts refer to the average number of units distributed by each OEM
distributer in any particular month. They do not refer to total OEM sales by
COREL.
** May only be distributed on PCs with RAM equal to or greater than 48MB and
that use DRAGON certified audio channels.
All dollar amounts are in U.S. currency.
3. The foregoing amounts shall be paid by COREL to DRAGON on a quarterly
basis within [**] days of the end of each quarter.
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<PAGE> 24
ADDENDUM NO.1 TO
THE DRAGON RECIPROCAL LICENSE AGREEMENT
THIS ADDENDUM made as of the 17th day of September, 1998, by and
between Corel Corporation and Corel Corporation Limited (collectively "COREL")
and Dragon Systems, Inc. ("DRAGON").
BACKGROUND:
1. COREL and DRAGON have entered into the Dragon Reciprocal License
Agreement made as of the 25th day of January, 1998 ("License
Agreement"), under which DRAGON granted to COREL a license to its
Naturally Speaking speech recognition software product.
2. Corel and Dragon wish to amend the License Agreement by amending the
Royalty Schedule as it relates to the Dutch version of Corel
WordPerfect with Dragon Naturally Speaking and to OEM sales of the
Integrated COREL Product.
NOW THEREFORE, in consideration of the mutual promises, covenants and
obligations contained herein, the parties agree as follows:
1. AGREEMENT TERMS
Except as specifically amended in this Addendum, the terms and conditions of the
License Agreement shall continue in full force and effect and govern this
Addendum as if repeated herein in full.
2. SCHEDULE "A" - DRAGON SOFTWARE
2.1 Dutch Language Dragon Software. Schedule "A" to the License Agreement
shall be amended by adding "Dutch" to the listing of language version of DNS 3.0
contained in paragraph 3. The Dutch version of DNS 3.0 or higher shall be
delivered to COREL on or before June 1st , 1999.
2.2 Dragon Software Version 3. Schedule "A" to the License Agreement shall
be amended by deleting the bundling restrictions for Version 3 of the Dragon
Software contained in paragraph 3 and replacing them with the following:
"Bundled with: COREL may bundle DNS 3.0 together with any version of
Corel WordPerfect Suite version 8.x or 9.x; provided the
associated DLL is compatible with the respective version
of Corel WordPerfect Suite."
-24-
<PAGE> 25
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
In addition, the delivery date listed under the heading "Delivery Date" shall be
deleted and replaced with "as soon as the quality assurance testing for Version
3 of Dragon Software used in conjunction with Corel WordPerfect Suite has been
completed ". Finally, the restrictions listed under the heading "Distribution
Restriction" in paragraph 3 shall be deleted in their entirety.
3. DRAGON RESPONSIBILITIES
3.1 The following new Section 5.4 shall be added to the Agreement:
"5.4 Delivery of Dutch Version. DRAGON shall deliver to COREL a
commercial version of the DRAGON Software in the Dutch language. In
consideration therefore, COREL shall pay to DRAGON a non-refundable,
non-recurring engineering costs (NRE) in the amount of [**]dollars, to
be paid as follows:
[**]
[**]
[**]
and [**]or on delivery of the final, commercial release version of
DRAGON Naturally Speaking 3.0 or higher - Dutch language version,
whichever is later."
4. SCHEDULE "C" - ROYALTY SCHEDULE
4.1 Dutch Retail Version. The following shall be added to Paragraph I of
Schedule "C" of the License Agreement:
"Notwithstanding the foregoing, in consideration of the licenses
granted by DRAGON to COREL regarding the Dutch version of the DRAGON
Software, COREL shall pay to DRAGON a royalty of [**]per unit of
Integrated COREL Product that includes the Dutch language version of
DRAGON Software for the initial [**]. After the initial [**], COREL
shall pay to DRAGON a royalty of [**]per unit.
The foregoing royalty rates shall apply to copies of the retail version
of the Integrated COREL Product sold to the retail sales channel only.
For clarity, the retail sales channel does not include corporate,
government or academic sales through COREL's corporate licensing
programs. In the event COREL wishes to sell the Integrated COREL
Product in which the Dutch language
-25-
<PAGE> 26
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
version of the DRAGON Software is included through the OEM channel the
parties shall establish a royalty rate using the approval process
outlined in Section 2.5 of the Agreement. In the event COREL wishes to
sell the Integrated COREL Product
in which the Dutch language, version of the DRAGON Software is included
through COREL's corporate licensing programs, or if COREL wishes to
sell an academic version of Integrated COREL Product in which the Dutch
language version of the DRAGON Software is included in the retail sales
channel, the parties shall establish a royalty rate for such sales and
shall evidence any agreed upon rate in writing.
4.2 OEM Sales. The pricing matrix for Integrated COREL Product in which DNS
is incorporated as set out in paragraph 2 of Schedule "C" shall be deleted and
replaced with the following:
UNITS/MONTH INTEGRATED COREL PRODUCT IN WHICH
DNS IS INCORPORATED
- ------------------------------------ ------------------------------------------
[**] [**]
- ------------------------------------ ------------------------------------------
[**] [**]
- ------------------------------------ ------------------------------------------
[**] [**]
- ------------------------------------ ------------------------------------------
[**] [**]
- ------------------------------------ ------------------------------------------
[**] [**]
- ------------------------------------ ------------------------------------------
[**] [**]
- ------------------------------------ ------------------------------------------
Note: Prices are for U.S. and Canada only.
In addition, the following shall be added to Paragraph 2 of Schedule
"C" to the License Agreement:
"COREL may distribute copies of the Integrated COREL Product through
the OEM sales channel on terms other than those set out above, provided
that COREL obtains the prior written approval of an authorized
representative of DRAGON, approving such alternate terms. In seeking
and granting such approval, the parties agree to follow the procedure
set out in Section 2.5 of the Agreement."
-26-
<PAGE> 27
5. OEM ARRANGEMENTS
5.1 OEM Distribution. The last sentence of Section 2.3 shall be deleted and
replaced with the following:
"No version of the Integrated COREL Product other than the English
(U.S.) version may be distributed by an OEM, and no version of the
Integrated COREL Product may be distributed by an OEM outside of Canada
and the U.S., without the written approval of an authorized
representative of DRAGON. In seeking and granting such approval, the
parties agree to follow the procedure set out in Section 2.5 of the
License Agreement. It is understood and agree that COREL shall not
publicly divulge the portion of the royalty it receives from its OEM
customer which is being paid to DRAGON by COREL. COREL further agrees
to require its OEM customers to implement similar promotion and
marketing requirements as set forth in Sections 4.5 and 4.6 of the
Agreement. Specifically, unless otherwise agreed to by DRAGON, COREL
shall require OEM to include a Dragon promotional flyer or "splash
screen" offer to purchase upgrades from Dragon. DRAGON will provide
camera-ready artwork for the promotional flier that will be printed at
COREL's or OEM's expense. COREL will also require OEM to include
DRAGON's name and logo wherever COREL's name and logo is included in
any packaging and marketing materials."
5.2 Approval Process. The following new Section 2.5 shall be added to the
License Agreement:
"2.5 Approval Process. In the event that COREL wishes to distribute
copies of the Integrated COREL Product through the OEM sales channel on
terms other than those set out in this Agreement, COREL shall submit to
DRAGON a term sheet substantially in the form set out in Schedule "D"
hereto ("Approval Form"). Such Approval Form shall specify, among other
things, the identity of the OEM through which COREL proposes to
distribute the Integrated COREL Product, the estimated monthly volume
of units of the Integrated COREL Product to be distributed by the OEM,
the proposed royalty to be paid by COREL to DRAGON in connection with
the proposed distribution and any other terms which are not otherwise
contained in the License Agreement. Upon receipt of a completed
Approval Form from COREL, DRAGON shall have five (5) business days in
which to either accept or reject proposed terms contained therein. Such
acceptance or rejection must be communicated to COREL in writing by
having an authorized representative of DRAGON check the appropriate
"Accepted" or "Rejected" box on the Approval Form, sign where indicated
and return by means of fax to the COREL contact person indicated on the
Approval Form. If DRAGON falls to communicate its acceptance or
rejection of the terms contained on a
-27-
<PAGE> 28
particular Approval Form within the five (5) business day period,
DRAGON shall be deemed to have rejected such terms. Any terms that have
been accepted by DRAGON in accordance with the process from part of the
Agreement but shall apply only with respect to the specific OEM set out
in the Approval Form. In the event of a conflict between the terms of
this Agreement and the terms contained in an Approval Form accepted by
DRAGON, the terms contained in the Approval Form shall prevail."
6. SCHEDULE "D"
6.1 The schedule attached hereto as Schedule "D" shall be added to the
License Agreement and shall therein also be referred to as Schedule
"D".
7. PRESS RELEASES
7.1 Publicity. The following shall be added to Section 14.10 of the
Agreement:
"In addition, where COREL issues a press release regarding the bundling
of Integrated COREL Product, COREL shall mention the DRAGON Software. COREL
shall also request permission from each OEM for DRAGON to be entitled to use
OEM's name in DRAGON press releases and other marketing materials; provided
DRAGON complies with any reasonable guidelines provided to DRAGON by OEM. COREL
shall be required to obtain DRAGON's written approval of any proposed OEM
distribution agreement for which such permission is not granted."
8. REGISTERED USER BASE
8.1 Dual Registration. The following shall be added to Section 4.8 of the
Agreement:
"Notwithstanding the foregoing, COREL agrees that it shall institute a
process whereby End Users of the Integrated COREL Product may elect to
register as users of the DRAGON Software at the same time that they
register as users of the COREL Product. Initially, this process will be
the inclusion of a DRAGON registration card in copies of the Integrated
COREL Product. To facilitate this process, DRAGON shall provide COREL
with camera-ready artwork for the DRAGON registration card. COREL may,
at any time, institute an alternate process to the inclusion of the
DRAGON registration card, that will permit dual registration. Where an
End User elects to register as a user of the DRAGON Software, such user
information shall be provided to DRAGON by COREL. DRAGON agrees that it
shall comply with all laws regarding the use of the registered user
names and shall defend or settle, and indemnify COREL from any claim,
action or demand arising
-28-
<PAGE> 29
from DRAGON's use of the registered names. DRAGON also agrees that it
shall not use the register user information that it receives from COREL
hereunder for the purposes of marketing any Competitive Products."
9. EFFECTIVE DATE
9.1 This Addendum shall be effective as of the date first set out above.
10. MISCELLANEOUS
10.1 The last instance of the word "COREL" in Section 8.1 of the Agreement
shall be deleted and replaced with the word "DRAGON".
[signature page follows]
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<PAGE> 30
IN WITNESS WHEREOF the parties hereto have executed this Addendum as of
the date first above written.
COREL CORPORATION
Per: /s/ Michael O'Reilly
-----------------------------------
Name: Michael P. O'Reilly
Title: Vice-President Finance
C.F.O.. and Treasurer
Per: /s/ Mitch Desrochers
-----------------------------------
Name: Mitch Desrochers
Title: Controller
COREL CORPORATION LIMITED
Per: /s/ Anthony O Dowd
-----------------------------------
Name: Anthony O Dowd
Title: General Mgr
DRAGON SYSTEMS, INC.
Per: /s/ John Shagoury
-----------------------------------
Name: John Shagoury
Title: C.O.O.
-30-
<PAGE> 31
SCHEDULE "D"
[see attached]
-31-
<PAGE> 32
OEM DISTRIBUTION APPROVAL FORM
COREL SALES CONTACT:
Name: Tel:
Title: Fax:
DATE OF SUBMISSION:
PROPOSAL:
OEM Customer: Address:
Software: Hardware:
(Inc. language and version no.)
Monthly Volume:______________________ Royalty to be paid by Corel to Dragon:
(per unit)
Royalty to be paid by OEM to Corel:
Term of Contract: (per unit)
Cost of Microphone:
Territory: (Who is responsible for cost)
OTHER TERMS:
Promotional Flyer Included: yes ____ no ____
Hardware Testing: To be tested by OEM ____ To be tested by Dragon ____
Approved Use of OEM Name by Dragon: yes ___ no ____ Other: Attach separate
sheet
APPROVAL:
TERMS ACCEPTED [ ] [check one] TERMS REJECTED [ ]
Signature of Authorized Dragon Representative
Print Name:
Title:
Date:
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<PAGE> 33
EXHIBIT 1
COREL RECIPROCAL LICENSE AGREEMENT
-33-
<PAGE> 34
ADDENDUM NO.2
This Addendum made as of the 24th day of November, 1998 by and between Corel
Corporation and Corel Corporation Limited (collectively "COREL") and Dragon
Systems, Inc. ("DRAGON").
WHEREAS COREL and DRAGON have entered into the Dragon Reciprocal License
Agreement made as of the 25th day of January, 1998 as amended by Addendum No. 1
dated September 17th , 1998 (the "License Agreement") whereby DRAGON granted
COREL a license to its Naturally Speaking speech recognition software product;
and COREL and DRAGON wish to amend the License Agreement on the terms and
conditions set out below.
NOW THEREFORE in consideration of the mutual promises, covenants and obligations
contained herein, the parties agree as follows:
1. Except as specifically amended in the Addendum, the terms and
conditions of the Agreement shall continue in full force and effect and
govern this Addendum as if repeated herein in full.
2. For the purpose of the Compaq Coupon offer more fully described below
the following terms and conditions shall apply:
Compaq Computer Corporation (with its principal place of business at
20555 SH 249, Houston, TX 77070-2698)("Compaq"), shall, between the
period of December 1st, 1998 through to March 31st, 1999, bundle a
coupon created by COREL ("Coupon") with Compaq's Presario line of
personal computers which have been pre-loaded with Corel WordPerfect
Suite 8 software and which will be distributed in the United State
only. The Coupon shall offer each end-user customers one of two (2)
options which shall entitle such end-user customers to receive via U.S.
mail and upon availability: (i) Corel WordPerfect Suite 9 including
Dragon NaturallySpeaking Personal Edition U.S. English version only and
a noise canceling headset microphone; or (ii) Dragon NaturallySpeaking
for Teens U.S. English version only and a noise canceling headset
microphone. Shipping and handling fee of nine dollars and ninety-nine
cents ($9.99 US) ("Fee") shall be charged to the end-user customer's
credit card. End user customers shall be required to redeem the Coupon
on or before December 31st, 1999.
DRAGON shall be solely responsible for fulfillment of the Coupon
through its designated fulfillment house.
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<PAGE> 35
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
In the event an end-user customer chooses option (i), COREL's
responsibilities shall be as follows:
a. COREL shall be responsible for the first level paid for
technical support for the Corel WordPerfect Suite 9 with
Dragon NaturallySpeaking Personal Edition U.S. English version
only; and
b. The amounts pay by COREL to DRAGON shall be calculated based
upon the following:
[**] US royalty otherwise payable by COREL for the Dragon
NaturallySpeaking feature less the Fee received by DRAGON from
the end-user customers after deduction of all costs related to
the Coupon ([**] US) and the prorated printing cost of the
Coupon as reported on DRAGON's quarterly reports and set out
on DRAGON's invoice to COREL. For purposes of clarity the
calculation of the amount payable by COREL to DRAGON is as
follows: [**] US - ([**] US - [**] US - pro-rated printing
cost of the Coupon) = final amount to be paid by COREL.
COREL shall pay such final amount to DRAGON for each Coupon
fulfilled by DRAGON sixty (60) days after COREL's receipt of
DRAGON's quarterly reports.
In the event that an end-user customer chooses option (ii), no royalty
shall be due from COREL to DRAGON.
IN WITNESS WHEREOF the parties have executed this Addendum by their
duly authorized representatives as of the date set forth above.
DRAGON SYSTEMS, INC. COREL CORPORATION
PER: /s/ Janet M. Baker PER: /s/ Mitch Desrochers
------------------------ ------------------------
Name: Janet M. Baker Name: Mitch Desrochers
Title: President Title: Controller
COREL CORPORATION LIMITED
PER: /s/ Anthony O Dowd
------------------------
Name: Anthony O Dowd
Title: General Mgr.
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<PAGE> 1
EXHIBIT 10.10
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
TECHNOLOGY LICENSE AGREEMENT
This Agreement is entered into as of July 7, 1998 (the "Effective
Date") by and between Articulate Systems, Inc., a corporation of the state of
Delaware and having its principal place of business 600 West Cummings Park,
Suite 4500, Woburn, MA 01801 ("ASI") and Dragon Systems, Inc., a Delaware
corporation having its principal place of business at 320 Nevada Street, Newton,
MA 02160 ("Dragon").
WHEREAS, Dragon is in the business of developing, using, and licensing
others to use and is the owner of, or has the relevant licenses to use, certain
voice recognition software and hardware ("Dragon Technology"); and
WHEREAS, ASI is in the business of providing voice recognition and
transcription products and services ("ASI Products"); and
WHEREAS, ASI desires to license the Dragon Technology for use in
conjunction with the ASI Products;
NOW THEREFORE, for good and valuable consideration and on the promises
and premises set forth below, the parties agree as follows:
1. DEFINITIONS.
1.1 CONFIDENTIAL INFORMATION:
a. DRAGON CONFIDENTIAL INFORMATION: Confidential and/or
proprietary information relating to the Dragon Technology,
research, development, products, processes, trade secrets,
business plans, customers, finances, and personnel data
related to the business of Dragon. Dragon Confidential
Information does not include any information (i) which ASI
knew before Dragon disclosed it to ASI; (ii) which has become
publicly known through no wrongful act of ASI; (iii) which ASI
developed independently, as evidenced by appropriate
documentation; (iv) which is disclosed to ASI by a third party
without restriction of confidentiality; or (v) the disclosure
of which is required by law.
b. ASI CONFIDENTIAL INFORMATION: Confidential and/or proprietary
information relating to the research, development, products,
processes, trade secrets, business plans, customers, finances,
and personnel data related to the business of ASI. ASI
Confidential Information does not include any information (i)
which Dragon knew before ASI disclosed it to Dragon; (ii)
which has become publicly known through no wrongful act of
Dragon; (iii) which Dragon developed independently, as
evidenced by appropriate documentation; (iv) which is
disclosed to Dragon by a third party without restriction of
confidentiality; or (v) the disclosure of which is required by
law.
1.2 DERIVATIVES: Any or all translation (including translation into
other human or computer languages), portation, modification, correction,
addition, extension, upgrade, update, enhancement, revision, new version,
improvement, compilation, abridgement, or other form in which the Intellectual
Property Rights may be recast, transformed, or adapted, including any products,
systems or other items which provide comparable or enhanced functionality
whether or not specifically based on or derived from such Intellectual Property
Rights.
<PAGE> 2
1.3 DRAGON DOCUMENTATION: Any and all manuals, user guides, product
specifications and other documentation, owned by or licensed to Dragon, relating
or referring to the Dragon Technology.
1.4 DRAGON RIGHTS: Any and all Intellectual Property Rights and
Derivatives, of Dragon in and to the Dragon Copyrights, Dragon Documentation,
Dragon Marks, Dragon Patents, Dragon Technology and/or the Project Work Product.
1.5 DRAGON TECHNOLOGY: Dragon's proprietary voice recognition software
and hardware as set forth in Exhibit A1 hereto including, but not limited to,
all English and foreign language, all commercial and non-commercial, and all
present and future versions thereof, and all required and/or relevant Dragon
Documentation, Intellectual Property Rights and other proprietary rights
therein, and Derivatives thereof that is required and/or relevant to ASI's
development of current and future versions of ASI Products. Dragon Technology
includes:
a. DRAGON DISTRIBUTABLE TECHNOLOGY: The Dragon Technology which
ASI is authorized to distribute as an integrated or bundled
feature in or in connection with the ASI Products, as set
forth in Exhibit
b. DRAGON NON-DISTRIBUTABLE TECHNOLOGY: The Dragon Technology
which ASI is authorized to use in the development of ASI
Products, but which it is not authorized to distribute as an
integrated or bundled feature in or in connection with the ASI
Products, as set forth in Exhibit A1.2. The Dragon
Non-Distributable Technology is divided into the "Core
Non-Distributable Technology" and the "Other Non-Distributable
Technology" as described in Exhibits A1.2I and A1.2II,
respectively.
1.6 FIELDS OF USE (FOU): ALL MARKETS AND INDUSTRIES, AS FOLLOWS:
a. EXCLUSIVE FIELDS OF USE (EXCLUSIVE FOU): The Exclusive FOU is
set forth in Exhibit A2.1 hereto.
b. NON-EXCLUSIVE FIELDS OF USE (NON-EXCLUSIVE FOU): The
Non-Exclusive FOU is set Exhibit A2.2 hereto.
The use of "FOU" by itself shall mean collectively both the Exclusive and
Non-Exclusive FOU.
1.7 INTELLECTUAL PROPERTY RIGHTS: Any and all proprietary, common law,
and/or statutory intellectual property rights, including but not limited to,
patentable materials and patent rights, copyrightable materials and copyrights,
moral rights, trade secret rights, trademark rights, service mark rights, and/or
any and all other proprietary rights, including all Derivatives.
1.8 ASI CLIENT: An end user customer of ASI in the FOU and Territory.
1.9 ASI DISTRIBUTOR: Authorized third party distributors licensed by
ASI to distribute the ASI Products to ASI Clients.
1.10 ASI PRODUCTS: Any and all voice recognition and transcription
products and services that use, integrate, or contain voice recognition
capabilities, made, distributed, and/or sold by ASI to one or more professional
user market segments.
1.11 ASI RIGHTS: Any and all Confidential Information and Intellectual
Property Rights of ASI in and to the ASI Products, exclusive of the Dragon
Rights.
-2-
<PAGE> 3
1.12 MREC ENGINE: The component of the Dragon Technology that is the
core speech recognition engine.
1.13 NATURALLYSPEAKING DELUXE EDITION: One of the commercially
available versions of Dragon's NaturallySpeaking voice recognition product line.
1.14 TERRITORY:
a. EXCLUSIVE FOU: North America (United States and its
territories and Canada) in American English
b. NON-EXCLUSIVE FOU: Worldwide
1.15 THIRD PARTY RIGHTS: Any and all of the proprietary third party
patents, copyrights, and trade secrets licensed to Dragon and included in the
Dragon Intellectual Property Rights relating or referring to the Dragon
Technology, as identified in Exhibit A3 hereto.
2. GRANT BY DRAGON.
Subject to the terms and conditions set forth in this Agreement, DRAGON
hereby grants to ASI during the Term and in the Territory, and ASI hereby
accepts:
a. EXCLUSIVE LICENSE - An exclusive, non-transferable (except as
provided in Section 13.1) license to use the Core
Non-Distributable Technology in the Exclusive FOU as set forth
in Exhibit A1.2I. During the term of this Agreement, Dragon
will not use, or authorize, license or permit any person other
than ASI to use the Core Non-Distributable Technology to
develop or offer any language models or other products or
services in the Exclusive FOU.
b. NON-EXCLUSIVE LICENSE - A non-exclusive, non-transferable
(except as provided in Section 13.1) license:
i. To use the Dragon Non-Distributable Technology in the
Non-Exclusive FOU;
ii. To use, reproduce, distribute, and prepare derivative
works of the Dragon Distributable Technology in the
Non-Exclusive FOU and the Exclusive FOU;
Without limitation, ASI's non-exclusive rights shall include
the rights:
i. to use the Dragon Other Non-Distributable Technology
for the Exclusive FOU;
ii. To use the Dragon Technology internally for testing,
demonstration, training, support and promotional
purposes by its personnel;
iii. To demonstrate the Dragon Distributable Technology to
potential ASI Distributors and ASI Clients;
iv. To provide training and technical support to
employees, ASI Distributors and ASI Clients; and
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v. To use the Dragon Documentation in support of ASI's
authorized use of Dragon Technology;
c. END-USER LICENSE - A non-exclusive, non- transferable license
to market and grant End User licenses of the Dragon
Distributable Technology, provided ASI presents or causes to
be presented to each End User an End User License Agreement
containing substantially the same terms and conditions as
contained in the License Agreement shown in Exhibit C hereto.
Upon DRAGON's request, ASI shall provide a copy of ASI's
standard End User License Agreement. ASI agrees to comply with
all reporting and record keeping requirements set forth
herein.
d. DISTRIBUTOR LICENSE - The right to appoint ASI Distributors to
market and grant sub licenses of the Dragon Distributable
Technology under terms of this Agreement. ASI shall ensure
that each ASI Distributor executes a written agreement with
ASI binding Distributors to provisions substantially similar
to those contained in the pertinent sections of this
Agreement. ASI agrees to comply with all reporting and record
keeping requirements set forth herein.
3. LIMITATIONS ON ASI. The foregoing license grants are expressly conditioned
upon ASI's compliance with the following requirements:
3.1 ASI acknowledges that the Dragon Rights and Dragon Confidential
Information are proprietary to Dragon and/or its licensor(s) and that Dragon
and/or its licensor (s) retains all right, title, and interest therein and
thereto, including without limitation all Intellectual Property Rights therein
and therefor, and that ASI has no rights therein other than as set forth in this
Agreement.
3.2 Other than as expressly set forth in this Agreement, ASI
agrees not to:
a. reproduce, sublicense, distribute or dispose of the Dragon
Rights;
b. alter, create derivative works of, edit, modify, or revise the
Dragon Rights;
c. reverse engineer, reverse compile, or disassemble the Dragon
Rights, in whole or in part, except as expressly permitted by
this Agreement or pursuant to applicable law.
3.3 On all copies of the Dragon Rights made by ASI pursuant to this
Agreement, ASI agrees that it shall (i) not remove any copyright notices,
trademarks, or other proprietary legends contained therein or thereon, as
provided by Dragon, and (ii) include any copyright notices, trademarks, or other
proprietary legends contained within the Dragon Technology, as provided by
Dragon.
3.4 ASI warrants and represents that it does not intend to, nor will,
directly or indirectly, export or transmit the Dragon Technology, in whole or in
part, or any Dragon Confidential Information or technical data relating thereto,
to any country to which such export or transmission is restricted by any
applicable U.S. regulation or statute, without prior written consent, if
required, of the Bureau of Export Administration of the U.S. Department of
Commerce, or other such governmental entity as may have jurisdiction over such
export or transmission.
Use, duplication, or disclosure by the United States Government of the
Dragon Technology is subject to restrictions as set forth in The Rights in
Technical Data and Computer Software clause at
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DFARS 252.227-7013 or of the Commercial Computer Software -Restricted Rights
clause at 48 C.F.R. 52.227-19 as applicable.
3.6 ASI agrees not to in any way misrepresent, or to mislead
(especially with respect to prospective customers, journalists, or market
analysts, etc.) about ASI's relationship with DRAGON, ASI's duties as specified
in this Agreement, the features of DRAGON's products including any technical
specifications, expected benefits of use, and the origin of DRAGON's products.
In particular, ASI shall not represent itself as an exclusive agent or exclusive
distributor of DRAGON's products, except as indicated in this Agreement. ASI
shall not represent itself as the developer or manufacturer of DRAGON's
products, or as DRAGON itself.
3.7 Prior to the first commercial shipment from ASI to any End User, of
an ASI Product incorporating the MREC Engine, ASI must submit a finished version
of such ASI Product, along with the accompanying documentation, to DRAGON for
testing to insure satisfactory operation and receive from DRAGON a written
notice of approval. DRAGON shall examine and test a finished version of each ASI
Product that incorporates the MREC Engine, and provide such notice of approval
or a statement of defects as quickly as possible but no later than 30-days from
receipt. ASI shall not be required to correct any such defects other than those
defects that are such as to cause material harm to Dragon if included in the
software distributed by ASI ("Major Defects"). In the event Dragon does not give
a statement identifying such Major Defects within such 30 day period, the
software shall be deemed approved for all purposes hereof. In the event DRAGON
notifies ASI in writing of Major Defects, ASI must correct such Major Defects
and return a newly finished version of the ASI Product for retesting, and DRAGON
shall within 30 days of such redelivery provide ASI with written notice of
approval or a statement of Major Defects. DRAGON's acceptance of a finished
version of ASI Product shall not be unreasonably withheld, and approval shall be
deemed to have been given if in any case Dragon does not deliver notice of Major
Defects within 30 days following delivery of a version of the software. The
above procedure may, at DRAGON's option, be repeated until a final version of
each ASI Product is approved. However, Dragon may terminate this Agreement if a
corrected version of an ASI Product is not approved after the 4th separate
attempt at correcting the Major Defects.
4.0 OBLIGATIONS OF THE PARTIES.
4.1 DRAGON OBLIGATIONS. During the Term of this Agreement, Dragon
agrees to:
a. Provide the expertise of sufficient personnel, with
appropriate expertise and competence ("Dragon Key Personnel"),
to provide technical information and support to ASI Key
Personnel (as identified in Exhibit A4 hereto) in the
development of ASI Products. Dragon will determine the
identity of Dragon Key Personnel. Dragon will also determine
the level of effort of these Dragon Key Personnel, but it will
be reasonable and sufficient to meet Dragon's obligations
under this Agreement. ASI Key Personnel must sign appropriate
individual non-disclosure agreements prior to receiving
confidential information from Dragon. ASI has the right, with
prior written permission from Dragon, to add individuals to
the list of ASI Key Personnel;
b. Provide relevant Dragon Technology to ASI in accordance with
the terms and conditions of this Agreement;
c. Provide ASI Key Personnel with access to the relevant Dragon
Technology, including participation in Dragon's first beta
testing of relevant Dragon Technology, whether or not such
testing is made available to other Dragon licensees;
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d. Provide sufficient and appropriate training to ASI personnel
to enable ASI to understand the developing Dragon Technology
including, but not limited to:
i. Dragon will provide appropriate training, at ASI's
sole cost and expense, to ASI in the marketing, use
and installation of the Dragon Technology at Dragon's
Corporate Headquarters;
ii. At ASI's option, Dragon will provide ASI with
training on Dragon's standard technical support
procedures at ASI's sole expense;
iii. Dragon will provide all other reasonable and
necessary training, support and maintenance to ASI,
as set forth in Exhibit B, and ASI shall be
responsible for providing such training, support and
maintenance to ASI Clients and ASI Distributors at
ASI's sole expense.
e. Refrain from developing, marketing, licensing, selling or
otherwise distributing, directly or indirectly (including
activities through or in cooperation with any third party),
any language models in the Exclusive FOU.
4.2 ASI OBLIGATIONS. During the Term of this Agreement ASI agrees
to:
a. Provide Dragon with appropriate marketing and promotional
assistance in the FOU in the manner and methods to be mutually
agreed between the parties in writing.
5.0 CONFIDENTIALITY.
a. Each party agrees not to disclose any Confidential Information
of the other party and to maintain such Confidential
Information in strictest confidence, to take all reasonable
precautions to prevent its unauthorized dissemination and to
refrain from sharing any or all of the information with any
third party for any reason whatsoever except as required by
court order, both during and after the termination of this
Agreement. Without limiting the scope of this duty, each party
agrees to limit its internal distribution of the Confidential
Information of the other party only on a "need to know" basis
and solely in connection with the performance of this
Agreement, and to take steps to ensure that the dissemination
is so limited.
b. Each party agrees not to use the Confidential Information of
the other party for its own benefit or for the benefit of
anyone other than the providing party, or other than in
accordance with the terms and conditions of this Agreement.
c. All ASI Confidential Information remains the property of ASI
and all Dragon Confidential Information remains the property
of Dragon, and other than as expressly provided by this
Agreement.
d. Upon written request of the providing party, or upon the
expiration or other termination of this Agreement for any
reason whatsoever, the receiving party agrees to return to the
providing party all such provided Confidential Information,
including but not limited to all copies thereof.
e. ASI agrees to limit access to the Dragon Non-Distributable
Technology, and any tangible embodiments thereof (including
without limitation documentation, descriptions, notes,
memoranda and other materials defining, describing or
containing the Dragon Non-Distributable Technology) shall be
made available only to those
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individuals identified as ASI Key Personnel in Exhibit A4
hereto, and such other employees of ASI whom Dragon may have
approved in writing and who require access to the Dragon
Non-Distributable Technology and such tangible embodiments in
connection with ASI's activities under the licenses granted
herein. Copies of such Dragon Non-Distributable Technology
shall be subject to appropriate physical and electronic
protection to prevent access by unauthorized personnel.
f. The provisions of this Section shall survive the expiration or
other termination of this Agreement.
6.0 OWNERSHIP, INTELLECTUAL PROPERTY RIGHTS, AND NON-DISCLOSURE.
6.1 DRAGON RIGHTS:
a. DRAGON shall retain all rights, title and interest (including
all intellectual property rights) of the Dragon Technology and
Dragon Documentation and any derivative works of the Dragon
Documentation, and any copies thereof.
b. ASI shall not alter or remove any copyright, trade secret,
patent, proprietary and/or other legal notices contained on or
in copies of the Dragon Technology and Dragon Documentation.
ASI shall reproduce and include any DRAGON trademark,
copyright, trade secret or proprietary information notices and
other legends on every copy, in whole or in part, of the
Dragon Technology in any form. ASI shall not decompile,
disassemble or otherwise reverse engineer the Dragon
Technology, except as DRAGON is required to allow ASI to do
under applicable law.
c. ASI shall render to DRAGON commercially reasonable assistance
in connection with DRAGON's enforcement of its rights in and
to the Dragon Technology and Dragon Documentation, including
without limitation using efforts to prevent End Users from
copying or using the Dragon Technology and Dragon
Documentation outside the scope of this Agreement, or the End
User License Agreement.
d. Certain data or portions thereof which may be supplied by
Dragon relating to the Dragon Technology are confidential and
proprietary to Dragon and will be so marked. ASI shall abide
its obligations under Section 5.0 as applicable to such data.
6.2 ASI: ASI is, and as to Dragon, shall be, the owner of all worldwide
right, title and interest, including any and all Intellectual Property Rights,
in and to the ASI Confidential Information and the ASI Rights.
7.0 TERM.
The license granted under this Agreement shall commence on the
Effective Date set forth above and terminate at the expiration of three years
from such effective date. The Agreement shall automatically renew for another
three year period unless terminated by either party in writing within ninety
(90) days before the end of the initial three year term unless sooner terminated
in accordance with the provisions of Section 11 below.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
8.0 PAYMENTS.
8.1 During the Term of this Agreement, Dragon shall give ASI [**] for a
NaturallySpeaking Deluxe Edition, its successors and equivalents made available
by Dragon to any of its resellers, distributors or technology licensees (the
"Engine Favorable Rate").
8.2 ASI shall pay to Dragon license fees [**] in the amount of the
lesser of (i) the applicable Engine Favorable Rate for the month in issue or
(ii) [**] for each MREC Engine run-time license it distributes to ASI Clients
during the month in issue.
8.3 Within [**] after the end of each calendar month, commencing with
the monthly period during which this Agreement becomes effective, ASI shall
furnish to DRAGON a statement in form acceptable to Dragon, certified by an
authorized representative of ASI, identifying the number of sub-licenses granted
to End Users during such monthly period and showing the amount of fees payable
to DRAGON hereunder. Within such [**] period, ASI shall pay DRAGON the fees
payable for such monthly period as shown in the statement required hereby. Such
statement, together with the payment in United States dollars for the fees shown
therein, shall be sent to DRAGON at its principal executive offices unless
otherwise indicated by DRAGON. If ASI does not remit payment within such [**]
period, interest shall accrue on any overdue amounts at the rate of 1.5% per
month or the highest rate allowable by law, whichever is less. ASI further
agrees to furnish whatever additional information DRAGON may reasonably require
from time to time to enable DRAGON to ascertain the amounts of fees payable
hereunder. No other license fees, royalties or other charges shall be payable
hereunder with respect to ASI's use, reproduction and distribution of the Dragon
Technology.
ASI shall maintain full, clear and accurate records reflecting and
recording all transactions subject to payment of license fees hereunder. ASI
shall institute a system to separately identify all copies of the Dragon
Distributable Technology which are distributed pursuant to this agreement. Such
system shall provide for identification by serial number or other method
acceptable to DRAGON. Upon reasonable notice, DRAGON shall have the right to
engage an independent certified public accounting firm to audit the systems,
books and records of ASI as they relate to ASI's obligations under this
agreement, provided that such firm shall first execute a confidentiality
agreement in form reasonably satisfactory to ASI in which it will agree to
disclose to Dragon only the ultimate results of its audits and not the details
of ASI's records, and not otherwise to disclose any information learned in such
audit to any person except Dragon's duly authorized accountants and lawyers. If
the audit of ASI's records pursuant to this paragraph determines that there is
any underpayment of royalties due, the payment due shall be made within [**].
ASI shall remit the amount owed within [**] of notice of such underpayment. If
the underpayment is greater than 5% of the payment due for the audited period,
then ASI shall pay the cost of the audit.
The license fees and all other amounts payable pursuant to this
Agreement are exclusive of all federal, state, local, municipal or other excise,
sales, use, property or similar taxes and fees, now in force or enacted in the
future, and all such taxes and fees shall be paid by ASI. ASI shall obtain and
provide to DRAGON any certificate of exemption or similar document required to
exempt any transaction under this Agreement from sales tax, use tax or other tax
liability.
9.0 DRAGON REPRESENTATIONS AND WARRANTIES.
Dragon represents and warrants to ASI, during the Term and in the
Territory, as follows:
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a. OWNERSHIP. Dragon is the owner, or has the right to enter into
this Agreement on behalf of the owner, of all worldwide right,
title and interest in and to any and all Dragon Confidential
Information and the Dragon Rights. Dragon will obtain in
writing, prior to delivery to ASI of any Dragon Confidential
Information or Dragon Rights, any and worldwide assignments,
licenses, permissions, or other consents of all third party
Intellectual Property Rights and/or other third party
proprietary rights as are or shall be necessary to enable
Dragon to fulfill its obligations to ASI hereunder, and to
enable ASI to utilize the Dragon Rights for their intended
purpose. Dragon shall immediately notify ASI in writing of any
limitations on use required by the proprietor of such third
party materials, and Dragon shall not agree to any such
demands or requirements without the prior written approval of
ASI.
b. NON-INFRINGEMENT. To the best of Dragon's knowledge the Dragon
Rights do not infringe any existing patent, copyright,
trademark, service mark, trade name, trade secret, patent, or
other Intellectual Property Right of any third person, firm,
corpora tion or other entity.
c. NO BUGS. Dragon agrees that prior to submission to ASI, the
Dragon Rights in the form of prerecorded media will be tested
by Dragon and confirmed to the best of Dragon's knowledge, to
be free of any known viruses and/or known bugs.
d. NO ENCUMBRANCES. To the best of Dragon's knowledge, the Dragon
Rights shall be free and clear of any and all encumbrances
and/or liens of any nature whatsoever, other than those
identified by Dragon pursuant to this Agreement, and other
than non-exclusive licenses granted by Dragon to others to use
the Dragon Rights.
e. NO CONFLICTS. To the best of Dragon's knowledge, Dragon's
performance of this Agreement does not conflict with any other
Agreement to which Dragon is bound and, while performing this
Agreement, Dragon will not knowingly enter into any other
Agreement in conflict with this Agreement or which would
impair the ability of Dragon to perform this Agreement.
f. CONFORMATION. Dragon warrants that the Dragon Rights shall
conform to the specifications set forth in the Dragon
Documentation. Dragon shall be responsible, at its sole cost
and expense, for replacing, revising, modifying, or otherwise
correcting any Dragon Rights that do not meet the
specifications.
g. MAINTENANCE OF DRAGON TECHNOLOGY. Dragon warrants in the
course of regular business that it will use its best efforts
to maintain, update, and upgrade the Dragon Technology on a
continuing and real-time basis during the Term of this
Agreement to ensure the continued and continuing operation,
operating system compatibility, relevance, and viability of
the Dragon Technology during the Term of the Agreement, and
that it will hire, train, and maintain sufficient, and
sufficiently qualified, programmers and technology
support/maintenance personnel during the Term of the
Agreement. Upon development and first commercial availability
(including beta test) of any new version of Dragon Technology,
Dragon shall promptly deliver a copy thereof, with available
documentation, to ASI.
h. YEAR 2000 COMPLIANCE. Dragon warrants and/or represents to ASI
as follows:
DRAGON warrants that the Dragon Technology, as provided by
DRAGON, is capable
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of processing, recording, storing and presenting data
containing four-digit years in substantially the same manner
and with substantially the same functionality as it performed
before January 1, 2000. However, DRAGON assumes no
responsibilities or obligations to cause third-party products
or services to function with the Dragon Technology. In
addition, DRAGON will not be in any breach of this warranty
for any failure of the Dragon Technology to correctly create
or process date-related data if such failure results form the
inability of any software, hardware, or systems of a customer
or any third party either to correctly create or process such
date-related data or to create or process such date-related
data in a manner consistent with the method in which the
Dragon Technology creates or process date-related data. In the
event of a breach of this warranty, DRAGON shall use its
commercially reasonable efforts to correct or provide a work
around for reproducible errors that cause breach of this
warranty, or if DRAGON is unable to make the Dragon
Technology operate as warranted herein within a reasonable period of time, the
customer shall be entitled to recover the fees paid for the license of the
Dragon Technology.
10.0 INDEMNIFICATION.
10.1 BY DRAGON. DRAGON will defend ASI against a claim that an ASI
Product supplied hereunder infringes a U.S. patent or copyright, or other
proprietary right of a third party, and DRAGON will indemnify ASI and hold it
harmless from and against any loss, liability and any costs, expenses and
reasonable attorneys' fees finally awarded. ASI shall prompt notify DRAGON in
writing of the claim, and DRAGON shall have sole control of the defense and all
related settlement negotia tions, and ASI shall provide DRAGON complete
information concerning the claim but any failure to provide prompt notice or
information shall not impair ASI's rights to indemnification hereunder except to
the extent that such failure has materially prejudiced or materially delayed
DRAGON in defense of its claim. DRAGON shall have the right to assume the
defense of any claim against ASI in connection with such violation or
infringement. After notice from DRAGON to ASI of election to assume the defense
thereof, DRAGON will not be liable to ASI for any legal or other expenses
subsequently incurred by ASI in connection with the defense thereof other than
reasonable costs of investigation, unless incurred at the written request of
DRAGON, in which event such legal or other expenses shall be borne by DRAGON.
ASI shall, however, have the right to participate in the defense and settlement
of such claim being defended by Dragon through separate counsel at ASI's
expense. ASI shall not be subject to any liability or restriction under any
settlement entered into by DRAGON without ASI's prior written approval.
a. DRAGON shall have no obligation to ASI under this Section if
any claimed infringe ment is based upon: (i) use of any Dragon
Technology delivered hereunder in connection or in combination
with equipment, software or devices not supplied by DRAGON;
(ii) ASI's use of a Dragon Technology in the practicing of any
process or in a manner for which the Dragon Technology was not
designed; or (iii) DRAGON's compliance with ASI's designs,
specifications or instructions. ASI shall indemnify and hold
DRAGON harmless from and against any loss, cost or expense
suffered or incurred in connection with any suit, claim or
proceeding brought against DRAGON so far as it is based on a
claim that the manufacture or sale of any Dragon Technology
delivered hereunder which has been either (1) modified,
altered or combined with any product, software, or device not
supplied by DRAGON or (2) modified by DRAGON in accordance
with ASI's designs, specifications or instructions,
constitutes such an infringement because of any such
modification, alteration or combination.
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The foregoing states DRAGON's entire liability for infringement by Dragon
Technology furnished under this Agreement
b. EXCEPT AS STATED ABOVE, DRAGON DISCLAIMS ALL WARRANTIES,
EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE DRAGON
TECHNOLOGY, INCLUDING BUT NOT LIMITED TO THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE. DRAGON SHALL IN NO EVENT SHALL DRAGON BE LIABLE FOR
ANY DAMAGES RESULTING FROM LOSS OF DATA, PROFITS OR USE OF
EQUIPMENT, OR FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE USE OR
PERFORMANCE OF THE DRAGON TECHNOLOGY.
c. IT IS ALSO UNDERSTOOD BY BOTH PARTIES TO THIS AGREEMENT THAT
SPEECH RECOGNITION IS INHERENTLY A STATISTICAL PROCESS; THAT
SPEECH RECOGNITION ERRORS ARE INHERENT IN THE PROCESS OF
SPEECH RECOGNITION; THAT SPEECH RECOGNITION APPLICATIONS AND
USAGE MUST BE DESIGNED TO ALLOW FOR SUCH ERRORS IN THE SPEECH
RECOGNITION PROCESS; AND THAT IT IS ASI'S RESPONSIBILITY THAT
ALL ITS SUBLICENSEES UNDERSTAND THAT SUCH ERRORS ARE
INEVITABLE AND THAT IT IS THE RESPONSIBILITY OF THE
APPLICATION DEVELOPER TO PROVIDE FOR HANDLING SUCH ERRORS AND
OF THE USER TO MONITOR THE SPEECH RECOGNITION PROCESS AND
CORRECT ANY ERRORS. DRAGON SHALL IN NO EVENT BE LIABLE FOR
ANYDIRECT OR INDIRECT DAMAGES, INCLUDING PERSONAL INJURY,
RESULTING FROM ERRORS IN THE RECOGNITION PROCESS.
10.2 BY ASI. ASI agrees to indemnify and hold harmless Dragon, its
officers, agents, and employees from and against all liability, loss, cost,
damages, claims or expenses (including reasonable attorneys fees) arising out of
any claims or suits, whatever their nature and however arising, which may be
brought or made against Dragon by reason or arising from (i) any material breach
this Agreement by ASI or (ii) any allegation of third party intellectual
property right(s) infringement or unfair competition, where such claim or suit
is based upon the combination, operation, modification, or use of the Dragon
Rights, if such claim of infringement would have been avoided but for such
combination, operation, modification, or use. ASI shall have sole control over
the selection of counsel and the defense of any claim or any settlement thereof,
at ASI's expense. Dragon shall provide ASI with its reasonable assistance in the
defense of such claim, at the expense of ASI. In no event may ASI enter into any
third party settlement agreements which would in any manner whatsoever affect
the right of, or bind, Dragon in any manner to said third party, without the
prior written consent of Dragon.
10.3 NOTIFICATION. The party seeking indemnification under this Section
shall immediately notify the other party, in writing, of any claim or proceeding
brought against it for which it seeks indemnification hereunder.
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL,
CONSEQUENTIAL, INDIRECT OR SPECIAL DAMAGES OF ANY NATURE WHATSOEVER, EVEN IF
SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
10.4 INSURANCE. Each party will carry appropriate and sufficient
policies of insurance, which must comply with all statutory regulations in the
state (or country) where this Agreement is being performed, which shall be in
effect at least as early as the Effective Date of this Agreement and which shall
remain in force and provide coverage throughout the Territory until the
effective date of
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Termination. Each party shall be solely responsible for the payment of all
deductibles on its own policies. Such policies of insurance shall include, but
are not limited to, the following: (i) Workers' Compensation and State
Disability, including Employers' Liability, (ii) Comprehensive General
Liability, (iii) Umbrella Liability, and (iv) Auto Liability. Prior to the
Effective Date of this Agreement, each party will deliver to the other a
certificate of insurance or other documentary proof that each party has obtained
the required insurance policies pursuant to this Agreement.
10.5 The provisions of this Section shall survive the expiration or
other termination of this Agreement.
11.0 TERMINATION.
11.1 FOR CAUSE: Without prejudice to any rights which it may have under
this Agreement or in law,equity, or otherwise:
a. Either party shall have the right to terminate this Agreement
if the other party defaults in the performance of any of its
obligations or breaches any term, provision, warranty, or
representation under this Agreement ("Defaults"). Upon the
occurrence of any of the foregoing Defaults, the
non-Defaulting party shall give notice of termination of this
Agreement in writing to the Defaulting party, who shall have
thirty (30) days from the date of notice in which to correct
any Default, or if not wholly curable within said thirty days,
to use its best efforts to commence any and all steps
reasonably necessary to cure such Default. If the Defaulting
party fails to correct the Default or to commence any and all
steps reasonably necessary to cure such Default within the
notice period, this Agreement shall terminate on the last day
of such notice period unless otherwise agreed to in writing
signed by both parties.
b. This Agreement shall terminate automatically and without
further notice to the other party in the event that either
party shall make any unauthorized assignment for the benefit
of creditors, file any petition under the bankruptcy or
insolvency laws of any jurisdiction, have or suffer a receiver
or trustee to be appointed for its business or property, or be
adjudicated a bankrupt or an insolvent.
11.2 EFFECT OF TERMINATION FOR DEFAULT OF EITHER PARTY.
Upon expiration or termination of this Agreement for the Default of
either party, or for any reason (including expiration under Section 7.0) other
than the insolvency, bankruptcy, reorganization of Dragon or its authorized
successors or assigns, or the termination, cessation, or inability or failure to
maintain the Dragon Technology or that portion of the business associated with
the Dragon Technology during the Term of the Agreement, by Dragon or its
authorized successors or assigns:
a. ASI shall, within five (5) business days thereof, return or,
at Dragon's option, destroy all whole or partial copies of the
Dragon Rights in ASI's possession, custody or control, and
certify to Dragon in writing within five (5) business days
thereafter that it has complied with the foregoing obligation;
b. Each party shall return all copies of Confidential Information
disclosed by the other party which remain in its possession or
under its control;
c. Termination shall not affect the rights of ASI Clients and ASI
Distributors to continue to use the Dragon Technology acquired
from ASI in accordance with the terms of this Agreement;
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d. Termination shall not affect ASI's obligation to pay to Dragon
all amounts due as of the effective date of Termination and
shall not affect Dragon's obligation to refund to ASI any
amounts paid by ASI attributable to any period of time after
the effective date of termination; and,
e. Except in the case of termination of this Agreement for the
Default of ASI, ASI shall have the continued right to exercise
the rights and licenses granted in Section 2 in connection
with the Dragon Technology as in existence as of the date of
expiration or termination (and not including any subsequent
improvements or Derivatives thereof), subject to the continued
payment of license fees under Section 8.0 with respect to any
distribution of the MREC Engine, if any, by ASI after such
expiration or termination, and provided that ASI's rights
under Section 2.a shall no longer be exclusive.
11.3 EFFECT OF TERMINATION FOR DRAGON INSOLVENCY, ETC.
In addition to requirements and dispositions set forth in preceding
paragraph 11.2, upon termination of this Agreement for the (i) insolvency,
bankruptcy, reorganization of Dragon or its authorized successors or assigns,
(ii) insolvency, bankruptcy, reorganization of Dragon or its authorized
successors or assigns, including the transfer (by cash, credit, or stock
purchase) of all or a majority of either Dragon's total assets or that portion
of Dragon's business attributable to the Dragon Technology to a third party, or
(iii) the termination, cessation, or inability or failure to maintain the Dragon
Technology or that portion of the business associated with the Dragon
Technology, during the Term of the Agreement, by Dragon or its authorized
successors or assigns, then all of the rights granted by Dragon to ASI hereunder
shall immediately and automatically convert into worldwide, fully paid up, fully
transferable, perpetual licenses (a)exclusive in the Exclusive FOU and (b)
Non-Exclusive in the Non-Exclusive FOU.
12.0 ESCROW.
Within thirty (30) days of the effective date of this Agreement, source
code for the Dragon Technology Licensed by ASI pursuant to this Agreement will
be placed in escrow, under the conditions set forth below, with an escrow agent
mutually agreed to by the parties.
1. The cost of maintaining the escrow shall be borne by ASI.
2. The source code shall not be released to ASI unless or until Dragon
ceases to continue its business or upon the failure of Dragon to perform
obligations it may have to maintain the Dragon Technology in question.
3. The use of the source code, if released to ASI, is subject to the
terms and conditions governing the use of the object code as set forth in this
Agreement with the additional restrictions that the source code is not
authorized to be sub-licensed and that it shall not be provided to or disclosed
to third parties.
4. The release of the source code to ASI shall be solely for the
purpose of assisting ASI in the use, maintenance, modification, or updating of
the object code and in no way shall impair Dragon's ownership of the Dragon
Technology or the rights of Dragon's creditors, assigns, or successors in
interest.
5. THE SOURCE CODE SHALL BE PROVIDED ON AN "AS IS" BASIS WITH WHATEVER
SUPPORT SERVICES MAY BE AVAILABLE AND WITHOUT ANY WARRANTY OF
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ANY KIND, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, OR FREEDOM FROM INFRINGEMENT OF PATENTS OR
COPYRIGHTS.
13.0 ASSIGNMENT.
13.1 Either party may assign its rights, duties and/or obligations
under this Agreement in connection with the transfer (by merger or by sale of
assets or stock) of all or a majority of either its total assets or that portion
of its business attributable to the Dragon Technology (in the case of Dragon) or
the ASI Products (in the case of ASI) to a third party, provided that any such
assignment is made expressly subject to the terms and conditions of this
Agreement, and the assignee agrees in writing to be bound by the terms and
conditions hereof.
13.2 Except as otherwise provided by this Agreement, neither party may
assign its rights, duties and obligations under this Agreement, without the
prior written consent of the other party, and further provided that any such
assignment is made expressly subject to the terms and conditions of this
Agreement, and the assignee agrees in writing to be bound by the terms and
conditions hereof.
14.0 GOVERNING LAW AND JURISDICTION.
This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts, without reference to its
conflicts of laws principles. Any lawsuit relating to any matter arising under,
or related to this Agreement, initiated by or on behalf of ASI against DRAGON,
its employees, ex-employees, officers, agents, or affiliates shall be initiated
in the appropriate state or Federal Court serving Middlesex County in the
Commonwealth of Massachusetts.
DRAGON and ASI may not institute any action in any form arising out of
or in any way connected with this Agreement more than eighteen (18) months after
the cause of action has arisen, or in the case of nonpayment, more than eighteen
(18) months from the date of last payment or promise to pay, except that this
limitation does not apply to an action for payment of taxes.
15.0 WAIVER, AMENDMENT, OR MODIFICATION.
Any waiver, amendment or modification of this Agreement shall not be
effective unless made in writing and signed by both parties. No failure or delay
by either party in exercising any right, power or remedy with respect to any of
its rights hereunder shall operate as a waiver thereof in the future.
16.0 NO PARTNERSHIP.
This Agreement does not constitute and shall not be construed as
constituting a partnership or joint venture between ASI and Dragon. Neither
party shall have any right to obligate or bind the other party in any manner
whatsoever, and noting herein contained shall give, or is intended to give, any
rights of any kind to any third persons.
Any commitment made by ASI to its customers with respect to quantities,
delivery, modifications, interfacing capability, suitability of software, or
suitability in specific applications will be ASI's sole responsibility. ASI has
no authority to modify the warranties contained in this Agreement or to make any
other commitment on behalf of DRAGON, and ASI will indemnify and defend DRAGON
from any liability, suit or proceeding for any such modified warranty or other
commitment by ASI.
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<PAGE> 15
ASI has the right to determine its own resale prices, and no DRAGON
representative will require that any particular price be charged by ASI or grant
or withhold any treatment to ASI based on ASI's pricing policies. ASI agrees
that it will promptly report directly to a DRAGON officer any effort by DRAGON
personnel to interfere with its pricing policies.
17.0 NOTICES.
All notices required under this Agreement will be in writing, will
reference this Agreement, and will be deemed given: (i) when delivered
personally; (ii) when sent by confirmed electronic mail or facsimile; (iii) five
(5) days after having been sent by registered or certified mail, return receipt
requested, postage prepaid; or (iv) one (1) day after deposit with a commercial
overnight carrier for one day overnight service, with written verification of
receipt. All communications will be sent to the names and addresses set forth
beneath the signature of each party to this Agreement.
18.0 FORCE MAJEURE.
Neither party will be deemed in default or breach of this Agreement to
the extent that performance of its obligations or attempts to cure any breach
are delayed or prevented by reason of any act of God, fire, natural disaster,
accident, act of government, or an act that is beyond the reasonable control of
either party, provided that such party gives the other party written notice
thereof promptly and, in any event, within fifteen (15) days of discovery
thereof and uses its best efforts to continue to so perform or cure. In the
event of such a Force Majeure, the time for performance or cure will be extended
for a period equal to the duration of the Force Majeure.
19.0 REMEDIES AND ATTORNEYS FEES.
19.1 1NJUNCTION. The parties recognize and acknowledge that a breach by
one party of any of its covenants, agreements or undertakings hereunder with
respect to the Confidential Information or Intellectual Property Rights of the
other party will cause the non-breaching party irreparable damage, which cannot
be readily remedied in monetary damages in an action at law. In the event of any
default or breach by one party which could result in irreparable harm to the
non-breaching party, or cause some loss or dilution of the good will, reputation
or business of the non-breaching party, the non-breaching party shall be
entitled to an immediate injunction in addition to any other remedies available,
to stop or prevent such irreparable harm, loss or dilution.
19.2 ATTORNEYS FEES. In the event that either DRAGON or ASI brings suit
against the other party for any matter arising out of or in connection with this
Agreement, and the party which is sued is ultimately adjudicated to not have
liability, then the party bringing suit agrees to pay the other party's
reasonable attorneys' fees and litigation costs.
20.0 ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof. The failure of either party to require
performance of any provision of this Agreement shall not be, construed as a
waiver of its rights to insist on performance of that same provision, or any
other provision, at some other time. Any waiver, variation or amendment, or
modification, of any term or condition of this Agreement shall be effective only
if signed by an authorized representative of both parties hereto. The waiver by
either party of any right created by this Agreement in one or more instances
shall not be construed as a further continuing waiver of such right or any other
right created by this Agreement. If any provision of this Agreement is found by
a court of competent jurisdiction to
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be unenforceable for any reason, the remainder of this Agreement shall continue
in full force and effect.
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<PAGE> 17
AGREED TO AND ENTERED INTO BY AND BETWEEN THE PARTIES AS OF THE
EFFECTIVE DATE SET FORTH ABOVE.
DRAGON SYSTEMS, INC.
\s\ James K. Baker
- ------------------
Print Name: James K. Baker
-----------------
Print Title: CEO
-----------------
Date: 7/6/98
-----------------
ARTICULATE SYSTEMS, INC.
\s\ Peter Durlach
- -----------------
Print Name: Peter Durlach
-----------------
Print Title: EVP
-----------------
Date: 7/7/98
-----------------
NOTICES TO DRAGON SHOULD BE SENT TO:
Janet Baker Hale & Dorr
President 60 State Street
Dragon Systems, Inc. Boston, MA 02109
320 Nevada Street Attn: Michael Bevilacqua
Newton, MA 02160
NOTICES TO ASI SHOULD BE SENT TO:
Ivan Mimica Goodwin, Proctor & Hoar
CEO Exchange Place
Articulate Systems Inc. Boston, MA 02109
600 West Cummings Park, Suite 4500 Attn: David Dietz
Woburn, MA 01801
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<PAGE> 18
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
EXHIBIT A
1. DRAGON TECHNOLOGY:
1. MREC Engine and all run-time versions thereof
2. Acoustic Models for MREC, including telephony models and microphone
(desktop) models
3. Language Models
4. Internal Language Modeling Tools (ILM) and Utilities
5. Pronunciation dictionaries
6. Label (category) mapping and definitions
7. Automatic Category Tools
8. Speech Developer's Application Programming Interface (SDAPI)
9. Dragon Developer Toolkits
10. Run-time versions of NaturallySpeaking
1.1 DRAGON DISTRIBUTABLE TECHNOLOGY
11. MREC Engine and all run-time versions thereof
12. Acoustic Models for MREC, including telephony models and microphone
(desktop) models
13. Language Models
14. Pronunciation dictionaries
15. Label (category) mapping and definitions
16. Run-time versions of NaturallySpeaking
1.2 DRAGON NON-DISTRIBUTABLE TECHNOLOGY
I. CORE NON-DISTRIBUTABLE TECHNOLOGY
17. Automatic Category Tools
18. Internal Language Modeling Tools (ILM) and Utilities
19. Speech Developer's Application Programming Interface (SDAPI)
II. OTHER NON-DISTRIBUTABLE TECHNOLOGY
20. Dragon Developer Toolkits
2. FIELDS OF USE (FOU):
2.1 EXCLUSIVE:
21. The [**] markets including all natural subsets for each specialty (by
way of example and not limitation, the natural subsets for [**]
includes [**] developed with the Dragon Core Non- Distributable
Technology,
2.2 NON-EXCLUSIVE
22. All other areas in the [**] market and all other markets not included
in the Exclusive FOU.
3. THIRD PARTY RIGHTS:
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4. ASI KEY PERSONNEL:
Jeff Hill
Peter Durlach
David Williams
Ricardo Salas
Ivan Mimica
Andrew Bernstein
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<PAGE> 20
EXHIBIT B
TRAINING, SUPPORT AND MAINTENANCE
To be provided.
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<PAGE> 21
EXHIBIT C
STANDARD DRAGON END USER LICENSE AGREEMENT
To be provided.
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<PAGE> 1
EXHIBIT 10.11
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
DEVELOPMENT AND LICENSE AGREEMENT
This Development and License Agreement (the "Agreement") is made and
entered into as of this 28th day of June, 1996 between SEAGATE TECHNOLOGY, INC.,
a Delaware corporation, with offices at 920 Disc Drive, Scotts Valley,
California 95066 ("Seagate"), and DRAGON SYSTEMS, INC., a Delaware corporation,
with offices at 320 Nevada Street, Newton, Massachusetts 02160 ("Dragon
Systems").
WHEREAS, Dragon Systems is developing the voice recognition software
described in Exhibit A hereto; and
WHEREAS, the parties desire that Dragon Systems complete development
of, and license to Seagate, this software on the terms and conditions set forth
herein;
In consideration of the mutual promises contained herein, Seagate and
Dragon Systems agree as follows:
1. Definitions.
The following terms shall have the following meanings herein:
1.1 "Software" shall mean all current and future versions
during the term of this Agreement of the software described in Exhibit A hereto,
including all Dragon Systems New Versions of the Software and all Dragon Systems
user documentation with respect thereto.
1.2 "New Version" of the Software means each error correction,
improvement, update, new version, new release, or other modification or addition
to the Software.
1.3 "Development Task" shall mean the development of the
Software to be performed by Dragon Systems pursuant to this Agreement and
Exhibit B.
1.4 "Deliverables" shall mean the items, if any, to be
delivered by Dragon Systems to Seagate in connection with each Milestone, as set
forth in Exhibit B.
1.5 "Specifications" shall mean the technical and other
specifications for the Deliverables and Development Task, as set forth in
Exhibit B.
1.6 "Development Schedule" shall mean the schedule for
completion of the Development Task, as set forth in Exhibit B.
<PAGE> 2
1.7 "Milestone" shall mean each development milestone
identified in Exhibit B.
1.8 "Aggregate Payment Cap" for each Milestone shall mean the
amount so specified in Exhibit B. This amount specifies the maximum aggregate
amount payable by Seagate for completion of that Milestone and all prior
Milestones.
1.9 "Status Report" shall have the meaning specified therefor
in Section 2.2 below.
1.10 "Development Costs" means all direct expenses plus
certain related overhead expended towards the development of the Software by
Dragon Systems pursuant to this Agreement. Overhead is defined as engineering
overhead only (non-S, G, & A) which would encompass such expenses as facilities
overhead costs, miscellaneous equipment and supplies, equipment depreciation,
travel, and MIS support. Direct expenses shall include direct payroll expenses,
and any other direct expenses specifically related to the development of the
Software. In the event that \s\ JKB \s\SL Dragon Systems employees engage in
extraordinary travel, Seagate will be charged only such extraordinary travel
expenses as are directly attributable to the Development Task.
1.11 "Complete" or "Completion," with respect to development
of the Software, shall mean that Dragon Systems has certified and Seagate has
confirmed that development and testing of the Software have been completed by
Dragon Systems, and that the Software and related documentation are fully ready
for commercial use and distribution.
1.12 "Net Revenue" of a party with respect to a product means
(i) the aggregate license fees and other revenue received by the party from the
licensing and distribution of the product, but only from licensing and
distribution of the product and not including such ancillary revenue as fees
received from support, maintenance, installation, technical assistance, or
consulting, and not including freight, taxes, insurance, and similar ancillary
charges, less (ii) credits for refunds and returns.
1.13 "Source Code" means the source code for the Software, in
printed, machine readable, and any other form and including all existing
comments, and all test suites and technical and other documentation reasonably
necessary for a reasonably skilled programmer to understand and use the source
code.
1.14 "Affiliate" of a party means any entity which controls,
is controlled by, or is under common control with that party, where "control"
means ownership or control, direct or indirect, of more than fifty percent (50%)
of the stock or other equity interest entitled to vote for the election of
directors or equivalent governing body of the entity.
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<PAGE> 3
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
2. Development.
2.1 Development.
(a) Dragon Systems agrees to use its best efforts to
perform the Development Task in accordance with the Specifications and task
description in Exhibit B, including without limitation completion of the
Development Task, and each Milestone, and delivery to Seagate of all applicable
Deliverables, in accordance with the Development Schedule. Upon completion of
each Milestone, Dragon Systems shall deliver to Seagate all applicable
Deliverables, including documentation, for evaluation by Seagate.
(b) Dragon Systems agrees not to engage in any work
or services on its behalf or for any other party which would jeopardize or
conflict with its obligations under this Agreement.
(c) Dragon Systems agrees to complete development of
the Software no later than [**] after Dragon Systems incurs [**] in performance
of the Development Task.
2.2 Status Reports.
Within twenty (20) days after the end of each calendar quarter, Dragon
Systems shall deliver to Seagate a written report (the "Status Report")
describing in reasonable detail the status of the development of the Software,
including without limitation the then current status of completed development,
development accomplished during the preceding calendar quarter, known problems
and the anticipated effect on the project, current and planned staffing, whether
Dragon Systems expects to meet the Development Schedule, Specifications, and
other aspects of the Development Exhibit and, if not, the variations, any other
information pertaining to the development of the Software that would reasonably
be of interest to Seagate, as well as any information specifically and
reasonably requested by Seagate. Dragon System represents and warrants that each
Status Report will be reasonably complete and accurate, and Dragon System agrees
to update each Status Report, prior to the delivery of the next quarterly Status
Report, in the event major problems or other major variations are encountered.
Dragon Systems will also respond to reasonable inquiries from time to time from
Seagate concerning the development project.
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<PAGE> 4
2.3 Acceptance.
Upon delivery to Seagate of the Deliverables for each
Milestone, Seagate shall test and evaluate such Deliverables for conformity to
the Development Task description and Specifications. Seagate shall provide
Dragon Systems within fourteen (14) days after delivery of such materials with
written acceptance thereof, or a statement of defects to be corrected. Dragon
Systems shall promptly correct such defects and return the corrected
Deliverables for retesting and reevaluation, and Seagate shall within fourteen
(14) days after such redelivery provide Dragon Systems with written acceptance
or a statement of defects. The parties shall repeat this procedure until
acceptance of the Deliverables or termination of this Agreement by Seagate.
3. Ownership.
Dragon Systems will retain ownership of the Software, and no
ownership of the Software is transferred to Seagate by this Agreement. Seagate,
however, shall retain ownership of any modifications, New Versions, or other
derivative works prepared by or for Seagate, subject to Dragon Systems'
ownership of the underlying Software.
4. Software License.
4.1 Object Code. Dragon Systems grants to Seagate, under all
intellectual property rights with respect thereto, a worldwide, perpetual,
irrevocable (subject only to Section 10.2 below) license, with right to
sublicense, to reproduce, have reproduced, use, import, and distribute the
Software, alone and/or integrated with other software, products, or other items,
and directly to end users and/or through third parties. This license extends to
the Software in executable code, object code, and any other form except Source
Code. Seagate will reproduce Dragon Systems' copyright notice in any copy of the
Software or any portion thereof.
4.2 Source Code. Dragon Systems grants to Seagate a worldwide,
perpetual, irrevocable (subject only to Section 10.2 below) license to
reproduce, use, modify and otherwise prepare derivative works of the Source Code
and derivative works thereof. Seagate, however, agrees not to exercise any
rights with respect to the Source Code until it is rightfully in possession of
the Source Code. It is understood that Seagate's right to obtain and possess the
Source Code is set forth exclusively in Section 4.5 below and the escrow
agreement referenced therein. The license granted to Seagate pursuant to Section
4.1 above shall extend to any modifications, New Versions, or other derivative
works of the Software prepared by Seagate pursuant to this section. Seagate
shall own each such modification, New Version, or other derivative work, subject
to Dragon Systems' retention of ownership of the underlying Software. Seagate
shall be entitled to retain consultants or other subcontractors to exercise its
rights pursuant to this section, subject to confidentiality obligations
substantially similar to those set forth in
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<PAGE> 5
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Sections 9.1, 9.2, and 9.3 below. Seagate shall protect the Source Code with
precautions similar to those used for its own software source code, and shall
restrict access to the Source Code to employees, consultants, and subcontractors
with a need for such access pursuant to this Agreement.
4.3 Exclusivity. Seagate's license to distribute the Software,
pursuant to Section 4.1 above, shall be exclusive. Dragon Systems shall refer to
Seagate all customer requests for Software. Except for this exclusive license to
distribute the Software, the licenses and rights granted to Seagate in Sections
4.1 and 4.2 above shall be co-exclusive, i.e., Dragon Systems shall retain the
right itself to also exercise the rights granted to Seagate, but Dragon Systems
shall not grant, and represents and warrants that it has not granted, such
rights, or any of them, to any third party.
4.4 Object Code Delivery. Within [**] after Completion of
development of the Software, Dragon Systems shall deliver to Seagate one master
copy of the Software in object code or executable form, suitable for
reproduction and use pursuant to this Agreement. Dragon Systems shall promptly
provide to Seagate each New Version of these materials as such New Version is
created by or for Dragon Systems.
4.5 Source Code Delivery. Upon written request of Seagate,
Dragon Systems shall immediately deliver to a third party escrow company
selected by Seagate, pursuant to an escrow agreement substantially in the form
attached hereto as Exhibit E, one copy of the Source Code (in machine readable
form suitable for use by Seagate). The Source Code shall be released and
delivered to Seagate as set forth in the escrow agreement, which shall be
limited to release only if (i) Dragon Systems dissolves or liquidates, or takes
any corporate or other action to achieve dissolution or liquidation, or Dragon
Systems ceases to conduct business in the normal course, or (ii) both (A)
Dragons Systems is a debtor in a bankruptcy proceeding or other proceeding for
the general settlement of its debts, or a receiver or other official is
appointed for all or substantially all of Dragon Systems' assets, or Dragon
Systems makes a general assignment for the benefit of creditors, and (B) Dragon
Systems is unable to perform its obligations pursuant to Section 8 below. Dragon
Systems shall promptly provide to the escrow company each New Version of these
materials as such New Version is created by or for Dragon Systems. Seagate shall
be responsible for the fees of the escrow company.
5. Dragon Systems Representations, Warranties, and Indemnities.
5.1 Dragon Systems represents and warrants on a continuing basis:
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<PAGE> 6
(a) Corporate Authority. Dragon Systems has the right
to enter this Agreement, is a corporation duly organized, validly existing, and
in good standing under the laws of Delaware, has the power and authority,
corporate and otherwise, to execute and deliver this Agreement and to perform
its obligations hereunder, and has by all necessary corporate action duly and
validly authorized the execution and delivery of this Agreement and the
performance of its obligations hereunder.
(b) No Conflicts. The execution, delivery and
performance by Dragon Systems of this Agreement and each other agreement,
document, or instrument now or hereafter executed and delivered by Dragon
Systems pursuant thereto or in connection herewith will not: (i) conflict with
or violate the articles or certificate of incorporation or by-laws of Dragon
Systems or any provision of any law, rule, regulation, authorization or judgment
of any governmental authority having applicability to Dragon Systems, its
employees, or its or their actions; or (ii) conflict with or result in any
breach of, or constitute a default under, any note, security agreement,
commitment, contract or other agreement, instrument or undertaking to which
Dragon Systems is a party or by which any of its property is bound. Dragon
Systems represents and warrants that it is under no obligation or restriction,
and agrees that it will not assume any obligation or restriction or take any
action, that does or would in any way interfere or conflict with, or that does
or would present a conflict of interest, concerning Dragon Systems' performance
under this Agreement or would restrict any of the rights and licenses granted to
Seagate herein.
(c) Ownership. Dragon Systems owns and will own the
Software or otherwise has and will have the right and power to grant the
licenses and other rights granted to Seagate hereunder.
(d) Independent Work. With exception of Text-to-
Speech \s\ JKB \s\SL, which may be licensed from a third party, the Software has
been and will have been independently created by Dragon Systems' employees,
agents, and consultants, and use and distribution of the Software by Seagate as
contemplated herein will not depend on the acquisition of rights from any third
party.
(e) No Infringement or Claims. To the best of Dragon
Systems' knowledge and belief, neither the Software nor the exercise by Seagate
of any of the rights granted hereunder, will infringe any intellectual property
or other right of any third party. There is no pending litigation or claim nor,
to the best of Dragon Systems' knowledge and belief, the basis for any claim,
that Dragon Systems does not own the Software or that the exercise by Seagate of
any right granted hereunder with respect thereto will infringe any intellectual
property right of any third party.
5.2 Infringement Indemnity. Dragon Systems agrees to defend
any claim or action against Seagate or any of Seagate's sublicensees or any of
their direct or indirect customers, to the extent alleging that the Software, or
any portion thereof,
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<PAGE> 7
infringes any third party US. or Canadian patent, worldwide copyright, or other
intellectual property right (other than trademarks), and Dragon Systems agrees
to pay all damages awarded, or settlements entered into, in connection
therewith. Seagate agrees to notify Dragon Systems in a timely fashion of each
such claim or action, and agrees to provide to Dragon Systems reasonable
assistance (at Dragon Systems' expense) in connection therewith and to provide
to Dragon Systems the right to control the defense or settlement of the claim or
action, provided that any settlement shall be subject to the prior written
approval of Seagate, which approval shall not be unreasonably withheld. Seagate
shall be entitled to participate in the defense of any such claim or action at
its expense, provided that if Dragon Systems is financially or otherwise unable
to properly undertake the defense of the claim or action, Seagate shall be
entitled to do so at Dragon Systems' expense. If the Software, or any portion
thereof, is held to infringe any U.S. or Canadian patent, worldwide copyright,
or other intellectual property right, or its use or distribution, or the
exercise of any other right granted to Seagate, is enjoined, Dragon Systems will
use its best efforts to modify or replace the Software with equivalent,
noninfringing software, or to obtain all necessary rights with respect thereto
to enable continued use and distribution of the Software and for Seagate to
continue to exercise all rights and licenses granted to Seagate in this
Agreement. If, in Dragon Systems' reasonable judgment, the Software, or any
portion thereof, is likely to be held to infringe any U.S. or Canadian patent,
worldwide copyright, or other intellectual property right, or its use or
distribution, or the exercise of any other right granted to Seagate, is likely
to be enjoined, Dragon Systems may modify or replace the Software with
equivalent, noninfringing software, or to obtain all necessary rights with
respect thereto to enable continued use and distribution of the Software and for
Seagate to continue to exercise all rights and licenses granted to Seagate in
this Agreement. Dragon Systems shall have no liability or obligation pursuant to
this section, however, to the extent the claim or action is caused by
modification of the Software (other than by Dragon Systems) or combination of
the Software with items not supplied by Dragon Systems.
6. Seagate Representations and Warranties. Seagate represents and
warrants on a continuing basis:
6.1 Corporate Authority. Seagate has the right to enter this
Agreement, is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware, has the power and authority,
corporate and otherwise, to execute and deliver this Agreement and to perform
its obligations hereunder, and has by all necessary corporate action duly and
validly authorized the execution and delivery of this Agreement and the
performance of its obligations hereunder.
6.2 No Conflicts. The execution, delivery and performance by
Seagate of this Agreement and each other agreement, document, or instrument now
or hereafter executed and delivered by Seagate pursuant thereto or in connection
herewith will not: (i) conflict with or violate the articles of incorporation or
by-laws of Seagate or any
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
provision of any law, rule, regulation, authorization or judgment of any
governmental authority having applicability to Seagate or its actions; or (ii)
conflict with or result in any breach of, or constitute a default under, any
note, security agreement, commitment, contract or other agreement, instrument or
undertaking to which Seagate is a party or by which any of its property is
bound.
7. Fees and Royalties.
7.1 Engineering Fee. Together with each Milestone delivery by
Dragon Systems pursuant to Section 2.1(a) above, Dragon Systems shall submit to
Seagate a detailed description of Development Costs incurred by Dragon Systems,
since completion of the preceding Milestone, in developing the Software pursuant
to this Agreement, substantially in the form attached hereto as Exhibit C and
signed and certified as correct by the chief financial officer of Dragon
Systems. Within [**] after Seagate's acceptance of the Milestone as complete
pursuant to Section 2.3 above, Seagate shall pay to Dragon Systems, as a
nonrefundable engineering fee, the amount of such Development Costs, plus any
such Developments Costs incurred and reported by Dragon Systems for prior
Milestones but not paid by Seagate due to the Aggregate Payment Cap, provided
that the aggregate payments by Seagate upon completion of each Milestone, for
that Milestone and all prior Milestones, shall not exceed the associated
Aggregate Payment Cap specified in Exhibit B for that Milestone. In no event
shall Seagate be obligated to pay to Dragon Systems in excess of [**] pursuant
to this section.
7.2 Software Royalty. Seagate shall pay to Dragon Systems a
royalty equal to [**] of Seagate's Software Net Revenue. These payments shall be
made within [**] after the end of each calendar quarter, based upon such Net
Revenue during that calendar quarter, and shall be accompanied by a report, in
reasonable detail, specifying the basis for the amount paid. All Software Net
Revenue and payments shall be computed in United States dollars. Net Revenue in
other currencies in any calendar month shall be converted to United States
dollars according to the rate of exchange published in the Wall Street Journal
on the last business day of that calendar month. The parties may, in their
discretion, renegotiate the above [**] royalty rate if Dragon Systems provides
to Seagate significant New Versions.
7.3 Audit Rights. Dragon Systems shall be entitled to audit
Seagate's books and records for the sole purpose of confirming the accuracy of
Net Revenue reported pursuant to Section 7.2 above. Seagate shall be entitled to
audit Dragon Systems' books and records to confirm the accuracy of Dragon
Systems' Development Costs reported pursuant to Section 2.2 or 7.1 above. Each
such audit shall be conducted in accordance with the procedures set forth in
this section. The auditing party shall be
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<PAGE> 9
entitled to retain an independent public accounting firm, reasonably acceptable
to the other party, to audit the audited party's books and records solely for
the purposes set forth hereinabove. Any such audit shall be performed at the
auditing party's expense, on at least twenty (20) days' prior written notice to
the audited party, during normal business hours and, at the audited party's
option, subject to the independent accounting firm's execution of a reasonable
confidentiality agreement. The independent accounting firm shall report to the
auditing party only whether the correct Net Revenue or Development Costs, as
applicable, have been reported and/or the correct royalties have been paid, as
applicable, and, if not, the amount of the discrepancy. In no event shall the
audited party's customer names be reported to the auditing party. Audits shall
be conducted no more frequently than twice in any twelve (12) month period,
unless the preceding audit revealed a discrepancy. In the case of any
discrepancy, the appropriate adjustment in payments shall promptly be made. Any
such audit shall be performed at the auditing party's expense, unless the audit
reveals a discrepancy of more than the greater of (i) fifty thousand dollars
($50,000) or (ii) five percent (5%) between the Net Revenue or Development Costs
actually reported and those which should have been reported, in which case the
audited party shall reimburse the audit fee.
8. Software Support.
Dragon Systems agrees to provide to Seagate the Software
support set forth in Exhibit D hereto.
9. Confidential Information.
9.1 Confidential Information. The term "Confidential
Information" shall mean any information disclosed by one party to the other (i)
prior to the date of this Agreement but with respect to the subject matter
hereof, or (ii) pursuant to this Agreement, in each case which is in written,
graphic, machine readable or other tangible form and is marked "Confidential,"
"Proprietary" or in some other manner to indicate its confidential nature.
Confidential Information may also include oral information disclosed by one
party to the other pursuant to this Agreement, provided that such information is
designated as confidential at the time of disclosure and reduced to a written
summary by the disclosing party, within thirty (30) days after its oral
disclosure, which is marked in a manner to indicate its confidential nature and
delivered to the receiving party. All Source Code, however, shall be considered
Confidential Information whether or not it is so marked.
9.2 Confidentiality. Each party shall treat as confidential
(as set forth herein) all Confidential Information of the other party, and shall
not use such Confidential Information except as contemplated herein or otherwise
authorized in writing. Each party shall implement reasonable procedures to
prohibit the unauthorized disclosure or misuse of the other party's Confidential
Information and shall not intentionally disclose such Confidential Information
to any third party except for the
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<PAGE> 10
purposes of this Agreement, and subject to confidentiality obligations similar
to those set forth herein. Each of the parties shall use at least the same
procedures and degree of care that it uses to prevent the disclosure of its own
confidential information of like importance to prevent the disclosure of
Confidential Information disclosed to it by the other party under this
Agreement, but in no event less than reasonable care.
9.3 Exceptions. Notwithstanding the above, neither party shall
have liability to the other with regard to any Confidential Information of the
other which:
(i) was publicly available at the time it was disclosed or
becomes publicly available through no fault of the receiver;
(ii) was known to the receiver, without similar
confidentiality restriction, at the time of disclosure;
(iii) is disclosed with the prior written approval of the
discloser;
(iv) was independently developed by the receiver without
any use of the Confidential Information; or
(v) becomes known to the receiver, without similar
confidentiality restriction, from a source other than the discloser without
breach of this Agreement by the receiver.
In addition, each party shall be entitled to disclose the other's Confidential
Information to the extent required by any order or requirement of a court,
administrative agency, or other governmental body, provided that the receiver
shall provide prompt, advance notice thereof to enable the discloser to seek a
protective order or otherwise prevent such disclosure.
9.4 Residuals. Notwithstanding anything else in this
Agreement, however, each party's employees and consultants shall be entitled to
use, without restriction (subject to the above nondisclosure obligations) or
payment and for any purpose, the other party's Confidential Information retained
in such employees' or consultants' memory as a result of exposure to such
Confidential Information pursuant to this Agreement, subject only to the other
party's patents, copyrights, and mask work rights. Nothing in this Agreement
will restrict each party's rights to assign or reassign its employees, including
without limitation those who have had access to the other party's Confidential
Information, to any project in its discretion.
10. Termination.
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<PAGE> 11
10.1 Term. The term of this Agreement shall commence on the
date first set forth above and shall continue thereafter unless and until
terminated as provided in this section or elsewhere in this Agreement.
10.2 Convenience. Seagate shall be entitled to terminate this
Agreement at any time, for any reason or for no reason, on written notice to
Dragon Systems. Upon any such termination by Seagate, the rights and licenses
granted to Seagate in Section 4 shall terminate, provided that Seagate shall be
entitled to retain and use a reasonable number of copies of the Software and
related materials to support existing Software customers. Seagate must reimburse
all reasonable Development Costs incurred by Dragon prior to such termination
subject to the limits set forth in Section 7.
10.3 Default. If either party defaults in the performance of
its material obligations hereunder and if any such default is not corrected
within sixty (60) days after it shall have been called to the attention of the
defaulting party, in writing, by the other party, then the other party, at its
option, may, in addition to any other remedies it may have, thereupon terminate
this Agreement by giving written notice of termination to the other party.
10.4 Survival. The parties' rights and obligations with
respect to the following sections shall survive any termination of this
Agreement: 3, 4 (subject to Section 10.2), 5, 6, 7.2 (provided that if the
license in Section 4.1 terminates, this section shall survive only as to
Software distribution prior to the effective date of termination), 7.3, 8, 9,
10.2 (second sentence), 11, 12 (unless the licenses pursuant to Sections 4.1 and
4.2 terminate), and 13.
11. Limitation of Liability.
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL,
CONSEQUENTIAL, INDIRECT, OR SPECIAL DAMAGES OF THE OTHER PARTY ARISING OUT OF
THIS AGREEMENT.
12. Infringement Prosecution.
The parties shall cooperate, as set forth herein, to prosecute
any patent, copyright, trade secret, or other intellectual property infringement
action against any third party with respect to the Software, but only with
respect to third party products, items, or activities which Seagate, in good
faith, determines are competitive with, or otherwise detrimentally affect
Seagate's activities with respect to, the Software ("Infringement Action").
(a) If either Seagate or Dragon Systems (the "Notifying
Party") wishes to commence an Infringement Action, then such party shall
promptly so notify
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<PAGE> 12
the other party (the "Other Party") in writing of such infringement (the
"Infringement Notice").
(b) The Other Party may, by written notice within thirty
(30) days after the Infringement Notice, elect to participate in the
Infringement Action and agree to pay one-half of the costs of such prosecution.
In such event, the parties shall jointly control and cooperate in prosecution of
the Infringement Action and shall share equally in any monetary award resulting
from such prosecution.
(c) If the Other Party does not elect to participate and
share expenses as set forth in Section 12(b):
(i) If the Notifying Party takes reasonable actions to
prosecute the infringement action within ninety (90) days after the expiration
of the thirty (30) day period specified in Section 12(b), then (A) the Notifying
Party shall have the sole right to prosecute the Infringement Action and retain
any monetary award resulting therefrom and (B) the Other Party shall, at the
Notifying Party's expense, take all actions reasonably requested by the
Notifying Party in such prosecution.
(ii) If the Notifying Party does not take reasonable
actions to prosecute the Infringement Action before the end of such ninety (90)
day period, or notifies the Other Party that it does not intend to prosecute
such infringement, then Section 12(a) shall become applicable again.
(d) If a party prosecutes an infringement and the other
party does not bear one-half the costs of such prosecution as set forth above,
then the prosecuting party shall retain the entire amount of any monetary award
resulting from such prosecution.
(e) If a party prosecuting an Infringement Action on its
own abandons the Infringement Action, then Section 12(a) above shall again apply
with respect to that infringement.
(f) Each party shall, at the other party's reasonable
expense, take all actions reasonably requested by the other party with respect
to any Infringement Action prosecuted pursuant to this section, including
without limitation the registration of copyrights (on an expedited basis if
reasonably requested by the prosecuting party), providing witnesses and
evidence, and/or joining the Infringement Action as a party plaintiff if
necessary.
13. General Provisions.
13.1 This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California, without reference to
conflict of laws principles.
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<PAGE> 13
13.2 All disputes arising out of this Agreement shall be
subject to the exclusive jurisdiction of the state and federal (United States
District Court for the Northern District of California) California courts, and
the parties agree and submit to the personal and exclusive jurisdiction and
venue of these courts.
13.3 Dragon Systems shall perform its obligations hereunder as
an independent contractor and shall be solely responsible for its own financial
obligations. Nothing contained herein shall be construed to imply a partnership,
joint venture, or principal and agent relationship between the parties, and
neither party shall have any right, power or authority to create any obligation,
express or implied, on behalf of the other in connection with the performance
hereunder.
13.4 At any time or from time to time on and after the date of
this Agreement, Dragon Systems shall at the request of Seagate take or cause to
be taken all such other actions, at Seagate's expense, as Seagate may reasonably
deem necessary or desirable in order for Seagate to obtain the full benefits of
this Agreement and the transactions contemplated hereby.
13.5 This Agreement shall inure to the benefit of, and shall
be binding upon, the parties hereto and their respective successors and assigns,
but neither party may assign this Agreement, by operation of law or otherwise,
without the prior written consent of the other except that (i) Seagate at any
time, and (ii) Dragon Systems only after Completion of development of the
Software, may assign this Agreement to a person into which it has merged or who
has otherwise succeeded to all or substantially all of its applicable business
and assets. Notwithstanding the foregoing, however, Seagate (and any Seagate
assignee) shall be entitled to assign this Agreement to any of its Affiliates.
13.6 Notice by either party under this Agreement shall be in
writing and personally delivered or given by registered mail, overnight courier,
or telecopy confirmed by registered mail, addressed to the other party at its
address given herein (or at such other address as may be communicated to the
other party in writing) and shall be deemed to have been served when delivered
or, if delivery is not accomplished by reason of some fault of the addressee,
when tendered.
13.7 No alteration, amendment, waiver, cancellation or any
other change in any term or condition of this Agreement shall be valid or
binding on either party unless the same shall have been mutually assented to in
writing by both parties.
13.8 The failure of either party to enforce at any time any of
the provisions of this Agreement, or the failure to require at any time
performance by the other party of any of the provisions of this Agreement, shall
in no way be construed to be a present or future waiver of such provisions, nor
in any way affect the right of either party to enforce each and every such
provision thereafter. The express waiver by either
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<PAGE> 14
party of any provision, condition or requirement of this Agreement shall not
constitute a waiver of any future obligation to comply with such provision,
condition or requirement.
13.9 (a) If the performance of this Agreement or any
obligations hereunder is prevented, restricted or interfered with by reason of
fire or other casualty or accident, strikes or labor disputes, war or other
violence, any law, order, proclamation, regulations, ordinance, demand or
requirement of any government agency, or any other act or condition beyond the
reasonable control of the parties hereto ("Event of Force Majeure"), the party
so affected upon giving prompt notice to the other party shall be excused from
such performance to the extent of such prevention, restriction or interference;
provided that the party so affected shall use its reasonable best efforts to
avoid or remove such causes of nonperformance and shall continue performance
hereunder with the utmost dispatch whenever such causes are removed.
(b) The party suffering an Event of Force Majeure shall
notify the other party within fifteen (15) days of the occurrence of such Events
and within thirty (30) days shall furnish the other party with a recovery plan
of action. Without limiting the foregoing, a party suffering an Event of Force
Majeure shall use its reasonable best efforts to limit the impact of the Event
of Force Majeure on such party's performance of this Agreement.
13.10 If any provision in this Agreement shall be found or be
held to be invalid or unenforceable in any jurisdiction in which this Agreement
is being performed, then the meaning of said provision shall be construed, to
the extent feasible, so as to render the provision enforceable, and if no
feasible interpretation would save such provision, it shall be severed from the
remainder of this Agreement which shall remain in full force and effect. In such
event, the parties shall negotiate, in good faith, a substitute, valid and
enforceable provision which most nearly effects the parties' intent in entering
into this Agreement.
13.11 In the event of any conflict or inconsistencies between
the provisions of this Agreement and the provisions of any exhibits attached
hereto or the provisions of any documents incorporated by reference, the
provisions of this Agreement shall prevail.
13.12 Each party may disclose the existence and general nature
of this Agreement, but agrees that the specific terms and conditions of this
Agreement shall be held in confidence and may not be disclosed without the
consent of the other party, except:
(i) as required by any court or other
governmental body;
(ii) as otherwise required by law;
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<PAGE> 15
(iii) to legal counsel of the parties;
(iv) in confidence, to accountants, banks, and
financing sources and their advisors;
(v) in confidence, in connection with the enforcement
of this Agreement or rights under this Agreement; or
(vi) in confidence, in connection with an actual or
prospective merger, acquisition or similar transaction.
14. Entire Agreement.
The terms and conditions herein contained constitute the
entire agreement between the parties and supersede all previous agreements and
understandings, whether oral or written, between the parties hereto with respect
to the subject matter hereof
SEAGATE TECHNOLOGY, INC. DRAGON SYSTEMS, INC.
By: \s\ Stephen J. Luczo By: \s\ James K. Baker
---------------------- --------------------
Print Name: Stephen J. Luczo Print Name: James K. Baker
---------------------- --------------------
Title: EVP Corporate Development Title: CEO
---------------------- --------------------
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<PAGE> 16
EXHIBIT A
SOFTWARE
This Exhibit consists of a general description and specification for
the Software, attached hereto as Exhibit A-1, and a detailed description and
specification for the Software, to be attached hereto as Exhibit A-2 within
fourteen (14) days after the date of this Agreement. Exhibit A-2 will be
supplied by Dragon Systems to Seagate, for Seagate's approval, and shall be
consistent with Exhibit A-1.
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<PAGE> 17
EXHIBIT A-I
SOFTWARE
The software under development provides remote telephone access to the
reports contained within the Crystal-Info software using Dragon Systems speech
recognition technology. Once a user has identified him or herself, and selected
the appropriate Crystal-Info APS, users are able to query the software as to the
available reports by means of a voice-recognition "dialog," and are able to
select an individual report for FAX transmission. Users are also able to specify
the destination as an existing pre-programmed destination, or to enter a new
phone number for this FAX transmission. Access to the system is gained by
calling a telephone line that is connected to the system that this software
operates on.
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<PAGE> 18
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
EXHIBIT B
DEVELOPMENT EXHIBIT
1. Development Task Description.
Dragon Systems shall develop and deliver to Seagate the Software in
accordance with Exhibit A and the Specifications.
2. Specifications.
See Exhibit A.
3. Development Schedule, Milestones and Deliverables.
<TABLE>
<CAPTION>
Aggregate Payment
Milestones Deliverables Completion Date Cap
---------- ------------ --------------- ---
<S> <C> <C> <C>
1. Initial Demonstration to August 15, 1996 [**]
operation of Seagate of first
first prototype prototype of Software
Software
2. First prototype Working version of October 15, 1996 [**]
Software system (Software (not
necessarily including
all features)
integrated with IMG
Crystal Info
software)
3. Complete Demonstration November 8, 1996 [**]
demonstration version of Software
version of suitable for
Software for demonstration at
COMDEX COMDEX
</TABLE>
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<PAGE> 19
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
<TABLE>
<S> <C> <C> <C>
4. Final Functionally complete February 1, 1997 [**]
prototype final prototype
Software version of Software
5. Complete Revised Beta version April 15, 1997 [**]
revised Beta of Software
version of
Software
(release
candidate 1)
6. Complete Commercial release June 1, 1997 [**]
commercial version of Software
release version
of Software
</TABLE>
5. Special Terms and Conditions.
It is understood that the above Schedule contemplates Software changes
as a result of potential customer and other information obtained as a
result of demonstration of the Software at COMDEX. If the parties agree
that these changes are sufficiently significant to cause a change in
the Schedule for Completion of Milestones 4, 5, and 6, then the parties
will agree on new dates for those milestones.
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EXHIBIT C
FORM OF DEVELOPMENT COSTS REPORT
A. Direct Expenses
1. Labor
Name Rate Hours Total
---- ---- ----- -----
2. Direct material costs
Item Amount
---- ------
B. Overhead Expenses
Overhead expenses will be determined by taking the total
number of salary dollars allocated to the Development Task, dividing that by the
total number of salary dollars spent by the department(s) involved in the
Development Task, and applying the resulting percentage to the total overhead
cost attributed to those department(s). Dragon Systems will provide detailed
expense summaries showing department spending for each month.
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<PAGE> 21
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
EXHIBIT D
SOFTWARE SUPPORT
Seagate will be responsible for all direct telephone support of its
Software customers. Dragon Systems will provide to Seagate all second line,
backup support, for the Software, during those hours when Dragon System makes
such support available to its customers (but in any event at least 9:00 a.m. -
5:00 p.m. eastern time), to enable Seagate to do so. If Seagate is unable,
notwithstanding its diligent, reasonable best efforts, to resolve any particular
customer Software problem, it shall be entitled to require direct contact for
that problem between Dragon Systems and the customer for direct resolution by
Dragon Systems.
Dragon Systems will use its diligent, reasonable best efforts to solve
each problem presented by Seagate within [**], provided that if a problem
reveals a Software error which requires program coding modifications, Dragon
Systems will use its diligent, reasonable best efforts to provide a correction
or suitable workaround within [**].
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EXHIBIT E
FORM OF SOURCE CODE ESCROW AGREEMENT
(ATTACHED)
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ESCROW AGREEMENT
This Escrow Agreement is entered into this 28th day of June, 1996,
between and among Seagate Technology, Inc. (hereinafter called "Seagate"), a
California corporation with its principal place of business at 920 Disc Drive,
Scotts Valley, California 95066; Dragon Systems, Inc., (hereinafter called
"Dragon Systems"), a Delaware corporation, with its principal place of business
at 320 Nevada Street, Newton, Massachusetts 02160; and the "Escrow Agent" set
forth at the end of this Agreement.
WHEREAS, Dragon Systems and Seagate have entered into a Software
Development and License Agreement dated June 28, 1996 (the "License Agreement"),
whereby Seagate is authorized to reproduce and distribute, in object code form,
the Software (as defined in the License Agreement);
WHEREAS, Dragon Systems desires to provide assurance to Seagate that,
in the event of certain conditions specified in the License Agreement, access to
the source codes for the Software, and related documentation, as specified in
Exhibit 1 hereto (the "Escrow Materials") may be obtained for the purpose of
providing maintenance, support, improvement, enhancement, and other modification
of or addition to the Software;
WHEREAS, Dragon Systems desires to enter into an escrow arrangement
with Seagate to provide for the deposit of the Escrow Materials to be held by
Escrow Agent pursuant to all of the terms and conditions of this Agreement; and
WHEREAS, the Escrow Agent is willing to act as escrow agent for Dragon
Systems and Seagate on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants, agreements
and conditions set forth herein, the parties agree as follows:
1. Appointment. Dragon Systems and Seagate hereby appoint Escrow
Agent as the escrow holder of the Escrow Materials under this Escrow Agreement,
and the Escrow Agent accepts such appointment on the terms and conditions set
forth in this Escrow Agreement.
2. Deposit of Escrow Materials. Dragon Systems agrees to deposit with
the Escrow Agent one copy of the Escrow Materials within thirty (30) days after
the date of this Agreement. Dragon Systems agrees to deposit updated versions,
if any, of the Escrow Materials [STRIKE-THROUGH TEXT]upon completion of any new
Revisions, Upgrades, etc \s\ JKB \s\SL. Escrow Agent shall hold and dispose of
the Escrow Materials only in accordance with the terms of this Escrow Agreement.
<PAGE> 24
3. Transfer of Copy Title. Title to the physical Escrow Materials shall
vest in the Escrow Agent when material constituting the Escrow Materials comes
into possession of the Escrow Agent. The Escrow Agent shall have no rights with
respect to the intellectual property embodied in the Escrow Materials and shall
have no right to use the Escrow Materials except to hold and dispose of the
Escrow Materials as set forth herein.
4. Purpose. The Escrow Materials shall constitute a reserve to be made
available to Seagate, under the terms of this Escrow Agreement, only upon the
occurrence of one of the release conditions set forth in Section 4.5 of the
License Agreement, i.e., in the event (i) Dragon Systems dissolves or
liquidates, or takes any corporate or other action to achieve dissolution or
liquidation, or Dragon Systems ceases to conduct business in the normal course,
or (ii) both (A) Dragons Systems is a debtor in a bankruptcy proceeding or other
proceeding for the general settlement of its debts, or a receiver or other
official is appointed for all or substantially all of Dragon Systems' assets, or
Dragon Systems makes a general assignment for the benefit of creditors, and (B)
Dragon Systems is unable to perform its obligations pursuant to Section 8 of the
License Agreement.
5. Escrow Release. Subject to Sections 6, 7, and 8, the Escrow Agent
shall promptly, release and deliver the Escrow Materials to Seagate following
the receipt of written authorization, but not sooner than sixteen (16) days
following the date of such notice, from an officer of Seagate certifying that
Seagate is entitled to the Escrow Materials (the "Notice") pursuant to Section 4
above, which is not disputed by Dragon Systems in accordance with Section 6
below. Seagate shall concurrently provide a copy of the Notice to Dragon
Systems.
6. Disputed Notice. If Dragon Systems disputes the existence of the
conditions upon which the Notice is based, then Dragon Systems shall, within
fifteen (15) days following its receipt of the Notice, submit a "Counternotice"
to the Escrow Agent explaining the basis for its dispute, with a concurrent copy
to Seagate. If the Counternotice is received by the Escrow Agent and Seagate
before the close of business on the fifteenth (15th) day following receipt of
the Notice by Dragon Systems (or, if the fifteenth day is not a Seagate business
day, the first Seagate business day thereafter), then the Escrow Agent shall
withhold delivery of the Escrow Materials pending receipt of (a) a decision
evidencing the outcome of the arbitration provided for in Section 7 below, or
(b) other written instructions signed by both Seagate and Dragon Systems. Upon
receipt of said decision or other instructions, the Escrow Agent shall deliver a
copy of the Escrow Materials only in accordance with the decision or
instructions.
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<PAGE> 25
7. Arbitration of Disputed Notice. Dragon Systems and Seagate agree
that, if the Counternotice is given by Dragon Systems pursuant to Section 6
above, then Seagate and Dragon Systems shall submit to the jurisdiction of the
American Arbitration Association to resolve the dispute promptly and shall
commence the hearing before a Board of Arbitrators (the "Board") in San Jose,
California, within thirty (30) days following receipt of the Counternotice by
the Escrow Agent. The Board shall consist of three (3) members selected by the
American Arbitration Association. The sole question before the Board shall be
whether there existed, at the time Seagate transmitted the Notice to the Escrow
Agent under Section 5 above, any of the conditions specified in Section 4. This
arbitration shall be governed by the then-current rules of the American
Arbitration Association. The parties agree that the decision of the Board shall
be final and binding and that this decision shall be immediately delivered to
the parties to the arbitration and to the Escrow Agent. If the Board finds that
the Notice was properly given by Seagate on the basis of the existence of a
condition specified in Section 4 above, then the Escrow Agent shall promptly
deliver the Escrow Materials to Seagate. If the Board finds to the contrary,
then the Escrow Agent shall not release the Escrow Materials. All fees and
charges by the American Arbitration Association shall be paid by the
nonprevailing party in the arbitration; each party, however, shall be
responsible for the payment of all fees and expenses connected with the
presentation of its respective case.
8. Termination. This Escrow Agreement and the escrow established
pursuant to this Escrow Agreement shall terminate upon (a) notice of such
termination by Seagate, or (b) termination of Seagate's Software license
pursuant to the License Agreement, and all materials comprising the Escrow
Materials, and title thereto, shall thereupon be returned to Dragon Systems.
9. Notices.
9.1 It is understood that the Escrow Agent will incur no
liability for acting upon any instruction, notice, direction or other document
believed by it in good faith to be genuine and to have been made, signed, sent
or presented by the person or persons authorized to perform such act under the
terms of this Escrow Agreement.
9.2 Each Notice, Counternotice, and all other notices,
instructions, deliveries and other communications required or permitted to be
given hereunder or necessary or convenient in connection herewith shall be in
writing and shall be deemed to have been given and received when personally
delivered (by overnight delivery or courier service or otherwise), when sent by
telecopy, or two (2) days after mailing if mailed by registered or certified
mail, return receipt requested, as follows (provided that notice of change of
address shall be deemed given only when actually received):
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<PAGE> 26
To Escrow Agent: To the address set forth at the end of this
Escrow Agreement, and to the attention of
the person signing this Escrow Agreement on
behalf of Escrow Agent.
To Dragon Systems: To the address first set forth above.
To Seagate: To the address first set forth above.
or to such other name or address as the Escrow Agent, Dragon Systems or
Seagate, as the case may be, shall designate by notice to the other party hereto
in the manner specified in this section.
10. Liability of Escrow Agent. The duties and obligations of the Escrow
Agent shall be determined solely by the express provisions of this Escrow
Agreement, and the Escrow Agent shall not be liable except for the performance
of such duties and obligations as are specifically set forth in this Escrow
Agreement. In the event of any controversy hereunder or with respect to any
questions as to the construction of this Escrow Agreement or any action to be
taken by the Escrow Agent, the Escrow Agent may, at its expense, consult with
counsel selected and employed by it, and the Escrow Agent shall incur no
liability for any action taken or suffered in good faith in accordance with the
opinion of such counsel. The Escrow Agent shall not be responsible in any manner
whatsoever for any failure or inability of Dragon Systems, Seagate, or for
anyone else, to perform or comply with any of the provisions of this Escrow
Agreement.
11. Governing Law; Forum Selection. This Escrow Agreement shall be
governed by the laws of the State of California, without reference to conflict
of laws principles. All disputes arising out of this Agreement, other than the
arbitration pursuant to Section 7, will be subject to the exclusive jurisdiction
and venue of the California state courts (or, if there is exclusive federal
jurisdiction, the United States District Court for the Northern District of
California), and the parties consent to the personal and exclusive jurisdiction
of these courts.
12. Entire Agreement. This Escrow Agreement sets forth the entire
understanding of the parties hereto with respect to the subject matter hereof
and cannot be changed, modified, or terminated orally.
13. Validity. No action taken by the Escrow Agent in accordance with
the terms and provisions hereof shall be deemed to constitute a representation
of the Escrow Agent as to the validity or value of any documents or instructions
held by, or delivered to, it.
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<PAGE> 27
14. Resignation/Replacement.
14.1 Upon sixty (60) days' prior written notice given to
Dragon Systems and Seagate, the Escrow Agent may resign. Within fifteen (15)
days after the giving of such notice, Dragon Systems and Seagate shall mutually
designate a successor Escrow Agent. Such successor Escrow Agent shall be bound
by the terms and provisions of this Escrow Agreement. In the event that no such
agreement is reached within such fifteen (15) day period, the Escrow Agent shall
continue to hold the Escrow Materials then held by it and shall take no further
actions and shall have no further obligations hereunder except as required by
the last sentence of this Section 14(a). The Escrow Agent named herein shall
cooperate with its successor in order to effectuate the transfer of its duties
to the successor Escrow Agent.
14.2 Upon notice, Dragon Systems and Seagate may replace
Escrow Agent with a successor, who shall replace Escrow Agent and be bound by
all the terms and conditions of this Agreement.
15. Fees and Expenses. Seagate agrees to pay the fees of the Escrow
Agent for its services hereunder during the term of this Agreement. Such fees
shall consist of periodical escrow maintenance charges, at Escrow Agent's
standard rates, and fees charged for carrying out its duties hereunder. In all
other cases, each party shall be responsible for its expenses incurred in
connection with this Agreement.
16. Indemnification. Seagate and Dragon Systems jointly and severally
agree to indemnify, [STRIKE-THROUGH TEXT] defend and hold harmless \s\ JKB \s\SL
\s\KY the Escrow Agent from and against any and all third party claims, suits
and other proceedings, and all judgments and other awards against the Escrow
Agent in connection therewith, in each case which may be imposed on, or incurred
by, or asserted against, the Escrow Agent in any way relating to, or arising out
of, this Agreement, or any action taken or omitted by the Escrow Agent under
this Agreement, provided that neither Seagate nor Dragon Systems shall be liable
for that portion of any such indemnification amount resulting from the Escrow
Agent's gross negligence or willful misconduct or violation by the Escrow Agent
of any terms or provisions of this Escrow Agreement. This indemnity shall be
conditioned in each case on the Escrow Agent's providing to Seagate and Dragon
Systems prompt written notice of the claim, allowing Seagate and Dragon Systems
to control the defense and settlement of the claim, and providing reasonable
assistance to Seagate and Dragon Systems in connection therewith.
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<PAGE> 28
IN WITNESS WHEREOF, the parties by their duly authorized
representatives have executed this Agreement as of the date set forth above.
SEAGATE TECHNOLOGY, INC.
By: \s\ Stephen J. Luczo
---------------------------
Print Name: Stephen J. Luczo
---------------------------
Title: EVP Corporate Development
---------------------------
DRAGON SYSTEMS, INC.
By: \s\ James K. Baker
---------------------------
Print Name: James K. Baker
---------------------------
Title: CEO
---------------------------
ESCROW AGENT:
Data Securities International, Inc.
Name: Contract Administration
9555 Chesapeake Drive. Suite 200
Address: San Diego, CA 92123
By: \s\ Katherine C. Young
---------------------------
10-1-96
Print Name: Katherine C. Young
---------------------------
Title: Senior Contracts Administrator
---------------------------
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<PAGE> 29
EXHIBIT 1
ESCROW MATERIALS
1. All source code (with all comments) in machine readable form.
2. All tools necessary to build the Software, and all necessary
documentation with respect thereto.
-7-
<PAGE> 1
Exhibit 10.12
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
[INGRAM MICRO LOGO]
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT ("Agreement"), is entered into this 15th
day of December, 1997, by and between INGRAM MICRO INC. ("Ingram"), a Delaware
corporation, having its principal place of business at 1600 E. St. Andrew Place,
Santa Ana, California 92705, and DRAGON SYSTEMS INC. ("Vendor"), a Delaware
corporation, having its principal place of business at 320 Nevada Street,
Newton, Massachusetts 02160. The parties desire to and hereby do enter into a
distributor/supplier relationship, the governing terms and mutual promises of
which are set out in this Agreement. This Agreement, upon the full execution
hereof, shall supersede in its entirety the mutual Start-up Agreement dated July
14, 1997.
1. DISTRIBUTION RIGHTS
1.1 Territory Vendor grants to Ingram, including its affiliates for resale, and
Ingram accepts, the non-exclusive right to distribute in North America all
computer products produced and/or offered by Vendor ("Product") during the term
of this Agreement. Ingram shall have the right to purchase, sell and ship to any
reseller within the territory or to Ingram's affiliate, or at Vendor's option
Ingram's affiliate may purchase direct from Vendor.
1.2 Product Vendor agrees to make available and to sell to Ingram such Product
as Ingram shall order from Vendor at the prices and subject to the terms set
forth in this Agreement. Ingram shall not be required to purchase any minimum
amount or quantity of the Product.
2. TERM AND TERMINATION
2.1 Term The initial term of this Agreement is one (1) year. Thereafter the
Agreement will automatically renew for successive one (1) year terms, unless it
is earlier terminated.
2.2 Termination
(a) Either party may terminate this Agreement, with or without cause,
by giving thirty (30) days written notice to the other party.
(b) Either party may immediately terminate this Agreement with written
notice if the other party:
<PAGE> 2
(i) materially breaches any term of this Agreement and such
breach continues for thirty (30) business days after written notification
thereof; or
(ii) ceases to conduct business in the normal course, becomes
insolvent, makes a general assignment for the benefit of creditors, suffers or
permits the appointment of a receiver for its business or assets, or avails
itself of or becomes subject to any proceeding under any Bankruptcy Act or any
other federal or state statute relating to insolvency or the protection of
rights of creditors; or
(iii) attempts to assign or otherwise transfer its rights
hereunder unless both have agreed in writing to such assignment or transfer.
3. INGRAM OBLIGATIONS
3.1 Product Availability Ingram will list Product in its catalog(s) as
appropriate and endeavor to make such Product available to customers.
3.2 Advertising Ingram will advertise and/or promote Product in a commercially
reasonable manner and will transmit as reasonably necessary Product information
and promotional materials to its customers.
3.3 Support Ingram will make its facilities reasonably available for Vendor and
will assist in Product training and support. Ingram will provide reasonable,
general Product technical assistance to its customers, and will direct all other
technical issues directly to Vendor.
3.4 Administration
(a) Upon request, Ingram will furnish Vendor with a valid tax exemption
certificate.
(b) Ingram will provide Vendor standard sales-out and inventory reports
via its electronic Bulletin Board System.
(c) Ingram may handle its customers' Product returns by batching them
for return to Vendor at regular intervals.
4. VENDOR OBLIGATIONS
4.1 Shipping/Export
(a) Vendor shall ship Product pursuant to Ingram purchase order(s)
("P.O."). Product shall be shipped F.O.B. Ingram's designated warehouse with
risk of
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<PAGE> 3
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
loss or damage to pass to Ingram upon delivery to the warehouse specified in
Ingram's P.O.
(b) Ingram requires concurrent with the execution of this Agreement
Export Administration Regulations product classification and supporting
documentation: Certificate of Origin (General Use and/or NAFTA), Export
Commodity Control Number's; (ECCN's), General License and/or Individual
Validated License information and Schedule "B"/Harmonized Numbers. This applies
when distribution rights granted under Section 1.1 are outside the United States
for the initial Product/s and when additions or changes to these Products
occurs.
4.2 Invoicing For each Product shipment to Ingram, Vendor shall issue to Ingram
an invoice showing Ingram's order number, the Product part number, description,
price and any discount. At least monthly, Vendor shall provide Ingram with a
current statement of account, listing all invoices outstanding and any payments
made and credits given since the date of the previous statement.
4.3 Product Availability Vendor agrees to maintain sufficient Product inventory
to fill Ingram's orders. If a shortage of any Product exists, Vendor agrees to
allocate its available inventory of such Product to Ingram in proportion to
Ingram's percentage of all of Vendor's customer orders for such Product during
the previous sixty (60) days.
4.4 Product Marketing Vendor will clearly mark each unit of Product with the
Product name and computer compatibility. Such packaging will also bear a
machine-readable bar code identifier scannable in standard Uniform Product Code
(UPC) format. The bar code must identify the Product as specified by the Uniform
Code Council (UCC). If the Vendor or Ingram customers' require serial number
tracking the serial number must be clearly marked and bar coded on the outside
of the individual selling unit. The bar code shall fully comply with all
conditions regarding standard product labeling set forth in Exhibit B in the
then-current Ingram Guide to Bar Code: The Product Label. Vendor may be assessed
a reasonable per unit charge for all Product not in conformance herewith.
4.5 TechNotes Vendor will within thirty (30) days of execution of this Agreement
sign the CIS/ Manufacture Product Information Library - TechNotes and Content
Distribution Agreements as shown in Exhibit C and provide the required product
information in the designated template format.
4.6 Support [**], Vendor shall support Product and any reasonable Ingram efforts
to sell Product. Vendor shall also provide to Ingram, its employees, and its
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<PAGE> 4
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
customers reasonable amounts of sales literature, advertising materials, and
training and support in Product sales, during Vendor's regular business hours.
4.7 New Product Vendor shall endeavor to notify Ingram at least thirty (30) days
before the date any new Product is introduced. Vendor shall make such Product
available for distribution by Ingram no later than the date it is first offered
for sale in the marketplace.
4.8 Insurance Vendor shall carry insurance coverage for product
liability/completed operations with minimum limits of [**]. Within ten (10) days
of full execution of this Agreement, Vendor shall provide Ingram with a
Certificate of Insurance. This Certificate of Insurance must include: (i) a
broad form endorsement naming Ingram as an additional insured, and (ii) a
mandatory thirty (30) day notice to Ingram of insurance cancellation.
4.9 Warranties/Certification
(a) General Warranty Vendor represents and warrants that (i) it has
good transferable title to the Products, (ii) the Product will perform in
conformity with specifications and documentation supplied by Vendor, (iii) to
the best of Vendor's knowledge, the Product or its use does not infringe any
patents, copyrights, trademarks, trade secrets, or any other intellectual
property rights, (iv) to the best of Vendor's knowledge, there are no suits or
proceedings pending or threatened which allege any infringement of such
proprietary rights other than described in Exhibit G, and (v) the Product sales
to Ingram do not in any way constitute violations of any law, ordinance, rule or
regulation in the distribution territory.
(b) Warranty Vendor hereby represents and warrants that any Product
offered for distribution does not contain any obscene, defamatory or libelous
matter or violate any right of publicity or privacy.
(c) End-User Warranty Vendor shall provide a warranty statement with
Product for end user benefit. This warranty shall commence upon Product delivery
to end-user. NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED
TO THE WARRANTIES OF MERCHANTABIITY AND FITNESS FOR A PARTICULAR PURPOSE ARE
MADE BY VENDOR WITH RESPECT TO THE PRODUCT. INGRAM SHALL NOT EXTEND ANY
ADDITIONAL WARRANTIES TO ANY RESELLERS OR END-USERS OF THE PRODUCT. IN NO EVENT
WILL INGRAM BE LIABLE FOR ANY LOST PROFITS OR ANY OTHER INCIDENTAL OR
CONSEQUENTIAL DAMAGES, EVEN IF INGRAM HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES. VENDOR SHALL IN NO EVENT BE LIABLE
-4-
<PAGE> 5
FOR ANY DAMAGES RESULTING FROM LOSS OF DATA, PROFITS OR USE OF EQUIPMENT, OR FOR
ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION
WITH THE USE OR PERFORMANCE OF THE LICENSED PROGRAM.
IT IS ALSO UNDERSTOOD BY BOTH PARTIES TO THIS AGREEMENT THAT SPEECH
RECOGNITION IS INHERENTLY A STATISTICAL PROCESS; THAT SPEECH RECOGNITION ERRORS
ARE INHERENT IN THE PROCESS OF SPEECH RECOGNITION; THAT SPEECH RECOGNITION
APPLICATIONS AND USAGE MUST BE DESIGNED TO ALLOW FOR SUCH ERRORS IN THE SPEECH
RECOGNITION PROCESS.
(d) Millennium Compliance Warranty Vendor warrants and represents that
the Product will properly (a) record, store, process, calculate or present
calendar dates falling on and after (and if applicable, spans of time including)
January 1, 2000 as a result of the occurrence, or use of data consisting of,
such dates and (b) calculate any information dependent on or relating to dates
on or after January 1, 2000 in the same manner, and with the same functionality,
data integrity and performance, as such Product records, stores, processes,
calculates and presents calendar dates on or before December 31, 1999, or
information dependent on or relating to such dates.
(e) EU Warranty Vendor further warrants and represents for Products
distributed to the European Union ("EU") that the Products will be accepted
under all EU directives, regulations and the EU country's legislation.
(f) Made in America Certification Vendor by the execution of this
Agreement certifies that it will not label any of its products as being "Made in
America," "Made in U.S.A.," or with similar wording, unless all components or
elements of such Product is in fact made in the United States of America. Vendor
further agrees to defend, indemnify and hold harmless from and against any and
all claims, demands, liabilities, penalties, damages, judgments or expenses
(including attorney's fees and court costs) arising out of or resulting in any
way from Product that does not conform to the Certification.
5. PRICING
5.1 Ingram Pricing The suggested retail price and any Ingram discount for
Product is set out in Exhibit D. Vendor may modify Exhibit D with a minimum of
thirty (30) days advance written notice to Ingram. All Ingram orders for Product
will be billed at the price in effect when the order is placed. Ingram shall
have sole discretion as to selling price of Product to its customers.
-5-
<PAGE> 6
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
5.2 Vendor Pricing Vendor agrees that [**]. If Vendor [**] Vendor's other like
distributors.
5.3 International Pricing If Vendor [**] into that territory.
5.4 Price Adjustments If Vendor [**], Vendor will [**] and its customers'
Product inventory, including: (i) any Customer Product in-transit from/to
Ingram, (ii) any unshipped orders, and (iii) orders in-transit to Ingram [**].
In the event that Vendor shall raise the list price of a Product, all orders for
such Product placed prior to the effective date of the price increase [**].
Vendor shall provide Ingram with thirty (30) days advance notice of any price
increases.
5.5 Payment Terms Payment terms shall be [**]. Payment shall be deemed made on
the payment postmark date. All checks will be sent via FedEx at Vendor's
expense.
5.6 Right to Withhold Notwithstanding any other provision in this Agreement to
the contrary, Ingram shall not be deemed in default if it withholds any specific
amount to Vendor because of a legitimate dispute between the parties as to that
specific amount pending the timely resolution of the disputed amount.
5.7 Bulletin Board System (BBS) Ingram will provide the Detailed Vendor Buying
Report weekly by its electronic BBS. The standard reports will include sales by
zip code, state, product/quantity sold and the detailed Vendor Buying Report.
Ingram will provide reporting on a monthly basis on sell-through including SKU,
title, version, company, zip, number sold subject to a separate Proprietary
Information Non-Disclosure Agreement attached hereto as Exhibit H.
5.8 Rebate Vendor will provide a guaranteed [**], for reporting under Section
5.7. In addition, Vendor will offer Ingram a minimum [**], based on gross sales,
for achieving sell-through quotas. The sell through quotas shall be mutually
agreed between both parties. The rebate will be paid by check within thirty (30)
days after the quarter end. If no check is received within that period Ingram
shall deduct that amount from the Vendor's next payment.
6. MARKETING
6.1 Trademarks Ingram may advertise and promote the Product and/or Vendor, and
may thereby use Vendor's trademarks, service marks and trade names according to
Vendor's guidelines. Neither party shall acquire any rights in the trademarks,
service marks or trade names of the other.
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<PAGE> 7
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
6.2 Advertising Vendor agrees to cooperate in Ingram's or Ingram's customers'
advertising and promotion of Product and hereby grants Ingram a cooperative
advertising allowance of [**] of Product invoice amount for such advertising
featuring Product and/or Vendor. Ingram shall submit advertising to Vendor for
review and approval prior to any initial release, and Vendor shall not
unreasonably withhold or delay such approval. Upon receipt of reasonable
evidence of such advertising expenditures, Vendor agrees to credit the amount
thereof against future Ingram purchases.
6.3 Programs
(a) Ingram may offer marketing programs to Vendor including but not
limited to launch programs and reseller pass through opportunities. If Vendor
elects to participate, Vendor agrees to pay such funds as may be required for
this purpose.
(b) Vendor may be asked to prepay all marketing activities until a
mutually agreed upon sell through rate is achieved.
(c) All marketing pass through activities are subject to Ingram/buyer
pre-approval.
6.4 Support Product Vendor shall consign a reasonable amount of demonstration
Product to aid Ingram in its support and promotion of Product. All such
consigned Product will be returned to Vendor upon request.
7. RETURNS
7.1 Stock Balancing Notwithstanding anything herein to the contrary, Ingram may
return throughout the term any Products which are in their original packaging to
Vendor [**]. Ingram will pay all freight charges for returned Products.
7.2 Post-Term/Termination [**], Ingram may return to Vendor any Product for
credit against outstanding invoices, or if there are no outstanding invoices for
a cash refund. Any credit or refund due Ingram for returned Product shall be
equal to the Product purchase price plus all freight charges incurred by Ingram
in returning the Product.
7.3 Product Discontinuation Vendor shall give Ingram thirty (30) days' advance
written notice of Product discontinuation. Ingram may return all such Product to
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<PAGE> 8
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Vendor for full credit of Product purchase price plus all freight charges
incurred by Ingram in returning the Product, [**].
7.4 Defective Product
(a) Ingram may return any Product to Vendor that Ingram or its customer
finds defective. Vendor shall immediately credit Ingram for the Product purchase
price, plus all freight charges incurred by Ingram in returning the defective
Product.
(b) If any Product is recalled by Vendor because of defects, revisions
or upgrades, Ingram will, at Vendor's request, provide reasonable assistance
with the recall. Vendor will pay Ingram's expenses in connection with such
recall.
8. INDEMNIFICATION
8.1 Product Indemnity Vendor shall defend, indemnify, and hold harmless Ingram
from and against any claims, demands, liabilities, or expenses (including
attorney's fees and costs) for any injury or damage, including, but not limited
to, any personal or bodily injury or property damage, arising out of or
resulting in any way from any defect in Products. This duty to indemnify Ingram
shall be in addition to the warranty obligations of Vendor.
8.2 General Indemnity Each party shall indemnify, defend and hold the other
harmless from and against any and all claims, actions, damages, demands,
liabilities, costs and expenses, including reasonable attorney's fees and
expenses, resulting from any act or omission of the acting party or its
employees under this Agreement, that causes or results in property damage,
personal injury or death.
8.3 Intellectual Property Rights Indemnity Vendor shall defend, indemnify and
hold Ingram, its resellers and their customers, harmless from and against all
damages and costs incurred by any of them arising from the infringement of any
patent, copyright, trademark, trade secret or other proprietary right by reason
of the manufacture, sale, marketing, or use of Product.
8.4 Product Infringement Upon threat of claim of infringement, Vendor may, at
its expense and option (i) procure the right to continue using any part of
Product, (ii) replace the infringing Product with a non-infringing Product of
similar performance, or (iii) modify Product to make it non-infringing. If
Vendor does not so act within ninety (90) days after such claim, Ingram may
return Product to Vendor for a full credit against future purchases or for a
cash refund, at Ingram's option.
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<PAGE> 9
8.5 Multi-Media Indemnity Vendor shall defend, indemnify and hold Ingram, its
resellers and their customers, harmless from and against all damages and costs
incurred by any of them to the extent it is based upon a claim that the Product
either (i) violates a third party's right of publicity and/or right of privacy,
or (ii) contains any obscene, defamatory or libelous matter.
8.6 European Indemnity For Products distributed to a country of the EU, the
Vendor accepts full responsibility for, and will indemnify Ingram for, all costs
and damages arising from any non-compliance with any manufacturer-directed EU
decree, regulation or directive.
8.7 Millennium Compliance Indemnity Vendor agrees to indemnify and hold Ingram
and its shareholders, officers, directors, employees, agents, successors, and
assigns harmless from and against any and all claims, suits, actions,
liabilities, losses, costs, reasonable attorney's fees, expenses, judgments or
damages, whether ordinary, special or consequential, resulting from any third
party claim made or suit brought against Ingram or such persons, to the extent
such results from Vendor's breach of the warranty specified in Section 4.9(d).
8.8 Limitation of Liability NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR LOST
PROFITS OF BUSINESS, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES, WHETHER BASED
IN CONTRACT OR TORT (INCLUDING NEGLIGENCE, STRICT LIABILITY OR OTHERWISE), AND
WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
THIS LIMITATION IS IN NO WAY MEANT TO LIMIT VENDOR'S LIABILITY FOR
PERSONAL INJURY OR DEATH AS A RESULT OF A DEFECT IN ANY PRODUCT IN THOSE
JURISDICTIONS WHERE THE LAW DOES NOT ALLOW THIS LIMITATION.
9. COMPLIANCE WITH FEDERAL LAWS AND REGULATIONS
9.1 Executive Order 11246 Vendor agrees to include the Equal Employment
Opportunity Clause by reference in every contract, agreement and purchase order
entered into with subcontractors or suppliers as required by 41 CFR 60-1.4.
9.2 Employer Information Report EEO-1 Written Affirmative Action Program Vendor
agrees that if the value of any contract or purchase order is fifty thousand
dollars ($50,000) or more and the Vendor has fifty (50) or more employees,
Vendor will (i) file an EEO-1 report (Standard Form 100) and comply with and
file such other compliance reports as may be required under Executive Order
11246, as amended, and Rules and Regulations adopted thereunder and (ii) will
develop a written
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<PAGE> 10
affirmative action compliance program for each of its establishments as required
by Title 41 CFR 60-1.40.
9.3 Veterans Employment Clause Vendor agrees to abide by and comply with the
provisions of the Affirmative Action Clause, 41 CFR 60-250.4.
9.4 Employment of Handicapped Persons Vendor agrees that it will abide by and
comply with the provisions of the Affirmative Action Clause, 41 CFR 60-741.4.
9.5 Small Business Concerns and Small Business Concerns Owned and Controlled by
Socially and Economically Disadvantaged Individuals Where a government contract
is expected to exceed five hundred thousand dollars ($500,000), Vendor agrees to
comply with all requirements of P.L. 95-507 and regulations promulgated
thereunder. Vendor shall comply with instructions contained in Exhibit E.
9.6 Women-Owned Business Concerns Vendor shall comply with instructions
contained in Exhibit F. Where a government contract is expected to exceed five
hundred thousand dollars ($500,000), Vendor agrees to comply with all
requirements of Executive Order 12138 and all regulations promulgated
thereunder.
10. GOVERNMENT PROGRAM
10.1 Partnership America Vendor may, at its sole option, participate in Ingram's
government reseller program in which case the provisions of Exhibit F,
Partnership America, shall apply. A draft copy is provided solely for your
information and review.
11. GENERAL PROVISIONS
11.1 Notices Any notice which either party may desire to give the other party
must be in writing and may be given by (i) personal delivery to an officer of
the party, (ii) by mailing the same by registered or certified mail, return
receipt requested, to the party to whom the party is directed at the address of
such party as set forth at the beginning of this Agreement, or such other
address as the parties may hereinafter designate, and (iii) by facsimile or
telex communication subsequently to be confirmed in writing pursuant to item
(ii) herein.
11.2 Governing Law This Agreement shall be construed and enforced in accordance
with the laws of the State of California, except that body of law concerning
conflicts of law. The United Nations Convention on Contracts for the
International Sale of Goods shall not apply to this Agreement.
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<PAGE> 11
11.3 Cooperation Each party agrees to execute and deliver such further documents
and to cooperate as may be necessary to implement and give effect to the
provisions contained herein.
11.4 Force Majeure Neither party shall be liable to the other for any delay or
failure to perform which results from causes outside its reasonable control.
11.5 Attorneys Fees In the event there is any dispute concerning the terms of
this Agreement or the performance of any party hereto pursuant to the terms of
this Agreement, and any party hereto retains counsel for the purpose of
enforcing any of the provisions of this Agreement or asserting the terms of this
Agreement in defense of any suit filed against said party, each party shall be
solely responsible for its own costs and attorney's fees incurred in connection
with the dispute irrespective of whether or not a lawsuit is actually commenced
or prosecuted to conclusion.
11.6 Export Regulations Ingram agrees by the purchase of Products to conform to,
and abide by, the export laws and regulations of the United States, including
but not limited to, the Export Administration Act of 1979 as amended and its
implementing regulations. Ingram shall include a statement in it's standard
sales terms and conditions that any shipment of Product outside the United
States will require a valid export license. Ingram further agrees to distribute
Product in accordance with the territory as defined in Section 1.1. Whenever a
EU country is specified as Territory under Section 1.1, Territory shall include
all EU countries.
12. AGREEMENT
12.1 Counterparts This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
12.2 Section Headings Section headings in this Agreement are for convenience
only, and shall not be used in construing the Agreement.
12.3 Incorporation of all Exhibits Each and every exhibit referred to
hereinabove and attached hereto is hereby incorporated herein by reference as if
set forth herein in full.
12.4 Severability A judicial determination that any provision of this Agreement
is invalid in whole or in part shall not affect the enforceability of those
provisions found to be valid.
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<PAGE> 12
12.5 No Implied Waivers If either party fails to require performance of any duty
hereunder by the other party, such failure shall not affect its right to require
performance of that or any other duty thereafter. The waiver by either party of
a breach of any provision of this Agreement shall not be a waiver of the
provision itself or a waiver of any breach thereafter, or a waiver of any other
provision herein.
12.6 Binding Effect/Assignment This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto, and their respective
representatives, successors and permitted assigns. This Agreement shall not be
assignable by Vendor, without the express written consent of Ingram, which
consent shall not be unreasonably withheld, except to a Person in which it has
merged or which has otherwise succeeded to all or substantially all of such
party's business and assets to which this Agreement pertains and which has
assumed in writing or by operation of law its obligations under this Agreement.
Any attempted assignment in violation of this provision will be void.
12.7 Survival Sections 5.5 (Payment Terms), 5.6 (Right to Withhold), 7.2
(Post-Term Termination) and 8. (Indemnification) shall survive the expiration or
earlier termination of this Agreement.
12.8 Entirety This Agreement constitutes the entire agreement between the
parties regarding its subject matter. This Agreement supersedes any and all
previous proposals, representations or statements, oral or written. Any previous
agreements between the parties pertaining to the subject matter of this
Agreement are expressly terminated. The terms and conditions of each party's
purchase orders, invoices, acknowledgments/confirmations or similar documents
shall not apply to any order under this Agreement, and any such terms and
conditions on any such document are objected to without need of further notice
or objection. Any modifications to this Agreement must be in writing and signed
by authorized representatives of both parties.
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<PAGE> 13
12.9 Authorized Representatives Either party's authorized representative for
execution of this Agreement or any amendment hereto shall be president, a
partner, or a duly authorized vice-president of their respective party. The
parties executing this Agreement warrant that they have the requisite authority
to do so.
IN WITNESS WHEREOF, the parties hereunto have executed this Agreement.
"Ingram" "Vendor"
Ingram Micro Inc. Dragon Systems Inc.
1600 E. St. Andrew Place 320 Nevada Street
Santa Ana, California 92705 Newton, Massachusetts 02160
By: \s\ VL Cotten By: \s\ Janet M. Baker
-------------------------- -------------------------------
Name: Name: Janet M. Baker
------------------------ -----------------------------
Victoria L. Cotten
Title: Sr. Vice President Purchasing Title: President
---------------------- ----------------------------
Date: 1-15-98 Date: 31 Dec. 1997
------------------------ -----------------------------
* AGREEMENT MUST BE SIGNED BY PRESIDENT OR BY A DULY AUTHORIZED VICE PRESIDENT
OR PARTNER.
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<PAGE> 14
EXHIBITS:
A - Vendor Routing Guide (if applicable)
B - Guide to Bar Code: The Product Label
C - TechNotes
D - Product Price List
E - Small And Disadvantaged Business Certification
F - Partnership America
G - Pending Litigation
H - Proprietary Information Non-Disclosure Agreement
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<PAGE> 15
EXHIBIT A
VENDOR ROUTING GUIDE
Not Applicable
- -------------------
Attached
- -------------------
<PAGE> 16
EXHIBIT C Vendor #: ____________
PA #: ____________
Job #: __________
CIS Manufacturer Product Information Library
TechNotes Agreement
This agreement ("Agreement") is made and entered into as of the ________ day of
_________,1997 between _________ ("Manufacturer Name"), with its principle place
of business at __________ ("Manufacturer Address") and Ingram Micro Inc.
("lngram"), with its principal place of business at 1600 E. St. Andrew Place,
Santa Ana, California 92705. By Manufacturer's signature below, Manufacturer
agrees to participate in Ingram's TechNotes program, according to and bound by
the terms and conditions of this Agreement including those printed on the
reverse side of this page.
PARTICIPATION DETAILS AND REQUIREMENTS:
1. Ingram will distribute all information authored by the Manufacturer
under the terms and conditions of this Agreement.
2. Ingram will provide the Manufacturer with authoring screens for product
templates via the World Wide Web, (Manufacturer must have Internet
access and a frame compatible browser such as Netscaps(R) 2.0. or later
or Internet Explorer 3.0.)
3. Manufacturer must maintain the content in the Electronic Catalog by
either maintaining product templates via the authoring tools OR provide
Ingram with product information necessary for Ingram to complete the
TechNotes Templates.
4. Manufacturer agrees to identify a contact person: ____________________
_____________________________________________________________________.
(person who will be providing the content to Ingram and can authorize
its distribution)
Title:___________ Telephone #:_____________ FAX #: ___________________
Address:______________________________________ E-mail:________________
5. 1997 SIGN UP/ OPTIONAL TEMPLATE
PARTICIPATION FEE STANDARD BASE PRICE ENTRY SERVICE
----------------- ------------------- -------------
FREE if you sign
up in 1997 $1,000 Value $50 Per SKU (1-100 SKUs)
$35 Per SKU (101-150
SKUs)
and $25 Per SKU (150+ SKUs)
vendor maintains 80% TechNotes completion rate within 60 days of
signing up for program. See details below.
<PAGE> 17
TEMPLATES WILL BE FILLED AND UPDATED BY (check one) / / Manufacturer
/ / Ingram (must indicate $ amount below)
Manufacturer will incur no sign up fees in 1997 if Manufacturer agrees to the
program prior to December 30, 1997. Fee will be completely waived in 1997 if
Manufacturer completes 80% of eligible TechNotes within 60 days of signing
contract and maintains an average completion rate of 80%. Manufacturer will be
notified in the event participation level drops below 80% and will be given a
grace period in which to complete necessary TechNotes.
If Manufacturer selects the "Ingram" box above, Manufacturer agrees to have
Ingram's Technical Support department fill out TechNotes on Manufacturer's
behalf and agrees to pay the service fees indicated above and below. Billing
will be done on a quarterly basis for TechNotes authored during the previous
quarter. Fees for the first 100 TechNotes will be $50 each. The next 50
TechNotes will be $35 each.
Additional TechNotes will be $25 each.
$ THERE ARE TWO TYPES OF AUTHORING FEES AVAILABLE TO MANUFACTURERS WHO HAVE
SELECTED TO HAVE INGRAM COMPLETE TECHNOTES: A ONE-TIME START-UP FEE AND A
QUARTERLY MAINTENANCE FEE. Start-up fees should be used to fund initial TechNote
completion for existing products. Quarterly Maintenance Fees are to be used for
completion of TechNotes for new products as they are released each quarter.
Please indicate the amount Manufacturer agrees to pay for each of the following:
Start-up: $______ OR/AND Quarterly Maintenance $ ______. MANUFACTURER WILL ONLY
BE BILLED FOR COMPLETED TECHNOTES UP TO THE MAXIMUM AMOUNT INDICATED. Payment is
due within thirty (30) days of the invoice billing date. If payment is not
received within 30 days, Ingram has the right to deduct monies from
Manufacturer's invoices.
<TABLE>
<CAPTION>
METHOD OF PAYMENT SOURCE OF FUNDS (Check One) ONLY FILL IN THIS SECTION IF INGRAM WILL FILL TECH/NOTES
<S> <C> <C>
(Check One)
______ Check Payable to ______ MDF ______ CO-OP
Ingram Micro
______ Credit Memo (Request ______ In-House MDF ______ Other (MVP, Etc) _____ (Please Specify)
Buyer Approval)
</TABLE>
Agreement will continue one year from the date above. Thereafter, the Agreement
will be automatically renewed for additional one year periods, subject to the
right of either party to terminate at the end of the term by delivering written
notice to the party at least thirty (30) days prior to the end of the period.
Manufacturer may terminate this Agreement, with or without cause.
Ingram reserves the right, at any time, to review and/or edit information added
to the Manufacturer Product Information.
<PAGE> 18
Library's Electronic Catalog without notice, and to refuse or cancel
participation for any reason at any time.
[3 arrows] THE FOLLOWING INFORMATION IS VERY CRITICAL. PLEASE COMPLETE!
[2 arrows] PLEASE INDICATE ALL VENDOR NUMBERS ASSOCIATED WITH THIS MANUFACTURER:
____________________________________________
[1 arrow] WHO IS THE BUYER __________________________ EXT. _______ AND MARKETING
MANAGER ____________________________________ EXT._____________
Return completed agreement to marketing manger or buyer.
<PAGE> 19
CIS/MANUFACTURER PRODUCT INFORMATION LIBRARY CONTENT DISTRIBUTION AGREEMENT
The agreement "Agreement" is made and entered into as of the ____day of
__________1997 (The "Commencement Date") between Ingram Micro Inc., a Delaware
corporation ("Ingram"), and ________________________________("Manufacturer"), a
_______________________________ corporation.
The parties agree as follows:
1. DELIVERY AND LICENSE. Manufacturer agrees to provide Ingram data and
information regarding Manufacturer's products and services (collectively
"Information") for distribution by Ingram through its information distribution
services which may be updated from time to time (hereinafter referred to as the
"Manufacturers Product Information Library" or "MPIL"), including, but not
limited to, distribution via the World Wide Web, Fax, CD-ROM, Floppy disk, and
other electronic media. Manufacturer hereby grants Ingram a non-exclusive
worldwide license to market, license, distribute, display, perform, transmit and
promote the information through the MPIL. Manufacturer agrees to deliver the
information to Ingram in the manner and format set forth in the MPIL Policies
and Procedure Manual ("Procedures"). Manufacturer agrees that it is both
necessary and of mutual benefit to the parties that the Information be as error
free as is commercially feasible.
2. USE. Both parties agree that the MPIL (and Manufacturer's Information
therein) will be made available to users which have registered with Ingram to
use the MPIL. Manufacturer acknowledges that the Information will be made
available to such users worldwide via the World Wide Web or other methods of
distribution.
3. INFORMATION WARRANTIES. Manufacturer hereby represents and warrants that the
Information (i) will not infringe on or violate any copyright, patent or any
other proprietary right of any third party, and (ii) will not contain any
content, materials or services which violate any applicable law, regulation or
third party right, and (iii) contains no computer virus or similar program or
data.
4. INGRAM OPERATING RESPONSIBILITIES. Ingram will maintain and implement such
facilities, equipment, programming and data communications network and any other
combination of hardware and software as are necessary to offer and provide MPIL.
Ingram shall not be responsible for screening, editing, or monitoring the
information prior to its distribution by MPIL.
5. LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE
TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY
DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES), ARISING FROM THE USE OR INABILITY TO USE THE MPIL OR THE INFORMATION,
OR ANY OTHER PROVISIONS OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO,
<PAGE> 20
LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS.
6. NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPUED, REGARDING THE MPIL OR THE
INFORMATION, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR
COURSE OF PERFORMANCE.
7. INDEMNITY. Either party will defend, indemnify, save and hold harmless the
other party and the officers, directors, agents, affiliates, distributors,
franchisees and employees of the other party from any and all third party
claims, demands, liabilities, cost or expenses, including reasonable attorney's
fees ("Liabilities"), resulting from the indemnifying party's material breach of
any duty, representation, or warranty in this Agreement, except where
Liabilities result from the gross negligence or knowing and willful misconduct
of the other party.
8. LAW. The validity, construction, and performance of this Agreement will be
governed by the substantive law of the State of California, not including its
law on conflicts of laws. If any provision of this Agreement is held by a court
of competent jurisdiction to be illegal, invalid, unenforceable, or otherwise
contrary to law, the remaining provisions of this Agreement shall remain in full
force and effect.
9. INDEPENDENT CONTRACTORS. The parties hereto hereby agree that in the
performance of their respective obligations hereunder, they are, and shall be
independent contractors, and not agents of each other.
10. WAIVER. The failure of either party to enforce or to exercise, at any time
or for any period of time, any term of or any right arising pursuant to this
Agreement does not constitute, and shall not be construed as, a waiver of such
term or right, and shall in no way affect that party's right later to enforce or
exercise it.
11. CONFIDENTIAL INFORMATION. Each party acknowledges that Confidential
Information may be disclosed to the other party during the course of this
Agreement. Each party agrees that it shall take reasonable steps, at lease
substantially equivalent to the steps it takes to protect its own proprietary
information, during the period this Agreement is in effect, and for a period of
three (3) years following expiration or termination of this Agreement, to
prevent the duplication or disclosure of Confidential Information, other than by
or of its employees or agents who must have access to the Confidential
Information to perform such party's obligations hereunder, who shall each agree
to comply with this Section 11. Nor shall there be "Confidential Information"
for purposes of this Agreement, any information relating to or disclosed in the
course of the Agreement, which is or should be reasonably understood to be
confidential or proprietary to the disclosing party, including, but not limited
to, the material terms of this Agreement, technical processes and formulas, and
<PAGE> 21
source codes, sales, projections and marketing data.
12. NOTICES. All notices or other communications required to be given hereunder
shall be in writing and delivered either personally or by mail or overnight
courier to the parties at the address provided by each party below, unless such
address has been changed and notice of such change has been delivered in
accordance with this provision.
13. ENTIRE AGREEMENT. The provisions of this Agreement or other agreements
authorizing Ingram to distribute manufacturer's information constitute the
entire Agreement between the subject matter hereof, except other related
agreements referenced herein. No amendment, modification, or waiver of any
provision of this Agreement shall be effective unless it is set forth in a
writing that refers to the Agreement and provisions so affected and is executed
by authorized representatives of both parties.
- --------------------------------------------------------------------------------
AGREED AS OF THE COMMENCEMENT DATE STATED ABOVE.
"MANUFACTURER"
(Company Name)_________________________________________________________________
(Mailing Address)______________________________________________________________
(City, State, Zip)_____________________________________________________________
By: _________________________________________________________________ (print)
_____________________________________________________________________ (sign)
Title:_________________________________________________________________________
"INGRAM"
Ingram Micro Inc.
1600 E. St. Andrew Place
Santa Ana, California 92705
By: _________________________________________________________________ (print)
_____________________________________________________________________ (sign)
Title:___________________________________________________________ Ext,_________
(must be signed by marketing manager or buyer)
<PAGE> 22
EXHIBIT D
PRODUCT PRICE LIST
The prices for the Products offered under this Agreement shall be (check one):
___________ As shown on Vendor's price list dated ________________.
___________ As shown below.
<TABLE>
<CAPTION>
Product List Price Discount
- ------- ---------- --------
<S> <C> <C>
</TABLE>
<PAGE> 23
EXHIBIT E
BUSINESS SIZE AND CLASSIFICATION
CERTIFICATION
Contact Name:__________________________________________________________________
Company:_______________________________________________________________________
Address:_______________________________________________________________________
City, State & Zip:_____________________________________________________________
(Please correct your address if it is incorrect or incomplete)
In order for INGRAM MICRO INC. to comply with federal and state guidelines, we
must obtain certain information about our suppliers. This information will be
requested on an annual basis only. Therefore, please complete the basic
information requested below.
Please complete, sign and return this certification to the address or fax below
at your earliest convenience. FAILURE TO PROVIDE THIS INFORMATION, MAY RESULT IN
YOUR COMPANY BEING REMOVED FROM OUR VENDOR LIST.
Thank you in advance for helping us in out efforts to maintain accurate records,
which will in return facilitate an on-going relationship with your company.
<TABLE>
<CAPTION>
<S> <C> <C>
Return this form by mail to: Ingram Micro Inc. OR FAX to: (714) 566-1767
Attn: Government Division
PO Box 25125
Santa Ana, CA 92799-5125
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Indicate the category which appropriately describes your business: (Refer to the
reverse of this form for category definitions.)
1. Business Size:
/ / Small Business / / Large Business
2. Business Classification (if applicable):
/ / Disadvantaged Business / / Women-owned Business
/ / Minority Business
3. Business Status:
Corporation: / / Yes / / No
Taxpayer ID No. (TIN) # _ _ - _ _ _ _ _ _ _
<PAGE> 24
OR Social Security # _ _ _ - _ _ - _ _ _ _
(if individual)
The above information is certified true and correct on ___________ day of
_______________________ , 19 ______ by:
__________________________________ ___________________________________
Authorized Signature Title
__________________________________ ___________________________________
Name (print or type) Phone Number
<PAGE> 25
<TABLE>
<CAPTION>
BUSINESS SIZE
<S> <C>
SMALL A business concern that, including domestic and
foreign affiliates is independently owned and
operated, not dominant in the field of operation in
which it is bidding on Government contracts, and
qualifies as a small business under the criteria and
size standards set forth in Title 13 of the Code of
Federal Regulations (CFR), Part 121.
LARGE The business concern exceeds the small business size
code standards established by the Small Business
Administration as set forth in Title 13 of the Code of
Federal Regulations (CFR), Part 121.
BUSINESS CLASSIFICATION
SMALL DISADVANTAGED A small business concern that is at least 51% owned
by one or more socially and economically
disadvantaged individuals (or a publicly owned
business having at least 51% of its stock
unconditionally owned by one or more socially or
economically disadvantaged individuals) and whose
management an daily business operations are
controlled by one or more of such individuals.
WOMEN-OWNED A business concern that is at least 51% owned,
controlled and operated by a woman or women.
MINORITY LARGE BUSINESS A concern which meets the criteria and definition of
'Disadvantaged' business, but which is not a small
business by the SBA's size standards.
FOREIGN BUSINESS More than 50% of production or services must be
performed outside of the United States or its
possessions.
NONPROFIT BUSINESS Any organization not conducted or maintained
for the purpose of making profit. Included in this
category are sheltered workshops, universities, colleges
and local, state and federal governments.
BUSINESS STATUS
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C>
CORPORATION A business entity that is registered with a state in the
United States as a corporation, including non-profit
corporations, but excluding professional corporations.
OTHER DATA Enter Federal Employer ID number or social Security
number, whichever is applicable.
</TABLE>
<PAGE> 27
EXHIBIT F
PARTNERSHIP AMERICA(SM) PROGRAM ADDENDUM
THIS PARTNERSHIP AMERICA(sm) PROGRAM ADDENDUM ("Addendum") is made and entered
into this _________________ day of __________________________ 199____________ by
and between INGRAM MICRO INC., a Delaware corporation ("Ingram") and
________________________________________("Vendor") a ________________________
corporation (state of incorporation).
RECITALS
A. On or about 199 , Ingram and Vendor entered into a Distribution
Agreement ("Distribution Agreement"), whereby Ingram was granted the
right to distribute in the U.S., all microcomputer products
manufactured, produced and/or offered by Vendor ("Vendor Products").
B. Ingram and Vendor now desire to sell and distribute Vendor Products,
through resellers and system integrators, to federal, state and local
governments and their various agencies and departments ("Government")
in accordance with the terms and conditions of this Addendum.
NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the mutual covenants and promises
contained herein, the parties agree as follows:
1. PARTNERSHIP AMERICA(SM) PROGRAM Vendor hereby grants to
Ingram, and Ingram hereby accepts, the non-exclusive right to
provide product and services to resellers and system
integrators in connection with Ingram's sale and distribution
of Vendor Product(s) to the Government in support of specific
government contract opportunities.
2. VENDOR OBLIGATIONS
2.1. PRODUCT NOTIFICATION Vendor shall notify Ingram of
any new Vendor Product(s), or any major revision of a
Vendor Product(s), and shall make such Vendor
Product(s) available for distribution by Ingram no
later than the date of first introduction into the
Government marketplace.
2.2. FIRM FIXED PRICING Upon request, Vendor shall provide
"Firm Fixed Pricing" which shall guarantee the
pricing of the Vendor Product(s) for the effective
term of a specific Government contract. Vendor shall
give Ingram thirty (30) days advance written notice
of any Vendor Product(s) being discontinued.
<PAGE> 28
2.3. REPRESENTATIONS AND CERTIFICATIONS Vendor understands
that due to the nature of Government bidding, Vendor
may be required to enter into a procurement specific
nondisclosure agreement or make certain
representations and certifications before any Vendor
Product(s) are sold or distributed into the
Government marketplace. In addition, Vendor agrees to
provide Ingram with an annual statement of
representations and certifications.
3. INGRAM OBLIGATIONS
3.1. GOVERNMENT SALE SPECIALISTS Ingram shall maintain a
separate government sales office, which shall include
sales specialists with an understanding of Government
regulations and Government contract terms and
conditions, to support resellers and system
integrators in the Government marketplace.
3.2 CONFIGURATION Ingram shall maintain a configuration
facility for system integration and testing in
support of Government specific contracts and
opportunities for resellers.
3.3. REPORTS Ingram agrees to make available to Vendor,
within ten (10) days after the close of each month,
via an electronic bulletin board system, a
point-of-sale report, by zip code, of Vendor Products
sold or distributed to resellers for Government
specific contracts. Vendor shall provide Ingram with
a list of individuals authorized to receive such
reports.
4. PRICING The price and applicable discount for all Vendor
Products sold through the Partnership America(sm) Program is
set forth in Exhibit "A" attached hereto. The pricing and
discounts for Vendor Products set forth therein shall only
apply to Vendor Products sold through the Partnership
America(sm) Program into the Government marketplace. Ingram
will, in its sole discretion, determine the sale price to
resellers and system integrators for all Vendor Products. All
Vendor Product pricing and discounts set forth pursuant to
this Section shall not apply to, amend or affect the pricing
and discounts set forth in connection with any Vendor Products
sold and distributed pursuant to the Distribution Agreement.
Vendor understands and agrees that for certain Government
proposals/quotes, which specify a significant quantity of
Vendor Products, Vendor shall provide program specific pricing
that will include additional discounts to those set forth in
Exhibit "A".
5. TERMINATION Either Vendor or Ingram may terminate this
Addendum, with or without cause, by giving the other ninety
(90) days written notice. Termination of this Addendum shall
not result in the termination of the Distribution Agreement.
Termination of this
<PAGE> 29
Addendum shall not affect the terms and conditions of any
Letter of Supply, issued by Vendor pursuant to Subsection 2.2.
In the event this Addendum is terminated, the rights of the
parties shall be determined under the terms and conditions of
the Distribution Agreement.
6. DISTRIBUTION AGREEMENT TERMS AND CONDITIONS Except as
otherwise provided pursuant to this Addendum, all terms and
conditions of the Distribution Agreement shall apply to the
Partnership America(sm) Program.
- --------------------------------------------------------------------------------
<PAGE> 30
AMENDMENT
March 10, 1998
Ms. Victoria L. Cotten
Sr. Vice President Purchasing
Ingram Micro Inc.
1600 E. St. Andrew Place
Santa Ana, California 92705
Dear Ms. Cotten:
In light of the training and special use requirements of Dragon
NaturallySpeaking(TM), Deluxe Edition and other high-end products, we are now
requiring Certification of all our Resellers who resell our Deluxe Edition.
Distributors may not sell such product to any Reseller who does not have this
Certification. Therefore, the following provision amends the December 15, 1997
Agreement between DRAGON and Ingram Micro Inc. and is to be inserted as
Paragraph 3.5 in the Agreement.
3.5 "Reseller Certification. Commencing on March 1, 1998, DRAGON requires that
all its Distributors ensure that their resellers procure a Certification Number
from DRAGON that allows the reseller to sell Dragon NaturallySpeaking(TM),
Deluxe Edition and other high-end DRAGON products. Resellers are specifically
prohibited from selling these products without this Certification. Distributor
may not sell such products without first ascertaining that the reseller has
procured such Certification."
Please sign below indicating your acknowledgment and acceptance of this
Amendment.
Sincerely,
\s\ S. Semenzato
- ----------------------------------
Steve Semenzato
Director, North American Sales
ACKNOWLEDGED AND ACCEPTED
By: \s\ V.L. Cotten
------------------------------------
Signature: Victoria L. Cotten
-----------------------------
Title: Sr. Vice President Purchasing
---------------------------------
Date: 3/25/98
----------------------------------
May 21, 1998
<PAGE> 31
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
AMENDMENT #2
This Amendment Agreement effective as of the 21st day of May, 1998 (the
"Effective Date") is between Ingram Micro Inc. ( hereinafter the "Distributor")
and Dragon Systems, Inc. (hereinafter "Dragon.")
Notwithstanding any provision to the contrary, the Agreement between the Parties
is hereby amended as follows:
Section 7.1 is hereby deleted in its entirety and the following Section 7.1 is
inserted in its place:
SECTION 7.1 STOCK ROTATION AND BALANCING
During the term of this Agreement, DISTRIBUTOR may return the Product(s) which
require Dragon certification and are sold through VAR Resellers i.e. non-retail
to DRAGON for stock rotation up to [**] of the dollar value of DISTRIBUTOR's
prior quarter's product orders, subject to the following conditions:
(a) DISTRIBUTOR must submit its request for stock rotation to DRAGON in
writing at least 14 days in advance of Distributor's proposed stock
return date, indicating in the request the identity, quantity, order
and invoice dates of the Products to be returned;
(b) The version of the Products being returned must be the current version
or the version immediately preceding the then-current version;
(c) Distributor must submit to DRAGON concurrently with its rotation
request, an order for Products equal to or greater than the value of
the Products being returned
(d) Distributor may submit only one stock rotation request [**]
(e) Products returned for rotation may not have been shipped by DRAGON more
than [**] before the date of the request; and
(f) the Products being returned must be new, resaleable, and in their
original, unopened packaging
(g) return shipping will be paid for by DISTRIBUTOR.
DRAGON, at its sole option, may amend or discontinue its stock rotation program.
For all other Products, Distributor may return such to DRAGON throughout the
term of this Agreement for full credit of the Product's purchase price provided
such Products are in their original packaging. Distributor will pay all freight
charges for returned Products.
<PAGE> 32
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Section 7.3 is hereby deleted in its entirety and the following Section 7.3 is
inserted in its place:
SECTION 7.3 DISCONTINUED PRODUCTS
Within [**] after notice by DRAGON of product discontinuance, DISTRIBUTOR may
return for credit all units of such Product then held by DISTRIBUTOR in
inventory, purchased [**] preceding such notice and not committed to sale. The
return rights set forth in this section are in addition to the Stock Rotation
rights described above.
Except as expressly modified herein, the Parties hereby ratify and affirm all
terms of the original agreement which terms and condition remain in full force
and effect as originally agreed to by the parties unless otherwise modified or
amended in writing.
IN WITNESS WHEREOF, each party has signed this Agreement on the day and year
written below effective as of the Effective Date.
DRAGON SYSTEMS, INC. INGRAM MICRO, INC.
By/s/ Janet M. Baker By: /s/ S. Semenzato
--------------------------- -------------------------------------
Printed Name Janet M. Baker Printed Name S. Semenzato
----------------- ----------------------------
Title President Title Director
----------------------- ----------------------------------
Date 5/21/98 Date 5/21/98
------------------------ ------------------------------------
<PAGE> 1
Exhibit 10.13
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
DISTRIBUTION AGREEMENT
This Agreement (the "Agreement") is made on the 30th day of April 1998.
BETWEEN
INGRAM EUROPEAN COORDINATION CENTER N.V./S.A. whose registered office is
situated at Leuvensesteenweg 11, B-1932 Zaventem, Belgium, on behalf of its
Ingram Micro affiliate companies in Europe (including but not limited to those
companies listed on the attached schedule 1) "Ingram") and
DRAGON SYSTEMS INC of 320 Nevada Street, Newton, MA 02160, USA ("Vendor").
IT IS AGREED:
The terms and conditions of the distribution agreement between Ingram Micro Inc.
and Vendor dated 15th December 1997 ("Distribution Agreement"), attached hereto
as Exhibit A and made a part hereof by reference, are hereby agreed to and
accepted by Ingram and Vendor (as amended by the terms of this document) to
govern any distribution relationship in Europe between Ingram and Vendor and the
terms of sale and purchase of Products between Ingram and Vendor.
Amendments to the Distribution Agreement
Clause 4: deliveries will be FOB Ingram's designated European warehouse. This
shall be one location designated by Ingram. All other terms of clause 4 of the
Distribution Agreement remain unchanged.
Additional Clauses
The following provisions will be deemed to be added.
This Agreement shall be construed and enforced in accordance with the laws of
the State of California, except that body of law concerning conflicts of law.
The United Nations Convention on Contracts for the International Sale of Goods
shall not apply to this agreement.
[STRIKE-THROUGH TEXT] \s\JB
<PAGE> 2
Vendor warrants, in addition to any other warranties, that the Products will
comply with all health and safety regulations applying at the date of supply in
the place where the Products are to be used by the end-user.
The provisions of the attached Schedule 2 shall apply in addition to the other
terms and conditions of this Agreement in respect of all Products supplied by
Vendor for the purposes of retail sale and/or which are supplied by IM for the
purposes of retail sale to its customers.
In the event of the Distribution Agreement containing provisions which are in
breach of European Union Law, it is expressly agreed that such provisions will
be void and non applicable.
All product must be packaged and include sufficient components (or advice
thereon) as to make them suitable for retail sale.
INGRAM EUROPEAN COORDINATION
CENTER N.V./S.A. DRAGON SYSTEMS INC.
By: \s\ Karel Everaet By: \s\ Janet M. Baker
-------------------------------- -----------------------------
Name: Karel EVERAET Name: Janet M. Baker
-------------------------------- -----------------------------
Title: MANAGING DIRECTOR Title: President
-------------------------------- -----------------------------
Date: N30538 Date: 30 April 1998
-------------------------------- -----------------------------
-2-
<PAGE> 3
SCHEDULE 1
AUSTRIA:
Ingram Micro Computer Ges.m.b.H
Concorde Business Park CS
2320 Schwechat
Tel: +43 1706 17 77 10
Fax: +43 1706 17 77 18
Reg. No. 131945m
VAT No. ATU 38585401
BELGIUM:
Ingram Micro NV
Leuvensesteenweg 11
1932 Sint-Stevens-Woluwe
Tel: +32 27 22 95 11
Fax: +32 27 25 15 11
Reg. No. HRB 456.077.106
VAT No. BE 425.077.655
DENMARK:
Ingram Micro A/S
Slobemarken 15
2970 Hereholm
Tel: +45 45 16 55 00
Fax: +45 42 76 55 80
Reg. No. 110598
VAT No. DK 70562618
FINLAND:
Ingram Micro OY
Sinimlentle 10B
02631 Espoo
Tel: +35 89 50 27 41
Fax: +35 89 50 27 499
Reg. No. 565-016
VAT No. 0690814/0
FRANCE:
Ingram Micro S.A.R.L.
Carrefour de l'Europe
59812 Lesquin Cedex (Lille)
Tel: +33 3 20 88 58 00
Fax: +33 3 20 88 58 88
Reg. No. R.C. LILLE 928127
VAT No. FR 50 344658117
GERMANY:
Ingram Micro Deutschland GmbH
Hans-Pinsel-Strasse 9B
85540 Haar (Munchen)
Tel: +49 89 46 18-0
Fax: +49 89 46 18 1190
Reg. No. HRB Munchen 115953
VAT No. DE 812261350
ITALY:
Ingram Micro SpA
Via Prima Maggio 2/4
20068 Peschlera
Borromeo (Milano)
Tel: +39 255 351
Fax: +39 255-38401
Reg. No. 1367714
VAT No. IT 10297220153
THE NETHERLANDS:
Ingram Micro BV
Mississippidreef 87
3506 CE Ultrecht
Tel: +31 30 285 1801
Fax: +31 30 262 1330
Reg. No. 85572
VAT No. NL 8047.55.486.BO1
NORWAY:
Ingram Micro AS
Brobeldnvelen 80
0583 Oslo
Tel: +47 23 05 0000
Fax: +47 23 05 0001
Reg. No. 963054432
VAT No. NO 963054432
SPAIN:
Ingram Micro SA
C/Sant Farran 52-68
Pol. Ind. Almeda
08940 Cornella de Llobragat (Barcelona)
Tel: +34 3 474 90 90
Fax: +34 3 377 34 50
Reg. No. A-75/076395
VAT No. ESA78076395
SWEDEN:
Ingram Micro AB
Kronborgsgrand 1
15487 Kista
Tel: +46 8 477 15 00
Fax: +45 8 703 93 48
Reg. No. 556254/8452
VAT No. SE 556254845201
SWITZERLAND:
Ingram Micro AG
Hardlinstrasse 15
8957 Spreltenbach
Tel: +41 56 4197 929
Fax: +41 56 4197 977
Reg. No. CH 400.3.017.0363
VAT no. CH 393154
UNITED KINGDOM:
Ingram Micro (UK) Ltd
Garamond Drive Wymbush
Milton Keynes MK8 8DF
Buckinghamshire, UK
Tel: +44 1908 260 422
Fax: +44 1908 265 526
Reg. No. 1609968
VAT No. GB 440.3552.80
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Confidential Materials omitted and filed separately
with the Securities and Exchange Commission. Asterisks
denote omissions.
SCHEDULE 2
RETAIL PRODUCTS
1. Defective Products
Vendor agrees to accept back for credit any Product returned to Ingram as
defective by Ingram's retail customers which has been returned to the retail
customer within [**] of the date of sale to the end user.
2. Pass through MDF
Vendor agrees to make a Marketing Development Fund available for Ingram and
Ingram's retail customers
3. Promotional opportunities
Vendor will from time to time subscribe to Ingram's promotion opportunities.
4. Merchandising services
Vendor will from time to time subscribe to Ingram's store Merchandising
providing in-store focus.
5. Product Requirements
5.1 PRODUCT CHANGES; All version changes for any product must be
notified in writing to Ingram as soon as reasonably practical
with details of Ingram's cost price and any RRP (or similar)
and in any event, at least 30 days before release date.
5.2 NEW PRODUCTS; Vendor must inform Ingram as soon as reasonably
possible of all new product releases and supply to Ingram
sufficient samples free of charge, as Ingram need to supply to
its retail customers for advertising purposes or evaluation.
Vendor will also supply bar code information, product
dimensions (both outer case and contents) and key selling
points.
5.3 BAR CODES All product must bear EAN-13/UPC bar code number and
code readable on an external facing of the packaging of each
product, any change of code must be notified in writing to
Ingram 14 days prior to the date of any change.
5.4. SHRINK WRAPPING If required by a particular retail customer of
Ingram's products must be shrink-wrapped.
5.5 SECURITY TAGGING All Products must be security tagged to a
standard agreed between Ingram, Vendor and its retail
customers.
5.6 CERTIFICATE RATINGS All age restricted Products must display
the appropriate symbol on the Product and advice given to
Ingram's Buyer in this respect
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6. Dummy Boxes
Reasonable quantities of dummy boxes will be supplied to Ingram from time to
time as Ingram requests.
7. Specifications
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EXHIBIT A
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT ("Agreement"), is entered into this 15th
day of December, 1997, by and between INGRAM MICRO INC. ("Ingram"), a Delaware
corporation, having its principal place of business at 1600 E. St. Andrew Place,
Santa Ana, California 92705, and DRAGON SYSTEMS INC. ("Vendor"), a Delaware
corporation, having its principal place of business at 320 Nevada Street,
Newton, Massachusetts 02160. The parties desire to and hereby do enter into a
distributor/supplier relationship, the governing terms and mutual promises of
which are set out in this Agreement. This Agreement, upon the full execution
hereof, shall supersede in its entirety the mutual Start-up Agreement dated July
14, 1997.
1. DISTRIBUTION RIGHTS
1.1 Territory Vendor grants to Ingram, including its affiliates for
resale, and Ingram accepts, the non-exclusive right to distribute in North
America all computer products produced and/or offered by Vendor ("Product")
during the term of this Agreement. Ingram shall have the right to purchase, sell
and ship to any reseller within the territory or to Ingram's affiliate, or at
Vendor's option Ingram's affiliate may purchase direct from Vendor.
1.2 Product Vendor agrees to make available and to sell to Ingram such
Product as Ingram shall order from Vendor at the prices and subject to the terms
set forth in this Agreement. Ingram shall not be required to purchase any
minimum amount or quantity of the Product.
2. TERM AND TERMINATION
2.1 Term The initial term of this Agreement is one (1) year. Thereafter
the Agreement will automatically renew for successive one (1) year terms, unless
it is earlier terminated.
2.2 Termination
(a) Either party may terminate this Agreement, with or without cause,
by giving thirty (30) days written notice to the other party.
(b) Either party may immediately terminate this Agreement with written
notice if the other party:
(i) materially breaches any term of this Agreement and such breach
continues for thirty (30) business days after written notification thereof; or
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<PAGE> 7
(ii) ceases to conduct business in the normal course, becomes
insolvent, makes a general assignment for the benefit of creditors, suffers or
permits the appointment of a receiver for its business or assets, or avails
itself of or becomes subject to any proceeding under any Bankruptcy Act or any
other federal or state statute relating to insolvency or the protection of
rights of creditors; or
(iii) attempts to assign or otherwise transfer its rights hereunder
unless both have agreed in writing to such assignment or transfer.
3. INGRAM OBLIGATIONS
3.1 Product Availability Ingram will list Product in its catalog(s) as
appropriate and endeavor to make such Product available to customers.
3.2 Advertising Ingram will advertise and/or promote Product in a
commercially reasonable manner and will transmit as reasonably necessary Product
information and promotional materials to its customers.
3.3 Support Ingram will make its facilities reasonably available for
Vendor and will assist in Product training and support. Ingram will provide
reasonable, general Product technical assistance to its customers, and will
direct all other technical issues directly to Vendor.
3.4 Administration
(a) Upon request, Ingram will furnish Vendor with a valid tax
exemption certificate.
(b) Ingram will provide Vendor standard sales-out and inventory
reports via its electronic Bulletin Board System.
(c) Ingram may handle its customers' Product returns by batching them
for return to Vendor at regular intervals.
4. VENDOR OBLIGATIONS
4.1 Shipping/Export
(a) Vendor shall ship Product pursuant to Ingram purchase order(s)
("P.O."). Product shall be shipped F.O.B. Ingram's designated warehouse with
risk of loss or damage to pass to Ingram upon delivery to the warehouse
specified in Ingram's P.O.
(b) Ingram requires concurrent with the execution of this Agreement
Export Administration Regulations product classification and supporting
documentation: Certificate of Origin (General Use and/or NAFTA), Export
Commodity Control
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<PAGE> 8
Number's; (ECCN's), General License and/or Individual Validated License
information and Schedule "B"/Harmonized Numbers. This applies when distribution
rights granted under Section 1.1 are outside the United States for the initial
Product/s and when additions or changes to these Products occurs.
4.2 Invoicing For each Product shipment to Ingram, Vendor shall issue
to Ingram an invoice showing Ingram's order number, the Product part number,
description, price and any discount. At least monthly, Vendor shall provide
Ingram with a current statement of account, listing all invoices outstanding and
any payments made and credits given since the date of the previous statement.
4.3 Product Availability Vendor agrees to maintain sufficient Product
inventory to fill Ingram's orders. If a shortage of any Product exists, Vendor
agrees to allocate its available inventory of such Product to Ingram in
proportion to Ingram's percentage of all of Vendor's customer orders for such
Product during the previous sixty (60) days.
4.4 Product Marketing Vendor will clearly mark each unit of Product
with the Product name and computer compatibility. Such packaging will also bear
a machine-readable bar code identifier scannable in standard Uniform Product
Code (UPC) format. The bar code must identify the Product as specified by the
Uniform Code Council (UCC). If the Vendor or Ingram customers' require serial
number tracking the serial number must be clearly marked and bar coded on the
outside of the individual selling unit. The bar code shall fully comply with all
conditions regarding standard product labeling set forth in Exhibit B in the
then-current Ingram Guide to Bar Code: The Product Label. Vendor may be assessed
a reasonable per unit charge for all Product not in conformance herewith.
4.5 TechNotes Vendor will within thirty (30) days of execution of this
Agreement sign the CIS/ Manufacture Product Information Library - TechNotes and
Content Distribution Agreements as shown in Exhibit C and provide the required
product information in the designated template format.
4.6 Support At no charge to Ingram, Vendor shall support Product and
any reasonable Ingram efforts to sell Product. Vendor shall also provide to
Ingram, its employees, and its customers reasonable amounts of sales literature,
advertising materials, and training and support in Product sales, during
Vendor's regular business hours.
4.7 New Product Vendor shall endeavor to notify Ingram at least thirty
(30) days before the date any new Product is introduced. Vendor shall make such
Product available for distribution by Ingram no later than the date it is first
offered for sale in the marketplace.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
4.8 Insurance Vendor shall carry insurance coverage for product
liability/completed operations with minimum limits of [**]. Within ten (10) days
of full execution of this Agreement, Vendor shall provide Ingram with a
Certificate of Insurance. This Certificate of Insurance must include: (i) a
broad form endorsement naming Ingram as an additional insured, and (ii) a
mandatory thirty (30) day notice to Ingram of insurance cancellation.
4.9 Warranties/Certification
(a) General Warranty Vendor represents and warrants that (i) it has
good transferable title to the Products, (ii) the Product will perform in
conformity with specifications and documentation supplied by Vendor, (iii) to
the best of Vendor's knowledge, the Product or its use does not infringe any
patents, copyrights, trademarks, trade secrets, or any other intellectual
property rights, (iv) to the best of Vendor's knowledge, there are no suits or
proceedings pending or threatened which allege any infringement of such
proprietary rights other than described in Exhibit G, and (v) the Product sales
to Ingram do not in any way constitute violations of any law, ordinance, rule or
regulation in the distribution territory.
(b) Warranty Vendor hereby represents and warrants that any Product
offered for distribution does not contain any obscene, defamatory or libelous
matter or violate any right of publicity or privacy.
(c) End-User Warranty Vendor shall provide a warranty statement with
Product for end user benefit. This warranty shall commence upon Product delivery
to end-user. NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED
TO THE WARRANTIES OF MERCHANTABIITY AND FITNESS FOR A PARTICULAR PURPOSE ARE
MADE BY VENDOR WITH RESPECT TO THE PRODUCT. INGRAM SHALL NOT EXTEND ANY
ADDITIONAL WARRANTIES TO ANY RESELLERS OR END-USERS OF THE PRODUCT. IN NO EVENT
WILL INGRAM BE LIABLE FOR ANY LOST PROFITS OR ANY OTHER INCIDENTAL OR
CONSEQUENTIAL DAMAGES, EVEN IF INGRAM HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES. VENDOR SHALL IN NO EVENT BE LIABLE FOR ANY DAMAGES RESULTING FROM
LOSS OF DATA, PROFITS OR USE OF EQUIPMENT, OR FOR ANY SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE USE OR
PERFORMANCE OF THE LICENSED PROGRAM.
IT IS ALSO UNDERSTOOD BY BOTH PARTIES TO THIS AGREEMENT THAT
SPEECH RECOGNITION IS INHERENTLY A STATISTICAL PROCESS; THAT SPEECH
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<PAGE> 10
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
RECOGNITION ERRORS ARE INHERENT IN THE PROCESS OF SPEECH RECOGNITION; THAT
SPEECH RECOGNITION APPLICATIONS AND USAGE MUST BE DESIGNED TO ALLOW FOR SUCH
ERRORS IN THE SPEECH RECOGNITION PROCESS.
(d) Millennium Compliance Warranty Vendor warrants and represents that
the Product will properly (a) record, store, process, calculate or present
calendar dates falling on and after (and if applicable, spans of time including)
January 1, 2000 as a result of the occurrence, or use of data consisting of,
such dates and (b) calculate any information dependent on or relating to dates
on or after January 1, 2000 in the same manner, and with the same functionality,
data integrity and performance, as such Product records, stores, processes,
calculates and presents calendar dates on or before December 31, 1999, or
information dependent on or relating to such dates.
(e) EU Warranty Vendor further warrants and represents for Products
distributed to the European Union ("EU") that the Products will be accepted
under all EU directives, regulations and the EU country's legislation.
(f) Made in America Certification Vendor by the execution of this
Agreement certifies that it will not label any of its products as being "Made in
America," "Made in U.S.A.," or with similar wording, unless all components or
elements of such Product is in fact made in the United States of America. Vendor
further agrees to defend, indemnify and hold harmless from and against any and
all claims, demands, liabilities, penalties, damages, judgments or expenses
(including attorney's fees and court costs) arising out of or resulting in any
way from Product that does not conform to the Certification.
5. PRICING
5.1 Ingram Pricing The suggested retail price and any Ingram discount
for Product is set out in Exhibit D. Vendor may modify Exhibit D with a minimum
of thirty (30) days advance written notice to Ingram. All Ingram orders for
Product will be billed at the price in effect when the order is placed. Ingram
shall have sole discretion as to selling price of Product to its customers.
5.2 Vendor Pricing Vendor agrees that the [**]. If Vendor [**] also be
entitled to participate in and receive notice of the same [**].
5.3 International Pricing If Vendor [**] into that territory.
5.4 Price Adjustments If Vendor reduces any Product price, or offers
increased discounts to any customers, Vendor will promptly credit Ingram for the
difference between the original Product price and the reduced Product price for
Ingram's and its customers' Product inventory, including: (i) any Customer
Product in-transit from/to
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Ingram, (ii) any unshipped orders, and (iii) orders in-transit to Ingram on the
price reduction or increased discount offer date. In the event that Vendor shall
raise the list price of a Product, all orders for such Product placed prior to
the effective date of the price increase shall be invoiced at the lower price.
Vendor shall provide Ingram with thirty (30) days advance notice of any price
increases.
5.5 Payment Terms Payment terms shall be [**]. Payment shall be deemed
made on the payment postmark date. All checks will be sent via FedEx at Vendor's
expense.
5.6 Right to Withhold Notwithstanding any other provision in this
Agreement to the contrary, Ingram shall not be deemed in default if it withholds
any specific amount to Vendor because of a legitimate dispute between the
parties as to that specific amount pending the timely resolution of the disputed
amount.
5.7 Bulletin Board System (BBS) Ingram will provide the Detailed
Vendor Buying Report weekly by its electronic BBS. The standard reports will
include sales by zip code, state, product/quantity sold and the detailed Vendor
Buying Report. Ingram will provide reporting on a monthly basis on sell-through
including SKU, title, version, company, zip, number sold subject to a separate
Proprietary Information Non-Disclosure Agreement attached hereto as Exhibit H.
5.8 Rebate Vendor will provide a guaranteed [**], based on gross
sales, for reporting under Section 5.7. In addition, Vendor will offer Ingram
[**], based on gross sales, for achieving sell-through quotas. The sell through
quotas shall be mutually agreed between both parties. The rebate will be paid by
check within thirty (30) days after the quarter end. If no check is received
within that period Ingram shall deduct that amount from the Vendor's next
payment.
6. MARKETING
6.1 Trademarks Ingram may advertise and promote the Product and/or
Vendor, and may thereby use Vendor's trademarks, service marks and trade names
according to Vendor's guidelines. Neither party shall acquire any rights in the
trademarks, service marks or trade names of the other.
6.2 Advertising Vendor agrees to cooperate in Ingram's or Ingram's
customers' advertising and promotion of Product and hereby grants Ingram a
cooperative advertising allowance of [**] of Product invoice amount for such
advertising featuring Product and/or Vendor. Ingram shall submit advertising to
Vendor for review and approval prior to any initial release, and Vendor shall
not unreasonably withhold or delay such approval. Upon receipt of reasonable
evidence of such advertising expenditures, Vendor agrees to credit the amount
thereof against future Ingram purchases.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
6.3 Programs
(a) Ingram may offer marketing programs to Vendor including but not
limited to launch programs and reseller pass through opportunities. If Vendor
elects to participate, Vendor agrees to pay such funds as may be required for
this purpose.
(b) Vendor may be asked to prepay all marketing activities until a
mutually agreed upon sell through rate is achieved.
(c) All marketing pass through activities are subject to Ingram/buyer
pre-approval.
6.4 Support Product Vendor shall consign a reasonable amount of
demonstration Product to aid Ingram in its support and promotion of Product. All
such consigned Product will be returned to Vendor upon request.
7. RETURNS
7.1 Stock Balancing Notwithstanding anything herein to the contrary,
Ingram may return throughout the term any Products which are in their original
packaging to Vendor [**]. Ingram will pay all freight charges for returned
Products.
7.2 Post-Term/Termination For [**] of this Agreement, Ingram may
return to Vendor any Product [**]. Any credit or refund due Ingram for returned
Product shall be equal to the Product purchase price plus all freight charges
incurred by Ingram in returning the Product.
7.3 Product Discontinuation Vendor shall give Ingram thirty (30) days'
advance written notice of Product discontinuation. Ingram may return all such
Product to Vendor for full credit of Product purchase price plus all freight
charges incurred by Ingram in returning the Product, [**].
7.4 Defective Product
(a) Ingram may return any Product to Vendor that Ingram or its
customer finds defective. Vendor shall immediately credit Ingram for the Product
purchase price, plus all freight charges incurred by Ingram in returning the
defective Product.
(b) If any Product is recalled by Vendor because of defects, revisions
or upgrades, Ingram will, at Vendor's request, provide reasonable assistance
with the recall. Vendor will pay Ingram's expenses in connection with such
recall.
8. INDEMNIFICATION
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8.1 Product Indemnity Vendor shall defend, indemnify, and hold harmless
Ingram from and against any claims, demands, liabilities, or expenses
(including attorney's fees and costs) for any injury or damage, including, but
not limited to, any personal or bodily injury or property damage, arising out of
or resulting in any way from any defect in Products. This duty to indemnify
Ingram shall be in addition to the warranty obligations of Vendor.
8.2 General Indemnity Each party shall indemnify, defend and hold the
other harmless from and against any and all claims, actions, damages, demands,
liabilities, costs and expenses, including reasonable attorney's fees and
expenses, resulting from any act or omission of the acting party or its
employees under this Agreement, that causes or results in property damage,
personal injury or death.
8.3 Intellectual Property Rights Indemnity Vendor shall defend, indemnify
and hold Ingram, its resellers and their customers, harmless from and against
all damages and costs incurred by any of them arising from the infringement of
any patent, copyright, trademark, trade secret or other proprietary right by
reason of the manufacture, sale, marketing, or use of Product.
8.4 Product Infringement Upon threat of claim of infringement, Vendor may,
at its expense and option (i) procure the right to continue using any part of
Product, (ii) replace the infringing Product with a non-infringing Product of
similar performance, or (iii) modify Product to make it non-infringing. If
Vendor does not so act within ninety (90) days after such claim, Ingram may
return Product to Vendor for a full credit against future purchases or for a
cash refund, at Ingram's option.
8.5 Multi-Media Indemnity Vendor shall defend, indemnify and hold Ingram,
its resellers and their customers, harmless from and against all damages and
costs incurred by any of them to the extent it is based upon a claim that the
Product either (i) violates a third party's right of publicity and/or right of
privacy, or (ii) contains any obscene, defamatory or libelous matter.
8.6 European Indemnity For Products distributed to a country of the EU,
the Vendor accepts full responsibility for, and will indemnify Ingram for, all
costs and damages arising from any non-compliance with any manufacturer-directed
EU decree, regulation or directive.
8.7 Millennium Compliance Indemnity Vendor agrees to indemnify and hold
Ingram and its shareholders, officers, directors, employees, agents, successors,
and assigns harmless from and against any and all claims, suits, actions,
liabilities, losses, costs, reasonable attorney's fees, expenses, judgments or
damages, whether ordinary, special or consequential, resulting from any third
party claim made or suit brought against Ingram or such persons, to the extent
such results from Vendor's breach of the warranty specified in Section 4.9(d).
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8.8 Limitation of Liability NEITHER PARTY SHALL BE LIABLE TO THE OTHER
FOR LOST PROFITS OF BUSINESS, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES,
WHETHER BASED IN CONTRACT OR TORT (INCLUDING NEGLIGENCE, STRICT LIABILITY OR
OTHERWISE), AND WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
THIS LIMITATION IS IN NO WAY MEANT TO LIMIT VENDOR'S LIABILITY FOR
PERSONAL INJURY OR DEATH AS A RESULT OF A DEFECT IN ANY PRODUCT IN THOSE
JURISDICTIONS WHERE THE LAW DOES NOT ALLOW THIS LIMITATION.
9. COMPLIANCE WITH FEDERAL LAWS AND REGULATIONS
9.1 Executive Order 11246 Vendor agrees to include the Equal
Employment Opportunity Clause by reference in every contract, agreement and
purchase order entered into with subcontractors or suppliers as required by 41
CFR 60-1.4.
9.2 Employer Information Report EEO-1 Written Affirmative Action Program
Vendor agrees that if the value of any contract or purchase order is fifty
thousand dollars ($50,000) or more and the Vendor has fifty (50) or more
employees, Vendor will (i) file an EEO-1 report (Standard Form 100) and comply
with and file such other compliance reports as may be required under Executive
Order 11246, as amended, and Rules and Regulations adopted thereunder and (ii)
will develop a written affirmative action compliance program for each of its
establishments as required by Title 41 CFR 60-1.40.
9.3 Veterans Employment Clause Vendor agrees to abide by and comply with
the provisions of the Affirmative Action Clause, 41 CFR 60-250.4.
9.4 Employment of Handicapped Persons Vendor agrees that it will abide
by and comply with the provisions of the Affirmative Action Clause, 41 CFR
60-741.4.
9.5 Small Business Concerns and Small Business Concerns Owned and
Controlled by Socially and Economically Disadvantaged Individuals Where a
government contract is expected to exceed five hundred thousand dollars
($500,000), Vendor agrees to comply with all requirements of P.L. 95-507 and
regulations promulgated thereunder. Vendor shall comply with instructions
contained in Exhibit E.
9.6 Women-Owned Business Concerns Vendor shall comply with instructions
contained in Exhibit F. Where a government contract is expected to exceed five
hundred thousand dollars ($500,000), Vendor agrees to comply with all
requirements of Executive Order 12138 and all regulations promulgated
thereunder.
10. GOVERNMENT PROGRAM
10.1 Partnership America Vendor may, at its sole option, participate in
Ingram's government reseller program in which case the provisions of Exhibit F,
Partnership
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America, shall apply. A draft copy is provided solely for your information and
review.
11. GENERAL PROVISIONS
11.1 Notices Any notice which either party may desire to give the other
party must be in writing and may be given by (i) personal delivery to an officer
of the party, (ii) by mailing the same by registered or certified mail, return
receipt requested, to the party to whom the party is directed at the address of
such party as set forth at the beginning of this Agreement, or such other
address as the parties may hereinafter designate, and (iii) by facsimile or
telex communication subsequently to be confirmed in writing pursuant to item
(ii) herein.
11.2 Governing Law This Agreement shall be construed and enforced in
accordance with the laws of the State of California, except that body of law
concerning conflicts of law. The United Nations Convention on Contracts for the
International Sale of Goods shall not apply to this Agreement.
11.3 Cooperation Each party agrees to execute and deliver such further
documents and to cooperate as may be necessary to implement and give effect to
the provisions contained herein.
11.4 Force Majeure Neither party shall be liable to the other for any
delay or failure to perform which results from causes outside its reasonable
control.
11.5 Attorneys Fees In the event there is any dispute concerning the
terms of this Agreement or the performance of any party hereto pursuant to the
terms of this Agreement, and any party hereto retains counsel for the purpose of
enforcing any of the provisions of this Agreement or asserting the terms of this
Agreement in defense of any suit filed against said party, each party shall be
solely responsible for its own costs and attorney's fees incurred in connection
with the dispute irrespective of whether or not a lawsuit is actually commenced
or prosecuted to conclusion.
11.6 Export Regulations Ingram agrees by the purchase of Products to
conform to, and abide by, the export laws and regulations of the United States,
including but not limited to, the Export Administration Act of 1979 as amended
and its implementing regulations. Ingram shall include a statement in it's
standard sales terms and conditions that any shipment of Product outside the
United States will require a valid export license. Ingram further agrees to
distribute Product in accordance with the territory as defined in Section 1.1.
Whenever a EU country is specified as Territory under Section 1.1, Territory
shall include all EU countries.
12. AGREEMENT
12.1 Counterparts This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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12.2 Section Headings Section headings in this Agreement are for
convenience only, and shall not be used in construing the Agreement.
12.3 Incorporation of all Exhibits Each and every exhibit referred to
hereinabove and attached hereto is hereby incorporated herein by reference as if
set forth herein in full.
12.4 Severability A judicial determination that any provision of this
Agreement is invalid in whole or in part shall not affect the enforceability of
those provisions found to be valid.
12.5 No Implied Waivers If either party fails to require performance of any
duty hereunder by the other party, such failure shall not affect its right to
require performance of that or any other duty thereafter. The waiver by either
party of a breach of any provision of this Agreement shall not be a waiver of
the provision itself or a waiver of any breach thereafter, or a waiver of any
other provision herein.
12.6 Binding Effect/Assignment This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, and their respective
representatives, successors and permitted assigns. This Agreement shall not be
assignable by Vendor, without the express written consent of Ingram, which
consent shall not be unreasonably withheld, except to a Person in which it has
merged or which has otherwise succeeded to all or substantially all of such
party's business and assets to which this Agreement pertains and which has
assumed in writing or by operation of law its obligations under this Agreement.
Any attempted assignment in violation of this provision will be void.
12.7 Survival Sections 5.5 (Payment Terms), 5.6 (Right to Withhold), 7.2
(Post-Term Termination) and 8. (Indemnification) shall survive the expiration or
earlier termination of this Agreement.
12.8 Entirety This Agreement constitutes the entire agreement between the
parties regarding its subject matter. This Agreement supersedes any and all
previous proposals, representations or statements, oral or written. Any previous
agreements between the parties pertaining to the subject matter of this
Agreement are expressly terminated. The terms and conditions of each party's
purchase orders, invoices, acknowledgments/confirmations or similar documents
shall not apply to any order under this Agreement, and any such terms and
conditions on any such document are objected to without need of further notice
or objection. Any modifications to this Agreement must be in writing and signed
by authorized representatives of both parties.
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12.9 Authorized Representatives Either party's authorized representative
for execution of this Agreement or any amendment hereto shall be president, a
partner, or a duly authorized vice-president of their respective party. The
parties executing this Agreement warrant that they have the requisite authority
to do so.
IN WITNESS WHEREOF, the parties hereunto have executed this Agreement.
"Ingram" "Vendor"
Ingram Micro Inc. Dragon Systems Inc.
1600 E. St. Andrew Place 320 Nevada Street
Santa Ana, California 92705 Newton, Massachusetts 02160
By: \s\ VL Cotten By: \s\ Janet M. Baker
----------------------------- ------------------------------
Name: Name: Janet M. Baker
----------------------------- ------------------------------
Victoria L. Cotten
Title: Sr. Vice President Purchasing Title: President
----------------------------- ------------------------------
Date: 1-15-98 Date: 31 Dec. 1997
----------------------------- ------------------------------
* AGREEMENT MUST BE SIGNED BY PRESIDENT OR BY A DULY AUTHORIZED
VICE PRESIDENT OR PARTNER.
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EXHIBITS:
A - Vendor Routing Guide (if applicable)
B - Guide to Bar Code: The Product Label
C - TechNotes
D - Product Price List
E - Small And Disadvantaged Business Certification
F - Partnership America
G - Pending Litigation
H - Proprietary Information Non-Disclosure Agreement
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<PAGE> 19
EXHIBIT A
VENDOR ROUTING GUIDE
Not Applicable
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Attached
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<PAGE> 1
Exhibit 10.14
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
DISTRIBUTOR AGREEMENT
This Distributor Agreement (the "Agreement") is made by and between Dragon
Systems, Inc., a ___________ corporation ("Supplier") and Merisel Americas,
Inc., a Delaware corporation ("Distributor"). Supplier and Distributor hereby
agree as follows:
1. Distribution Rights. Supplier grants to Distributor the
non-exclusive right and license to distribute Supplier's Products to
Distributor's customers in the U.S. and Canada; provided, that Distributor may
at any time during the term of this Agreement assign its rights and obligations
under this Agreement to one or more of Merisel, Inc., or any of Merisel, Inc.'s
majority owned direct or indirect subsidiaries or affiliates (individually, a
"Subsidiary") with respect to the U.S. and Canada, and each Subsidiary shall
thereafter have the rights and obligations of Distributor hereunder with respect
to the territory assigned to it as if such Subsidiary had entered into this
Agreement directly with Supplier. "Products" shall include all of Supplier's
products set forth on Exhibit A hereto and any other products manufactured or
marketed by Supplier for distribution, during the term of this Agreement and
intended for sale by resellers. Supplier has provided Distributor a list of all
other distributors purchasing Products from Supplier as of the date hereof, and
Supplier shall give Distributor reasonable prior written notice of the
appointment of any other distributor of any of its Products during the term of
this Agreement.
2. Price and Payment Terms.
2.1 Retail Price and Discount. The purchase price payable for any
Product ordered by Distributor shall be equal to Supplier's published suggested
retail price for the Product less a discount of _________ %. Suggested retail
prices, Distributor and Reseller discount amounts and purchase prices for the
Products are set forth on Exhibit A. In the event Supplier wishes to change the
suggested retail price of any Product, Supplier shall give Distributor at least
thirty (30) days' prior written notice of the change, specifying the new
suggested retail price, discount amount (determined using the above discount
percentage) and purchase price payable by Distributor. In the event any new
Product is manufactured or marketed by Supplier for distribution during the term
of the Agreement, Supplier shall notify Distributor in writing of the suggested
retail price, discount amount (determined using the above discount percentage)
and purchase price payable by Distributor.
<PAGE> 2
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
2.2 Price Protection.
(a) If the purchase price of any Product is increased, Supplier
shall honor any Distributor purchase orders placed prior to the effective date
of the increase at the price in effect immediately prior to the time the
increase is announced.
(b) If the purchase price of any Product is decreased, Supplier
shall grant Distributor a credit in the amount of the price decrease for each
unit of the Product that is or has been (i) on order or in transit to
Distributor on the effective date of the price decrease, (ii) in Distributor's
inventory on the effective date of the decrease, and (iii) in Distributor's
customers inventory on the effective date of the decrease. In order to receive
any credits hereunder, Distributor shall provide Supplier with a report or
reports specifying the number of units for which credits are requested, and
Supplier shall grant such credits within thirty (30) days after receipt of any
such report. In the event no amounts are due to Supplier at such time,
Distributor shall mutually agree upon a method of payment for such credit
amount, which may include but shall not be limited to cash payment, in
accordance with Section 2.7 of this Agreement. Should Supplier have reasonable,
valid cause to question or contest any credit requested under this Section 2.2,
Supplier shall contest such amount or pose such question within thirty (30) days
following Supplier's receipt of Distributor's report(s) as described hereinabove
or Supplier shall waive its rights to contest or question such credits and shall
remit such credit amounts to Distributor as described in this Section 2.2.
(c) Section 2.2(b) shall apply to all Subsidiaries that have the
rights of Distributor hereunder, provided that for such Subsidiaries (and also
for Merisel Americas, Inc. to the extent Product is held in inventory in North
America outside of the United States or ordered from a location in North America
outside of the United States) the applicable credit shall be indexed to the
local currency rate in effect on the date of the price decrease, for the
territory or country in which such inventory of affected Product(s) is located.
In no event shall the credit granted for such price decrease under this section
exceed the aggregate purchase price paid in U.S. dollars for the products which
are subject to the price decrease.
2.3 Payment Terms. Payments to Supplier with respect to all Products
received by Distributor shall be due and payable within sixty (60) days after
Distributor's receipt of the Products set forth on Exhibit A hereto; except for
Distributor's Initial Stocking Order ("ISO"), which shall be due and payable
within ninety (90) days after Distributor's receipt of the Products set forth on
the ISO. All payments shall be subject to (i) [**] of the date of receipt of
Products and (ii) a [**] if payment is made prior to the receipt of the order.
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<PAGE> 3
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
2.4 Rebates. Set forth on Exhibit A are Quarterly Sales Goals agreed
upon by Distributor and Supplier for the first four fiscal quarters of
Distributor during the term of this Agreement (with a prorated goal being
included in the event this Agreement commences on a date other than the start of
a fiscal quarter of Distributor). In the event Distributor achieves the
Quarterly Sales Goal in any quarter (as they may be adjusted from time to time
pursuant to Exhibit A), Supplier shall pay Distributor a rebate in the amount
determined pursuant to Exhibit A within thirty (30) days after receipt of a
sales report from Distributor setting forth its sales results. For quarters
after the first four quarters, Supplier and Distributor shall agree on mutually
acceptable Quarterly Sales Goals as provided in Exhibit A.
2.5 [**]. Supplier agrees that [**] shall not at any time [**] and
other terms and conditions of sale for the Products [**].
2.6 Recoupment.
(a) Distributor shall have the right of recoupment with respect to
all amounts owed to it by Supplier under this Agreement. Any amounts payable to
Distributor under this Agreement for any reason (including, without limitation,
for price protection, product returns, or marketing funds) shall first be
applied as a credit by Distributor and shall reduce any uncontested amounts owed
by Distributor to Supplier. In the event that Distributor maintains a credit
balance with Supplier after application of credits, Supplier shall, upon
Distributor's request, promptly pay Distributor the amount of the remaining
credit balance via an instrument acceptable to Distributor (which may include,
but shall not be limited to, in Distributor's sole option, by cash, company
check, cashier's check, or wire transfer).
(b) Distributor shall have the right of recoupment with respect to
any amounts owed by it to Supplier. Any amounts owed to Supplier by Distributor
under this Agreement for any reason (including, without limitation, for the
purchase of products) shall first be reduced by any amounts owed to Distributor
by Supplier. In the event that Distributor maintains a debit balance with
Supplier after such reduction (including the application of credits),
Distributor shall have the right, in its sole option, to either: (i) return
Products in Distributor's inventory to Supplier for credit in the amount of the
purchase price paid for such Products, less any credits previously issued to
Distributor under Section 2.2 hereof, which credit shall be applied to the
amounts owed by Distributor to Supplier; or (ii) pay Supplier the amount owed by
Distributor to Supplier. Irrespective of which option Distributor selects,
Distributor shall retain all future rights to return Product as set forth in
this Agreement.
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<PAGE> 4
3. Orders and Shipping.
3.1 Order Placement. Distributor shall place orders for Products
with Supplier in writing. Supplier shall use reasonable efforts to deliver
Products to Distributor within five (5) days of the delivery date set forth in
Distributor's order, or, if no delivery date is specified on Distributor's
order, within ten (10) days of Supplier's receipt of Distributor's order.
Distributor shall have no obligation to order any minimum quantity of Products.
3.2 Allocation. In the event of any shortage of Products, upon order
by Distributor Supplier shall ship to Distributor at least as many units of
Product as Supplier ships to any other similar customer. In the event any
Product is subject to limited availability at any time and Distributor has
placed orders for such Product, either prior to the date such Product becomes
subject to limited availability, or during such time as such Product is subject
to limited availability, Supplier agrees to contact Distributor prior to
shipping any order for such Product, and Distributor shall have the right, in
its sole option and without liability, to cancel any existing order for such
Product(s).
3.3 Title and Risk of Loss. Products shall be shipped F.O.B. to the
Distributor warehouse specified in the order. Any freight costs for Products
shipped to Distributor shall be paid by Supplier.
3.4 Incorrect or Erroneous Shipment. In the event the Product(s)
shipped to Distributor does not conform to the Product description for such
Product set forth on the applicable purchase order for such Product(s),
Distributor shall contact Supplier, and Supplier shall ship the correct
Product(s) to Distributor within two (2) business days of Distributor's
notification of such misshipment to Supplier at no additional cost to
Distributor. Distributor shall obtain a Return Material Authorization number, as
is set forth in Section 5.4 of this Agreement, for any such Product and shall
return any misshipped Product to Supplier, via freight collect, for credit in
the amount paid by Distributor for such Product.
3.5 Disclaimer of Standard Terms. All terms, conditions, or
provisions which may appear as pre-printed language or otherwise be inserted
within any order, order confirmation or invoice for any Products shall be of no
force and effect notwithstanding the execution or delivery of such other
document subsequent to the date of this Agreement.
3.6 Bar Coding. Supplier shall mark each Product sold to Distributor
with the appropriate UPC bar code: The preferred bar codes are Version A
barcode, or Code 39 with FACT Data Identifiers barcode. In the event Supplier
utilizes any other UPC standard bar code, Supplier shall submit a sample of such
bar code to Distributor, prior to the execution of this Agreement, to verify
compatibility with Distributor's bar
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<PAGE> 5
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
code recognition systems. Distributor reserves the right, in its sole discretion
and without penalty or liability to Distributor, to (i) refuse any shipment of
Product(s) which are not so marked; and (ii) elect not to set up any Product in
its systems which is not marked with a UPC standard bar code compatible with
Distributor's bar code recognition systems.
4. Defective Products. Supplier shall accept the return of any Product
alleged by Distributor or its customers to be defective and shall grant to
Distributor a credit for any Products to be returned in the amount of the
purchase price charged to Distributor therefor, less any applicable credits
pursuant to Section 2.2 hereof which have been previously paid to Distributor.
Supplier agrees to issue Distributor a blanket Return Authorization for all
Products which are returned to Distributor, by its customers, as defective.
Supplier also shall pay all freight charges for shipments of such Products to
Supplier by Distributor.
5. Inventory Maintenance.
5.1 Stock Balancing Rights. At any time or from time to time after
the date of execution of this Agreement, Distributor may stock balance Products
which are in their original packaging to Supplier [**].
5.2 Acceptable Level Return Rights. In addition to the Stock
Balancing Rights set forth hereinabove, in the event [**] at any time during the
term of this Agreement, Distributor may [**].
5.3 Discontinued Products.
(a) In the event Supplier shall discontinue any Product or declare
any Product to be obsolete, Supplier shall notify Distributor thirty (30) days
in advance of such discontinuation or declaration of obsolescence. Distributor
shall have the right to return all units of such Product then in Distributor's
Inventory to Supplier, for credit for a period of [**] days following the
effective date of discontinuation.
(b) In the event Supplier offers to Distributor, or any other
similar purchaser, new Products which are of equivalent and/or superior fit,
form and function to a similar Product, and such new Product negatively affects
Distributor's ability to sell such similar Product(s) then in Distributor's
inventory, Distributor shall have the right to declare its inventory of such
similar Product(s) functionally discontinued, shall so
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<PAGE> 6
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
notify Supplier, and shall return the affected inventory of such functionally
discontinued Product(s) for credit for a period of [**] days following the date
of functional discontinuation.
(c) The return rights set forth in this Section 5.3 are in addition
to any return rights described under Sections 5.1 and 5.2 of this Agreement.
5.4 Return Procedures. Supplier agrees to issue Distributor a
blanket Return Authorization for all Products which are returned to Supplier by
Distributor; or, at Distributor's sole option, Supplier shall issue a Return
Material Authorization ("RMA") number for any Products Distributor requests to
return within [**] business days following the date Distributor requests such
RMA; (provided, however, that in the event such RMA is not issued within such
[**] day period, Distributor shall have the right to return any units of the
Product(s) to Supplier without an RMA, and Supplier shall be obligated to accept
such return). All Products returned pursuant to this Section 5 shall be unopened
and in their original packaging. The amount of the credit for any returned
Products shall be equal to the original purchase price charged to Distributor
less any credits pursuant to Section 2.2 hereof which have been previously paid
to Distributor. Distributor shall bear all freight costs associated with returns
of Product to Supplier by Distributor under Section 5.1 and 5.2. Supplier shall
bear all freight costs associated with returns of Product to Supplier by
Distributor under Section 5.3.
6. Product Information Obligations and D.A.T.A. Bank Program.
6.1 Product Set Up, Descriptions and Technical Support Requirements.
Supplier shall provide Distributor's Product Information Center with the
materials set forth on Exhibit B hereto. Distributor may, from time to time,
change the requirements set forth in Exhibit B, and Supplier in its discretion
may continue to provide such new materials. Supplier shall be solely responsible
for the factual accuracy and completeness of any information or materials
provided to Distributor. Distributor reserves the right to delay set up in
Distributor's systems of any Product for which this information is not provided.
6.2 Product Physical Information. Supplier agrees to provide
Distributor with the per-unit weight of each Product (such weight to include
packaging) to be distributed by Distributor, and the cube dimension of each unit
of Product, each Master Carton (if any) for each Product, and each pallet.
Distributor reserves the right to delay set up in Distributor's systems of any
Product for which this information is not provided.
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<PAGE> 7
6.3 New Products. Supplier agrees to provide Distributor with the
material described in Section 6.1 and Exhibit B hereof for all updates and
revisions of each Product and for each new Product made available for
distribution by Supplier during the term of this Agreement, and shall provide
Distributor with thirty (30) days prior notice or at least as much notice given
to any other similar purchaser of any such update, revision or new Product.
6.4 Product Changes. Supplier shall give Distributor thirty (30)
days notice, or at least as much notice as is given to any other similar
purchaser for any changes in Product packaging, documentation or major version
changes.
6.5 Information, Products and Services.
(a) Distributor, from time to time, may design, develop and operate
a variety of materials, product catalogues, product set up forms, sales support
and marketing services in connection with its wholesale computer products
distribution business, including, without limitation, maintaining an electronic
library containing computer hardware, software, peripheral and accessory product
descriptions, creating custom product descriptions upon the request of its
customers, publishing a computer reseller price book, creating and publishing
advertisements for computer products; operating direct mail promotions,
publishing catalogues; operating sales events and promotions and training
sessions; operating an on-line order entry and information service
(collectively, the "Information Products"). Distributor's Information Products
may also permit Supplier to communicate directly with resellers through on-line
message boards and other technology.
(b) From time to time Supplier may provide information to
Distributor for inclusion in the Information Products. Distributor may, in its
sole discretion, with prior written approval from Supplier, charge a fee to the
Supplier as a condition precedent for the inclusion of Supplier's information in
an Information Product.
(c) Distributor, in its sole discretion, may publish the Information
Products through any available medium, including, without, limitation, through
on-line computer networks, print media, CD ROM, diskette, facsimile, cable or
satellite transmission. The type, amount and usage of the Information Products
shall be as determined by Distributor from time to time, in its sole discretion.
Distributor, in its sole discretion, may elect to charge the recipient of the
Information Products (the "Customer") for receipt of the Information Products
and the pricing charged by Distributor may include a profit for Distributor.
Distributor reserves the right to modify or terminate any Information Product at
any time, without notice or liability to Supplier, unless Supplier has paid for
inclusion in which case Distributor will notify Supplier and provide a refund
for service paid for but not provided.
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<PAGE> 8
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
(d) The information that is contained in the Information Products
come from the following sources:
(i) Distributor created or generated information, including
materials created by Distributor, that may or may not embody product information
provided by the Supplier; and
(ii) Supplier provided "Spec Sheets", photographs and Supplier
trademarks, tradenames and logos (collectively, the "Supplier Information").
"Distributor Information" means all intellectual property and information that
is contained in the Information Products, except the Supplier Information.
(e) Distributor shall have the ownership rights for all Distributor
Information. Supplier grants Distributor a nonexclusive worldwide right and
license to republish and distribute the Supplier Information and to include the
Supplier Information in any Information Product that Distributor may produce
from time to time. Supplier warrants to Distributor that it has all rights to
grant such a license in the Supplier Information.
(f) Supplier shall be solely responsible for the factual accuracy
and completeness of any information provided to Distributor for use in any
Information Product.
6.6 D.A.T.A. Bank Program. At Supplier's sole discretion, Supplier
may participate in Distributor's D.A.T.A. Bank Program, in such countries where
Distributor offers such a Program, a copy of which is attached to this Agreement
as Exhibit C and which may subsequently be amended or discontinued by
Distributor from time to time. Supplier's participation in the D.A.T.A. Bank
Program during each subsequent year shall be automatically renewed unless
Supplier gives written notice to Distributor, in accordance with the terms set
forth in Exhibit C, at least thirty (30) days prior to the expiration of the
first or any subsequent Program year during the term of this Agreement.
Distributor shall render an invoice each calendar quarter to Supplier for the
participation fees payable by Supplier in connection with the D.A.T.A. Bank
Program during the preceding quarter. Invoices rendered hereunder shall be paid
by Supplier within thirty (30) days after receipt or, at Distributor's option,
Distributor may deduct such amounts from any amounts due Supplier hereunder.
7. Marketing, and Shelf Space Acquisition Fee.
7.1 Programs and Development Funds. Supplier shall provide
Distributor with marketing development funds equal to [**] of Distributor's
gross
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<PAGE> 9
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
purchases of Products. Such funds shall be used in connection with marketing
programs to be mutually agreed upon by Supplier and Distributor. Supplier shall
also provide Distributor with Product launch funds of at least [**] to be
utilized by Distributor to conduct initial marketing activities in connection
with the commencement of Distributor's relationship with Supplier, such funds to
be expended in accordance with a launch plan to be mutually agreed upon by
Supplier and Distributor. Distributor shall invoice Supplier for all marketing
development and launch funds due Distributor hereunder, and such invoices shall
be due and payable within [**] days after receipt or, at Distributor's option,
Distributor may deduct such amounts from amounts due Supplier.
7.2 Shelf-Space Acquisition Fees. To defray the costs incurred by
Distributor associated with the initial warehousing start-up expenses of the
Product(s), Supplier shall provide Distributor with a nonrecurring Shelf-Space
Acquisition Fee in the amount of [**]. Supplier agrees to remit, to Distributor
prior to the set up of any Supplier Product in Distributor's systems, the
Shelf-Space Acquisition Fee via an instrument acceptable to Distributor (which
may include, but shall not be limited to, in Distributor's sole option, by cash,
company check, cashier's check, or wire transfer).
7.3 News Releases. No news releases, including photographs, films or
videos, public announcements, Product or company endorsements by Distributor or
confirmation of all, or any part of, the subject matter of this Agreement shall
be made public without the prior written consent of Distributor.
8. Product Agreements and Indemnification.
8.1 No Violations. Supplier represents and warrants that the
purchase of Products by Distributor and subsequent sale to its customers, as
contemplated by this Agreement throughout the United States, Canada and Mexico,
and, to the best knowledge of Supplier, the sale of each Product in any other
foreign country, violates no foreign, federal state or local law or regulation
or any agreement between Supplier and any other person or entity.
8.2 Title and Infringement. Supplier represents and warrants that
(a) it owns all rights, title and interest in and to the Products necessary to
enter into and perform its obligations to Distributor hereunder, and (b) not
withstanding a current lawsuit against Supplier, to the best of Supplier's
knowledge, no Product sold to Distributor during the term of this Agreement, nor
the use of any such Product, nor anything in or contemplated by this Agreement,
infringes upon the Intellectual Rights (as herein defined) of any other person
or entity, and no suit or proceeding is pending or threatened alleging that any
Product or the use thereof infringes upon any Intellectual
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<PAGE> 10
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Rights. As used herein, the term "Intellectual Right" means any rights relating
to any trademark, tradename, service mark, copyright, patent, trade secret or
other proprietary right.
8.3 Indemnification. Supplier agrees to hold Distributor harmless
and indemnify, reimburse, and defend it upon request at its own cost from any
proceedings related to any claim asserted against Distributor or its customers
with respect to the Products, any information or materials provided by Supplier
pursuant to this Agreement, or which otherwise arises out of its relationship
with Distributor, (including without limitation any claim that any Product
infringes the Intellectual Rights of another) and shall pay them for all amounts
owed by them to third persons and expenses incurred by them in connection with
any such claim or suit. Notwithstanding the above, Supplier shall not be
responsible for indemnifying Distributor for claims resulting from (a) express
warranties by Distributor in excess of those provided by Supplier; (b) gross
negligence of Distributor; or (c) intentional misconduct by Distributor.
8.4 Insurance. Supplier shall maintain, at its expense, a policy or
policies of product liability insurance, with a broad form Vendor's Endorsement
naming Distributor as an additional insured, providing coverage of not less than
[**] combined single limit, and shall provide Distributor with a Certificate of
Insurance (including broad form Vendor's Endorsement) reflecting such coverage.
The Certificate shall provide for at least ten (10) days prior written notice of
cancellation or substantial change.
8.5 Buy American Act. In order to ascertain whether or not the
Products meet the requirements of the "Buy American Act" and to ensure that the
Products may be exported to Canada and Mexico in accordance with the terms of
the North American Free Trade Agreement, Supplier shall set forth, on Exhibit A
hereto, which Products, if any, are less than fifty-one percent (51 %) U.S.
manufactured, and further shall complete the information set forth on Exhibit D
hereto, the "Certificate of Origin" with respect to each Product made available
to Distributor under this Agreement, such form to be completed on or prior to
the date such Product is first made available for purchase hereunder. Further, a
new copy of such form shall be provided to Distributor each year during the term
of this Agreement, prior to the annual anniversary date of such Agreement.
Supplier shall indemnify Distributor, hold it harmless and reimburse it for any
and all expenses or costs incurred by Distributor in the event the information
set forth by Supplier on the "Certificate of Origin" is incorrect or erroneous.
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<PAGE> 11
9. Term and Termination.
9.1 Unless earlier terminated as provided herein, this Agreement
shall have an initial term of one years from the last date either party executed
this Agreement, and shall automatically renew for successive one year periods
unless either party notifies the other party in writing of its election to
terminate the Agreement at least sixty (60) days prior to the expiration of the
initial term or any renewal term, as applicable.
9.2 Either party may terminate this Agreement with or without cause,
upon thirty (30) days prior written notice to the other party; provided that, in
the event the terminating party notifies the other party that such other party
has materially breached any provision of this Agreement, the party in breach
shall have thirty (30) days after written notification detailing the breach is
delivered by the non-breaching party to cure such breach. If such breach is not
cured within this thirty (30) day period, the non-breaching party shall confirm
its intention to terminate the Agreement in writing within five (5) business
days, such termination to be effective immediately upon receipt, by the party in
breach, of such written response.
9.3 Upon expiration of this Agreement or termination by either
party, Distributor may return to Supplier for credit any Products in its
inventory or returned to it by its customers within the succeeding one hundred
eighty (180) days under its stock balancing program. Distributor shall be
credited for any Products so returned in an amount equal to the original
purchase price thereof, less any credits pursuant to Section 2.2 hereof which
have been previously paid to Distributor and shall be first applied to any
uncontested amounts due Supplier. Any remaining balance shall be promptly paid
to Distributor. Supplier shall bear all freight costs associated with returns of
Product to Supplier by Distributor under this Section 9 if Supplier is
terminating without cause or Distributor is terminating due to Supplier's
material breach. Distributor will bear all freight costs associated with returns
of Product to Supplier by Distributor under this Section 9 if Distributor is
terminating without cause or Supplier is terminating due to Distributor's
material breach.
10. General.
10.1 Entire Agreement. This Agreement contains all the agreements,
understanding, representations, conditions, warranties and covenants, and
constitutes the sole and entire agreement between the parties hereto pertaining
to the subject matter hereof and supersedes all prior communications or
agreements, written or oral. This Agreement may not be released or modified
except by the mutual written consent of both Distributor and Supplier as
attested to by an instrument signed by an officer of each of them. If any
provision of this Agreement is declared invalid or unenforceable the remaining
provisions of this Agreement shall remain in full force and effect.
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<PAGE> 12
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
10.2 Independent Relationship. Nothing contained herein shall be
deemed or construed as creating a joint venture or partnership between
Distributor and Supplier. Neither Distributor nor Supplier is by virtue of this
Agreement authorized as an agent or other representative of the other.
10.3 Assignment. Except as expressly provided herein, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party; provided, that Distributor
may assign its rights and obligations hereunder to one or more subsidiary or
affiliate corporations without consent, but Distributor shall remain liable for
all obligations hereunder. In the event either party denies consent to
assignment of this Agreement, the other party shall have the right to terminate
under Section 9.2.
10.4 Waiver or Delay. Any waiver of any provision of this Agreement,
or a delay by either party in the enforcement of any right hereunder, shall
neither be construed as a continuing waiver, or create an expectation of
non-enforcement, of that or any other provision of this Agreement, either in the
present or in the future.
10.5 Governing Law and Jurisdiction. The validity, interpretation,
and performance of this Agreement shall be controlled by and construed under the
laws of the of the state of the non-filing parties. Venue shall lie in the
county and state of the non-filing party.
10.6 Force Majeure. Neither party hereto shall be liable for the
failure to perform any of its obligations under this Agreement if such failure
is caused by the occurrence of any force majeure beyond the reasonable control
of such party, including without limitation fire, flood, strikes and other
industrial disturbances, failure of transport, accidents, wars, riots,
insurrections or acts of God.
10.7 Confidentiality. Distributor and Supplier shall hold in trust
and confidence and shall not disclose for a period of [**] from the date of
disclosure any information deemed "Confidential Information" by the disclosing
party and identified as such at the time of disclosure. Information shall not be
deemed "Confidential Information" for the purposes of this Agreement that (i) is
already known to the non-disclosing party at the time of disclosure; (ii) is or
becomes publicly known through no wrongful act of the non-disclosing party,
including by public announcement by the disclosing party; (iii) is received from
a third party without similar restrictions and without breach of this Agreement;
(iv) is independently developed by the non-disclosing party; or (v) is lawfully
required to be disclosed by any governmental agency or otherwise required to be
disclosed by law.
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<PAGE> 13
10.8 Headings. The headings appearing in this Agreement are inserted
only as a matter of convenience and in no way define, limit, construe or
describe the scope or extent of such section or in any way affect such
paragraph.
10.9 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute a single instrument
and agreement.
10.10 Notices. Any notices under this Agreement shall be in writing
addressed to both the President and Contract Administrator of such party at the
address set forth below (or such other address as a party may notify the other
party in accordance with these provisions), and shall be delivered by certified
mail, return receipt requested or by an overnight delivery service of national
standing.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth below.
MERISEL AMERICAS, INC. DRAGON SYSTEMS, INC.
200 Continental Blvd. Address: 320 Nevada St.
P.O. Box 984 Newton, MA 02160
El Segundo, CA 90245-0984
By: /s/ James P. Faulkner By: /s/ Janet M. Baker
-------------------------- --------------------------
Name: JAMES FAULKNER Name: Janet M. Baker
Title: VICE PRESIDENT Title: President
PRODUCT & INVENTORY
MANAGEMENT
Date: 1/7/98 Date: 29 Dec 1997
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<PAGE> 14
EXHIBIT A
PRODUCTS
SUGGESTED DISTRIBUTOR RESELLER % U.S.
PRODUCT LIST PRICE DISCOUNT DISCOUNT MFCTD.
- --------------------------------------------------------------------------------
REBATE
QUARTERLY SALES GOAL REBATE PERCENTAGE
During all subsequent years of the Agreement, the Quarterly Sales Goals and
Rebate Percentage for the year shall be as mutually agreed to by the parties
hereto and shall be based upon Distributor's sales of the Products during the
prior year. Any Quarterly Sales Goals shall, at Distributor's option, be amended
following the end of any calendar quarter, if both parties mutually agree to
such amendments.
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<PAGE> 15
EXHIBIT B
PRODUCT INFORMATION CENTER AND TECHNICAL SUPPORT REQUIREMENTS
1. A new Product Set Up Form must be fully completed for each Product,
update, version change or new Product introduced by Supplier, which
Supplier wishes Merisel to distribute. The Product Set Up Form shall be
provided to Supplier by the Product Information Center.
2. Spec Sheets, Original Data Sheets and additional Supplier-provided
reference materials must be completely legible. Materials which are not
completely legible will be returned to Supplier and will not be used.
3. For each Product distributed by Distributor, Supplier is required to
provide the following:
3.1 Spec and Data Sheets.
3.1.1 Three (3) original Spec or Data Sheets for the Product and any
product information which is available on CD-ROM.
3.1.2 If Supplier is new to Distributor, Supplier must send fifteen
(15) Product family, or company product offering, brochures to
each of the persons listed below:
Director Director
Inside Sales, West Coast Inside Sales, East Coast
Merisel, Inc. Merisel, Inc.
200 Continental Blvd. 293 Boston Post Road West
El Segundo, CA 90245 Marlboro, MA 01752
3.1.3 Distributor part numbers must be affixed to three (3) of the
Spec Sheets referenced in Section 3.1.1. Distributor part
numbers must also be affixed to the back sides of Product
photographs or any sleeves containing transparencies.
3.1.4 If a Spec Sheet refers to multiple Products, all relevant
Distributor part numbers must be listed on such Spec or Data
Sheet.
3.1.5 If a Distributor part number is not available for a Product,
Supplier should refer to its own part number.
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<PAGE> 16
3.2 Logos and Photos.
3.2.1 Two Supplier logos scanned at 2400 dpi resolution into EPS or
TIFF files. One of the EPS or TIFF files must contain a
black-and-white logo and one of the EPS or TIFF files must
contain a color logo.
3.2.2 One (1) approximately 2" x 3" digitized color image of each
product in high resolution CMYK TIFF format ready for output
up to 2400 dpi. (Other formats such as native PhotoShop, EPS,
etc. are also acceptable.)
OR
Digitized images are preferred, but if they are not available please send: One
(1) color photograph of each product (in 35-mm slide, 2 1/4-inch or 4 X 5-inch
transparency format). All photos must be marked with Merisel SKU number and/or
Manufacturer's UPC code. Merisel SKU number and/or Manufacturer UPC code must
also be affixed to the back side of product photos or any sleeves containing
transparencies.
3.3 EMPTY BOXES. Two (2) empty boxes for each of Supplier's software
and/or accessory Product(s) distributed by Distributor.
4. SOFTWARE AND HARDWARE PRODUCT FOR EVALUATION TESTING.
4.1 For all Products which Distributor has not previously
distributed, including, but not limited to, new models or
software updates which differ significantly from previous
releases, Supplier shall provide fully-functional
"Not-For-Resale" ("NFR") software or hardware units of the
Product(s) for a ninety (90) day evaluation testing by
Distributor's Technical Support department, as follows:
4.1.1 Evaluation/NFR units of Products shall be sent to
Distributor's Technical Support operations as follows:
<TABLE>
<S> <C>
National Manager, Tech Support Tech Support Operations
Merisel, Inc. East Coast
200 Continental Blvd. Merisel, Inc.
El Segundo, CA 90245 293 Boston Post Road West
Marlboro, MA 01752
2 Fully-functional copies of 1 Fully-functional copy of
1 unit of each Hardware Software
</TABLE>
-16-
<PAGE> 17
Product
4.2 Supplier must complete and FAX a "Product Tracking Form" to
the Distributor Product Information Center when any unit of
evaluation/NFR Product is shipped as set forth in Section 4.1
above. The Product Tracking Form is available from
Distributor's on-line FAX-back service; Supplier may obtain
the FAX number for such service from the Product Information
Center.
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<PAGE> 18
EXHIBIT C
D.A.T.A. BANK CORE PROGRAM
U.S. Program (U.S. dollars)
Supplier agrees to participate in the D.A.T.A. Bank Program under the following
terms and conditions:
PARTICIPATION DETAILS
1. Initial program, period: Annual: August 1st - July 31st of each year (the
"Program Period'). Participation starting after August 1st of any year
will be prorated. Merisel will invoice Supplier every three months for the
previous three months through July 31st of each year.
2. If Supplier wishes to discontinue participation in the D.A.T.A. Bank
Program, Supplier must provide a minimum of thirty (30) days written
termination notification before the end of the initial, or any subsequent,
Program Period, to the Director of Marketing for Distributor's "'The
Information Company" and Distributor's Contracts Administration Manager.
If such notification is not received within such thirty (30) day period,
Supplier's participation in the D.A.T.A. Bank Program will automatically
renew for that year and each year thereafter unless Supplier provides such
thirty (30) day minimum written notice of its intent to terminate its
participation in the D.A.T.A. Bank Program prior to the end of any Program
Period. Merisel has the right to cancel Supplier's program participation
by providing a minimum, of thirty (30) days written cancellation
notification to Supplier.
3. Supplier must participate in the D.A.T.A. Bank Core Program in order to
participate in unique, targeted Add-on Marketing Opportunities (a separate
contract will be provided for such Add-on Marketing Opportunities).
4. To ensure the D.A.T.A. Bank database remains current, reports will be
provided to participating Suppliers listing an inventory of library items
per SKU at least every two months.
5. Proof of performance will consist of one copy of SELline (one time only,
updates on-line), one copy of each CD-ROM and a listing of SKUs in the
Literature Fax-back System. By signing this agreement, Supplier waives all
rights to further proof of performance.
-18-
<PAGE> 19
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
6. Suppliers are encouraged to promote their participation in D.A.T.A. Bank
with the use of the SELline and D.A.T.A. Bank logos in their reseller
communications.
7. Speed of upload of Supplier Information will depend on quality, volume and
timeliness of information submitted to Merisel by Supplier.
PARTICIPATION REQUIREMENTS
Supplier must maintain current information in Merisel libraries at all times by
providing the necessary coding and supporting materials through the ongoing
product set-up process to take full advantage of D.A.T.A. Bank (e.g., Product
Detail is driven by class codes submitted by Supplier during product set-up).
PARTICIPATION FEES
Participation In D.A.T.A. Bank consolidates the distribution of your information
through Merisel's electronic media: SELline, Salesnet, CD-ROM, and Literature
Fax-back System.
Annual fees (which include setup and maintenance) will be billed [**] and are
based on current Merisel Price Book SKU count a of the date of billing
("baseline" SKU count) and up to 50MB of Library information storage space. If
Supplier SKU count is significantly exceeded (defined as [**] baseline SKU
count), Supplier will be required to upgrade to the next participation level.
Add-on Marketing Opportunities are offered at additional fees.
Fees:
[**]
[The D.A.T.A. Bank Program replaces the current On-Line Literature Library
(OLLL). This agreement supersedes any prior agreement or terms for the OLLL
program. By signing this agreement, Supplier authorizes Merisel to transfer
funds remaining in the OLLL to D.A.T.A. Bank Program equivalents.]
-19-
<PAGE> 20
EXHIBIT D
CERTIFICATE OF ORIGIN
(Document Original To Be Attached)
-20-
<PAGE> 21
MERISEL AND MERCHANDISING SOLUTIONS
MILITARY EXCHANGE PROGRAM AMENDMENT
This amendment (the "Amendment") is made as of by __________________________ and
between Merisel Americas, Inc. ("Distributor") and Dragon Systems, Inc.
("Supplier") and constitutes an amendment to the Distributor Agreement between
Distributor and Supplier dated (the "Agreement"). This Amendment is
applicable to Products purchased for resale to Military Exchange Customers of
Merisel; purchases of Products by Distributor for resale to other customers
shall remain governed by the Agreement without reference to this Amendment. To
the extent this Amendment conflicts with the terms of the Agreement, the terms
of this Amendment shall govern and shall replace and supersede the Agreement; to
the extent this Amendment conflicts with, or adds to, the terms of any amendment
executed prior to the date of execution below, the terms of this Amendment shall
govern and shall replace and supersede the previously executed document; all
other terms and conditions of the Agreement shall remain in full force and
effect. In consideration of the representations, warranties, covenants and
agreements set forth herein and intending to be mutually bound, the parties
hereto agree as follows:
1. MILITARY EXCHANGES PROGRAM PARTICIPATION: Supplier agrees to participate
in Distributor's Military Exchange Program. Such participation in the Program
provides the following benefits:
- - Products(s) placed in approximately 225* military bases worldwide.
- - Products priced competitively.
- - Product inventory is managed remotely (electronically) and through planned
monthly in-store visits* which guarantees accurate inventory and
exceptional reporting.
- - Product presentations and POP placements are managed through monthly
in-store visits*.
- - Proof of performance reporting, including sales, turns, and returns is
provided monthly.
- - No charge to Supplier for on-site destruction by detailing partner*.
* Number may vary based on base openings and/or closings, and
allowable Planogram (number of SKUs at each base location).
Detailing is provided by Watt/Spohn Universal.
2. MILITARY EXCHANGES PARTICIPATION COSTS: To defray the costs of supporting
the Military Exchange's contractual requirements for:
- - Best of class pricing
- - International freight
- - In-store inventory management
-1-
<PAGE> 22
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
- - In-store detailing
all provided by Distributor and Merchandising Solutions; Distributor shall
debit, monthly, from amounts owed to Supplier, an amount equal to [**] of the
Cost Of Goods Sold (COGS), based on net sales.
3. EXCEPTION RETURNS. Returns from Military Exchange Customers are limited,
by Distributor, to [**] of the Military Exchange Customer's net purchases made
in the prior calendar quarter. In the event any Military Exchange Customer
returns Product in excess of [**] of such Military Exchange Customer's purchases
of Supplier's Product(s) made in the preceding calendar quarter, Supplier shall
be charged an Exception Returns fee equal to [**] of the aggregate value of the
Product returned which exceeds the [**] Military Exchange Customer returns
allowance to offset the costs incurred by Distributor to handle each such
exception return. In the event the parties mutually determine that a substantial
return was the sole result of Distributor's actions, that return shall not count
towards the percentages set forth above.
4. DESTRUCTION OF PRODUCT. At Supplier's option, Distributor shall arrange to
have destroyed at an on-site location all Product that Distributor would
otherwise have the right to return under the terms and conditions of the
Agreement and/or of this Amendment. Distributor shall contact Supplier, on a
case by case basis, to either arrange the return of such Product, or arrange the
destruction of said Product, at Supplier's option. Product that is destroyed in
accordance with the terms and conditions of this section shall not be subject to
the Exception Returns fee outlined above in Section 3. Supplier shall be
responsible for all costs of such on-site destruction of said Product, should a
charge for such service in the future arise.
5. REPORTS AND PAYMENT OF CREDITS. Within fifteen (15) days after the end of
each month, Distributor shall provide Supplier with a report detailing the
number of units and aggregate Purchase Price of all Products shipped by
Distributor to Military Exchange Customers of Merisel in such month and the
amount of credit due Distributor under this Amendment. Distributor will deduct
such amount from amounts due Supplier. In the event (i) no uncontested amounts
are due Supplier by Distributor, or (ii) the amount of such uncontested amount
due to Supplier is not equal to the amount of such credit, Supplier shall pay
Distributor the full amount or remaining balance of such credit promptly upon
written request by Distributor, in a manner that is acceptable to Distributor.
This Amendment shall not be binding upon either party hereto until it has been
executed by a duly authorized officer of each party. This Amendment may not be
-2-
<PAGE> 23
released or modified except by the mutual written consent of both Distributor
and Supplier as attested to by an instrument signed by an officer of each of
them.
Except as modified herein, the terms and conditions of the existing
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment is executed as of the day and year first
above written.
MERISEL AMERICAS, INC. DRAGON SYSTEMS, INC.
200 Continental Blvd. Address: 320 Nevada Street
P.O. Box 984 Newton, MA 02160
El Segundo, CA 90245-0984
By: /s/ James P. Faulkner By: /s/ Janet M. Baker
----------------------------- -----------------------------
Name: JAMES FAULKNER Name: Janet M. Baker
Tide: VICE PRESIDENT Title: President
PRODUCT & INVENTORY MANAGEMENT
Date: 1/7/98 Date: Dec 29, 1997
-3-
<PAGE> 24
RETAIL DIVISION
DISTRIBUTION AGREEMENT AMENDMENT
This amendment (the "Amendment") is made as of by and between Merisel
Americas, Inc. ("Distributor") and Dragon Systems, Inc., ("Supplier") and
constitutes an amendment to the Distributor Agreement between Distributor and
Supplier dated (the "Agreement"). This Amendment is applicable to
Products purchased for resale to Distributor's Retail Division Customers of
Merisel's Retail Products Division; purchases of Products by Distributor for
resale to other customers shall remain governed by the Agreement without
reference to this Amendment. To the extent this Amendment conflicts with the
terms of the Agreement, the term of this Amendment shall govern and shall
replace and supersede the Agreement; all other terms and conditions of the
Agreement shall remain in full force and effect. In consideration of the
representations, warranties, covenants and agreements set forth herein
(including the definitions set forth in Exhibit A hereto) and intending to be
mutually-bound, the parties hereto agree as follows:
1. Retail Division Programs.
1.1 Administrative Services, Distributor agrees that it will distribute
and license Products purchased under this Amendment only to Retail Division
Customers. As used in this Amendment, "Retail Division Customer" shall mean any
entity who purchases products from the Retail Products Division of Distributor
for sale to end-users and for which Distributor provides one or more of the
following services: monthly inventory forecasting models; monthly inventory
audits to determine stock on hand and sell-through; dedicated customer support
representatives for stock balancing, product version change rotation,
refurbishment procedures and special return authorization requests; specialized
financing options; dedicated accounts receivable management representatives and
procedures; special operations support including customer-specific product
labeling, unique carton markings and special freight handling procedures; and
weekly telecopy reports detailing new product additions, product version
changes, discontinued products, product price changes, and promotional
opportunities.
1.2 Mutual Funds Program. Supplier shall cooperate, with Distributor's
Retail Products Division in the Mutual Funds Program for its Retail Division
Customers. Mutual Funds provided to Distributor by Supplier for the Mutual Funds
Program shall be passed through to the Retail Division Customer by Distributor.
In addition, Supplier may, from time to time at its sole discretion, separately
authorize Distributor to conduct advertising and other activities and may agree
at that time to pay the costs from funds outside of the allowance granted in the
preceding sentence. In the event Supplier elects to terminate the provision of
funds under this Section 1.2, Supplier shall provide Merisel with not less than
ninety (90) days prior written notice
-1-
<PAGE> 25
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
of such termination, and such notice shall be sent in accordance with the Notice
requirements set forth in the Agreement.
2. Retail Division Fees and Rebate.
2.1 Administrative Services Fee. To defray the cost of the Administrative
Services set forth in Section 1.1 above provided by Distributor to Retail
Division Customers, Supplier shall credit Distributor's account, in accordance
with the procedures described in Section 6.1, with an amount equal to [**] of
the aggregate Purchase Price of all Products shipped by Distributor to Retail
Division Customers.
2.2 Mutual Funds Cost. Supplier shall be responsible to pay as its share
of the cost of the Mutual Funds Program an amount equal to [**] of the Retail
Product Division's net cost of goods sold to those Customers listed on Exhibit
B. Exhibit B may be amended from time to time to reflect additional Retail
Division Customers. If Supplier wishes to exclude any of the additional Retail
Division Customers from the Mutual Funds Program, Supplier must promptly notify
Distributor, in writing. Supplier shall credit Distributors account with the
amounts contemplated under this Section 2.2, in accordance with the procedures
described in Section 6.1.
2.3 Automatic Rebate. In the event Distributor is able to secure the
placement of any of the Products purchased hereunder with any Retail Division
Customer listed on Exhibit C. Supplier shall provide Distributor with a
one-time, non-recurring rebate of an additional [**] of the aggregate value of
the initial stocking order placed by the Retail Division Customer with
Distributor. Such rebate will be paid to Distributor by Supplier within thirty
(30) days after Distributor's placement of the initial stocking order for such
new Retail Division Customer, in accordance with the procedures described in
Section 6.2.
3. Product Changes and Price Protection.
3.1 In the event that Supplier shall (a) sell any additional Product not
set forth in the Agreement (b) introduce a new version or materially change the
specifications or packaging of, or discontinue any Product, or (c) change the
Suggested List Price of any Product, Supplier shall notify Distributor at least
as quickly as Supplier notifies any other customer of Supplier. Such notice
shall be sent via certified mail, Federal Express or other express mail service,
to the Product and Inventory Management Department of Distributor.
3.2 In the event that the Purchase Price of any Product is reduced through
a reduction in the Suggested List Price of such Product or any other price or
Discount
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<PAGE> 26
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
reduction is made by Supplier, on a temporary or permanent basis to any other
distributor, Supplier will credit to Distributor an amount equal to the product
of (a) the difference between the new Purchase Price and the former Purchase
Price for such Product and (b) the number of units of such Product then in
Distributor's Inventory or Distributor's Retail Division Customers' inventory,
such credit to be paid as set forth in accordance with the procedure specified
in Section 6.2 hereof. All orders in transit and unshipped orders already
scheduled by Supplier for Product affected by such price reduction shall be
automatically adjusted by Supplier to reflect such decrease. If the purchase
price of any Product is increased, Supplier shall honor any Distributor purchase
orders placed prior to the effective date of the increase at the price in effect
immediately prior to the time the increase is announced.
4. Product Returns: Stock Balancing, Discontinued Products, Exception
Returns.
4.1 Distributor may at any time or from time to time after the date hereof
return to Supplier all Products from Inventory, including those Products
returned by the Retail Division Customers during the term of the Agreement, upon
written notice to Supplier. Within thirty (30) days of Supplier's receipt of
such returned Products, Supplier shall credit Distributor with an amount equal
to the Return Price of such Products, in accordance with the procedures
described in Section 6.2. Distributor will bear the transportation costs to
Supplier's U.S. location for all Products so returned.
4.2 In the event Supplier discontinues any Product or declares any Product
to be obsolete, or end-of-life, Distributor shall have the right to return all
units of such Product then in its Inventory, including those Products returned
by the Retail Division Customers during the term of the Agreement, for credit in
the amount of the Return Price of such discontinued Product, such credit to be
paid in accordance with the procedures described in Section 6.2. Supplier will
bear the transportation costs to Supplier's U.S. location for all Products so
returned.
4.3 In the event the Retail Division Customer returns any Product to
Distributor, based on the failure of such Product to sell at an acceptable level
through the Retail Division Customer, Distributor shall have the right to return
all units of such Product then in its Inventory, including those Products
returned by the Retail Division Customers during the term of the Agreement, for
credit in the amount of the Return Price of such Product. Such credit shall be
paid in accordance with the procedures described in Section 6.2. Distributor
will bear the transportation costs to Supplier's U.S. location for all Products
so returned.
4.4 Exception Returns: Returns from Retail Division Customers are limited,
by Distributor, to [**] of the Retail Division Customer's net purchases made in
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<PAGE> 27
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
the prior calendar quarter. In the event any Retail Division Customer returns
Product in excess of [**] of such Retail Division Customer's purchases of
Supplier's Product(s) made in the preceding calendar quarter, Supplier shall be
charged an Exception Returns fee equal to [**] of the aggregate value of the
Product returned which exceeds the [**] Retail Division Customer returns
allowance to offset the costs incurred by Distributor to handle each such
exception return. In the event that the parties mutually determine that a
substantial return was the sole result of Distributor's actions, that return
shall not count towards the percentage set forth above.
5. Defective Products. Distributor may return any unit of Product which it or
any Retail Division Customer finds to be defective in workmanship or material or
damaged in shipment to Distributor for credit in the amount of the Return Price
of such unit. Such credit shall be paid in accordance with the procedures
described in Section 6.2. All transportation charges for Product so returned
shall be borne by Supplier.
6. Reports and Payment of Credits.
6.1 Within fifteen (15) days after the end of each month, Distributor
shall provide Supplier with a report detailing the number of units and aggregate
Purchase Price of all Products shipped by Distributor to Retail Division
Customers in such month and the amount of credit due Distributor under Sections
2.1 and 2.2 hereof with respect thereto. Within thirty (30) days of receipt of
such report, Supplier shall credit Distributor's account for the aggregate
credit set forth in such report. If such credit is not received within such
thirty (30) day period, Distributor may, at Distributor's option, deduct such
amount from amounts due Supplier. In the event (i) no uncontested amounts are
due to Supplier by Distributor; or (ii) the amount of such uncontested amount
due to Supplier is not equal to the amount of such credit, Supplier shall pay
Distributor the full amount or remaining balance of such credit promptly upon
written request by Distributor.
6.2 Any credits due to Distributor, by Supplier, as specified in Sections
3.2, 4.1, 4.2, 4.3, 4.4 and 5 of this Amendment shall be paid to Distributor
within thirty (30) days from the date of the return for which such credit is to
be issued. Any such credit shall be applied to any uncontested, outstanding
amounts due to Supplier by Distributor with respect to the Products. In the
event (i) no uncontested amounts are due to Supplier by Distributor; or (ii) the
amount of such uncontested amount due to Supplier is not equal to the amount of
such credit, Supplier shall pay Distributor the full amount or remaining balance
of such credit promptly upon written request by Distributor.
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<PAGE> 28
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
7. Other Term and Provisions.
7.1 In the event of any shortage of newly launched Product(s), upon order
by Distributor, Supplier shall ship to Distributor a pro rata share of available
Product based on the percentage of Product previously purchased by Distributor
in the prior two (2) calendar quarters in relation to other similarly situated
distributors and aggregators
7.2 Supplier shall mark each Product sold under this Amendment with the
appropriate UPC Bar Code and shall, upon the request of Distributor, provide
Distributor with all information regarding the UPC Barcode and its contents.
Supplier shall indemnify Distributor, hold it harmless and reimburse it for any
and all expenses or costs incurred by Distributor in the event such bar code, or
bar code information, is incorrect or erroneous.
7.3 In the event that the Agreement is terminated, Distributor shall have
the right to return any or all Products of Supplier remaining in Distributor's
inventory, its Retail Division Customers' inventory and/or returned to
Distributor by its Retail Division Customers [**] under its dealer stock
balancing program. Supplier shall repurchase such returned products at their
Return Price.
7.4 Execution. The Amendment shall not be binding upon either party hereto
until it has been executed by a duly authorized officer of each party. This
Amendment may not be released or modified except by the mutual written consent
of both Distributor and Supplier as attested to by an instrument signed by an
officer of each of them.
-5-
<PAGE> 29
Except as modified herein, the terms and conditions of the existing Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment is executed as of the day and year first
above written.
MERISEL AMERICAS, INC. DRAGON SYSTEMS, INC.
200 Continental Blvd. 320 Nevada Street
P.0. Box 984 Newton, MA 02160
El Segundo, CA 90245-0984
By: /s/ James P. Faulkner By: /s/ Janet M. Baker
--------------------------- ---------------------------
Name: JAMES FAULKNER Name: Janet Baker
Title: VICE PRESIDENT Title: President
PRODUCT & INVENTORY MANAGMENT
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<PAGE> 30
EXHIBIT A
DEFINITIONS
For the purpose of this Agreement, the following terms shall have the meanings
set forth below:
1. "Discounts" shall mean the discount from the Suggested List Price of
the Product used to determine the Purchase Price of such Product.
2. "Distributor" shall mean any person or entity purchasing Products from
Supplier for sale to Retailers.
3. "Inventory" shall mean at any time all units of Product (a) in
Merisel's inventory, (b) ordered by Merisel but not yet received by Merisel at
such time, and/or (c) returned by Retail Division Customers to Merisel within
one hundred eighty (180) days of such time.
4. "Merisel" shall mean Merisel, Inc. and any parent, subsidiary or
affiliated corporations it may have during the term hereof.
5. "Products" shall mean all of the present and future personal computer
and related products designated by Supplier for standard retail distribution in
U.S. and Canada during the term of this Amendment and all improvements and
variations thereof, including, without limitation, all foreign language versions
for distribution in the U.S. and Canada.
6. "Purchase Price" of any Product shall be as determined under the
Agreement.
7. "Retailer" shall mean any person who sells any Product to end-users in
retail stores.
8. "Return Price" for any unit of Product shall mean the amount originally
billed Merisel for such unit less any rebates or amounts under Section 2 with
respect to such unit actually paid or credited by Supplier to Merisel.
9. "Reseller" shall mean any person or entity who resells any product.
10. "Suggested List Price" of any Product shall mean the retail sales
price of such Product as suggested by Supplier to retailers.
EXHIBIT B
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<PAGE> 31
Mutual Funds Retailer List
<TABLE>
<S> <C> <C>
2Connect Computer Emporium Home Shopping
47th St. Photo Computer Express Network
Aafee Computer Express Inc. Tri-City Sales, Inc.
ABM Group Corp. Computer Hut Information
Advanced Logic Computer Images Technologies, Inc.
Industries, Inc. Computer Marketplace, Infostar, Inc.
Advanced Micro Inc. Intelicom, USA
Solutions Computer Network J&R Computer World
American Appliance Services Jade Systems
Anmar's Computer Network Jonathan's Computer
Ann & Hope Systems Corp. Centers
Apex Department Stores Computer Paradise K & K Laser Graphix
Atchley Appliance & TV Computer SuperCenter Kay-Bee Toy Stores
Atlantic N.E. Marketing, Computer Systems of Key America
Inc. Sumter KFBC, Inc.
AVR Enterprises, Inc. Computer Town L.O.S.
Barnes & Noble Computerbanc Corporation/Nationwide
Beat Street Computers Etc. Laptop Superstores
BJ's Wholesale Club Connect Computer Corp. Learning Smith
Blumenthal's Connecting Point Lipman Computers
Boscov's Department Computer Ctr. Management Advisory
Store County TV & Appliance Software
Brandsmart USA CyberPlay McAuliffe, Inc.
Burdines Cybersmith McCartney's Computer
Caldor CyberWarehouse Center
Capitol Computers, Inc. Daily Business Mega Port, Inc.
Central Data Computer Products/ISG Metro Business Systems
Ctrs Data Trend, Inc. Micro Products
Chaney Computer Datavision Computer Micro-Computer Centre
Assoc., Inc. Video Micro/Center
Chemung Computer Electronics Boutique MicroGallery, Inc.
Cherrytree Software Friendship Computer Microland
Circuit City Stores Supplies MicroRetailing, Inc.
Clipper Technologies, Future Computer Inc. Moovies
Inc. H & H Service Store More Computers
College & University Hartney Enterprises Inc. N.E. Microcomputer
Computers Heilig-Meyers Solution
Comcity Inc. HMV Record Stores Nationwide Comp. &
Command Services Holdren's Electronics
Compunet Home Depot Nationwide Computers
Computeam Home Entertainment Co. Nationwide TV &
Computer Concepts Inc. Appliance
</TABLE>
-8-
<PAGE> 32
<TABLE>
<S> <C>
NATM Technology Works, Inc.
Navy Exchange The ASCII Group
Command The Computing Center
Nobody Beats the Wiz The Consumer
Noodle Kidoodle Expo/Event Mkt.
OEO, Inc. The Molway
Office Depot Corp./Bitznbytes
Omnitech Computer, The Shields Group, Inc.
Inc. TOPS Appliance City
P.C. Richard & Son Toys R Us
Patterson-Erie Corp. TransNet Corporation
PC Connection UL&F Computers
PC Warehouse Un-Plug it
PC's Complete United CD-ROM
Percy's Univ. System & Service
Personal Computer of Princeton
Store, Inc. Valens Information
QVC Systems, Inc.
RCS Voyles, Inc.
Roberds Well Informed
Sason Corporation Computing
Shoreline Computers West Coast
Inc. Entertainment
Simplex Computer Whalley Computer
Centers Assoc., Inc.
Sixth Avenue Electronics Wood Market, Ltd.
City Zany Brainy
Software City
Software City Computer
Center
Software City Computer
Center
Software City of Puerto
Rico
Spec's Music
Staples, Inc.
State Street Discount
Sunrise Computers
Syracuse Computer
Store, Inc.
System Plus Computers,
Inc.
Technical Challenge, Inc.
Technical Institute
</TABLE>
-9-
<PAGE> 33
Exhibit C
Automatic Rebate Retailer List
<TABLE>
<S> <C> <C>
Connect Learning Smith The Consumer Expo/Event Mkt.
Capitol Computers, Inc. Metro Business Systems TOPS Appliance City
Chaney Computer Assoc., Inc. Micro-Computer Centre Well Informed Computing
Cherrytree Software MicroGallery, Inc. Whalley Computer Assoc., InC.
Comcity Inc. MicroRetailing, Inc.
Command Services More Computers
Compunet Nationwide Comp. & Electronics
Computeam Omnitech Computer, Inc.
Computer Concepts Inc. PC. Connection
Computer Emporium PC's Complete
Computer Express Personal Computer Store, Inc.
Computer Express Roberds
Computer Hut Sason Corporation
Computer Images Shoreline Computers Inc.
Computer Marketplace, Inc. Simplex Computer Centers
Computer Network Services Sixth Avenue Electronics City
Computer Network Systems Corp. Software City
Computer SuperCenter Software City Computer Center
Computer Systems of Sumter Software City Computer Center
Computers Etc. Software City of Puerto Rico
Connect Computer Corp. Syracuse Computer store, Inc.
Connecting Point Computer Ctr. The Computing Center
</TABLE>
-10-
<PAGE> 34
DRAGON SYSTEMS, INC.
The Natural Speech Company 320 NEVADA STREET
NEWTON, MASSACHUSETTS 02160
AMENDMENT
March 10, 1998
Mr. James Faulkner
MERISEL AMERICAS, INC.
200 Continental Blvd.
P.O. Box 984
El Segundo, CA 90245-0984
Dear Mr. Faulkner:
In light of the training and special use requirements of Dragon
NaturallySpeaking,(TM) Deluxe Edition and other high-end products, we are now
requiring Certification of all our Resellers who resell our Deluxe Edition.
Distributors may not sell such product to any Reseller who does not have this
Certification. Therefore, the following provision amends the January 7, 1998
Agreement between DRAGON and Merisel and is to be inserted as Paragraph 10.11 in
the Agreement.
10.11 "Reseller Certification. Commencing on March 1, 1998, DRAGON
requires that all its Distributors use reasonable efforts to ensure that
their resellers procure a Certification Number from DRAGON that allows the
reseller to sell Dragon NaturallySpeaking(TM), Deluxe Edition and other
high-end DRAGON products (generally, those products which retail for $500
or more). Resellers are specifically prohibited from selling these
products without this Certification. Distributor may not sell such
products without first ascertaining that the reseller has procured such
Certification."
Please sign below indicating your acknowledgment and acceptance of this
Amendment.
Sincerely,
/s/ S. Semenzato
- ------------------------------
Steve Semenzato
Director, North American Sales
ACKNOWLEDGED AND ACCEPTED
By: James P. Faulkner
--------------------------
Signature: /s/ James P. Faulkner
Title: VP Product / Inventory Mgt
Date: 5/13/98
tel + 1 (617) 965-5200 fax + 1 (617) 527-0372 www.naturalspeech.com
-11-
<PAGE> 1
EXHIBIT 10.15
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Authorized Distributor Agreement, Version 1.0 1 3/12/98
AUTHORIZED DISTRIBUTOR AGREEMENT
THIS AGREEMENT is made Multimicro inc, 1998
between:
DRAGON SYSTEMS, INCORPORATED
320 NEVADA STREET
NEWTON, MASSACHUSETTS 02160
USA
(hereinafter "DRAGON")
AND
MULITMICRO, INC.
9393 LOUIS H. LAFONTAINE
VILLE D'ANJOU
QUEBEC
CANADA
H1J 1Y8
FAX: 514-354-2299
(hereinafter "DISTRIBUTOR")
<PAGE> 2
Authorized Distributor Agreement
Revision 3/12/98
LIST OF APPENDICES
Appendix A: Products
Appendix B: Territories
Appendix C: Quotas/Prices
appendix D: Trademark Guidelines
Appendix E: List of Distributors in Territories
Appendix F: License Agreement
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<PAGE> 3
Authorized Distributor Agreement
Revision 3/12/98
1. DECLARATIONS.
Whereas DRAGON develops, manufactures and/or distributes certain products shown
in Appendix A and which may be changed from time to time, ("PRODUCTS"); and
WHEREAS DISTRIBUTOR, distributes, markets, and sells items used in the computer
and software field, and
WHEREAS RESELLER, markets and sells items used in the computer and software
field to end users, and includes
WHEREAS the PARTIES intend to enter into an agreement pursuant to which
DISTRIBUTOR will solicit orders from RESELLERS for the purchase of the PRODUCTS
in the areas ("TERRITORIES") specified in Appendix B;
NOW, THEREFORE the PARTIES hereto agree as follows:
2. APPOINTMENT AND DUTIES.
2.1 APPOINTMENT OF DISTRIBUTOR
DRAGON hereby appoints and grants to DISTRIBUTOR the non-exclusive right to sell
the PRODUCTS provided by DRAGON within TERRITORIES.
(a) If the DISTRIBUTOR does not meet an assigned quarterly quota as defined
in Appendix C this AGREEMENT is terminated immediately, unless DRAGON
extends AGREEMENT in writing.
(b) DRAGON retains the right to negotiate and transact directly with all
customers within the territory.
2.2 DUTIES OF DISTRIBUTOR
DISTRIBUTOR agrees that it shall use reasonable efforts to promote the sale and
distribution of the PRODUCTS, including, but not limited to:
(a) Ensuring that its staff is appropriately trained by DRAGON or its
designee as needed;
(b) Following-up any and all leads of prospective buyers furnished to
DISTRIBUTOR by DRAGON in a timely and efficient manner
(c) Participating in promotions and selling programs sponsored by DRAGON;
(d) Complying with all reasonable standards of DRAGON for displaying,
advertising, demonstrating, and explaining the operation and use of the
PRODUCTS to RESELLERS and prospective RESELLERS;
-3-
<PAGE> 4
Authorized Distributor Agreement
Revision 3/12/98
(e) Using its best efforts to resolve any customer satisfaction issues that
may arise from the use of DRAGON's PRODUCTS;
(f) Submitting to DRAGON financial data on a yearly basis. Public companies
should also include annual report with such financial data.
(g) Advising DRAGON immediately of any legal notices served on DISTRIBUTOR
or filed by DISTRIBUTOR which might affect DRAGON or the market
prospects of the PRODUCTS;
(h) Supplying DRAGON with monthly sell through data including reseller
name, address, street, zip, country and telephone number along with
number of units of Dragon Products sold by SKU and version. This is a
condition precedent to DRAGON giving any Marketing Development Funds to
DISTRIBUTOR.
(i) Ensuring that RESELLERS of the Dragon NaturallySpeaking Deluxe and
other high-end DRAGON Products receive a Certification Number from
Dragon before selling such Product.
(j) Making available to RESELLERS designated new products as they become
available from DRAGON
DISTRIBUTOR understands that failure to satisfactorily perform the above duties
will provide grounds for termination of this Agreement.
2.3 DUTIES OF DRAGON.
DRAGON shall provide to DISTRIBUTOR:
(a) training of DISTRIBUTOR's salespeople and technical support people in
the important characteristics, benefits, markets, competition, and
operation of PRODUCTS; the frequency, duration, location, subject
matter, and cost of training shall be provided as appropriate in the
judgment of DRAGON. DRAGON will not pay a fee associated with training
of DISTRIBUTOR staff.
(b) when available, reasonable quantities, at a reasonable cost, and in a
timely manner, of information, descriptive materials, demonstration
programs, and manuals on the sale, and support of PRODUCTS;
(c) (3) three copies of PRODUCT at no charge for internal use only by
DISTRIBUTOR;
(d) reasonable access to DRAGON's pre-sale and post-sale technical
assistance information sources as needed by DISTRIBUTOR with regard to
the application and uses of the PRODUCTS;
(e) according to DRAGON's then-current DISTRIBUTOR lead distribution
policy, timely sales leads of prospective buyers who have responded to
DRAGON's advertising or public relations efforts;
(f) inclusion of DISTRIBUTOR's name and contact information in DRAGON's
home page information on the World Wide Web.
-4-
<PAGE> 5
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Authorized Distributor Agreement
Revision 3/12/98
(g) whenever possible thirty (30) days advanced notice of expected changes
in DRAGON policy, products or DISTRIBUTOR promotions including new
versions, new pricing, special DISTRIBUTOR promotions, etc.
(h) notification of any new Distributors in the Territories in addition to
those listed on Appendix E
Notwithstanding anything to the contrary contained herein, DRAGON shall have no
obligation to provide servicing, repairs, counseling or other assistance to any
customers of DISTRIBUTOR unless DRAGON has made agreements with any such
customer directly.
3. PRICING & TERMS.
PRICE FROM DRAGON TO DISTRIBUTOR. For each item or type of PRODUCTS ordered by
DISTRIBUTOR from DRAGON during the term of this Agreement, DISTRIBUTOR shall pay
to DRAGON the Distribution price listed on Appendix C.
DISCOUNT. DRAGON will give DISTRIBUTOR a discount on the Product price in the
event the quarterly sales goals on Appendix C are met.
PRICE CHANGES. DRAGON retains the right to change the product and pricing
schedules, set forth in Appendices A and C. Whenever possible DRAGON will give
DISTRIBUTOR 30 days prior notice.
TERMS AND CONDITIONS OF SALES. Costs of duties, customs, and taxes shall be the
exclusive responsibility of the DISTRIBUTOR. Cost of ground freight will be the
responsibility of DRAGON.
PAYMENT TERMS
DRAGON grants DISTRIBUTOR the option of the following payment terms: Net 60
days, with a [**] at the time of shipping or [**] of receipt of Product and
invoice. For purposes of determining discount, payment is deemed made on the day
received by DRAGON.
4. SALES REQUIREMENTS.
SALES WITHIN TERRITORIES. This Agreement only provides authorization for
DISTRIBUTOR to resell DRAGON's products through its own sales and marketing
efforts within the TERRITORIES, and/or through its facilities located within the
TERRITORIES as specified in Appendix B. Sales of DRAGON's product through other
facilities or through selling/marketing programs outside of the TERRITORIES,
without express written permission from DRAGON, is grounds for termination of
this Agreement by DRAGON.
-5-
<PAGE> 6
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Authorized Distributor Agreement
Revision 3/12/98
5. APPOINTMENT OF RESELLERS BY DISTRIBUTOR
DISTRIBUTOR is authorized to appoint third parties ("RESELLERS") to assist in
the sales of DRAGON's products, and fulfillment of DISTRIBUTOR's duties as
defined above, provided that:
(a) DISTRIBUTOR uses its good faith efforts to appoint RESELLERS whose
ethics, business practices, and professionalism are consistent with
DRAGON's.
(b) Such DEALERS are located solely within the TERRITORIES specified in
Appendix B and will be bound by the same restrictions as above.
(c) DISTRIBUTOR is only authorized to sell to RESELLERS. DISTRIBUTOR is NOT
authorized to sell any of DRAGON's products directly to end-users.
d) All orders for PRODUCTS supplied to RESELLERS must be placed to DRAGON
through DISTRIBUTOR and DISTRIBUTOR shall retain any and all financial
responsibilities for such purchases.
(e) DISTRIBUTOR will remain responsible for meeting its duties as defined
above with respect to any users of RESELLERS
6. ADVERTISING AND MARKET DEVELOPMENT PROGRAM
DRAGON grants DISTRIBUTOR a cooperative advertising allowance of [**] of Product
invoice amount for such advertising featuring Product and/or DRAGON. DISTRIBUTOR
shall submit advertising to DRAGON for review and approval prior to any initial
release. Upon receipt of evidence of Authorized Distributor Agreement such
advertising expenditures, DRAGON agrees to credit the amount thereof against
future DISTRIBUTOR purchases.
DRAGON will provide an [**] for Marketing Development Funds which will be used
for marketing activities specific to DRAGON products. DISTRIBUTOR and DRAGON
will reach prior agreement on how these funds are to be used. These funds are
subject to completion of reports required of DISTRIBUTOR pursuant to section
2.2(h) herein.
Whether or not DISTRIBUTOR uses or qualifies for DRAGON's Market Development
Funds, DISTRIBUTOR agrees to use a DRAGON-approved logo or mark on any of
DISTRIBUTOR's advertising or marketing communications that feature DRAGON's
products, but only according to the provisions in paragraph 7 below, and
according to DRAGON's guidelines, which are attached hereto as Appendix D.
It is understood that the co-op allowance, the marketing development funds and
the discount for meeting the quarterly sales targets are net of all price
protections, rebates, and returns.
-6-
<PAGE> 7
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Authorized Distributor Agreement
Revision 3/12/98
7. REPRESENTATIONS BY DISTRIBUTOR.
Under this Agreement, DISTRIBUTOR may represent that it is an authorized
DISTRIBUTOR of DRAGON's products in the TERRITORIES.
DISTRIBUTOR agrees not to in any way misrepresent, or in any way cause to be
ambiguous (especially with respect to prospective customers, journalists, or
market analysts, etc.) about DISTRIBUTOR's relationship with DRAGON,
DISTRIBUTOR's duties as specified in this Agreement, the features of DRAGON's
products including any technical specifications, expected benefits of use, and
the origin of DRAGON's products. In particular, DISTRIBUTOR shall not represent
itself as an exclusive agent or exclusive distributor of DRAGON's products. The
DISTRIBUTOR shall not represent itself as the developer or manufacturer of
DRAGON's products, or as DRAGON itself.
8. STOCK ROTATION AND RETURNS
DISTRIBUTOR shall be allowed to return Product for [**] after purchase of
Product. The Product being returned as overstock will have return ground
shipping paid for by DISTRIBUTOR. Defective Products will be destroyed on a
monthly basis except for unused headsets upon DRAGON's approval, which will be
shipped to Dragon freight collect. DISTRIBUTOR will provide proof of on-site
destruction prior to issuance of credit by DRAGON.
DRAGON shall give DISTRIBUTOR [**] of product discontinuation. DISTRIBUTOR may
return all such products to DRAGON [**] incurred by DISTRIBUTOR in returning the
product, within [**]. [**].
In the event that DISTRIBUTOR wishes a return of Product, it will request an RMA
(Return Merchandise Authorization Number) DISTRIBUTOR shall issue an RMA within
5 business days. DRAGON will accept product returns only when clearly labeled
with the RMA.
9. WARRANTY.
DRAGON warrants that its PRODUCTS shipped to DISTRIBUTOR shall be free from
material defect and shall be reasonably suitable for resale. Unless otherwise
specified, the warranty period for DRAGON's products shall be ninety (90) days
from date of DRAGON's shipment. In the event that DISTRIBUTOR finds such defects
in DRAGON's products DISTRIBUTOR's sole remedy shall be the repair, replacement
or refund of the amounts paid to DRAGON for any defective product, at the sole
discretion of DRAGON.
IN NO EVENT SHALL DRAGON BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL OR SPECIAL
DAMAGES, OR FOR INSTALLATION, ADJUSTMENTS, OR OTHER EXPENSES WHICH MAY ARISE
FROM THE PURCHASE OR RESALE OF PRODUCTS. NO WARRANTIES OTHER THAN THOSE
EXPRESSLY SET FORTH ABOVE SHALL APPLY, AND DRAGON MAKES NO EXPRESS OR IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ITS
PRODUCTS.
-7-
<PAGE> 8
Authorized Distributor Agreement
Revision 3/12/98
DISTRIBUTOR UNDERSTANDS THAT DRAGON'S SPEECH RECOGNITION PRODUCTS ARE BASED UPON
A STATISTICAL PROCESS IN WHICH ERRORS ARE AN INHERENT PART OF THEIR OPERATION.
DISTRIBUTOR ACCEPTS THE RESPONSIBILITY OF ENSURING THAT ITS RESELLERS AND THEIR
CUSTOMERS UNDERSTAND THAT SUCH ERRORS ARE INEVITABLE AND THAT ITS CUSTOMERS AND
ITS RESELLERS AND RESELLERS CUSTOMERS ARE RESPONSIBLE FOR CORRECTING SUCH
ERRORS. DRAGON SHALL IN NO EVENT BE LIABLE FOR ANY DIRECT OR INDIRECT DAMAGES,
INCLUDING PERSONAL INJURY OR DEATH, RESULTING FROM ERRORS THAT OCCUR IN THE USE
OF PRODUCTS.
Some states or countries do not allow the exclusion or limitation of implied
warranties or liability for incidental or consequential damages, so the above
limitation or exclusion may not apply.
10. USE OF PATENTS, TRADEMARKS AND OTHER PROPRIETARY RIGHTS.
DRAGON shall retain all rights, title and interest (including all intellectual
property rights) in the PRODUCTS. DISTRIBUTOR shall, at DISTRIBUTOR's expense,
deliver to DRAGON whenever requested by DRAGON a sample of all labels, packages,
advertisements and other materials related to the PRODUCTS so that DRAGON may
review the same. DISTRIBUTOR shall not at any time adopt, or use, or attempt to
register with any governmental authority, without first obtaining DRAGON's
written approval, any word or mark that is similar, or bears any resemblance, to
a trademark or service mark owned or used by DRAGON.
11. PROTECTION OF KNOW HOW.
ACKNOWLEDGMENT OF PROPRIETARY INFORMATION. DISTRIBUTOR acknowledges (i) that the
KNOW-HOW (as hereafter defined) obtained from DRAGON hereunder is commercially
valuable proprietary information of DRAGON or others, the design and development
of which has involved the expenditure of substantial amounts of money and the
use of skilled development experts over a long period of time and which affords
DRAGON a commercial advantage over its competitors: (ii) that such KNOW-HOW
constitutes trade secrets and confidential business information that is
disclosed to DISTRIBUTOR for use on the basis of the confidential relationship
between DRAGON and DISTRIBUTOR under this Agreement and is to be used only as
may be expressly permitted by the terms and conditions of this Agreement; (iii)
that the loss of this competitive advantage due to unauthorized disclosure of
such proprietary information would cause great injury and harm. As used in the
Agreement, the term "KNOW-HOW" means any and all information of any kind
whatsoever now possessed by or known to, or hereafter developed or acquired by,
DRAGON relating to (1) the manufacturing data, and technical specifications for
the PRODUCTS, and/or marketing information of potential competitive value (e.g.
customer information, promotional plans, market data, etc.) (2) the techniques
and methods for installing and servicing the product, (3) specific techniques,
algorithms and methods used within the PRODUCTS and (4) any techniques and
methods for locating defects in the PRODUCTS.
CONFIDENTIALITY COVENANT. DISTRIBUTOR covenants that it will not divulge, or
publish to others, other than as herein provided, any KNOW-HOW obtained from
DRAGON hereunder, or any information about the DRAGON's commercial practices,
policies, or plans, and that it shall divulge the same only to employees of
DISTRIBUTOR or DEALER who require it for the purpose of DISTRIBUTOR's or
RESELLER's distribution of PRODUCTS hereunder and only if such employees are
-8-
<PAGE> 9
Authorized Distributor Agreement
Revision 3/12/98
subject to restrictions on use and disclosure at least as restrictive as those
assumed by DISTRIBUTOR hereunder.
CONFIDENTIALITY OF WORKERS. DISTRIBUTOR shall take reasonable action, by
instruction, agreement or otherwise, with respect to independent contractors
employed by DISTRIBUTOR or to DISTRIBUTOR's employees or other persons who have
not entered into the aforesaid restrictive engagements in order to prevent the
unauthorized disclosure or use of such KNOW-HOW.
EXCEPTIONS. This section shall not apply to (i) any KNOW-HOW or information that
shall become generally known in the trade through no fault of DISTRIBUTOR, (ii)
any KNOW-HOW or information that shall be disclosed to DISTRIBUTOR by a party
having legitimate possession thereof and the unrestricted right to make such
disclosure, (iii) any KNOW-HOW or information that DISTRIBUTOR can demonstrate
was within its possession prior to the disclosure by DRAGON, and was provided by
a party having legitimate possession thereof and the unrestricted right to make
such disclosure, or (iv) any confidential business information after four (4)
years from the termination of the Agreement.
REVERSE ENGINEERING. Except to the extent DRAGON is required by the law in the
Territory to allow Distributor to do so, Distributor shall not decompile,
disassemble or otherwise reverse engineer the PRODUCTS.
12. INFRINGEMENT OF PROPRIETARY RIGHTS.
If any action, claim or suit is threatened, filed or made against DISTRIBUTOR,
based upon infringement of a copyright, patent, trademark, or other proprietary
right in connection with the PRODUCTS, DISTRIBUTOR shall promptly notify DRAGON
in writing of such action, claim or suit. DRAGON shall at its own expense, take
charge of the defense of any such action through attorneys of DRAGON's
selection. DISTRIBUTOR shall make available to DRAGON any relevant records,
papers or information and shall cooperate in such defense as reasonably
requested by DRAGON. DRAGON shall indemnify and hold harmless DISTRIBUTOR from
and against all damages and claims arising out of such infringement action
provided that DISTRIBUTOR has otherwise complied with all the provisions of the
Agreement and with applicable state, province, federal, and international law.
DISTRIBUTOR shall notify DRAGON promptly whenever it shall obtain information
that any of the trademarks, patents, or copyrights of DRAGON are being infringed
by any other person.
13. TERMINATION.
This Agreement shall continue in effect for a period of one year from the date
of execution hereof or to the end of the current calendar year whichever period
is longer. Thereafter, the Agreement will continue from year to year subject to
mutual agreement on the quarterly sales goals for the subsequent renewal term.
This Agreement may be terminated as follows:
(a) termination for cause: by either PARTY by written notice to the other
PARTY given no less than thirty (30) days after prior written notice of
breach, if such breach is not cured.
-9-
<PAGE> 10
Authorized Distributor Agreement
Revision 3/12/98
(b) termination for no cause: by either PARTY at any time upon the giving
of sixty (60) days' notice to the other party prior to any subsequent
renewal term.
14. EFFECT OF TERMINATION.
TERMINATION OF RIGHTS. Upon the termination of this Agreement, all rights
granted by DRAGON to DISTRIBUTOR, or through DISTRIBUTOR to its RESELLERS herein
shall terminate and revert immediately to DRAGON or its successors or assigns.
RETURN OF MATERIALS. Upon the termination of this Agreement, DISTRIBUTOR shall
promptly return all KNOW-HOW in written form, together with any copies thereof
made by DISTRIBUTOR, obtained from DRAGON hereunder. This will include any
PRODUCT demonstration product, evaluation product, product literature and other
like materials unless paid for.
15. ASSIGNMENTS.
This Agreement may not be assigned, in whole or in part, by DISTRIBUTOR without
prior written consent of the DRAGON.
16. COMPLIANCE WITH LAWS AND REGULATIONS.
This Agreement is made subject to, and both PARTIES in the performance hereof
expressly agree to comply with and abide by, all applicable laws, ordinances,
codes and regulations in TERRITORIES insofar as the same may be applicable to
the terms and conditions of the Agreement, and both PARTIES hereby agree to
indemnify and hold harmless the other from and against all claims, suits, causes
of action, demands, penalties, losses or damages (including court costs and
attorney fees) which may arise or accrue because of the failure or neglect of
the indemnifying PARTY in this respect.
17. MISCELLANEOUS.
GOVERNING LAW. This Agreement and all amendments, modifications, alterations, or
supplements hereto, and the rights of the PARTIES hereunder shall be construed
under, and be governed by, the laws of the Commonwealth of Massachusetts in the
United States of America. Any lawsuit relating to any matter arising under this
Agreement, initiated by or on behalf of DISTRIBUTOR shall be initiated in a
State or Federal Court in the Commonwealth of Massachusetts, United States of
America. Any lawsuit relating to any matter arising under this Agreement
initiated by DRAGON may be initiated in a State or Federal Court located in the
Commonwealth of Massachusetts, or in any court in the country in which the
DISTRIBUTOR is located having jurisdiction over the matter. Accordingly,
DISTRIBUTOR irrevocably consents to the jurisdiction and to the service of
process, pleadings, and notices in connection with any and all actions and
processes initiated in a State or Federal court located in the Commonwealth of
Massachusetts, United States of America or any such court in the country in
which DISTRIBUTOR is located.
ULTIMATE DESTINATION OF SHIPMENTS. The DISTRIBUTOR hereby agrees not to
knowingly export or re-export, directly, or indirectly, any product or technical
data, acquired under this Agreement, except in complete compliance with the
export laws and regulations of the United States of America.
-10-
<PAGE> 11
Authorized Distributor Agreement
Revision 3/12/98
END USER LICENSE AGREEMENT. Use of DRAGON's PRODUCTS are subject to the terms
and conditions of the End User License Agreement provided by DRAGON in Appendix
F, or as it may be amended from time to time by DRAGON and each end user shall
agree to such terms before it uses the PRODUCTS.
NOTICES. All notices, offers, requests, instructions, acceptances, consents,
approvals and other communications required or authorized to be given by either
party to the other under this Agreement shall be in writing, shall be addressed
as indicated below, and shall be deemed to have been given upon the receipt of
the addressee.
DRAGON: DISTRIBUTOR:
Steven Semenzato
Director of North American Sales President
Dragon Systems, Inc. MultiMicro
320 Nevada Street 9393 Louis H. LaFontaine
Newton, MA 02160 USA Ville d'Anjou
Quebec
With a copy to: CANADA
HIJ IY8
Janet Baker, President
Dragon Systems, Inc.
320 Nevada Street
Newton, MA 02160 USA
NONWAIVER OF DEFAULT. Any failure by either party, at any time or from time to
time, to enforce and require the strict keeping and performance of any of the
terms and conditions of this Agreement shall not constitute a waiver of any such
terms and conditions at any future time and shall not prevent such party from
insisting on the strict keeping and performance of such terms and conditions at
any later time.
AMENDMENT OR RESCISSION. This Agreement shall not be modified or rescinded
except by written instrument signed by authorized representatives of both
parties hereto.
SEVERABILITY. In the event that any term or provision of this Agreement shall be
deemed by a court of competent jurisdiction to be overly broad in scope,
duration or area of applicability, such court shall have the power, and is
hereby directed, to limit such scope, duration or area of applicability, or all
of them, so that such term or provision is not overly broad, and to enforce the
same as so limited. Subject to the foregoing sentence, in the event any
provision of this Agreement shall be held invalid or unenforceable for any
reason, such invalidity or unenforceability shall attach only to such provision
and shall not affect or render invalid any other provision of this Agreement.
ENTIRETY OF AGREEMENT. This is the entire agreement between the parties hereto
with respect to the subject matter hereof and there are no agreements,
understanding, covenants, conditions or undertakings, oral or written, express
or implied, concerning such subject matter that are not merged herein or
superseded hereby.
-11-
<PAGE> 12
Authorized Distributor Agreement
Revision 3/12/98
CAPTIONS. The captions or headings of the Sections or other subdivisions hereof
are inserted only as a matter of convenience or for reference and shall have no
effect on the meaning of the provisions hereof.
COUNTERPARTS. This Agreement may be executed in two or more counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
18. SIGNATURES.
IN WITNESS WHEREOF, the PARTIES hereto have caused this Agreement to be executed
in their respective corporate names, as of the date first herein above by their
respective representatives hereunder duly authorized.
"DISTRIBUTOR" "DRAGON"
By: \s\ S. Rosen By: \s\ Janet M. Baker
---------------- -------------------
(Signature) (Signature)
3/18/98 3/16/98
- -------------------- -----------------------
Date Date
-12-
<PAGE> 13
Authorized Distributor Agreement
Revision 3/12/98
APPENDIX A
"PRODUCTS"
<TABLE>
<CAPTION>
Product Name Version
- --------------------------------------------------------------------------------------------------------
<S> <C>
Dragon NaturallySpeaking, Personal Edition, American English 2.x
Dragon NaturallySpeaking, Preferred Edition, American English 2.x
Dragon NaturallySpeaking, Deluxe Edition, American English 2.x
Dragon Dictate Classic Edition, American English 3.x
Dragon Dictate Power Edition, American English 3.x
Dragon Power Secretary Power Edition, American English 2.0.7
Dragon Power Secretary Medical Edition, American English 2.0.7
Dragon Power Secretary Personal Edition for Microsoft Word, American English 2.07
Dragon Power Secretary Personal Edition for Corel WordPerfect, American English 2.07
Dragon Power Secretary Personal Edition for File Maker Pro, American English 2.07
Dragon Power Secretary Personal Edition for Claris Works, American English 2.07
Dragon NaturallySpeaking French Personal Edition 2.02
Dragon NaturallySpeaking Spanish Personal Edition 2.02
</TABLE>
-13-
<PAGE> 14
Authorized Distributor Agreement
Revision 3/12/98
APPENDIX B
"TERRITORIES"
The TERRITORIES for DISTRIBUTOR shall include the following:
North America
-14-
<PAGE> 15
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Authorized Distributor Agreement
Revision 3/12/98
APPENDIX C
"QUOTA"
<TABLE>
<CAPTION>
Quarter I. 1998 Quarter II, 1998 Quarter III, 1998 Quarter IV, 1998
- --------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
[**] [**] [**] [**]
</TABLE>
If DISTRIBUTOR meets the above targets, DISTRIBUTOR will be entitled to a [**]
on the price of the Product.
"PRICES"
<TABLE>
<CAPTION>
Product Version Vendor # Distributor
- --------------------------------------------------------------------------------------------------------
Price US$
- ---------
<S> <C> <C> <C>
Dragon NaturallySpeaking, Personal Edition 2X 010420101 [**]
Dragon NaturallySpeaking, Preferred Edition 2X 010340101 [**]
Dragon NaturallySpeaking, Preferred Edition (CANADA*) 2X 010340101 [**]
Dragon NaturallySpeaking, Deluxe Edition 2X 010450101 [**]
Dragon Dictate Classic Edition 3X 010202401 [**]
Dragon Dictate Power Edition 3X 010222401 [**]
Dragon Power Secretary Power Edition 2.0.7 CDO500OPS [**]
Dragon Power Secretary Medical Edition 2.0.7 CD08000MD [**]
Dragon Power Secretary Personal Edition for Microsoft Word 2.07 CDO4002MW [**]
Dragon Power Secretary Personal Edition for Corel WordPerfect 2.07 CDO400OWP [**]
Dragon Power Secretary Personal Edition for File Maker Pro 2.07 CDO4003FM [**]
Dragon Power Secretary Personal Edition for Claris Works 2.07 CDO4001CW [**]
Dragon NaturallySpeaking French Personal Edition 2.02 0103401061 [**]
Dragon NaturallySpeaking Spanish Personal Edition 2.02 0103401041 [**]
</TABLE>
Dragon NaturallySpeaking, Preferred Edition (CANADA*) product price is ONLY
applicable for product sold into Canadian Retail Outlets
Prices as of 2/25/98
-15-
<PAGE> 16
Authorized Distributor Agreement
Revision 3/12/98
APPENDIX D
TRADEMARK GUIDELINES
See the attached sheets
USE OF DRAGON LOGO
The use of this trademark must be accompanied
By a red Dragon Logo in PMS 185 Red. The
Dragon must be no smaller than the Dragon
on the accompanying trademark guideline.
-16-
<PAGE> 17
Authorized Distributor Agreement
Revisions 3/12/98
DRAGON NATURALLYSPEAKING(TM)
Identity Mark
The following guidelines specify usage of the Dragon NaturallySpeaking(TM)
identity mark. Any individuals (whether Dragon Systems employees, consultants,
outside vendors or third parties) involved in developing communications,
documentation, or packaging related to Dragon Systems products must understand
and comply with the following guidelines. Please contact Becky Squier at Dragon
Systems, 1-617-965-5200, with any questions or issues.
DRAGON NATURALLYSPEAKING(TM)
IDENTITY MARK USAGE
Size: The NaturallySpeaking identity mark must be
reproduced with a minimum horizontal
dimension of 2 inches.
Color: Whenever possible, the mark should be
reproduced in color as follows: the word
"Dragon" prints 100% PMS 185 Red (or
process match - 91 magenta, 76 yellow). The
word "NaturallySpeaking(TM)" prints in 100%
black.
ACKNOWLEDGMENT
Use of the Dragon NaturallySpeaking(TM) identity mark should be accompanied by
an acknowledgement line (when required), as follows: "An authorized reseller of
Dragon Systems' speech products and services."
Trademarks
Dragon Systems and the Dragon image are registered
trademarks of Dragon Systems, Inc. Dragon
NaturallySpeaking(TM) is a trademark of Dragon Systems,
Inc.
USE OF DRAGON LOGO
------------------
The use of this trademark must be
accompanied by a red Dragon Logo
in PMS 185 Red. The Dragon must
be no smaller than the Dragon on
the accompanying trademark
guideline.
-17-
<PAGE> 18
Authorized Distributor Agreement
Revision 3/12/98
APPENDIX E
CURRENT LIST OF DISTRIBUTORS IN NORTH AMERICA
Ingram
TechData
Merisel
Beamscope
-18-
<PAGE> 19
Authorized Distributor Agreement
Revision 3/12/98
APPENDIX F
"DRAGON SYSTEMS, INC. LICENSE AGREEMENT"
End User License Agreement.
- ---------------------------
Before using this Software, you should carefully read the following terms and
conditions. Operating this software indicates your acceptance of these terms and
conditions.
Dragon Systems, Inc. (Dragon Systems) provides this Software and licenses its
use to you, the Customer.
Dragon Systems retains ownership of all rights in the Software and of all
proprietary technology embodied therein. You acknowledge that the unauthorized
distribution or use of the Software or documentation received from Dragon
Systems will cause Material Damage to Dragon Systems.
You assume responsibility for the selection of the programs to achieve intended
results, and for the installation, use and results obtained from the Software.
IT IS UNDERSTOOD BY BOTH PARTIES TO THIS AGREEMENT THAT SPEECH RECOGNITION IS A
STATISTICAL PROCESS, THAT RECOGNITION ERRORS ARE INHERENT IN THE PROCESS OF
SPEECH RECOGNITION, AND THAT SPEECH RECOGNITION APPLICATIONS MUST BE DESIGNED TO
ALLOW FOR SUCH ERRORS IN THE RECOGNITION PROCESS. YOU MUST UNDERSTAND THAT SUCH
ERRORS ARE INEVITABLE AND THAT IT IS YOUR RESPONSIBILITY TO CORRECT RECOGNITION
ERRORS BEFORE USING THE RESULTS OF THE RECOGNITION. THE SOFTWARE AND ANY
DOCUMENTATION ARE PROVIDED ON AN "AS IS" BASIS. DRAGON SYSTEMS DISCLAIMS ALL
WARRANTIES, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE
SOFTWARE AND ANY DOCUMENTATION, INCLUDING ALL WARRANTIES OF TITLE AND IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. DRAGON
SYSTEMS' LIABILITY FOR DAMAGES TO THE LICENSEE FOR ANY CAUSE WHATSOEVER,
REGARDLESS OF THE FORM OF ANY CLAIM OR ACTION, SHALL NOT EXCEED THE TOTAL
LICENSE FEE PAID BY THE LICENSEE FOR THE LICENSE TO USE THE SOFTWARE UNDER THIS
AGREEMENT. DRAGON SYSTEMS SHALL IN NO EVENT BE LIABLE FOR ANY DAMAGES RESULTING
FROM LOSS OF DATA, PROFITS OR USE OF EQUIPMENT, OR FOR ANY SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE USE OR
PERFORMANCE OF THE SOFTWARE.
LICENSE
This license granted under this Agreement permits the Licensee and its employees
who agree to be bound by the terms and conditions of this Agreement to:
I. use the software on a single machine, (The Software is considered used
when loaded into temporary memory or installed into permanent memory),
II. install a copy of the Software on a network server so that the Software
can be used by other computers. The number of users of the Software
shall not exceed the number of applicable licenses you have purchased
from Dragon Systems,
Ill. copy the Software in machine-readable form for backup purposes only.
You may transfer this Software to another party only with the prior written
consent of Dragon Systems. If you transfer possession of any copy, modification
or merged portion of the Software or documentation to another party, your
license is automatically terminated.
The user of the Software or any end-user application incorporating any part of
the Software must agree (1) not to disassemble or reverse engineer the Software
or any portion thereof and (2) to comply
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<PAGE> 20
Authorized Distributor Agreement
Revision 3/12/98
with all U.S. export laws. Any attempt to disassemble the object code of this
Software is unauthorized and will result in immediate termination of this
Agreement.
You must reproduce and include the copyright notice on any copy, modification or
portion of the Software merged into another program. You may not use, copy,
modify, or transfer the Software, or any copy, modification or merged portion,
in whole or in part, except as expressly provided for in this Agreement. You may
not commit any act which would directly or indirectly violate any U.S. law,
regulation, treaty, or other agreement, relating to the export or re-export of
the Software, to which the U.S. adheres or with which the U.S. complies.
TERM
The license is effective until terminated. You may terminate the license at any
time by destroying the programs along with any copies, modifications and merged
portions in any form. It will also terminate upon conditions set forth elsewhere
in this Agreement or if you fail to comply with any term or condition of this
Agreement. You agree upon such termination to destroy the programs together with
all copies, modifications and merged portions in any form.
RESTRICTED RIGHTS LEGEND
Use, duplication, or disclosure by the Government is subject to restrictions as
set forth in subparagraph (c)(I)(ii) of the Rights in Technical Data and
Computer Software clause at DFARS 252.227-7013.
-20-
<PAGE> 1
EXHIBIT 10.16
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SOFTWARE DISTRIBUTION AGREEMENT
BETWEEN
TECH DATA PRODUCT MANAGEMENT, INC.
AND
DRAGON SYSTEMS, INC.
<PAGE> 2
SOFTWARE DISTRIBUTION AGREEMENT
THIS AGREEMENT, DATED AS OF THIS 16TH DAY OF JUNE, 1997, IS BETWEEN
TECH DATA PRODUCT MANAGEMENT, INC., A FLORIDA CORPORATION ("'TECH DATA"), WITH
ITS PRINCIPAL CORPORATE ADDRESS AT 5350 TECH DATA DRIVE, CLEARWATER, FLORIDA
34620 AND DRAGON SYSTEMS, INC., A DELAWARE CORPORATION ("DRAGON SYSTEMS" OR
"VENDOR"), WITH ITS PRINCIPAL CORPORATE ADDRESS AT: 320 NEVADA STREET, NEWTON,
MA 02160 USA.
RECITALS
A. Tech Data desires to purchase certain Products from Dragon Systems
from time to time and Dragon Systems desires to sell certain Products to Tech
Data in accordance with the terms and conditions set forth in this Agreement.
B. Dragon Systems desires to appoint Tech Data as its non-exclusive
distributor to market Products within the Territory (as hereinafter defined) and
Tech Data accepts such appointment on the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the Recitals, the mutual covenants contained
in this Agreement and other good and valuable consideration, Tech Data and
Dragon Systems hereby agree as follows:
ARTICLE I.
DEFINITIONS, APPOINTMENT AND TERM OF AGREEMENT
1.1 Definitions. The following definitions shall apply to this Agreement.
(a) "Customers" of Tech Data shall include dealers, resellers,
value added resellers, direct resellers and other entities
that acquire the Products from Tech Data.
(b) "DOA" shall mean Product, or any portion thereof, which fails
to operate properly on initial installation, boot, or use, as
applicable.
(c) "Documentation" shall mean user manuals, training materials,
Product descriptions and specifications, brochures, technical
manuals, license agreements, supporting materials and other
printed information relating to the Products, whether
distributed in print, electronic, or video format.
(d) "Effective Date" shall mean the date on which this Agreement
is signed and dated by a duly authorized representative of
Tech Data.
-2-
<PAGE> 3
(e) "End Users" shall mean the final purchasers or licensees who
have acquired Products for their own use and not for resale,
remarketing or redistribution.
(f) "Non-Saleable Products" shall mean any Product that has been
returned to Tech Data by its Customers that has had the
outside shrink wrapping or other packaging seal broken; any
components of the original package are missing, damaged or
modified; or is otherwise not fit for resale.
(g) "Products" shall mean, individually or collectively, the
software licenses, electronic products, the sealed software
packages comprised of the computer programs encoded on media
together with manuals, materials and other contents of the
packages associated therewith, if any, as more fully described
in Schedule 1.1g attached hereto.
(h) "Return Credit" shall mean a credit to Tech Data in an amount
equal to the price paid by Tech Data for Products less any
price protection credits but not including any early payment,
prepayment or other discounts.
(i) "Services" means any warranty, maintenance, advertising,
marketing or technical support and any other services
performed or to be performed by Dragon Systems.
(j) "Territory" shall mean the United States of America.
1.2 Term of Agreement. The term of this Agreement shall commence on the
Effective Date and, unless terminated by either party as set forth in
this Agreement, shall remain in full force and effect for a term of one
(1) year, and will be automatically renewed for successive one (1) year
terms unless prior written notification of termination or non-renewal
is delivered by one of the parties in accordance with the notice
provision of this Agreement.
1.3 Appointment as Distributor. Dragon Systems hereby grants to Tech Data
the non-exclusive right and license to distribute Products during the
term of this Agreement within the Territory, together with any updates
or enhancements to the Products and any new releases related to the
Products. This license includes the right to order, possess and
distribute the Products to Customers and to provide the Products to
Customers for use on demonstration units. Dragon Systems and Tech Data
acknowledge and agree that the license to use the Product is solely
between Dragon Systems and the End Territory User and is governed by
the terms of the Vendor's standard use license enclosed with the
Product, and Tech Data shall have no right hereunder to use, copy,
modify, reverse engineer, reverse compile or reverse assemble any
Product except as expressly permitted by applicable law or this
Agreement. This Agreement does not grant Dragon
-3-
<PAGE> 4
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Systems or Tech Data an exclusive right to purchase or sell Products
and shall not prevent either party from developing or acquiring other
vendors or customers or competing Products. Tech Data will use
commercially reasonable efforts to promote distribution of the
Products. Dragon Systems agrees that Tech Data may obtain Products in
accordance with this Agreement for the benefit of its parent,
affiliates and subsidiaries of Tech Data, provided that Tech Data
remains responsible for all actions and liabilities of such entities.
ARTICLE II. PURCHASE ORDERS
2.1 Issuance and Acceptance of Purchase Order.
(a) This Agreement shall not obligate Tech Data to purchase any
Products or Services except as specifically set forth in a written
purchase order.
(b) Tech Data may issue to Dragon Systems one or more purchase orders
identifying the Products Tech Data desires to purchase from Dragon
Systems. The terms and conditions of this Agreement shall govern all
purchase orders, except that purchase orders may include other terms
and conditions which are consistent with the terms and conditions of
this Agreement, or which are mutually agreed to in writing by Tech Data
and Dragon Systems. Purchase orders will be placed by Tech Data by fax
or electronically transferred in a manner acceptable to Dragon Systems.
(c) All purchase orders are subject to acceptance by Dragon Systems. A
purchase order shall be deemed accepted by Dragon Systems unless Dragon
Systems notifies Tech Data in writing within [**] days of the date of
the purchase order that Dragon Systems does not accept the purchase
order.
2.2 Purchase Order Alterations or Cancellations. Up to [**] days prior to
the shipment date of the Products, Dragon Systems shall accept
alterations or cancellation to a purchase order in order to: (i) change
a location for delivery, (ii) modify the quantity or type of Products
to be delivered or (iii) correct typographical or clerical errors.
2.3 Evaluation or Demonstration Purchase Orders. Dragon Systems shall
provide to Tech Data a reasonable number of demonstration or evaluation
Products at no charge.
2.4 Product Shortages. If for any reason Dragon Systems's production is not
on schedule, Dragon Systems may allocate available inventory to Tech
Data and
-4-
<PAGE> 5
make shipments based upon a fair and reasonable percentage allocation
among Dragon Systems's customers. Such allocations shall not impact the
calculation of performance rebates.
ARTICLE III. DELIVERY AND
ACCEPTANCE OF PRODUCTS
3.1 Acceptance of Products. Tech Data shall, after a reasonable time to
inspect each shipment, accept Product (the "Acceptance Date") if the
Products and all necessary documentation delivered to Tech Data are in
accordance with the purchase order. Any Products not ordered or not
otherwise in accordance with the purchase order (e.g. misshipments,
overshipments) may be returned to Dragon Systems at Dragon Systems's
expense (including without limitation reasonable costs of shipment or
storage). Dragon Systems shall refund to Tech Data within ten (10)
business days following notice thereof, all monies paid in respect to
such rejected Products. Tech Data shall not be required to accept
partial shipment unless Tech Data agrees prior to shipment.
3.2 Title and Risk of Loss. FOB Dragon Systems warehouse. Title and risk of
loss or damage to Products shall pass to Tech Data at the time the
Products are delivered to Tech Data's warehouse. Dragon Systems and
Tech Data warehouse agree that no title or ownership of the proprietary
rights to any software code is transferred by virtue of this Agreement
notwithstanding the use of terms such as "purchase", "sale" or the like
within this Agreement. Dragon Systems retains all ownership rights and
title to any software code within the Products.
3.3 Transportation of Products. Dragon Systems shall deliver the Products
clearly marked on the Product package with serial number, product
description and machine readable bar code (employing UPC or other
industry standard bar code) to Tech Data at the location shown. Dragon
Systems shall use reasonable efforts to deliver Products by the
delivery date set forth in the applicable purchase order or as
otherwise agreed upon by the parties. Charges for transportation of the
Products shall be paid by Dragon Systems. Dragon Systems shall use
reputable common carriers to ship Products. If Tech Data has reasonable
objections to the carrier used by Dragon Systems, Dragon Systems shall
consider in good faith an alternate carrier.
ARTICLE IV. RETURNS
4.1 Inventory Adjustment. Dragon Systems agrees to accept return of
overstocked Products as determined by Tech Data, in Tech Data s
reasonable discretion. Shipments of Product being returned shall be
new, unused and in sealed cartons. Vendor shall credit Tech Data's
account in the amount of the Return Credit. Tech Data shall pay for
freight charges under this section.
-5-
<PAGE> 6
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
4.2 Defective Products/Dead on Arrival (DOA) . Tech Data shall have the
right to return to Dragon Systems for Return Credit any DOA Product
that is returned to Tech Data within ninety (90) days after the initial
delivery date to the End User and any Product that fails to perform in
accordance with Dragon Systems's Product warranty. Dragon Systems shall
bear all costs of shipping and risk of loss of DOA and in-warranty
Products to Dragon Systems's location and back to Tech Data or Tech
Data's Customer.
4.3 Obsolete or Outdated Product. Tech Data shall have the right to return
for Return Credit, [**], all Products that become obsolete or Dragon
Systems discontinues, updates, revises or are removed from Dragon
Systems's current price list; provided Tech Data returns such Products
within [**] after Tech Data receives written notice from Dragon Systems
that such Products are obsolete, superseded by a newer version,
discontinued or are removed from Dragon Systems's price list. Dragon
Systems shall bear all costs of shipping and risk of loss of Obsolete
or Outdated Products to Dragon Systems's location.
4.4 Non-Saleable. Tech Data shall have the right to return to Dragon
Systems for Return Credit Non-Saleable Products. Tech Data shall bear
all costs of shipping and risk of loss of Non-Saleable Product to
Dragon System's location.
4.5 Condition Precedent to Returns. As a condition precedent to returning
Products, Tech Data shall request and Dragon Systems shall issue a
Return Material Authorization Number (RMA) in accordance with and
subject to Section 8.9 of this Agreement.
ARTICLE V. PAYMENT TO VENDOR
5.1 Charges, Prices and Fees for Products. Charges, prices, quantities and
discounts, if any, for Products shall be determined as set forth in
Schedule 1.1.g, or as otherwise mutually agreed upon by the parties in
writing, and may be confirmed at the time of order. In no event shall
charges exceed Dragon Systems's then current list prices. Tech Data
shall not be bound by any of Dragon Systems's suggested prices.
5.2 Payment. Except as otherwise set forth in this Agreement, any
undisputed sum due to Dragon Systems pursuant to this Agreement shall
be payable as follows:[**], net sixty (60) days after the invoice
receipt. Dragon Systems shall invoice Tech Data no earlier than the
applicable shipping date for the Products covered by such invoice.
Products which are shipped from outside the United
-6-
<PAGE> 7
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
States, shall not be invoiced to Tech Data prior to the Products being
placed on a common carrier within the United States for final delivery
to Tech Data. The due date for payment shall be extended during any
time the parties have a bona fide dispute concerning such payment.
Notwithstanding anything herein to the contrary, for the initial order
only, payment shall be made by Tech Data upon resale of the Products
and expiration of the Customer return period and Tech Data may return
any of the Products delivered under the initial order for Return
Credit.
Notwithstanding anything contained in the Agreement or in any other
agreements between Tech Data and Dragon Systems, including Dragon
Systems's invoices, Tech Data has the right to delay payment for any
Products ordered or received by Tech Data until Tech Data's sale of the
Products.
5.3 Invoices. A "correct" invoice shall contain (i) Dragon Systems's name
and invoice date, (ii) a reference to the purchase order or other
authorizing document, (iii) separate descriptions, unit prices and
quantities of the Products actually delivered, (iv) credits (if
applicable), (v) shipping charges (if applicable) (vi) name (where
applicable), title, phone number and complete mailing address as to
where payment is to be sent, and (vii) other substantiating
documentation or information as may reasonably be required by Tech Data
from time to time. Notwithstanding any pre-printed terms or conditions
on Dragon Systems's invoices, the terms and conditions of this
Agreement shall apply to and govern all invoices issued by Dragon
Systems hereunder, except that invoices may include other terms and
conditions which are consistent with the terms and conditions of this
Agreement, or which are mutually agreed to in writing by Tech Data and
Dragon Systems.
5.4 Taxes. Tech Data shall be responsible for franchise taxes, sales or use
taxes or shall provide Dragon Systems with an appropriate exemption
certificate. Dragon Systems shall be responsible for all other taxes,
assessments, permits and fees, however designated which are levied upon
this Agreement or the Products, except for taxes based upon Tech Data's
income. No taxes of any type shall be added to invoices without the
prior written approval of Tech Data.
5.5 [**] Pricing and Terms. Dragon Systems represents that the prices
charged and the terms offered to Tech Data are and will be [**]. If
Dragon Systems [**], Tech Data shall also be entitled to participate
and receive notice of the same no later than other like distributors,
aggregators, or resellers.
-7-
<PAGE> 8
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
5.6 Price Adjustments.
(a) Price Increases. Dragon Systems shall have the right to increase
prices from time to time, upon written notice to Tech Data [**]. All
orders placed prior to the effective date of the increase, for shipment
[**] after the effective date, shall be invoiced by Dragon Systems
[**].
(b) Price Decreases. Dragon Systems shall have the right to decrease
prices from time to time, upon written notice to Tech Data . Dragon
Systems shall grant to Tech Data, its parent, affiliates and
subsidiaries and Tech Data's Customers a price credit for the full
amount of any Dragon Systems price decrease on all Products on order,
in transit and in their inventory on the effective date of such price
decrease. Tech Data and its Customers shall, after receiving written
notice of the effective date of the price decrease, provide a list of
all Products for which they claim a credit. Dragon Systems shall have
the right to a reasonable audit at Dragon Systems's expense unless the
credits claimed by Tech Data are more than [**] percent [**] higher
than disclosed by the audit in which case Tech Data will bear the cost
of the audit.
5.7 Advertising.
(a) Cooperative Advertising. Dragon Systems offers a [**] co-op program
and may offer at its sole option additional advertising credits, or
other promotional programs or incentives to Tech Data as it offers to
its other distributors or customers. Tech Data shall have the right, at
Tech Data's option, to participate in such programs. Attached as
Schedule 5.7 is a copy of Dragon Systems's co-op policy. All monies
spent require Dragon Systems prior approval.
(b) Advertising Support. Dragon Systems shall provide [**] to Tech Data
and the Customers of Tech Data, marketing support, and advertising
materials in connection with the resale of Products as are currently
offered or that may be offered by Dragon Systems. Tech Data reserves
the right to charge Dragon Systems for advertising, marketing and
training services which are preapproved by the vendor.
(c) Launch Funds. Prior to receipt of the initial purchase order,
Dragon Systems shall pay Tech Data for all launch funds expenditures to
which Dragon Systems and Tech Data have agreed.
-8-
<PAGE> 9
ARTICLE VI. WARRANTIES,
INDEMNITIES AND OTHER OBLIGATIONS OF VENDOR
6.1 Warranty. Dragon Systems hereby represents and warrants that Dragon
Systems has all right, title, ownership interest and marketing rights
necessary to provide the Products to Tech Data. Dragon Systems further
represents and warrants that it has not entered into any agreements or
commitments which are inconsistent with or in conflict with the rights
granted to Tech Data in this Agreement; the Products are new and when
provided to Tech Data shall be free and clear of all liens and
encumbrances; Tech Data and its Customers and End Users shall be
entitled to use the Products without disturbance; the Products have
been listed with Underwriters' Laboratories or other nationally
recognized testing laboratory whenever such listing is required; if
applicable, the Products meet all FCC requirements; the Products do and
will conform to all codes, laws or regulations; and the Products
conform in all respects to the Product warranties. Dragon Systems
agrees that Tech Data shall be entitled to pass through to Customers of
Tech Data and End Users of the Products all Product warranties granted
by Dragon Systems. Tech Data shall have no authority to alter or extend
any of the warranties of Dragon Systems expressly contained or referred
to in this Agreement without prior approval of Dragon Systems. Dragon
Systems has made express warranties in this Agreement and in
Documentation, promotional and advertising materials. EXCEPT AS SET
FORTH HEREIN OR IN THE END USER WARRANTIES ENCLOSED IN THE PRODUCT
PACKAGING, DRAGON SYSTEMS DISCLAIMS ALL WARRANTIES WITH REGARD TO THE
PRODUCTS, INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THIS SECTION
SHALL SURVIVE TERMINATION OR EXPIRATION OF THIS AGREEMENT.
6.2 Proprietary Rights Indemnification. Dragon Systems hereby represents
and warrants that the Products and the sale and use of the Products do
not infringe upon any copyright, patent, trademark, trade secret or
other proprietary or intellectual property right of any third party in
the Territory, and that there are no suits or proceedings, pending or
threatened alleging any such infringement, except as specified in
Schedule 6.2. Dragon Systems shall indemnify and hold Tech Data, Tech
Data's parent, affiliates and subsidiaries and their respective,
officers, directors, employees and agents harmless from and against any
and all actions, claims, losses, damages, liabilities, awards, costs
and expenses, which they or any of them incur or become obligated to
pay resulting from or arising out of any breach or claimed breach of
the foregoing warranty. Tech Data shall inform Dragon Systems of any
such suit or proceeding filed against Tech Data and shall have the
right, but not the obligation, to participate in the defense of any
such suit or proceeding at Tech Data's expense. Dragon Systems shall,
at its option and expense, either (i) procure for Tech Data, its
Customers and End Users the
-9-
<PAGE> 10
right to continue to use the Product as set forth in this Agreement, or
(ii) replace, to the extent Products are available, or modify the
Product to make its use non-infringing while being capable of
performing the same function without degradation of performance. If
neither of the foregoing alternatives (i) or (ii) is reasonably
available, Dragon Systems shall accept a return of the Products from
Tech Data, at Dragon Systems's sole cost and expense, and shall refund
to Tech Data the full amount of the price paid by Tech Data for said
returned Products, less any price protection credits, but not including
any early payment or prepayment discounts. Dragon Systems shall have no
liability under this Section 6.2 for any infringement based on the use
of any Product, if the Product is used in a manner or with equipment
for which it was not reasonably intended. Dragon Systems's obligations
under this Section 6.2 shall survive termination or expiration of this
Agreement.
6.3 Indemnification.
(a) Vendor. Dragon Systems shall be solely responsible for the design,
development, supply, production and performance of the Products. Dragon
Systems agrees to indemnify and hold Tech Data, its parent, affiliates
and subsidiaries and their officers, directors and employees harmless
from and against any and all claims, damages, costs, expenses
(including, but not limited to, reasonable attorney s fees and costs)
or liabilities that may result, in whole or in part, from any warranty
or Product liability claim, or any claim for infringement, or for
claims for violation of any of the warranties contained in this
Agreement.
(b) Tech Data. Tech Data agrees to indemnify and hold Dragon Systems,
its officers, directors and employees harmless from and against any and
all claims, damages, costs, expenses (including, but not limited to,
reasonable attorneys' fees and costs) or liabilities that may result,
in whole or in part, from Tech Data's negligence or misconduct in the
distribution of the Products pursuant to this Agreement, or for
representations or warranties made by Tech Data related to the Products
in excess of the warranties of Dragon Systems.
6.4 Insurance.
(a) The parties shall be responsible for providing Worker's
Compensation insurance in the statutory amounts required by the
applicable state laws.
(b) Without in any way limiting Dragon Systems's indemnification
obligation as set forth in this Agreement, Dragon Systems shall
maintain Commercial General Liability or Comprehensive General
Liability Insurance in such amounts as is reasonable and standard for
the industry. Either policy form should contain the following
coverages: Personal and Advertising Injury, Broad Form Property
-10-
<PAGE> 11
Damage, Products and Completed Operations, Contractual Liability,
employees as Insured and Fire Legal Liability.
(c) Dragon Systems will provide evidence of the existence of insurance
coverages referred to in this Section 6.4 by certificates of insurance
which should also provide for at least thirty (30) days notice of
cancellation, non-renewal or material change of coverage to Tech Data.
The certificates of insurance shall name Tech Data Product Management,
Inc., its parent, affiliates and subsidiaries as an additional insured
for the limited purpose of claims arising pursuant to this Agreement.
6.5 Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
PURSUANT TO THIS AGREEMENT FOR AMOUNTS REPRESENTING INDIRECT, SPECIAL,
INCIDENTAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF THE OTHER PARTY
ARISING FROM THE PERFORMANCE OR BREACH OF ANY TERMS OF THIS AGREEMENT
EVEN IF SUCH PARTY HAS BEEN MADE AWARE OF THE POSSIBILITIES OF SUCH
DAMAGES.
6.6 INTENTIONALLY DELETED.
6.7 INTENTIONALLY DELETED.
6.8 Vendor Reports. Dragon Systems shall, if requested, render monthly
reports to Tech Data setting forth the separate Products, dollars
invoiced for each Product, and total dollars invoiced to Tech Data for
the month, and such other information as Tech Data may reasonably
request.
6.9 Tech Data Reports. Tech Data shall, if requested, render monthly sales
out reports on Tech Data s BBS system. Information provided will
include: month and year sales activity occurred, internal product
number (assigned by Tech Data), written description, state and zip-code
of Customers location, unit cost (distributor's cost at quantity 1),
quantity and extended cost (cost times quantity. Dragon Systems agrees
that any such information provided by Tech Data shall be received and
held by Dragon Systems in strict confidence and shall be used solely
for sell through or compensation reporting information and shall not be
used for purposes related to Dragon Systems's sales activities.
6.10 Trademark Usage. Tech Data is hereby authorized to use the following
trademarks and trade names of Dragon Systems to be used in connection
with advertising, promoting or distributing the Products: Dragon
Systems, DragonDictate, Dragon PowerSecretary, and the Dragon logo.
Tech Data recognizes Dragon Systems or other third parties may have
rights or ownership of certain trademarks, trade names and patents
associated with the Products. Tech Data will act consistent with such
rights, and Tech Data shall comply with
-11-
<PAGE> 12
any reasonable written guidelines when provided by Dragon Systems or
third parties licensing Dragon Systems related to such trademark or
trade name usage. Tech Data will notify Dragon Systems of any
infringement of which Tech Data has actual knowledge. Tech Data shall
discontinue use of Dragon Systems's trademarks or trade names upon
termination of this Agreement, except as may be necessary to sell or
liquidate any Product remaining in Tech Data's inventory. Tech Data
will at all times conduct its business in which it uses the trademarks
of Dragon Systems in a manner consistent with the standard of quality
established by written guidelines provided to Tech Data by Dragon
Systems for such marks. Tech Data shall at no time register any Dragon
Systems's trade names or trademarks or any mark or name confusingly
similar thereto.
ARTICLE VII. TERMINATION OR EXPIRATION
7.1 Termination.
(a) Termination With or Without Cause: Either party may terminate this
Agreement, without cause, upon giving the other party sixty (60) days
prior written notice. In the event that either party materially or
repeatedly defaults in the performance of any of its duties or
obligations set forth in this Agreement, and such default is not
substantially cured within thirty (30) days after written notice is
given to the defaulting party specifying the default, then the party
not in default may, by giving written notice thereof to the defaulting
party, terminate this Agreement or the applicable purchase order
relating to such default as of the date specified in such notice of
termination.
(b) Termination for Insolvency or Bankruptcy Either party may
immediately terminate this Agreement and any purchase orders by giving
written notice to the other party in the event of (i) the liquidation
or insolvency of the other party, (ii) the appointment of a receiver or
similar officer for the other party, (iii) an assignment by the other
party for the benefit of all or substantially all of its creditors,
(iv) entry by the other party into an agreement for the composition,
extension, or readjustment of all or substantially all of its
obligations, or (v) the filing of a petition in bankruptcy by or
against a party under any bankruptcy or debtors' law for its relief or
reorganization which is not dismissed within ninety (90) days.
7.2 Rights Upon Termination or Expiration.
(a) Termination or expiration of this Agreement shall not affect Dragon
Systems's right to be paid for undisputed invoices for Products already
shipped and accepted by Tech Data or Tech Data s rights to any credits
or payments owed or accrued to the date of termination or expiration.
Tech Data's rights to credits upon termination or expiration shall
include credits
-12-
<PAGE> 13
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
against which Tech Data would, but for termination or expiration, be
required under this Agreement to apply to future purchases.
(b) Dragon Systems shall accept purchase orders from Tech Data for
additional Products which Tech Data is contractually obligated to
furnish to its Customers and does not have in its inventory upon the
termination or expiration of this Agreement; provided Tech Data
notifies Dragon Systems of any and all such transactions within sixty
(60) days following the termination or expiration date.
(c) Upon termination or expiration of this Agreement, Tech Data shall
discontinue holding itself out as a distributor of the Products.
7.3 [**] Products Upon Termination or Expiration. Upon the effective date
of termination or expiration of this Agreement for any reason, Dragon
Systems agrees to [**] all Products in Tech Data's inventory and
Products which are returned to Tech Data by its Customers within [**]
days following the effective date of termination or expiration. Dragon
Systems will [**]. [**] shall not be [**] any deductions or offsets for
early pay or prepay discounts. Such returns shall not [**] any co-op
payments or obligations owed to Tech Data. Within [**] days following
the effective date of termination or expiration, Tech Data shall return
to Dragon Systems [**] all Product held in Tech Data's inventory as of
the effective date of termination or expiration. Additional returns
shall be sent at reasonable intervals thereafter, provided all returns
of Product by Tech Data under this Section 7.3 shall be shipped within
[**] following the effective date of termination or expiration. Dragon
Systems will issue an RMA to Tech Data for all such Products; provided,
however, that Dragon Systems shall accept returned Products in
accordance with this Section absent an RMA if Dragon Systems [**].
Dragon Systems shall credit any outstanding balances owed to Tech Data.
If such credit exceeds amounts due from Tech Data, Dragon Systems shall
remit in the form of a check to Tech Data the excess within [**] of
receipt of the Product. Customized Products shall not be eligible for
repurchase pursuant to this Section.
7.4 Survival of Terms. Termination or expiration of this Agreement for any
reason shall not release either party from any liabilities or
obligations set forth in this Agreement which (i) the parties have
expressly agreed shall survive any such termination or expiration, or
(ii) remain to be performed or by their nature would be intended to be
applicable following any such termination or expiration. The
termination or expiration of this Agreement shall not affect any of
Dragon Systems's warranties, indemnification or obligations relating to
-13-
<PAGE> 14
returns, co-op advertising payments, credits or any other matters set
forth in this Agreement that should survive termination or expiration
in order to carry out their intended purpose, all of which shall
survive the termination or expiration of this Agreement.
ARTICLE VIII. MISCELLANEOUS
8.1 Binding Nature, Assignment, and Subcontracting. This Agreement shall be
binding on the parties and their respective successors and assigns.
Neither party shall have the power to assign this Agreement without the
prior written consent of the other party.
8.2 Counterparts, This Agreement may be executed in several counterparts,
all of which taken together shall constitute one single agreement
between the parties.
8.3 Headings. The Article and Section headings used in this Agreement are
for reference and convenience only and shall not affect the
interpretation of this Agreement.
8.4 Relationship of Parties. Tech Data is performing pursuant to this
Agreement only as an independent contractor. Nothing set forth in this
Agreement shall be construed to create the relationship of principal
and agent between Tech Data and Dragon Systems. Neither party shall act
or represent itself, directly or by implication, as an agent of the
other party.
8.5 Confidentiality. Each party acknowledges that in the course of
performance of its obligations pursuant to this Agreement, it may
obtain certain information specifically marked as confidential or
proprietary. Each party hereby agrees that all such information
communicated to it by the other party, its parent, affiliates,
subsidiaries, or Customers, whether before or after the Effective Date,
shall be and was received in strict confidence, shall be used only for
purposes of this Agreement, and shall not be disclosed without the
prior written consent of the other party, except as may be necessary by
reason of legal, accounting or regulatory requirements beyond either
party's reasonable control. The provisions of this Section shall
survive termination or expiration of this Agreement for any reason for
a period of two (2) years after said termination or expiration.
8.6 Arbitration. Any disputes arising under this Agreement shall be
submitted to arbitration in accordance with such rules as the parties
jointly agree. If the parties are unable to agree on arbitration
procedures, arbitration shall be conducted in the city and state of the
respondent party, in accordance with the
-14-
<PAGE> 15
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Commercial Arbitration Rules of the American Arbitration Association.
Any such award shall be final and binding upon both parties.
8.7 Notices. Wherever one party is required or permitted to give notice to
the other party pursuant to this Agreement, such notice shall be deemed
given when actually delivered by hand, by telecopier (if and when
immediately confirmed in writing by any of the other means provided
herein ensuring acknowledgment of receipt thereof for purposes of
providing notice of default or termination), via overnight courier, or
when mailed by registered or certified mail, return receipt requested,
postage prepaid, and addressed as follows:
In the Case of Vendor: In the Case of Tech Data:
---------------------- -------------------------
Dragon Systems, Inc. Tech Data Product Management, Inc.
320 Nevada Street 5350 Tech Data Drive
Newton, MA 02160 Clearwater, FL 34620
Attn: Claudia Ellermann Attn: Tamra Muir
Vice President-Marketing Operations
Contracts Administration
Either party may from time to time change its address for notification
purposes by giving the other party written notice of the new address
and the date upon which it will become effective.
8.8 Force Majeure. The term "Force Majeure" shall be defined to include
fires or other casualties or accidents, acts of God, severe weather
conditions, strikes or labor disputes, war or other violence, or any
law, order, proclamation, regulation, ordinance, demand or requirement
of any governmental agency.
(a) A party whose performance is prevented, restricted or interfered
with by reason of a Force Majeure condition shall be excused from such
performance to the extent of such Force Majeure condition so long as
such party provides the other party with prompt written notice
describing the Force Majeure condition and immediately continues
performance until and to the extent such causes are removed.
(b) If, due to a Force Majeure condition, the scheduled time of
delivery or performance is or will be delayed for more than ninety (90)
days after the scheduled date, the party not relying upon the Force
Majeure condition may terminate, without liability to the other party,
any purchase order or portion thereof covering the delayed Products.
8.9 Return Material Authorization Numbers. Dragon Systems is required to
issue an RMA to Tech Data within [**] business days of Tech Data's
request;
-15-
<PAGE> 16
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
however, if the RMA is not received by Tech Data within [**] business
days, Dragon Systems shall accept returned Products absent an RMA.
8.10 Credits to Tech Data. In the event any provision of this Agreement or
any other agreement between Tech Data and Dragon Systems requires that
Dragon Systems grant credits to Tech Data's account, and such credits
are not received within thirty (30) days, all such credits shall become
effective immediately upon notice to Dragon Systems. In such event,
Tech Data shall be entitled to deduct any such credits from the next
monies owed to Dragon Systems. In the event credits exceed any balances
owed by Tech Data to Dragon Systems, Dragon Systems shall, upon request
from Tech Data, issue a check payable to Tech Data within ten (10) days
of such notice. Credits owed to Tech Data shall not be reduced by early
payment or prepayment discounts. Tech Data shall have the right to set
off against any amounts due to Dragon Systems under this Agreement or
any invoices issued by Dragon Systems related to this Agreement any and
all amounts due to Tech Data from Dragon Systems, whether or not
arising under this Agreement.
8.11 Severability. If, but only to the extent that, any provision of this
Agreement is declared or found to be illegal, unenforceable or void,
then both parties shall be relieved of all obligations arising under
such provision, it being the intent and agreement of the parties that
this Agreement shall be deemed amended by modifying such provision to
the extent necessary to make it legal and enforceable while preserving
its intent.
8.12 Waiver. A waiver by either of the parties of any covenants, conditions
or agreements to be performed by the other party or any breach thereof
shall not be construed to be a waiver of any succeeding breach thereof
or of any other covenant, condition or agreement herein contained.
8.13 Remedies. All remedies set forth in this Agreement shall be cumulative
and in addition to and not in lieu of any other remedies available to
either party at law, in equity or otherwise, and may be enforced
concurrently or from time to time.
8.14 Entire Agreement. This Agreement, including any Exhibits and documents
referred to in this Agreement or attached hereto, constitutes the
entire and exclusive statement of Agreement between the parties with
respect to its subject matter and there are no oral or written
representations, understandings or agreements relating to this
Agreement which are not fully expressed herein. The parties agree that
unless otherwise agreed to in writing by the party
-16-
<PAGE> 17
intended to be bound, the terms and conditions of this Agreement shall
prevail over any contrary terms in any purchase order, sales
acknowledgment, confirmation or any other document issued by either
party affecting the purchase or sale of Products hereunder.
8.15 Governing Law. This Agreement shall have Florida as its situs and shall
be governed by and construed in accordance with the laws of the State
of Florida, without reference to choice of laws. The parties agree that
this Agreement excludes the application of the 1980 United Nations
Convention on Contracts for the International Sale of Goods, if
otherwise applicable.
8.16 INTENTIONALLY DELETED.
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
signed and delivered by its duly authorized officer or representative as of the
Effective Date.
DRAGON SYSTEMS INC. TECH DATA PRODUCT
MANAGEMENT, INC.
By: \s\ Janet M. Baker By: \s\ P. K. Caldwell
------------------------- ----------------------------------
Printed Name: Janet M. Baker Printed Name: Peggy K. Caldwell
--------------- -------------------------
Title: President Title: Senior Vice President, Marketing
---------------------- --------------------------------
Date: 16 June 1997 Date: June 26, 1997
----------------------- ---------------------------------
-17-
<PAGE> 18
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SCHEDULE 5.7
CO-OP GUIDELINES
To increase the effectiveness of advertising and sales promotions Tech Data has
developed the following advertising requirements:
HOW CO-OP IS EARNED:
- - Co-op dollars will be at least [**]% of the purchases made by Tech Data, net
of returns.
- - Co-op dollars will be accrued on a monthly basis.
HOW CO-OP IS SPENT:
- - Tech Data will obtain Vendor's prior approval for all co-op expenditures.
- - Tech Data will be reimbursed for [**]% of the cost for ads or promotions that
feature Vendor products.
- - Co-op dollars will be used within the [**] months immediately following the
month in which they are earned.
HOW CO-OP IS CLAIMED:
- - Claims for co-op will be submitted to vendor within [**] days of the event
date.
- - Claims for co-op will be submitted with a copy of vendor prior approval and
proof of performance.
- - Payment must be remitted within [**] days of the claim date, or Tech Data
reserves the right to deduct from the next invoice.
CO-OP REPORTING:
- - Vendor will submit a monthly co-op statement outlining (i) co-op earned, (ii)
co-op used and (iii) co-op claims paid.
Accepted:
\s\ Janet M. Baker
- -------------------------
Name: Janet M. Baker
Title: President
Date: 16 June 1997
-18-
<PAGE> 19
SCHEDULE 6.2
PENDING LITIGATION AGAINST DRAGON SYSTEMS:
Excerpt taken from letter sent by Claudia Ellermann, Manager - Business Affairs,
via fax to Juan J. Lojo, Jr. on May 21, 1997:
"We need to make you aware of a counter lawsuit the Apple has extended to
Dragon, because one of Dragon's affiliates, Articulate Systems, whose product
Dragon distributes (Power Secretary), had sued Apple. The counter suit claims a
violation in the user interface because of the use of pull-down menus, which are
of course widely used in the industry. Our lawyers assure us that we have a
strong position in this, but since it has not been resolved to-date, we are
making you aware of this."
-19-
<PAGE> 20
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
DRAGON SYSTEMS
Discount Schedule
SRP Range in US$ Discount Rebate Prepay Discount
[**] [**] [**] [**]
Dragon Systems Confidential Do Not Distribute 06/06/97
This information is believed to be accurate as of its publication date; such
information is subject to change without notice. Dragon Systems is not
responsible for any inadvertent errors.
-20-
<PAGE> 21
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
DRAGON SYSTEMS
Price List
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION PART NUMBER SRP Price Price
<S> <C> <C> <C> <C>
DragonDictate Singles -CD/VXI Dictate into Single App, Internet 01-030-22-01 [**] [**]
& more
DragonDictate Personal Edition -CD 10,000 active word vocabulary 01-008-22-01 [**] [**]
ROM/VXI Microphone Dictate into virtually any
Windows App
DragonDictate Personal Edition - 10,000 active word vocabulary 01-010-22-01 [**] [**]
Diskettes/VXI Microphone Dictate into virtually any
Windows App
Text to Speech Option Converts written text to Speech 01-031-22-01 [**] [**]
Upgrade from Dragon Singles to Upgrade allows users to dictate 01-915-21-01 [**] [**]
Personal Edition CD/no Microphone into any virtually app & the
ability to edit/create macros
Dragon Dictate Classic Edition - 30,000 active word vocabulary 01-020-22-01 [**] [**]
CD Version /VXI Microphone Dictate into virtually any
Windows App
Dragon Dictate Power Edition - 60,000 active word vocabulary 01-022-22-01 [**] [**]
CD Version /VXI Microphone Dictate into virtually any
Windows App
Power Secretary Personal Edition Dictate into WordPerfect only CD-04000-WP [**] [**]
for WordPerfect - CD ROM 32,000 Active Word Vocabulary
Power Secretary Personal Edition for Dictate into ClarisWorks only CD-04001-CW [**] [**]
ClarisWorks - CD ROM 32,000 Active Word Vocabulary
Power Secretary Personal Edition for Dictate into MS Word only CD-04002-MW [**] [**]
MS Word - CD ROM 32,000 Active Word Vocabulary
Power Secretary Personal Edition for Dictate FileMaker Pro into only CD-04003-FM [**] [**]
FileMaker Pro - CD ROM 32,000 Active Word Vocabulary
Power Secretary Power Edition Dictate into many Macintosh CD-05000-PS [**] [**]
CD ROM Applications 60,000 Active
Word Vocabulary
Power Secretary MED Edition Dictate into many Macintosh CD-08000-MD [**] [**]
CD ROM Applications 60,000 Active
Word Vocabulary; Medical Terms
</TABLE>
Dragon Systems Confidential Do Not Distribute 06/06/97
This information is believed to be accurate as of its publication date; such
information is subject to change without notice. Dragon Systems is not
responsible for any inadvertent errors.
-21-
<PAGE> 22
MODIFICATION to the
SOFTWARE DISTRIBUTION AGREEMENT
BETWEEN TECH DATA PRODUCT MANAGEMENT, INC., AND DRAGON SYSTEMS, INC.
This Modification Agreement (the "Agreement"), effective as of the 26 day of
June, 1997 (the "Effective Date"), is between Tech Data Product Management,
Inc., a Florida corporation ("Tech Data") and Dragon Systems, Inc., a Delaware
corporation ("Dragon Systems").
RECITALS
A. Tech Data and Dragon Systems entered into a Software Distribution
Agreement dated June 26, 1997, (the "Original Agreement"), pursuant to
which Tech Data acts as a distributor of Dragon Systems products.
B. Tech Data and Dragon Systems desire to modify certain terms in the
Original Agreement in accordance with this Agreement.
C. Unless otherwise defined herein, all capitalized terms shall have the
same meaning ascribed thereto in the Original Agreement.
NOW THEREFORE, in consideration of mutual promises herein contained and other
good and valuable consideration, Tech Data and Dragon Systems hereby agree as
follows:
1. Modification. The Original Agreement is hereby modified and amended as
stated in this section.
(a) Section 3.2 of the Original Agreement is hereby revised in its
entirety to read as follows:
Title and Risk of Loss. FOB Dragon Systems warehouse.
Title and risk of loss or damage to Products shall
pass to Tech Data at the time the Product are
delivered to the common carrier. Dragon Systems and
Tech Data agree that no title or ownership of the
proprietary rights to any software code is
transferred by virtue of this Agreement
notwithstanding the use of terms such as "purchase",
"sale" or the like within this Agreement. Dragon
Systems retains all ownership rights and title to any
software code within the Products.
(b) Section 5.2 of the Original Agreement is hereby revised in its
entirety to read as follows:
-22-
<PAGE> 23
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Payment. Except as otherwise set forth in this Agreement, any
undisputed sum due to Dragon Systems pursuant to this Agreement shall
be payable as follows: [**], net sixty (60) days after the invoice
receipt. Dragon Systems shall invoice Tech Data no earlier than the
applicable shipping date for the Products covered by such invoice.
Products which are shipped from outside the United States, shall not be
invoiced to Tech Data prior to the Products being placed on a common
carrier within the United States for final delivery to Tech Data. The
due date for payment shall be extended during any time the parties have
a bona fide dispute concerning such payment.
2. Ratification. Except as expressly modified herein, the parties hereby
ratify and affirm all terms and conditions of the Original Agreement,
which terms and conditions remain in full force and effect as
originally agreed to by the parties unless otherwise modified or
amended in a signed writing.
IN WITNESS WHEREOF, each party has signed this Agreement on the day and year
written above effective as of the Effective Date.
DRAGON SYSTEMS, INC. TECH DATA PRODUCT MANAGEMENT, INC.
a Delaware corporation a Florida corporation
By: \s\ Diane M. Hudson By: \s\ P. K. Caldwell
------------------------- --------------------------------
Printed Name: Diane M. Hudson Printed Name: Peggy K. Caldwell
------------------------- --------------------------------
Title: Vice President - Finance Title: Senior Vice President, Marketing
------------------------- --------------------------------
Date: 5/7/98 Date: 5/11/98
------------------------- --------------------------------
-23-
<PAGE> 1
Exhibit 10.17
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
OUTSOURCING AGREEMENT
BETWEEN:
MODUS MEDIA INTERNATIONAL
LANDDROSTLAAN 51
7327 GM APELDOORN
THE NETHERLANDS
(HEREINAFTER "MMI")
AND
DRAGON SYSTEMS, INC.
320 NEVADA STREET
NEWTON, MA 02160
U.S.A.
(HEREAFTER "DRAGON SYSTEMS")
EFFECTIVE AS OF (EFFECTIVE DATE)
1. PURPOSE OF AGREEMENT
Formalize the agreements made regarding services and products between Dragon
Systems and MMI.
2. SERVICES
MMI will produce products for Dragon Systems on a Turnkey basis. Initially,
services will cover 3 products, as per the attached price sheets. However, this
may be extended.
Specific services will be:
- - Receipt and Management of master materials
- - Supply base management
- - Production (both components & finished goods)
- - Delivery
- - Inventory Management
- - Financial Services
Quality and Services Level Agreements will be based on mutual agreement.
3. DELIVERY
MMI shall deliver the Services in line with the agreed service levels to Dragon
Systems.
<PAGE> 2
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
4. ACCEPTANCE OF SERVICES
Dragon Systems may reject the Services if they do not comply with the
specification set out by Dragon \s\ JB. The Services are deemed to be accepted
if MMI does not receive a notification within 60 days after delivery to Dragon
Systems or its customers.
5. PAYMENT AND PRICING
Dragon Systems will compensate MMI for all Services rendered in accordance with
the rates specified in the Annex "Prices." Unless otherwise agreed, prices shall
exclude transport, insurance, VAT and Import duties (outside EC countries) to
Dragon Systems' designated delivery address.
For all materials in stock, older than 90 days, MMI will charge Dragon Systems
with an Inventory Carriage Charge of [**] of its value per month.
MMI will invoice Dragon Systems based on actual shipments that have been
performed.
Payments will be due in US dollars within 30 days after delivery, or when agreed
after delivery of installments or the receipt of invoice by Dragon Systems,
which ever is later. MMI shall invoice Dragon Systems indicating the performed
services in US$ with reference to this Agreement.
Dragon Systems shall be entitled to deduct from or set off against any sums
which Dragon Systems may be liable to pay to MMI any amounts owed by MMI, its
affiliated entities, subsidiaries or successors in interest.
6. WARRANTY
MMI warrants providing the Services with due diligence and care in accordance
with the specifications set by Dragon Systems. Should MMI not supply the
Services as agreed or should the Services become defective within 6 months from
their delivery to Dragon Systems, Dragon Systems may at its option require MMI
to complete or re-perform the Services within a reasonable period of time,
rescind the contract or refuse payment of the compensation in part or in total,
notwithstanding any damage claims.
7. INDEMNITY
MMI shall reimburse Dragon Systems and hold Dragon Systems harmless from any
liabilities or obligations imposed upon Dragon Systems resulting directly or
indirectly from MMI's or its employees or agents activities under this
Agreement.
-2-
<PAGE> 3
8. LIABILITY
Either party shall be liable for failure or delay in performance of its duties
under this Agreement except for reasons beyond such party's reasonable control.
MMI shall not be liable for indirect or consequential damages unless caused by
intention or gross negligence.
9. CONFIDENTIALITY
Both parties shall take reasonable precautions to preserve in strict confidence
any confidential or proprietary information obtained by them, their agents or
employees concerning the business, products, equipment or services of the other
party, including without limitation, trade secrets. Such reasonable precautions
shall include exercising precautionary measures designed to preserve the secrecy
of such information and to prevent its disclosure to third parties, except
following prior consent of the other party, with such precautions being at least
equivalent to those taken by each party with respect to its own confidential
information.
10. PATENTS AND COPYRIGHT
MMI warrants that the Services supplied to Dragon Systems will not infringe any
third parties' intellectual property rights. MMI will defend and indemnity
Dragon Systems against a claim that the Services supplied hereunder infringe a
patent or copyright and will pay resulting costs and damages provided that
Dragon Systems (i) promptly informs MMI in writing of the claim and (ii) gives
MMI sole control of the defense and all related settlement negotiations. MMI
will either procure the right for Dragon Systems to continue using the Services
or replace or modify them so that they become non-infringing or accept return of
the Services for a credit equal to the price paid by Dragon Systems.
11. COPYRIGHT AND COPYRIGHT LICENSE
Dragon Systems hereby grants MMI the rights to copy in printed or electronic
form the master materials according to the forecasted numbers given to MMI by
Dragon Systems.
12. TERM AND TERMINATION
This Agreement shall be valid for an indefinite period.
Both parties may terminate the Agreement with immediate effect
- - of either party breaches a material term of the Agreement
- - in case of a merger or change of key management or control
- - in case of bankruptcy or similar.
Dragon may terminate this agreement without cause by giving sixty (60) days
written notice to MMI.
-3-
<PAGE> 4
13. GOVERNING LAW
Any lawsuit relating to any matter arising under this Agreement may be initiated
in a State or Federal Court located in the Commonwealth of Massachusetts or in
any court in the Netherlands having jurisdiction over the matter.
14. INSURANCE
MMI shall at its own expense obtain and maintain with an insurer adequate
insurance coverage in respect of any Dragon Systems property under the care,
custody or control of MMI. MMI shall immediately notify Dragon Systems in
writing of any theft, loss or damage to any Dragon Systems property and shall
indemnify Dragon Systems in respect of the same.
MMI
\s\ John Dick General Manager
- -------------------------------------------------------
19 Jan. 1998
DRAGON SYSTEMS, INC.
\s\ Janet M. Baker, President
- -----------------------------------------------------
12 Jan. 1998
-4-
<PAGE> 5
NaturallySpeaking
<TABLE>
<CAPTION>
Part Number Description 1,000 units 2,500 units 5,000 units 10,000 units 25,000 units 50,000 units
- ---------------------- ------------------- ------------- ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
[**]
</TABLE>
-5-
<PAGE> 6
Dictate Power
<TABLE>
<CAPTION>
Part Number Description 1,000 units 2,500 units 5,000 units 10,000 units 25,000 units 50,000 units
- ---------------------- ------------------- ------------- ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
[**]
</TABLE>
-6-
<PAGE> 7
Dictate Classic
<TABLE>
<CAPTION>
Part Number Description 1,000 units 2,500 units 5,000 units 10,000 units 25,000 units 50,000 units
- ---------------------- ------------------- ------------- ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
[**]
</TABLE>
-7-
<PAGE> 1
Exhibit 10.18
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
AGREEMENT
SONY CONSUMER AUDIO/VIDEO PRODUCTS GROUP
SONY ELECTRONICS INC.
RESELLER AGREEMENT
ARTICLE I
PARTIES TO THIS AGREEMENT
This Agreement is entered into and effective as of May 15,1998 ("Effective
Date") by and between:
Sony Consumer Audio/Video Products Group Dragon Systems, Inc.
Diversified Markets and 320 Nevada Street
Sony Electronics Inc. Newton, MA 02160
One Sony Drive
Park Ridge, NJ 07656
(hereinafter referred to as the "SEL") (hereinafter referred to as the
"Reseller")
ARTICLE II
PREMISES OF THIS AGREEMENT
WHEREAS, SEL is engaged in the sale and distribution (or, in the case of
software, license) of various kinds of electronics products and accessories;
and,
WHEREAS, the Reseller desires to purchase and/or license certain of such
products and accessories for resale to Customers (as defined below).
NOW, THEREFORE, by reason of the foregoing premises, and in consideration of the
mutual covenants set forth in this Agreement, the parties agree as follows:
ARTICLE III
TERM/RESELLER CLASSIFICATION/DEFINITIONS
(a) TERM: This Agreement shall commence as of the Effective Date and expire on
March 31, 1999 (the "Term") unless earlier terminated in accordance with Section
11.0.
(b) RESELLER CLASSIFICATION: Reseller hereby represents and agrees that it will
resell only the Products (iii) by adding value to, but not modifying, the
Products as described in the Product and Market Schedule attached hereto and
defined below.
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RESELLER HEREBY ACKNOWLEDGES THAT SEL IS RELYING ON THE ABOVE REPRESENTATION AND
AGREEMENT AS A FACTOR IN DECIDING TO ENTER INTO THIS AGREEMENT AS WELL AS TO
DETERMINE RESELLER'S CLASS OF TRADE, THE PRODUCTS SEL IS WILLING TO SELL THE
RESELLER, THE PRICES FOR SAME AND THE WARRANTY APPLICABLE TO THE PRODUCTS AS TO
THE RESELLER AND THE END-USERS.
(c) BUNDLE: Pursuant to Article III (c), "Bundle" shall refer to only the
combination of the Product and the Value-Added Component in a physical package
which is sold as a single unit.
(d) CUSTOMERS: The term "Customer(s)" is defined and limited to those third
party business entities not affiliated with the Reseller within a particular
customer classification and/or market as set forth in the Product and Market
Schedule through which Reseller distributes the Bundles.
(e) PRODUCT AND MARKET SCHEDULE: The Product and Market Schedule, attached
hereto as Article VI and made a part hereof, in addition to defining the
Products and Customers, may contain terms and conditions in addition to or
different from the General Terms and Conditions set forth in Article IV. In the
event of a conflict between the terms and conditions of Article IV and the terms
and conditions of the Product and Market Schedule, the terms and conditions of
the Product and Market Schedule shall control.
(f) PRODUCTS: The term "Product(s)" shall be defined and limited to those
products, accessories and software of SEL set forth in the Product and Market
Schedule.
(g) SALE/RESALE: The term "Sale" or "Resale" (in any tense or form) whenever
used in this Agreement shall mean license in the case of software Products. The
term "Resale" (in any tense or form) shall also mean lease.
(h) THE SONY GROUP: The term "Sony Group" shall mean SEL, Sony Corporation of
America, Sony Corporation (Tokyo, Japan) and all subsidiaries and affiliates of
said companies.
(i) VALUE-ADDED COMPONENT: The term "Value-Added Component" shall mean the
product or component created, owned and/or obtained or licensed by Reseller that
must be included in the Bundle as set forth in the Product and Market Schedule.
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ARTICLE IV
GENERAL TERMS AND CONDITIONS
SECTION 1.0 SCOPE OF THIS AGREEMENT
1.1 RESALE LIMITATION: SEL agrees to sell, and the Reseller agrees to purchase,
the Products from SEL for resale only to the Customers upon the terms and
conditions set forth in this Agreement.
1.2 NON-EXCLUSIVE: The Reseller acknowledges that its right to resell the
Products under this Agreement is non-exclusive, and that SEL reserves the right
to sell and distribute any of its products to any customers in the world, and to
appoint any third party to do so, without giving the Reseller notice thereof and
without incurring any liability to the Reseller therefor. Further, nothing
herein shall be deemed to preclude the Reseller from selling brands of
electronics products and accessories that are competitive with the Products.
1.3 STATUS AS INDEPENDENT CONTRACTOR: The relationship established between SEL
and the Reseller by this Agreement is that of a vendor to its vendee and nothing
herein contained shall be deemed to establish or otherwise create a relationship
of principal and agent between SEL and the Reseller. The Reseller represents
that it is an independent contractor who will not be deemed an agent of SEL for
any purpose whatsoever and neither the Reseller nor any of its agents or
employees will have any right or authority to assume or create any obligation of
any kind, whether express or implied, on behalf of SEL. This Agreement is not a
franchise agreement and does not create a franchise relationship between the
parties and if any provision of this Agreement is deemed to create a franchise
between the parties, then this Agreement will be deemed null and void and will
automatically terminate as if such provision had been deemed unenforceable by a
court as provided in Section 12.8.
SECTION 2.0 ACCESS AND AUDIT
In order to verify the Reseller's compliance with this Agreement, the Reseller
shall give SEL reasonable access to the Reseller's facilities during normal
business hours to make inspections of the Reseller's premises and to audit the
books and records of the Reseller relating to the Products purchased by the
Reseller, including the right to make copies of or abstracts from such books and
records.
SECTION 3.0 SALE OF THE PRODUCTS
3.1 TERMS: SEL shall sell the Products to the Reseller upon the terms and
conditions set forth in this Agreement.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
3.2 PRICES: SEL shall sell the Products to the Reseller at the prices and/or
fees set forth on the Products and Market Schedule attached to the Agreement and
made a part hereof subject to adjustment as provided in Section 3.3. SEL may
increase or decrease the price of the Products by giving the Reseller notice and
such new pricing will apply to all of the Reseller's orders received by SEL
after the effective date set forth in such notice. The Reseller may terminate
this Agreement by giving SEL notice within [**] days after the issuance of any
such price increase to the extent of any orders not yet shipped by SEL. If SEL
offers price, payment or promotional discounts or other special pricing or
similar programs to other value-added resellers, integrators or bundlers who
compete with the Reseller for the Customers in the Market (as both Market and
Customer are described in the Product and Market Schedule), then SEL will make
such offer(s) available to the Reseller. SEL will use commercially reasonable
efforts to provide the Reseller with forty-five (45) days notice of any such
change.
3.3 ADJUSTMENTS: If the prices at which the Products are sold hereunder
represent a price which has been reduced based on a representation by the
Reseller that the Reseller would make certain volume purchases, and the Reseller
fails to make purchases in the volumes represented, SEL may in its sole
discretion adjust prices to the otherwise prevailing prices for the number of
items actually purchased, and the Reseller will pay SEL the difference promptly
upon receipt of SEL's invoice therefor. If the Reseller resells any of the
Products to any party other than the Customers or to any party on a stand-alone
basis (i.e., not within a System) the Reseller shall pay SEL an adjustment
charge equal to the difference between the price charged the Reseller for such
Products and the then-current single lot list price of SEL for such Products.
3.4 ALLOCATIONS: SEL may, in its sole discretion, allocate its inventory of the
Products.
3.5 DISCONTINUATION/CHANGES TO PRODUCTS: SEL may, in its sole discretion,
discontinue the sale of any of the Products and any parts/accessories thereto
(except where continued availability is required by law) and make such changes
affecting their form, fit or function as it, in its sole discretion, determines,
by giving the Reseller prior notice thereof but without incurring any liability
to the Reseller therefor. SEL will use commercially reasonable efforts to
provide such notice at least [**] days in advance. If, because of any
discontinuance or change to the Products affecting their form, fit or function,
the Reseller does not wish to purchase same or any of the other Products covered
by this Agreement, then the Reseller may terminate this Agreement by giving SEL
notice thereof within [**] days of SEL's notice to it. SEL agrees that for any
outstanding orders of the Reseller it will provide Products which are greater
than or equal to the discontinued Product in form, fit and function at the same
or lesser price subject to availability and the provisions of Section 3.4 above.
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3.6 TAXES: The Reseller shall bear the cost of any taxes (exclusive of taxes
based on the net income of the Sony Group), levies, duties and fees of any kind,
nature or description whatsoever applicable to any of the Products supplied by
SEL to the Reseller. The Reseller will pay SEL all such sums upon demand unless
the Reseller provides SEL, at the time of the submission of its purchase orders,
tax exemption certificates or licenses acceptable to the appropriate taxing
authorities.
3.7 PURCHASE ACCEPTANCE/CONTROLLING TERMS: SEL shall have the right in the
exercise of its sole and absolute discretion to reject any purchase order,
either in whole or in part, placed by the Reseller, and no purchase order shall
be binding upon SEL unless accepted by SEL in writing or by delivery of Products
in whole or partial fulfillment thereof.
Anything herein to the contrary notwithstanding, unless otherwise expressly
agreed to in writing by SEL, any shipment of Products to the Reseller in whole
or partial fulfillment of any purchase order placed by the Reseller shall not be
deemed to constitute an acceptance by SEL of any of the terms and conditions of
such purchase order, except as to the identification of the Products, and the
quantities involved. All such purchase orders shall be governed by the
provisions of this Agreement.
SECTION 4.0 TRADEMARKS
The Reseller acknowledges the validity of trade names and trademarks of the Sony
Group ("Trademarks'") and that it shall NOT, as a result of this Agreement, have
any right to or interest in any tradenames or trademarks owned, used or claimed
now or in the future by the Sony Group. Notwithstanding the foregoing, Reseller
shall have the right to use relevant Trademarks in conjunction with the
authorized sale of the Bundle, subject to SEL's prior written approval for each
particular use, which approval shall not be unreasonably withheld.
SECTION 5.0 SHIPMENTS
5.1 SHIPMENTS: The Reseller shall bear all costs and expenses incident to SEL's
shipment of the Products to it, except in the case of any shipment which
qualifies for prepaid freight under SEL's program then in effect. SEL shall
select the method of shipment and the carrier. SEL will ship the Products only
to locations in the continental United States, including Alaska.
5.2 TITLE AND RISK OF LOSE: Title to all of the Products sold by SEL to the
Reseller shall pass upon SEL's delivery thereof to the carrier. Risk of loss or
damage to any of the Products in transit, without regard to whether SEL paid the
shipping charges therefor or whether any third party is designated as consignee
thereof, is the Reseller's, whose responsibility it will be to file claims with
the carrier.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
5.3 TIME OF DELIVERY: Delivery dates set forth in any Reseller order or other
purchasing documents, or any confirmation thereof by SEL, shall be deemed to be
estimated only and subject to SEL's then current leadtimes for the Products. The
Reseller will not be excused from payment of any amounts it owes (invoices for
Products sold are only issued upon shipment) to SEL or from the performance of
any of its other obligations under the terms and conditions hereof as a result
of, and SEL will not be liable to the Reseller for damages resulting from, SEL's
failure to meet any of those dates. However, if SEL's delay in shipment or
delivery of any ordered Products exceeds by thirty (30) days such first
estimated date, then either party may cancel any Reseller order or part thereof
not previously fulfilled by giving the other written notice thereof and without
incurring any liability to the other therefor.
5.4 SEPARATE TRANSACTION: Each Reseller order for the Products under this
Agreement shall be deemed a separate transaction and each shipment of the
Products by SEL will constitute a separate sale, obligating the Reseller to pay
therefor, whether such shipment be in whole or only in partial fulfillment of
such order.
5.5 SHIPMENTS AFTER EXPIRATION: SEL's acceptance or shipment of any order from
the Reseller for Products after the termination or expiration of this Agreement
will not be construed as a renewal or extension of this Agreement nor as a
waiver of termination or expiration of this Agreement. Any such acceptance or
shipment shall be deemed an accommodation only.
5.6 STOP SHIPMENTS: SEL may, in its sole discretion, cancel any Reseller orders
previously accepted by SEL or delay the delivery of any of the Products covered
thereby if the Reseller defaults in any of its obligations under this Agreement
or if SEL reasonably believes that the Reseller may do so for or with respect to
any past or pending Reseller order.
SECTION 6.0 CREDIT; PAYMENT AND INDEBTEDNESS
6.1 MAINTENANCE OF CREDIT LINE: The Reseller shall maintain a credit line
sufficient to support its purchases of the Products and to pay any indebtedness
to SEL when due. SEL may, in its sole discretion, either generally or with
respect to any specific Reseller order, vary, change or limit the amount or
duration of credit allowed to the Reseller. The Reseller will make available to
SEL such statements of its financial condition as SEL may, from time to time,
reasonably request.
6.2 PAYMENT TERM: Unless otherwise provided in the Product and Market Schedule,
payment terms are net [**] days from the date of SEL's invoice; invoices are
issued only on the date of shipment.
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6.3 UNAUTHORIZED DEDUCTIONS: The Reseller shall not make deductions of any kind
from any monies it owes to SEL unless the Reseller has received an official
credit memorandum from SEL authorizing such deduction.
6.4 DEFAULT; ACCELERATION OF OBLIGATIONS AND CHARGE FOR LATE PAYMENT: The
Reseller's payment for the Products shall be considered past due if it is not
received by SEL by the due date shown on SEL's invoice. If any payment is past
due, then in addition to any other remedy available to SEL under this Agreement
or at law therefor, SEL may declare, by giving the Reseller notice thereof, (a)
all of the liabilities and obligations of the Reseller to SEL, whether then due
or not, to be immediately due unless the past due payment is received by the
time specified in the notice; and/or, (b) impose a finance charge on all amounts
past due or declared due by (a) above equal to the lesser of one and one half
percent (1-1/2%) per month or the maximum allowed by law and charge the Reseller
for SEL's reasonable expenses of collection therefor, including but not limited
to, attorneys' and experts' fees and court costs.
6.5 E.D.I. TRANSACTIONS: If and to the extent that the parties elect to use
electronic communication lines known as Electronic Data Interchange ("EDI") to
allow for the transmission of purchase orders and/or invoices for Products,
and/or to undertake other EDI transaction sets as may be agreed to in writing
between the parties, the terms and conditions of this Agreement shall apply to
such transactions. EDI will be transmitted either directly or through a
third-party servicer ("Provider"). If a Provider's services are utilized, unless
agreed to otherwise in writing, each party will pay the cost to set up and
maintain its own mailbox, the cost of all sends and receives to and from its own
mailbox and any other costs associated with its own mailbox. Upon proper receipt
of any EDI transmission, the receiving party shall promptly and properly
transmit a functional acknowledgment that an EDI transmission was received.
Neither the receipt nor acknowledgment of an EDI transmission shall constitute
an acceptance by the Company of any order placed by the "J" Account. Each party
shall take all necessary steps to provide for reasonable security to ensure that
all access and usage of its EDI system are properly authorized. Either party may
discontinue the utilization of EDI services upon thirty (30) days' prior written
notice to the other party.
SECTION 7.0 REPRESENTATIONS AND WARRANTIES
7.1 LIMITED WARRANTY: SEL'S WARRANTY FOR THE PRODUCTS SHALL BE AS SET FORTH IN
THE PRODUCT AND MARKET SCHEDULE.
7.2 COMPATIBILITY: SEL HEREBY DISCLAIMS AND EXCLUDES ANY REPRESENTATIONS OR
WARRANTIES THAT THE PRODUCTS ARE COMPATIBLE WITH ANY COMBINATION OF PRODUCTS NOT
FURNISHED BY
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SEL WHICH THE RESELLER OR ANY PURCHASER OR END USER MAY CHOOSE TO CONNECT TO THE
PRODUCT EXCEPT FOR THOSE EXPRESSLY APPROVED IN WRITING BY SEL.
7.3 MUTUAL: Each party represents and warrants to the other that (i) it has the
right and power to enter into and fully perform the obligations it has
undertaken in this Agreement; (ii) it is not under any obligations, contractual
or otherwise, to any other entity that might conflict, interfere, or be
inconsistent with any of the provisions of this Agreement; and (iii) it shall
comply with all federal, state and local laws, rules and regulations necessary
for it to perform its obligations under this Agreement.
7.4 INTELLECTUAL PROPERTY INDEMNIFICATION:
(a) SEL'S INDEMNITY OF THE RESELLER: SEL agrees to protect, defend,
hold harmless and indemnify the Reseller from and against any and all
liabilities, damages and actions arising out of any claim that the Products
infringe any patent, trademark or copyright of third parties. Such indemnity,
however, is specifically exclusive of any such claims which arise or result from
the use or misuse of Products; alteration of the Products as furnished by SEL;
use of the Products in combination with apparatus and software not delivered or
furnished by SEL; processes or methods allegedly performed by the Products; use
of the Products furnished by SEL in the manner for which the same were neither
designed nor contemplated; or a patent, trademark or copyright in which the
Reseller or an affiliate or subsidiary of the Reseller has any direct or
indirect interest by license or otherwise. This indemnification and hold
harmless provision shall extend only to damages and costs assessed against the
Reseller embodied in a final judgment by a court of competent jurisdiction
holding that such Products constitute a patent, trademark or copyright
infringement or damages and costs incurred by the Reseller as a result of a
settlement entered into with the prior written consent of SEL. SEL shall not be
responsible for any loss of profits or the Reseller's incidental or
consequential damages or losses.
SEL will be promptly notified by The Reseller of any suit or threat of suit as
to which SEL may have obligations under the above provisions and be given
reasonable opportunity to defend the same. The Reseller shall reasonably
cooperate with SEL with regard to the defense of any suit or threatened suit and
SEL shall have authority to settle or otherwise dispose of any such suit or
threatened suit, and to appeal any judgment which may be entered. This indemnity
shall be effective with respect to all Products sold by SEL to the Reseller on
or after the date set forth above and shall continue until terminated by written
notice by SEL to the Reseller upon ten (10) days prior notice. Termination of
this indemnity shall not affect its applicability as to Products sold by SEL to
the Reseller prior to the termination date thereof.
(b) THE RESELLER'S INDEMNITY OF SEL: The Reseller agrees to protect,
defend, hold harmless and indemnify SEL from and against any and all
liabilities,
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
damages and actions arising out of any claim that the software or other products
of the Reseller bundled with or sold in conjunction with the Products or in
connection with this Agreement ("Reseller Goods") infringe any patent, trademark
or copyright of third parties. Such indemnity, however, is specifically
exclusive of any such claims which arise or result from the use or misuse of
Reseller Goods; alteration of the Reseller Goods as furnished by the Reseller,
use of the Reseller Goods in combination with apparatus and software not
delivered or furnished by the Reseller other than the Products; processes or
methods allegedly performed by the Reseller Goods; use of the Reseller Goods
furnished by the Reseller in the manner for which the same were neither designed
nor contemplated; or a patent, trademark or copyright in which SEL or an
affiliate or subsidiary of SEL has any direct or indirect interest by license or
otherwise. This indemnification and hold harmless provision shall extend only to
damages and costs assessed against SEL embodied in a final judgment by a court
of competent jurisdiction holding that such Reseller Goods constitute a patent,
trademark or copyright infringement or damages and costs incurred by SEL as a
result of a settlement entered into with the prior written consent of the
Reseller. The Reseller shall not be responsible for any loss of profits or SEL's
incidental or consequential damages or losses.
The Reseller will be promptly notified by SEL of any suit or threat of suit as
to which the Reseller may have obligations under the above provisions and be
given reasonable opportunity to defend the same. The Reseller shall reasonably
cooperate with SEL with regard to the defense of any suit or threatened suit and
SEL shall have authority to settle or otherwise dispose of any such suit or
threatened suit, and to appeal any judgment which may be entered. This indemnity
shall be effective with respect to all Products sold by SEL to the Reseller on
or after the date set forth above and shall continue until terminated by written
notice by SEL to the Reseller upon ten (10) days prior notice. Termination of
this indemnity shall not affect its applicability as to Products sold by SEL to
the Reseller prior to the termination date thereof.
SECTION 8.0 PRODUCT INDEMNITIES
8.1 BY THE RESELLER: The Reseller shall indemnify and hold harmless all members
of the Sony Group and their respective officers, directors and employees from
and against any claims, suits, liabilities, losses, fines, penalties, damages
and expenses (including reasonable attorneys' and experts' fees and costs)
arising from or incident to the Reseller's software and/or the Reseller's breach
of its obligations or responsibilities under this Agreement including, without
limitation on the foregoing, its obligations under Section 1.3 of this Article
IV and Article VI.
8.2 BY SEL: SEL shall provide to the Reseller a Broad Form Vendors Endorsement
Certificate of Insurance in an amount of [**] evidencing SEL's product liability
insurance which Certificate names the Reseller as an additional insured under
said policy. Said policy will provide that the Reseller will be given ten (10)
days notice of
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termination of said policy. In the event that SEL's insurance carrier does not
defend and indemnify any third party action pursuant to any obligation said
insurance carrier may have undertaken as a result of its issuance of such
Certificate of Insurance, or in the event any third party claim exceeds the
insurance limits set forth in this paragraph, SEL agrees to protect, defend,
hold harmless and indemnify the Reseller against any and all liabilities,
damages and actions, directly and solely arising out of any personal injury or
property damage to a third party from its use of the Products sold by SEL to the
Reseller. SEL's obligation to defend the Reseller in connection with such
indemnity, however, shall terminate with respect to such a claim in the event
SEL obtains and furnishes to the Reseller information that reasonably supports
the conclusion that the Reseller altered the Products or made warranties or
representation not expressly permitted in writing by SEL.
SECTION 9.0 LIMITATION ON LIABILITY
EXCEPT AS OTHERWISE PROVIDED IN SECTIONS 7.0 AND 8.0, THE LIABILITY OF EITHER
PARTY, IF ANY, AND THE OTHER PARTY'S SOLE AND EXCLUSIVE REMEDY FOR DAMAGES FOR
ANY CLAIM OF ANY KIND WHATSOEVER WITH RESPECT TO ANY ORDER FOR, OR DELIVERY OF,
THE PRODUCTS OR WITH RESPECT TO ANY OF THE PRODUCTS COVERED THEREBY, AND
REGARDLESS OF THE LEGAL THEORY OR THE DELIVERY OR NON-DELIVERY OF THE PRODUCTS,
SHALL NOT BE GREATER THAN THE ACTUAL PURCHASE PRICE OF THE PRODUCTS WITH RESPECT
TO WHICH SUCH CLAIM IS MADE, WITH THE EXCEPTION OF INTEREST OR LATE PENALTIES
DUE IN RESPECT OF PAYMENT FOR PRODUCTS SHIPPED AND DELIVERED TO RESELLER. UNDER
NO CIRCUMSTANCES WILL SEL BE LIABLE TO THE RESELLER FOR ANY SPECIAL, INDIRECT,
INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING, BUT NOT LIMITED TO,
COMPENSATION, REIMBURSEMENT OR DAMAGES ON ACCOUNT OF THE LOSS OF PRESENT OR
PROSPECTIVE PROFITS, EXPENDITURES, INVESTMENTS OR COMMITMENTS, WHETHER MADE IN
THE ESTABLISHMENT, DEVELOPMENT OR MAINTENANCE OF BUSINESS REPUTATION OR
GOODWILL, FOR LOSS OF DATA, COST OF SUBSTITUTE PRODUCTS, COST OF CAPITAL, AND
THE CLAIMS OF ANY THIRD PARTY, OR FOR ANY OTHER REASON WHATSOEVER.
SECTION 10.0 TERMINATION
10.1 TERMINATION FOR CAUSE: Either party may immediately terminate this
Agreement by giving the other notice if such other party:
a) defaults in the payment of any monies it owes to the other when due
and such default continues for a period of ten (10) days after notice thereof;
or,
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b) defaults in the performance of any of its obligations under any of
the terms or conditions of this Agreement other than as provided in subsection
(a) above, which default is not remedied within thirty (30) days after notice
thereof; or,
c) defaults in the performance of an of its obligations under the terms
and conditions of this Agreement which default by its nature, cannot be
remedied; or,
d) engages directly or indirectly in any attempt to defraud the party
issuing such notice; or,
e) issues any press release, advertising, brochure or other release of
information to any of the Customers, the trade or the general public concerning
or in any way referring to this Agreement or any other agreement or relationship
between the parties without the prior written approval of the party issuing such
notice; or,
(f) is unable to pay any and/or all of its debts as they become due or
becomes insolvent or ceases to pay any and/or all of its debts as they mature in
the ordinary course of business, or makes an assignment for the benefit of its
creditors; or,
g) is liquidated or dissolved or if any proceedings are commenced by,
for or against it under any bankruptcy, insolvency, reorganization of debts or
debtors relief law, or law providing for the appointment of a receiver or
trustee in bankruptcy.
SEL may also immediately terminate this Agreement by notice: 1) pursuant to
Section 10.3; or 2) upon the occurrence of, or the Reseller's failure to give
notice of, any of the events referenced in Section 11.1 (a) - (c).
10.2 REMEDIES FOR BREACH: If the Reseller defaults in its obligations under the
terms and conditions of this Agreement, then SEL may, in addition to any other
remedy available to it hereunder or at law therefor, suspend or cease further
shipments of the Products to the Reseller for a period of time specified in a
notice to the Reseller.
10.3 SET-OFF: If the Reseller defaults with respect to this Agreement or any
other agreement(s) with SEL including, but not limited to, the Reseller's
failure to pay any monies when due either pursuant to this Agreement or any
other such agreement, then SEL may, in its sole discretion, setoff against any
monies due and owing the Reseller such sum or sums of money due and owing from
the Reseller to SEL pursuant to this Agreement or such other agreement(s),
and/or to terminate this Agreement.
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10.4 SURVIVING OBLIGATIONS AND LIMITATIONS: Neither the termination nor
expiration of this Agreement nor the termination of any of the agreements
referred to in this Section shall release either party from the obligation to
pay any monies that may be owing to the other party or operate to discharge any
liability that had been incurred by either party prior to any such termination
or expiration.
10.5 ORDER PROCEDURE AFTER NOTICE OF TERMINATION: During the period between SEL
giving the Reseller notice of this Agreement's termination and the effective
date of such termination, all Reseller orders not then fulfilled and all new
Reseller orders for the Products that are accepted by SEL will be shipped to the
Reseller only on a cash in advance basis.
SECTION 11.0 NOTICES
11.1 CHANGE IN STATUS: The Reseller shall give SEL immediate notice in writing
of:. (a) any transaction effecting a change in control of the Reseller or a
transfer of fifty (50) percent or more of the Reseller's assets if the Reseller
is a corporation; or, (b) any change in the respective interests of the
partners, if the Reseller is a partnership; or, (c) any transaction affecting
the ownership of any part of the business, if the Reseller is an individual
proprietorship.
11.2 CHANGE IN NAME OR ADDRESS OF THE RESELLER: Each party shall give the other
prompt notice in writing of any change in the: (a) name of the party, or, (b)
address of the party principal office from that first set forth above.
11.3 METHOD OF TRANSMISSION: Any notices given under this Agreement shall be in
writing and will be deemed to have been sufficiently given when delivered by
hand or sent by facsimile transmission (which is acknowledged by the recipient),
overnight courier service or by certified or registered mail, postage and other
charges prepaid, to the parties at the addresses first above written or as
subsequently changed by notice duly given. The date of mailing any written
notice will be deemed the date on which such notice is given unless otherwise
specified in the notice.
SECTION 12.0 GENERAL
12.1 EXPORT: The Reseller shall not export the Products covered by this
Agreement in violation of U.S. export laws and regulations. The Reseller will be
solely responsible for compliance with and the obtaining of any required export
licenses.
12.2 ASSIGNMENT: Neither party may assign or otherwise transfer this Agreement
or any interest or right hereunder or delegate the performance of any of its
obligations hereunder to any third party without the prior written consent of
the other party, except that SEL may assign its accounts receivable generated by
this Agreement upon commercially reasonable notice thereof to the Reseller. Any
such attempted
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assignment, transfer or delegation without the prior written consent of the
other, will be deemed null and void and result in the immediate termination of
this Agreement without necessity of any notice.
12.3 WAIVERS: Waiver by either party of any default, or either party's failure
to enforce any of the terms and conditions of this Agreement shall not in any
way affect, limit or waive such party's right thereafter to enforce and compel
strict performance of every term and condition hereof.
12.4 NON-EXCLUSIVENESS; REMEDIES: Any specific right or remedy provided in this
Agreement shall not be exclusive but will be cumulative of all other rights and
remedies set forth herein and allowed at law.
12.5 LITIGATION: In the event of any litigation between the parties with respect
to this Agreement, the prevailing party (the party entitled to recover costs of
suit at such time as all appeals have been exhausted or the time for taking such
appeals has expired) shall be entitled to recover reasonable attorneys' and
experts' fees, and costs in addition to such other relief as the court may
award.
12.6 HEADINGS: The headings of Articles and Sections in this Agreement are for
convenience and reference only, and they shall in no way define, limit, or
describe the scope of the provisions or be considered in the interpretation,
construction or enforcement hereof.
12.7 GOVERNING LAW AND VENUE:
This Agreement shall be interpreted, construed and enforced in accordance with
the local law of the State of New Jersey.
If SEL initiates any litigation against the Reseller, it shall only bring such
action or suit in the federal or state court with appropriate jurisdiction over
the subject matter established or sitting in the State of Massachusetts. If the
Reseller initiates any litigation against SEL, it shall only bring such action
or suit in the federal or state court with appropriate jurisdiction over the
subject matter established or sitting in the State of New Jersey. The parties
shall not raise in connection therewith, and hereby waive, and any defenses
based upon the venue, the inconvenience of the forum, the lack of personal
jurisdiction, or the like in any such action or suit brought in such states.
THE PARTIES HEREBY WAIVE TRIAL, BY JURY IN CONNECTION WITH ANY ACTION OR SUIT
UNDER THIS AGREEMENT OR OTHERWISE ARISING FROM THE REIATIONSHIP OF THE PARTIES
HERETO.
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<PAGE> 14
12.8 INVALIDITY: If and to the extent that any term or condition of this
Agreement is specifically determined by any court to be in whole or in part
invalid or unenforceable, then this Agreement shall be immediately terminated
upon such determination. However, such termination will not operate to discharge
either party from the obligation to pay the other party any sum due such other
party or discharge any liability that had been incurred prior thereto.
12.9 SURVIVAL: Any provision herein which by its nature is indicated or intended
to extend beyond the expiration or termination of this Agreement shall survive
any expiration or termination of this Agreement.
12.10 GOVERNMENT CONTRACTS: No provision required in any United States
government contract or subcontract related thereto shall be deemed a part of
this Agreement, or be imposed upon or binding upon SEL, and this Agreement will
not be deemed an acceptance of any government provisions that may be included or
referred to in any Reseller order or other purchasing document.
SECTION 13.0 FORCE MAJEURE
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY DELAY IN THE PERFORMANCE OF
ANY OF ITS OBLIGATIONS HEREUNDER DUE TO ANY CAUSE BEYOND SUCH PARTY'S REASONABLE
CONTROL OR DUE TO ACTS OF GOD, ACTS OF CIVIL OR MILITARY AUTHORITIES, FIRES,
LABOR DISTURBANCES, FLOODS, EPIDEMICS, GOVERNMENTAL RULES OR REGULATIONS, WAR,
RIOT, DELAYS IN TRANSPORTATION OR SHORTAGES IN RAW MATERIALS OR OTHER PRODUCTS.
THIS SECTION SHALL NOT RELIEVE OR RELEASE EITHER PARTY FROM ITS OBLIGATION TO
MAKE PAYMENT WHEN DUE OF ANY MONIES WHICH EITHER PARTY MAY OWE TO THE OTHER.
ARTICLE V
INCORPORATION/ ENTIRETY OF AGREEMENT
This Agreement supersedes, terminates and otherwise renders null and void any
and all prior written and/or oral agreements between the Reseller and SEL with
respect to the matters herein expressly set forth, except that nothing herein
contained shall be construed as intended to relieve or release either party from
its obligation to make payment of any monies which either party may owe to the
other party. This Agreement represents and incorporates the entire understanding
of the parties hereto with respect to the matters herein expressly set forth and
each party acknowledges that there are no warranties, representations, covenants
or understandings of any kind, nature or description whatsoever made by either
party to the other, except as are herein expressly set forth. This Agreement may
be modified only by a written instrument signed by the
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<PAGE> 15
parties to this Agreement, which instrument makes specific reference to this
Agreement and the changes to be made hereto.
The Reseller hereby warrants and represents that the individual executing this
Agreement is duly authorized and empowered to bind the Reseller. This Agreement
shall be subject to acceptance by SEL through its execution in the space
provided below by an authorized representative only.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date
first above written.
Reseller: SEL:
DRAGON SYSTEMS, INC. SONY CONSUMER AUDIO/VIDEO GROUP
SONY ELECTRONICS INC.
By: \s\ Janet M. Baker By: \s\ Arthur Halloran
---------------------------- ------------------------------
(Authorized Signature) (Authorized Signature)
Print Name: Janet M. Baker Print Name: Arthur Halloran
---------------------------- ------------------------------
* Title: President Title: Vice President
---------------------------- ------------------------------
* Execution of this Agreement: If the Reseller is a corporation, indicate
the office of the person signing the Agreement on behalf of the
corporation. If the Reseller is a partnership, the same should be
signed by a general partner, who should so indicate by use of the word
"General Partner". If the Reseller is an individual proprietorship, the
same should be indicated by use of the title "Sole Proprietor".
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<PAGE> 16
ARTICLE VI
PRODUCT AND MARKET SCHEDULE
With DRAGON SYSTEMS, INC. ("Reseller")
Dated as of May 15,1998 ("Effective Date")
1. CLASSIFICATION. Pursuant to Article III (b) of this Agreement, the Reseller
agrees that it will only sell the Products by adding value to them as described
below and reselling same to Customers in the manner set forth in this Schedule.
2. PRODUCTS. Pursuant to Article III (f) "Products" shall include and mean only
the following:
MZ-R50 Minidisc recorder units and other Minidisc products as
SEL may authorize from time to time.
3. VALUE-ADDED COMPONENT. Pursuant to Article III (i), the "Value-Added
Component" shall mean only Dragon's speech recognition software utilized in
(a) Dragon NaturallySpeaking Mobile Suite for Legal;
(b) Dragon NaturallySpeaking Mobile Suite for Medical; and
(c) Dragon NaturallySpeaking Mobile Suite
4. SPECIAL MARKETING REQUIREMENTS.
(a) The Reseller agrees that it shall only sell the Products as part of
the Bundle described above. In all instances, the packaging, MZ-R50 advertising
and related marketing materials for the Bundle must clearly and conspicuously
state; (i) the then current MZ-R50 (or other Product) MSRP as provided by SEL
and (ii) that the MZ-R50 (or other Product) is being included in the Bundle as a
special promotional offer. In addition, the Reseller agrees that it shall
sticker both the Products and the Value-Added Component in each Bundle to
indicate that they are not to be sold separately.
(b) Notwithstanding the foregoing, the Reseller may sell the MZ-R50
Product to end-user customers of the Reseller who have previously purchased
Dragon NaturallySpeaking Deluxe or Professional versions, including Legal,
Medical, Business Products and other products as our mutually agreed on a
one-for-one purchase basis.
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<PAGE> 17
(c) The Reseller may promote the availability of the Bundle on the
Internet only on its Website, and may sell it on the Internet or its Website
(i.e. takes orders for the Bundle via the Internet or its Website). The Reseller
may not promote or offer for sale the MZ-R50 by itself on the Internet or its
Website, but may advise purchasers of its Dragon NaturallySpeaking Mobile
Products of the availability of an upgrade subject to SEL's prior review and
approval of such upgrade offer.
5. APPROVALS. Prior to distributing the Bundle, the Reseller must obtain SEL's
written approval of the packaging and any representations the Reseller may wish
to make regarding the Product. In addition, neither party will issue any press
releases or other publicity (including on the Internet or any on-line method)
regarding this Agreement or the relationship between the parties without the
prior written approval of the other party, which shall not be unreasonably
withheld.
6. ADDITIONAL RESELLER RESPONSIBILITIES. The Reseller
(a) will ensure that the Value-Added Components work properly with the
Products prior to distributing the Bundles;
(b) will sell the Product with Product-related materials in a mutually
acceptable manner,
(c) shall not sell the Products in any manner other than in the Bundle,
except as provided in 4.(b) above. In the event the Product is sold unbundled by
the Reseller or any of its Customers in violation hereof, the Reseller shall be
liable to SEL for the full retail price of the Bundle. In addition, SEL shall
have the, right to terminate this Agreement pursuant to Section 10.1 (b).
(d) shall not accept returns of Bundles from its Customer and shall
require that its Reseller Customer not accept returns from end-users unless all
components of the Bundle are returned. Notwithstanding the foregoing, SEL shall
not accept any returns from the Reseller, but shall provide its limited warranty
to end-users as per Section 10 below;
(e) will maintain and enforce on a commercially-reasonable basis, the
Reseller's Customer agreements for the Bundle that are consistent with the
Reseller's obligations hereunder, including contractual provisions that
(i) such Customer not sell the components of the Bundle
separately or in any manner other than as received from the Reseller;
(ii) such Customer shall be liable to the Reseller for the
full retail price of the Product plus any cost of collection in the event it is
sold unbundled;
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<PAGE> 18
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
(iii) such Customer shall maintain proof of bundled sale for
two years;
(iv) such Customer shall allow the Reseller and/or SEL to
access an Customer's records for two years from the date of sale of Bundles to
verify compliance;
(v) such Customer shall bind its distributors/resellers of the
Bundle of this Paragraph 6 (e); and
(vi) sales of the Bundle may be suspended and Bundles recalled
if any such reseller is in breach of these requirements;
(f) will obtain and/or maintain customer service support functions
sufficient to meet all reasonable inquiries and needs of end-user Bundle
purchasers. SEL will provide a one-time training session for up to [**] people
at [**] to the Reseller at the Reseller's facilities.
7. PRICES. The price for the Products shall be as notified to the Reseller by
SEL from time to time. All pricing is subject to increase and/or adjustment in
accordance with Sections 3.2 and 3.3 of Article IV of this Agreement. All
pricing is F.O.B. [**]. Current payment terms are [**] days subject to the
provisions of Section 6.0 of Article IV of this Agreement.
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<PAGE> 19
8. CUSTOMER/MARKET DEFINITION. Pursuant to Article III (e), the Reseller agrees
that it will only sell the Products to individuals, the government or resellers
who directly reach business/medical/legal professionals located in the United
States of America. The Reseller will require reseller customers to sell the
Bundle as such and not separately and that its end-user customers are purchasing
such Bundles for their use and not for resale.
9. WARRANTY
DIVISION'S LIMITED WARRANTY. SEL's warranty for each of the Products
shall be to the end-user only as set forth in SEL's Limited Warranty Card
enclosed with or accompanying the Products. If any Products are not accompanied
by warranty cards, SEL's then-current warranty applicable to those Products will
apply.
10. SERVICE. The Reseller will direct all of its customers and end-users of the
Bundle to contact the Reseller through the Reseller's toll-free number regarding
all end-user Bundle performance inquiries, complaints and claims to determine
whether the performance problem relates to the Value-Added Component or the
Product. If the Product appears to be involved, the Reseller only then will
refer said end-user to SEL by a mechanism to be determined by the parties.
DRAGON SYSTEMS, INC. SONY CONSUMER AUDICI/VIDEO GP.
(Name of Reseller) SONY ELECTRONICS INC.
By: \s\ Janet M. Baker By: \s\ Arthur Halloran
---------------------------- ------------------------------
(Authorized Signature) (Authorized Signature)
Print Name: Janet M. Baker Print Name: Arthur Halloran
---------------------------- ------------------------------
Title: President Title: Vice President
---------------------------- ------------------------------
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<PAGE> 1
DRAGON SYSTEMS, INC.
320 Nevada Street
Newton, MA 02160
December 24, 1998
Fleet National Bank
One Federal Street
Boston, MA 02110
Gentlemen:
This letter agreement will set forth certain understandings between Dragon
Systems, Inc., a Delaware corporation (the "Borrower") and Fleet National Bank
(the "Bank") with respect to Revolving Loans (hereinafter defined) to be made by
the Bank to the Borrower, with respect to letters of credit which may hereafter
be issued by the Bank for the account of the Borrower and with respect to other
facilities to be provided by the Bank for the Borrower. In consideration of the
mutual promises contained herein and in the other documents referred to below,
and for other good and valuable consideration, receipt and sufficiency of which
are hereby acknowledged, the Borrower and the Bank agree as follows:
I. AMOUNTS AND TERMS
1.1. REFERENCE TO DOCUMENTS. Reference is made to (i) that certain
$6,000,000 principal amount promissory note (the "Revolving Note") of even date
herewith made by the Borrower and payable to the order of the Bank, (ii) that
certain Inventory and Accounts Receivable Security Agreement and that certain
Supplementary Security Agreement - Security Interest in Goods and Chattels, each
of even date herewith, from the Borrower to the Bank (collectively, the
"Security Agreement"), and (iii) a pledge agreement (the "Pledge") from the
Borrower to the Bank with respect to the capital stock of Dragon Systems
Securities, Inc. ("Securities Corp.") and a related letter of representations
from Securities Corp.
1.2. THE BORROWING; REVOLVING NOTE. Subject to the terms and conditions
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the first to occur of (i) the Expiration Date, or (ii) the earlier
termination of the within-described revolving financing arrangements pursuant to
ss.5.2 or ss.6.7; provided, however, that (1) the aggregate principal amount of
Revolving Loans advanced under this ss.1.2 and outstanding shall at no time
exceed $4,000,000 and (2) the Aggregate Bank Liabilities (hereinafter defined)
shall at no time exceed the Borrowing Base (hereinafter defined). Within such
limits, and subject to the terms and conditions hereof, the Borrower may obtain
Revolving Loans, repay Revolving Loans and obtain Revolving Loans again on one
or more occasions. The Revolving Loans
<PAGE> 2
shall be evidenced by the Revolving Note and interest thereon shall be payable
at the times and at the rate provided for in the Revolving Note. Overdue
principal of the Revolving Loans and, to the extent permitted by law, overdue
interest shall bear interest at a fluctuating rate per annum which at all times
shall be equal to the sum of (i) four (4%) percent per annum PLUS (ii) the per
annum rate otherwise payable under the Revolving Note (but in no event in excess
of the maximum rate from time to time permitted by then applicable law),
compounded monthly and payable on demand. The Borrower hereby irrevocably
authorizes the Bank to make or cause to be made, on a schedule attached to the
Revolving Note or on the books of the Bank, at or following the time of making
each Revolving Loan and of receiving any payment of principal, an appropriate
notation reflecting such transaction and the then aggregate unpaid principal
balance of the Revolving Loans. The amount so noted shall constitute presumptive
evidence as to the amount owed by the Borrower with respect to principal of the
Revolving Loans. Failure of the Bank to make any such notation shall not,
however, affect any obligation of the Borrower or any right of the Bank
hereunder or under the Revolving Note. All payments of interest, principal and
any other sum payable hereunder and/or under the Revolving Note and/or with
respect to any of the other Obligations shall be made to the Bank, in lawful
money of the United States in immediately available funds, at its office at One
Federal Street, Boston, MA 02110 or to such other address as the Bank may from
time to time direct. All payments received by the Bank after 2:00 p.m. on any
day shall be deemed received as of the next succeeding Business Day. All monies
received by the Bank shall be applied first to fees, charges, costs and expenses
payable to the Bank under this letter agreement, the Revolving Note and/or any
of the other Loan Documents and/or with respect to any of the other Obligations,
next to interest then accrued on account of any Revolving Loans or letter of
credit reimbursement obligations or on any of the other Obligations and only
thereafter to principal of the Revolving Loans, the letter of credit
reimbursement obligations and the other Obligations. All interest and fees
payable hereunder and/or under the Revolving Note and/or with respect to any of
the other Obligations shall be calculated on the basis of a 360-day year for the
actual number of days elapsed.
1.3. REPAYMENT; RENEWAL. The Borrower shall repay in full all Revolving
Loans and all interest thereon upon the first to occur of: (i) the Expiration
Date or (ii) an acceleration under ss.5.2(a) following an Event of Default. The
Borrower may repay, at any time, without penalty or premium, the whole or any
portion of any Revolving Loan. In addition, if at any time the Borrowing Base is
in an amount which is less than the then outstanding Aggregate Bank Liabilities,
the Borrower will forthwith pay so much of the Revolving Loans as may be
required (or arrange for the termination of such letters of credit as may be
required) so that the Aggregate Bank Liabilities will not exceed the Borrowing
Base. The Bank may, at its sole discretion, renew the financing arrangements
described in this letter agreement by extending the Expiration Date in a writing
signed by the Bank and accepted by the Borrower. Neither the inclusion in this
letter agreement or elsewhere of covenants relating to periods of time after the
Expiration Date, nor any other provision hereof, nor any action (except a
written extension pursuant to the immediately preceding sentence), non-action or
course of dealing on the part of the Bank will be deemed an extension of, or
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<PAGE> 3
agreement on the part of the Bank to extend, the Expiration Date.
1.4. ADVANCES AND PAYMENTS. The proceeds of all Revolving Loans shall be
credited by the Bank to a general deposit account maintained by the Borrower
with the Bank. The proceeds of each Revolving Loan will be used by the Borrower
solely for working capital purposes.
The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest, principal and other sums due, from
time to time, under this letter agreement and/or the Revolving Note and/or with
respect to any letter of credit and/or with respect to any of the other
Obligations; and will thereafter notify the Borrower of the amount so charged.
The failure of the Bank so to charge any account or to give any such notice
shall not affect the obligation of the Borrower to pay interest, principal or
other sums as provided herein or in the Revolving Note or with respect to any
letter of credit or with respect to any of the other Obligations.
Whenever any payment to be made to the Bank hereunder or under the
Revolving Note or with respect to any letter of credit or with respect to any of
the other Obligations shall be stated to be due on a day which is not a Business
Day, such payment may be made on the next succeeding Business Day, and interest
payable on each such date shall include the amount thereof which shall accrue
during the period of such extension of time. All payments by the Borrower
hereunder and/or in respect of the Revolving Note and/or with respect to any
letter of credit or any of the other Obligations shall be made net of any
impositions or taxes and without deduction, set-off or counterclaim,
notwithstanding any claim which the Borrower may now or at any time hereafter
have against the Bank.
1.5. LETTERS OF CREDIT. At the Borrower's request, the Bank may from time
to time, in its sole discretion, issue one or more letters of credit for the
account of the Borrower; provided that at the time of such issuance and after
giving effect thereto (A) the aggregate stated amounts of all letters of credit
issued under this paragraph will not exceed $2,000,000 and (B) the Aggregate
Bank Liabilities will not exceed the then effective Borrowing Base. Any such
letter of credit will be issued for such fee and upon such terms and conditions
as may be agreed to by the Bank and the Borrower at the time of issuance. The
Borrower hereby authorizes the Bank, without further request from the Borrower,
to cause the Borrower's liability to the Bank for reimbursement of funds drawn
under any such letter of credit to be repaid from the proceeds of a Revolving
Loan to be made hereunder. The Borrower hereby irrevocably requests that such
Revolving Loans be made, and same will be deemed advanced at the discretion of
the Bank and applied to repayment of the Borrower's reimbursement obligations
even if the conditions to advance contained in ss.1.8 are not then met and even
if the aggregate Revolving Loans outstanding would thereupon exceed $4,000.000.
1.6. ACH TRANSACTIONS. The Bank may from time to time prior the Expiration
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<PAGE> 4
Date, at the request of the Borrower, initiate automated clearinghouse ("ACH")
transactions for the Borrower; provided that the Bank's total ACH Exposure shall
not (unless otherwise agreed by the Bank in its sole discretion) exceed
$3,000,000 at any one time. ACH transactions will bear such fees and charges and
as may be agreed upon by the Bank and the Borrower and will be governed by the
Bank's then current documentation and practices with respect to such
transactions. As used herein, "ACH Exposure" as determined at any date means the
sum of (i) all amounts then owed by the Borrower to the Bank in connection with
any ACH transaction pursuant to which the Bank has advanced funds on behalf of
the Borrower PLUS (ii) the maximum amount which could be owed by the Borrower
(assuming settlement within two (2) Business Days of each date when funds are
advanced) to the Bank in connection with all ACH transactions then authorized by
the Borrower but as to which the Bank has not yet advanced funds.
1.7. FOREIGN EXCHANGE CONTRACTS. During the term of this letter agreement
and subject to the terms and conditions hereof, the Bank may from time to time
prior to the Expiration Date, at the Borrower's request, provide to the Borrower
one or more forward contracts ("Foreign Exchange Contracts") for the purchase by
the Borrower of foreign currency from the Bank; provided that (i) each such
Foreign Exchange Contract will be at such pricing as the Bank and the Borrower
may agree at the time of execution of such Foreign Exchange Contract, (ii) the
documentation for each such Foreign Exchange Contract will be in such form as is
then customarily used by the Bank for transactions of this type, (iii) the
Foreign Exchange Contracts will be used by the Borrower to minimize its exposure
to the fluctuation of the value of those foreign currencies in which payments
are expected to be made to the Borrower by customers or in which the Borrower is
required to make payments to suppliers, (iv) the United States Dollar equivalent
of all amounts subject to the Foreign Exchange Contracts will not exceed
$2,000,000 in the aggregate and (v) the F/X Exposure will at no time exceed
$300,000. As used herein, "F/X Exposure" as determined at any date means the sum
of (i) all amounts then owed by the Borrower to the Bank in connection with
settlement of any Foreign Exchange Contract, PLUS (ii) the maximum two-day
settlement amount for all then outstanding Foreign Exchange Contracts.
1.8. CONDITIONS TO ADVANCE. Prior to the making of the initial Revolving
Loan or the issuance of any letter of credit hereunder or the initiation of any
ACH transaction or the issuance of any Foreign Exchange Contract hereunder, the
Borrower shall deliver to the Bank duly executed copies of this letter
agreement, the Security Agreement, the Revolving Note and the documents and
other items listed on the Closing Agenda delivered herewith by the Bank to the
Borrower, all of which shall be satisfactory in form and substance to the Bank
and its counsel.
Without limiting the foregoing, any Revolving Loan or letter of credit
issuance or ACH transaction or the issuance of a Foreign Exchange Contract
(including the initial Revolving Loan, letter of credit issuance, ACH
transaction or the issuance of a Foreign Exchange Contract) is subject to the
further conditions precedent (listed in clauses (a) - (d)
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<PAGE> 5
below) that on the date on which such Revolving Loan is made or such letter of
credit is issued or such ACH transaction is initiated or such Foreign Exchange
Contract is issued (and after giving effect thereto):
(a) All statements, representations and warranties of the Borrower made in
this letter agreement and/or in the Security Agreement shall continue to be
correct in all material respects as of the date of such Revolving Loan or the
date of issuance of such letter of credit or the date of such ACH transaction or
the date of issuance of such Foreign Exchange Contract, as the case may be,
except any such statements, representations and warranties which are
specifically stated herein as being made as of a particular date.
(b) All covenants and agreements of the Borrower contained herein and/or in
any of the other Loan Documents shall have been complied with in all material
respects on and as of the date of such Revolving Loan or the date of issuance of
such letter of credit or the date of such ACH transaction or the date of
issuance of such Foreign Exchange Contract, as the case may be.
(c) No event which constitutes, or which with notice or lapse of time or
both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.
Each request by the Borrower for any Revolving Loan or for the issuance of
any letter of credit or for any ACH transaction or for the issuance of any
Foreign Exchange Contract, and each acceptance by the Borrower of the proceeds
of any Revolving Loan or delivery of a letter of credit or delivery of a Foreign
Exchange Contract, will be deemed a representation and warranty by the Borrower
that at the date of any such event, and after giving effect thereto, all of the
conditions set forth in the foregoing clauses (a)-(d) of this ss.1.8 will be
satisfied. Each request for a Revolving Loan or letter of credit issuance will
be accompanied by a Borrowing Base certificate on a form satisfactory to the
Bank, executed by the chief financial officer of the Borrower, unless such a
certificate shall have been previously furnished as required by clause (iv) of
ss.3.6 setting forth the Borrowing Base as at the most recent month-end prior to
the date of the requested borrowing or the requested letter of credit issuance,
as the case may be.
II. REPRESENTATIONS AND WARRANTIES
2.1. REPRESENTATIONS AND WARRANTIES. In order to induce the Bank to enter
into this letter agreement and to make Revolving Loans hereunder and/or issue
letters of credit hereunder and/or engage in ACH transactions for the Borrower
and/or issue Foreign Exchange Contracts, the Borrower warrants and represents to
the Bank as follows:
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<PAGE> 6
(a) The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of Delaware. The Borrower has full corporate power
to own its property and conduct its business as now conducted, to grant the
security interests contemplated by the Security Agreement and to enter into and
perform this letter agreement and the other Loan Documents. The Borrower is duly
qualified to do business and is in good standing in Massachusetts and is also
duly qualified to do business in and is in good standing in each other
jurisdiction in which the Borrower maintains any facility, sales office,
warehouse or other location, and in each other jurisdiction where the failure so
to qualify could (singly or in the aggregate with all other such failures) have
a material adverse effect on the financial condition, business or prospects of
the Borrower, all such jurisdictions being listed on item 2.1(a) of the attached
Disclosure Schedule. At the date hereof, the Borrower has no Subsidiaries,
except as shown on said item 2.1(a) of the attached Disclosure Schedule. The
Borrower is not a member of any partnership or joint venture.
(b) At the date of this letter agreement, all of the outstanding capital
stock of the Borrower is owned, of record and beneficially, as set forth on item
2.1(b) of the attached Disclosure Schedule.
(c) The execution, delivery and performance by the Borrower of this letter
agreement and each of the other Loan Documents have been duly authorized by all
necessary corporate and other action and do not and will not:
(i) violate any provision of, or require (as a prerequisite to
effectiveness) any filings (other than filings under the Uniform Commercial
Code), registration, consent or approval under, any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award presently
in effect having applicability to the Borrower;
(ii) violate any provision of the charter or by-laws of the Borrower,
or result in a breach of or constitute a default or require any waiver or
consent under any indenture or loan or credit agreement or any other
material agreement, lease or instrument to which the Borrower is a party or
by which the Borrower or any of its properties may be bound or affected or
require any other consent of any Person; or
(iii) result in, or require, the creation or imposition of any lien,
security interest or other encumbrance (other than in favor of the Bank)
upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents has been
duly executed and delivered by the Borrower and each is a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
(e) Except as described on item 2.1(e) of the attached Disclosure Schedule,
there are no actions, suits, proceedings or investigations pending or, to the
knowledge of the
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<PAGE> 7
Borrower, threatened by or against the Borrower or any Subsidiary before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which could hinder or prevent the
consummation of the transactions contemplated hereby or call into question the
validity of this letter agreement or any of the other Loan Documents or any
action taken or to be taken in connection with the transactions contemplated
hereby or thereby or which in any single case or in the aggregate might result
in any material adverse change in the business, prospects, condition, affairs or
operations of the Borrower or any Subsidiary.
(f) The Borrower is not in violation of any term of its charter or by-laws
as now in effect. Neither the Borrower nor any Subsidiary of the Borrower is in
material violation of any term of any mortgage, indenture or judgment, decree or
order, or any other instrument, contract or agreement to which it is a party or
by which any of its property is bound which in any single case or in the
aggregate might result in any material adverse change in the business,
prospects, condition, affairs or operations of the Borrower or any Subsidiary.
(g) The Borrower has filed (and has caused each of its Subsidiaries to
file) all federal, state and local tax returns, reports and estimates required
to be filed by the Borrower and/or by any such Subsidiary. All such filed
returns, reports and estimates are proper and accurate and the Borrower or the
relevant Subsidiary has paid all taxes, assessments, impositions, fees and other
governmental charges required to be paid in respect of the periods covered by
such returns, reports or estimates. No deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows of no
material tax liability or basis therefor.
(h) The Borrower is in compliance (and each Subsidiary of the Borrower is
in compliance) with all requirements of law, federal, state and local, and all
requirements of all governmental bodies or agencies having jurisdiction over it,
the conduct of its business, the use of its properties and assets, and all
premises occupied by it, failure to comply with any of which could (singly or in
the aggregate with all other such failures) have a material adverse effect upon
the assets, business, financial condition or prospects of the Borrower or any
such Subsidiary. Without limiting the foregoing, the Borrower has all the
franchises, licenses, leases, permits, certificates and authorizations needed
for the conduct of its business and the use of its properties and all premises
occupied by it, as now conducted, owned and used.
(i) The audited financial statements of the Borrower as at December 31,
1997 and the management-generated statements of the Borrower as at September 30,
1998, each heretofore delivered to the Bank, are complete and accurate and
fairly present the financial condition of the Borrower as at the respective
dates thereof and for the periods covered thereby, except that the
management-generated statements do not have footnotes and thus do not present
the information which would normally be contained in footnotes to financial
statements. Neither the Borrower nor any of the Borrower's Subsidiaries has any
liability, contingent or otherwise, not disclosed in the aforesaid financial
statements or in any notes
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<PAGE> 8
thereto that could materially affect the financial condition of the Borrower.
Since December 31, 1997, there has been no material adverse development in the
business, condition or prospects of the Borrower, and the Borrower has not
entered into any transaction other than in the ordinary course, other than the
sale of its interest in Articulate Systems, Inc.
(j) The principal place of business and chief executive office of the
Borrower are located at 320 Nevada Street, Newton, MA 02160. All of the books
and records of the Borrower are located at said address. Except as described on
item 2.1(j) of the attached Disclosure Schedule, no assets of the Borrower are
located at any other address. Said item 2.1(j) of the attached Disclosure
Schedule sets forth the names and addresses of all record owners of any premises
where any material amount of Collateral is located.
(k) The Borrower owns or has a valid right to use all of the patents,
licenses, copyrights, trademarks, trade names and franchises now being used to
conduct its business. The conduct of the Borrower's business as now operated
does not conflict with valid patents, licenses, copyrights, trademarks, trade
names or franchises of others in any manner that could materially adversely
affect the business, prospects, assets or condition, financial or otherwise, of
the Borrower.
(l) None of the executive officers or key employees of the Borrower is
subject to any agreement in favor of anyone other than the Borrower which limits
or restricts that person's right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or which grants to anyone
other than the Borrower any rights in any inventions or other ideas susceptible
to legal protection developed or conceived by any such officer or key employee.
(m) The Borrower is not a party to any contract or agreement which now has
or, as far as can be foreseen by the Borrower at the date hereof, may have a
material adverse effect on the financial condition, business, prospects or
properties of the Borrower.
(n) The Borrower has reviewed the software which it uses in its business
for "Year 2000" compliance and has determined that such software will continue
to function in the manner intended without material interruption of service or
other difficulty resulting from the "Year 2000 problem". The Borrower will, at
the request of the Bank, provide such reports and other information as the Bank
may reasonably request in order to evidence such Year 2000 compliance.
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<PAGE> 9
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
Without limitation of any other covenants and agreements contained herein
or elsewhere, the Borrower agrees that so long as the financing arrangements
contemplated hereby are in effect or any Revolving Loan or any of the other
Obligations shall be outstanding or any letter of credit issued hereunder shall
be outstanding or any Foreign Exchange Contract shall be outstanding or any
amount shall be owed by the Borrower in respect of any ACH transaction or any
Foreign Exchange Contract:
3.1. LEGAL EXISTENCE; QUALIFICATION; COMPLIANCE. The Borrower will maintain
(and will cause each Subsidiary of the Borrower to maintain) its corporate
existence and good standing in the jurisdiction of its incorporation. The
Borrower will remain qualified to do business and in good standing in
Massachusetts. The Borrower will qualify to do business and will remain
qualified and in good standing (and the Borrower will cause each Subsidiary of
the Borrower to qualify and remain qualified and in good standing) in each
jurisdiction where the Borrower or such Subsidiary, as the case may be,
maintains any plant, sales office, warehouse or other facility and in each other
jurisdiction in which the failure so to qualify could (singly or in the
aggregate with all other such failures) have a material adverse effect on the
financial condition, business or prospects of the Borrower or any such
Subsidiary. The Borrower will comply (and will cause each Subsidiary of the
Borrower to comply) with its charter documents and by-laws, to the extent
applicable. The Borrower will comply with (and will cause each Subsidiary of the
Borrower to comply with) all applicable laws, rules and regulations (including,
without limitation, ERISA and those relating to environmental protection) other
than (i) laws, rules or regulations the validity or applicability of which the
Borrower or such Subsidiary shall be contesting in good faith by proceedings
which serve as a matter of law to stay the enforcement thereof and (ii) those
laws, rules and regulations the failure to comply with any of which could not
(singly or in the aggregate) have a material adverse effect on the financial
condition, business or prospects of the Borrower or any such Subsidiary.
3.2. MAINTENANCE OF PROPERTY; INSURANCE. The Borrower will maintain and
preserve (and will cause each Subsidiary of the Borrower to maintain and
preserve) all of its fixed assets in good working order and condition, making
all necessary repairs thereto and replacements thereof. The Borrower will
maintain all such insurance as may be required under the Security Agreement and
will also maintain, with financially sound and reputable insurers, insurance
with respect to its property and business against such liabilities, casualties
and contingencies and of such types and in such amounts as shall be reasonably
satisfactory to the Bank from time to time and in any event all such insurance
as may from time to time be customary for companies conducting a business
similar to that of the Borrower in similar locales, with the Bank named as loss
payee with respect to all Collateral.
3.3. PAYMENT OF TAXES AND CHARGES. The Borrower will pay and discharge (and
will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and
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<PAGE> 10
governmental charges or levies imposed upon it or upon its income or property,
including, without limitation, taxes, assessments, charges or levies relating to
real and personal property, franchises, income, unemployment, old age benefits,
withholding, or sales or use, prior to the date on which penalties would attach
thereto, and all lawful claims (whether for any of the foregoing or otherwise)
which, if unpaid, might give rise to a lien upon any property of the Borrower or
any such Subsidiary, except any of the foregoing which is being contested in
good faith and by appropriate proceedings which serve as a matter of law to stay
the enforcement thereof and for which the Borrower (or such Subsidiary, as the
case may be) has established and is maintaining adequate reserves. The Borrower
will pay, and will cause each of its Subsidiaries to pay, in a timely manner,
all lease obligations, all material trade debt, purchase money obligations,
equipment lease obligations and all of its other material Indebtedness. The
Borrower will perform and fulfill all material covenants and agreements under
any leases of real estate, agreements relating to purchase money debt, equipment
leases and other material contracts. The Borrower will maintain in full force
and effect, and comply with the terms and conditions of, all permits,
permissions and licenses necessary or desirable for its business.
3.4. ACCOUNTS. The Borrower will maintain its principal depository and
operating accounts with the Bank; provided that the Borrower may take up to 90
days from the date of this letter agreement to transition its accounts to the
Bank.
3.5. CONDUCT OF BUSINESS. The Borrower will conduct, in the ordinary
course, the business in which it is presently engaged. The Borrower will not,
without the prior written consent of the Bank, directly or indirectly (itself or
through any Subsidiary) enter into any other lines of business, businesses or
ventures which are not substantially related to the Borrower's core business at
the date of the letter agreement.
3.6. REPORTING REQUIREMENTS. The Borrower will furnish to the Bank:
(i) Within 90 days after the end of each fiscal year of Borrower, a
copy of the annual audit report for such fiscal year for the Borrower,
including therein the consolidated balance sheet of the Borrower and
Subsidiaries as at the end of such fiscal year and related consolidated
statements of income, stockholders' equity and cash flow for the fiscal
year then ended. The annual consolidated financial statements shall be
certified by independent public accountants selected by the Borrower and
reasonably acceptable to the Bank, such certification to be in such form as
is generally recognized as "unqualified". The audited consolidated
statements will be accompanied by unaudited consolidating balance sheets,
income statements and cash flow statements for the relevant fiscal periods.
(ii) Within 45 days after the end of each fiscal quarter of the
Borrower, consolidated balance sheets of the Borrower and its Subsidiaries
and related consolidated statements of income and stockholders' equity and
cash flow, unaudited
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but complete and accurate and prepared in accordance with generally
accepted accounting principles consistently applied fairly presenting the
financial condition of the Borrower as at the dates thereof and for the
periods covered thereby (except that such quarterly statements need not
contain footnotes) and certified as accurate (subject to normal year-end
audit adjustments, which shall not be material) by the chief financial
officer of the Borrower, such balance sheets to be as at the end of such
fiscal quarter and such statements of income and stockholders' equity and
cash flow to be for such fiscal quarter and for the fiscal year to date, in
each case together with a comparison to budget.
(iii) At the time of delivery of each annual or quarterly statement of
the Borrower, a certificate executed by the chief financial officer of the
Borrower stating that he or she has reviewed this letter agreement and the
other Loan Documents and has no knowledge of any default by the Borrower in
the performance or observance of any of the provisions of this letter
agreement or of any of the other Loan Documents or, if he or she has such
knowledge, specifying each such default and the nature thereof. Each
financial statement given as at the end of any fiscal quarter of the
Borrower will also set forth the calculations necessary to evidence
compliance with ss.ss.3.7-3.10.
(iv) Monthly, within 15 days after the end of each month, (A) an aging
report in form satisfactory to the Bank covering all Receivables of the
Borrower outstanding as at the end of such month, and (B) a certificate of
the chief financial officer of the Borrower setting forth the Borrowing
Base as at the end of such month, all in form reasonably satisfactory to
the Bank.
(v) Promptly after receipt, a copy of all audits or reports submitted
to the Borrower by independent public accountants in connection with any
annual, special or interim audits of the books of the Borrower and any
"management letter" prepared by such accountants. The management letter for
each fiscal year will be delivered within 90 days after the close of such
fiscal year.
(vi) As soon as possible and in any event within five days of the
occurrence of any Event of Default or any event which, with the giving of
notice or passage of time or both, would constitute an Event of Default,
the statement of the Borrower setting forth details of each such Event of
Default or event and the action which the Borrower proposes to take with
respect thereto.
(vii) 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,
in which the Borrower or any Subsidiary of the Borrower is a defendant;
provided that nothing in this clause (vii) will be deemed to require the
Borrower to give notice of any such action, suit or
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<PAGE> 12
proceeding in which only monetary damages are sought and the damages so
sought are less than $100,000.
(viii) Promptly upon filing any registration statement or listing
application (or any supplement or amendment to any registration statement
or listing application) with the Securities and Exchange Commission ("SEC")
or any successor agency or with any stock exchange or with the National
Association of Securities Dealers quotations system, a copy of same.
(ix) If the Borrower becomes a publicly-traded company, a copy of each
periodic or current report filed with the SEC or any successor agency and
each annual report, proxy statement and other communication sent to
shareholders or other securityholders generally, such copy to be provided
to the Bank promptly upon such filing with the SEC or such communication
with shareholders or securityholders, as the case may be.
(x) Promptly after the Borrower has knowledge thereof, written notice
of any development or circumstance which may reasonably be expected to have
a material adverse effect on the Borrower or its business, properties,
assets, Subsidiaries or condition, financial or otherwise.
(xi) Promptly upon request, such other information respecting the
financial condition, operations, Receivables, inventory, machinery or
equipment of the Borrower or any Subsidiary as the Bank may from time to
time reasonably request.
3.7. DEBT TO WORTH. The Borrower will maintain as at the last day of each
fiscal quarter of the Borrower (each, a "Determination Date") (commencing with
December 31, 1998) on a consolidated basis a Leverage Ratio which is equal to or
less than 1.0 to 1. As used herein, "Leverage Ratio" means, as at any
Determination Date, the ratio of (x) the total consolidated Senior Liabilities
of the Borrower and/or its Subsidiaries then outstanding to (y) the Borrower's
then consolidated Capital Base.
3.8. CAPITAL BASE. The Borrower will maintain as at each Determination Date
(commencing December 31, 1998) a consolidated Capital Base which shall be equal
to or greater than the then-effective Capital Base Requirement. As used herein,
the "Capital Base Requirement" will be deemed to have been $19,000,000 as at
September 30, 1998; and, as at each Determination Date thereafter, the Capital
Base Requirement will be deemed to become an amount equal to the sum of: (i)
that Capital Base Requirement which had been in effect at the last day of the
immediately preceding fiscal quarter, PLUS (ii) 80% of the net proceeds of any
equity securities sold by the Borrower during the fiscal quarter ending at such
Determination Date and 80% of the proceeds of any Subordinated Debt issued by
the Borrower and/or its Subsidiaries during the fiscal quarter ending at such
Determination Date (nothing contained herein being deemed to approve the
issuance of any such Subordinated
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<PAGE> 13
Debt), PLUS (iii) 80% of the consolidated Net Income of the Borrower and
Subsidiaries during the fiscal quarter ending at such Determination Date (but
without giving effect to any Net Income which is less than zero for any fiscal
quarter).
3.9. PROFITABILITY. The Borrower will achieve consolidated quarterly Net
Income of at least $500,000 for its fiscal quarter ending December 31, 1998 and
for each fiscal quarter thereafter.
3.10. LIQUIDITY. The Borrower will maintain as at each Determination Date
(commencing with December 31, 1998) a ratio of Net Quick Assets to Current
Liabilities, which ratio shall be equal to or greater than 1.4 to 1.
3.11. BOOKS AND RECORDS. The Borrower will maintain (and will cause each of
its Subsidiaries to maintain) complete and accurate books, records and accounts
which will at all times accurately and fairly reflect all of its transactions in
accordance with generally accepted accounting principles consistently applied.
The Borrower will, at any reasonable time and from time to time upon reasonable
written notice and during normal business hours (and at any time and without any
necessity for notice following the occurrence of an Event of Default), permit
the Bank, and any agents or representatives thereof, to examine and make copies
of and take abstracts from the records and books of account of, and visit the
properties of the Borrower and any of its Subsidiaries, and to discuss its
affairs, finances and accounts with its officers, directors and/or independent
accountants, all of whom are hereby authorized and directed to cooperate with
the Bank in carrying out the intent of this ss.3.11. Each financial statement of
the Borrower hereafter delivered pursuant to this letter agreement will be
complete and accurate and will fairly present the financial condition of the
Borrower as at the date thereof and for the periods covered thereby.
IV. NEGATIVE COVENANTS
Without limitation of any other covenants and agreements contained herein
or elsewhere, the Borrower agrees that so long as the financing arrangements
contemplated hereby are in effect or any Revolving Loan or any of the other
Obligations shall be outstanding or any letter of credit issued hereunder shall
be outstanding or any Foreign Exchange Contract shall be outstanding or any
amount shall be owed by the Borrower in respect of any ACH transaction or any
Foreign Exchange Contract:
4.1. INDEBTEDNESS. The Borrower will not create, incur, assume or suffer to
exist any Indebtedness (nor allow any of its Subsidiaries to create, incur,
assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation, the
Indebtedness represented by the Revolving Note and any Indebtedness in
respect of letters of credit issued by the Bank or in respect of any ACH
transactions or in respect
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<PAGE> 14
of any Foreign Exchange Contracts;
(ii) Indebtedness of the Borrower or any Subsidiary for taxes,
assessments and governmental charges or levies not yet due and payable;
(iii) unsecured current liabilities of the Borrower or any Subsidiary
(other than for money borrowed or for purchase money Indebtedness with
respect to fixed assets) incurred upon customary terms in the ordinary
course of business;
(iv) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) owed to equipment
vendors and/or lessors for equipment purchased or leased by the Borrower
for use in the Borrower's business, provided that the total of Indebtedness
permitted under this clause (iv) plus presently-existing equipment
financing permitted under clause (v) of this ss.4.1 will not exceed
$500,000 in the aggregate outstanding at any one time;
(v) other Indebtedness existing at the date hereof (including, without
limitation, any existing Subordinated Debt), but only to the extent set
forth on item 4.1 of the attached Disclosure Schedule;
(vi) any guaranties or other contingent liabilities expressly
permitted pursuant to ss.4.3; and
(vii) borrowings by Securities Corp. in an aggregate amount not in
excess of $3,500,000.
4.2. LIENS. The Borrower will not create, incur, assume or suffer to exist
(nor allow any of its Subsidiaries to create, incur, assume or suffer to exist)
any mortgage, deed of trust, pledge, lien, security interest, or other charge or
encumbrance (including the lien or retained security title of a conditional
vendor) of any nature (collectively, "Liens"), upon or with respect to any of
its property or assets, now owned or hereafter acquired, except that the
foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies on
property of the Borrower or any of its Subsidiaries if the same shall not
at the time be delinquent or thereafter can be paid without interest or
penalty;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary course of
business for sums not yet due or which are being contested in good faith
and by appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and as to which adequate reserves have been made;
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<PAGE> 15
(iii) pledges or deposits under workmen's compensation laws,
unemployment insurance, social security, retirement benefits or similar
legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors and/or lessors securing
purchase money Indebtedness to the extent permitted by clause (iv) of
ss.4.1; provided that no such Lien will extend to any property of the
Borrower other than the specific items of equipment financed; or
(vi) other Liens existing at the date hereof, but only to the extent
and with the relative priorities set forth on item 4.2 of the attached
Disclosure Schedule.
Without limitation of the foregoing, the Borrower covenants and agrees that
it will not enter into (and will not suffer or permit any of its Subsidiaries to
enter into) any agreement or understanding (each, a "Restrictive Agreement")
with any Person other than the Bank which could prohibit or restrict in any
manner the right of the Borrower or any such Subsidiary to grant to the Bank any
Lien on any of its assets. The Borrower represents and warrants that, at the
date of this letter agreement, neither the Borrower nor any such Subsidiary is
party to any such Restrictive Agreement.
4.3. GUARANTIES. The Borrower will not, without the prior written consent
of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will not permit any of its Subsidiaries so to assume,
guaranty or become directly or contingently liable) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business and (ii) guaranties
existing at the date hereof and described on item 4.3 of the attached Disclosure
Schedule.
4.4. DIVIDENDS. The Borrower will not, without the prior written consent of
the Bank, make any distributions to its shareholders, pay any dividends (other
than dividends payable solely in capital stock of the Borrower) or redeem,
purchase or otherwise acquire, directly or indirectly any of its capital stock.
4.5. LOANS AND ADVANCES. The Borrower will not make (and will not permit
any Subsidiary to make) any loans or advances to any Person, including, without
limitation, the Borrower's directors, officers and employees, except (i)
existing loans described in item 4.5 of the attached Disclosure Schedule, (ii)
loans made to the Borrower by Securities Corp. which give rise to Indebtedness
permitted by clause (vii) of ss.4.1; and (iii) advances to such directors,
officers or employees with respect to expenses incurred by them in the ordinary
course of their duties and advances against salary, all of which advances will
not exceed, in
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the aggregate, $100,000 outstanding at any one time.
4.6. INVESTMENTS. The Borrower will not, without the Bank's prior written
consent, invest in, hold or purchase any stock or securities of any Person (nor
will the Borrower permit any of its Subsidiaries to invest in, purchase or hold
any such stock or securities) except (i) readily marketable direct obligations
of, or obligations guarantied by, the United States of America or any agency
thereof, (ii) other investment grade debt securities, (iii) mutual funds, the
assets of which are primarily invested in items of the kind described in the
foregoing clauses (i) and (ii) of this ss.4.6, (iv) deposits with or
certificates of deposit issued by the Bank and any other obligations of the Bank
or the Bank's parent, (v) deposits in any other bank organized in the United
States having capital in excess of $100,000,000, (vi) deposits with foreign
banks to the extent reasonably necessary to support the foreign operations of
the Borrower and/or any of its Subsidiaries, and (vii) investments in any
Subsidiaries now existing or hereafter created by the Borrower pursuant to
ss.4.7 below; provided that in any event the Tangible Net Worth of the Borrower
alone (exclusive of its investment in Subsidiaries and any debt owed by any
Subsidiary to the Borrower) will not be less than 90% of the consolidated
Tangible Net Worth of the Borrower and Subsidiaries.
4.7. SUBSIDIARIES; ACQUISITIONS. Neither the Borrower nor any of its
Subsidiaries will, without the prior written consent of the Bank (such consent
not to be unreasonably withheld) form or acquire any Subsidiary or make any
other acquisition of the stock of any other Person or of all or substantially
all of the assets of any other Person; except that after the Borrower has closed
an initial public offering and is a publicly traded company, the Borrower may,
without having to obtain such consent, make one or more Permitted Acquisitions.
The Borrower will not become a partner in any partnership.
4.8. MERGER. The Borrower will not, without the prior written consent of
the Bank, merge or consolidate with any Person, or sell, lease, transfer or
otherwise dispose of any material portion of its assets (whether in one or more
transactions), other than sale of inventory in the ordinary course.
4.9. AFFILIATE TRANSACTIONS. The Borrower will not, without the prior
written consent of the Bank, enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property or the rendering of
any service, with any affiliate of the Borrower, except in the ordinary course
of and pursuant to the reasonable requirements of the Borrower's business and
upon fair and reasonable terms no less favorable to the Borrower than would be
obtained in a comparable arms-length transaction with any Person not an
affiliate; provided that nothing in this ss.4.9 shall be deemed to prohibit the
payment of salary or other similar payments to any officer or director of the
Borrower at a level consistent with the salary and other payments being paid at
the date of this letter agreement and heretofore disclosed in writing to the
Bank, nor to prevent the hiring of additional officers at a salary level
consistent with industry practice, nor to prevent reasonable periodic increases
in salary. For the purposes of this letter agreement, "affiliate" means any
Person which, directly or
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<PAGE> 17
indirectly, controls or is controlled by or is under common control with the
Borrower; any officer or director or former officer or director of the Borrower;
any Person owning of record or beneficially, directly or indirectly, 5% or more
of any class of capital stock of the Borrower or 5% or more of any class of
capital stock or other equity interest having voting power (under ordinary
circumstances) of any of the other Persons described above; and any member of
the immediate family of any of the foregoing. "Control" means possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of any Person, whether through ownership of voting
equity, by contract or otherwise.
4.10. CHANGE OF ADDRESS, ETC. The Borrower will not change its name or
legal structure, nor will the Borrower move its chief executive offices or
principal place of business from the address described in the first sentence of
ss.2.1(j) above, nor will the Borrower remove any books or records from such
address, nor will the Borrower keep any Collateral at any location other than
the premises described in ss.2.1(j), without, in each instance, giving the Bank
at least 30 days' prior written notice and providing all such financing
statements, certificates and other documentation as the Bank may request in
order to maintain the perfection and priority of the security interests granted
or intended to be granted pursuant to the Security Agreement. The Borrower will
not change its fiscal year or methods of financial reporting unless, in each
instance, prior written notice of such change is given to the Bank and prior to
such change the Borrower enters into amendments to this letter agreement in form
and substance satisfactory to the Bank in order to preserve unimpaired the
rights of the Bank and the obligations of the Borrower hereunder.
4.11. HAZARDOUS WASTE. Except as provided below, the Borrower will not
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material", "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower, (ii) any release or known threat of
release of any hazardous material or oil at or from any site or vessel owned,
occupied or operated by the Borrower or any Subsidiary of the Borrower, and
(iii) any incurrence of any expense or loss by any government or governmental
authority in connection with the assessment, containment or removal of any
hazardous material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the
Borrower and its Subsidiaries may use, store and transport and arrange for the
transport or disposal of, and need not notify the Bank of the use, storage,
transport, arrangement for transport or disposal of, (x) oil as fuel for their
respective facilities or for vehicles or machinery used in the ordinary course
of their respective businesses and (y) hazardous materials that are solvents,
cleaning agents or other
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<PAGE> 18
materials used in the ordinary course of the respective
business operations of the Borrower and its Subsidiaries, as long as in each
case the Borrower or the Subsidiary concerned (as the case may be) has obtained
and maintains in effect any necessary governmental permits, licenses and
approvals, complies with all requirements of applicable federal, state and local
law relating to such use, storage, transportation, arrangement for transport or
disposal, follows the protective and safety procedures that a prudent
businessperson conducting a business the same as or similar to that of the
Borrower or such Subsidiary (as the case may be) would follow, and in any event
disposes of such materials (not consumed in the ordinary course) only through
licensed providers of hazardous waste removal services.
4.12. NO MARGIN STOCK. No proceeds of any Revolving Loan shall be used
directly or indirectly to purchase or carry any margin security.
4.13. SUBORDINATED DEBT. The Borrower will not directly or indirectly make
any optional or voluntary prepayment or purchase of Subordinated Debt or modify,
alter or add any provisions with respect to payment of Subordinated Debt. In any
event, the Borrower will not make any payment of any principal of or interest on
any Subordinated Debt at any time when there exists, or if there would result
therefrom, any Event of Default hereunder.
V. DEFAULT AND REMEDIES
5.1. EVENTS OF DEFAULT. The occurrence of any one of the following events
shall constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or interest
on the Revolving Note on or before the date when due; or the Borrower shall fail
to pay when due any amount owed to the Bank in respect of any letter of credit
now or hereafter issued by the Bank or in respect of any Foreign Exchange
Contract or in respect of any ACH transaction; or
(b) Any representation or warranty of the Borrower contained herein shall
at any time prove to have been incorrect in any material respect when made or
any representation or warranty made by the Borrower in connection with any
Revolving Loan or letter of credit or any ACH transaction or any Foreign
Exchange Contract shall at any time prove to have been incorrect in any material
respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of ss.ss.3.1, 3.3, 3.6, 3.7, 3.8, 3.9 or 3.10
or Article IV; or
(d) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or
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<PAGE> 19
(e) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or
(f) Any default shall exist and remain unwaived or uncured with respect to
any Subordinated Debt of the Borrower or with respect to any instrument
evidencing, guaranteeing or otherwise relating to any such Subordinated Debt, or
any such Subordinated Debt shall not have been paid when due, whether by
acceleration or otherwise, or shall have been declared to be due and payable
prior to its stated maturity, or any event or circumstance shall occur which
permits, or with the lapse of time or the giving of notice or both would permit,
the acceleration of the maturity of any Subordinated Debt by the holder or
holders thereof; or
(g) Any default shall exist and remain unwaived or uncured with respect to
any other Indebtedness of the Borrower or any Subsidiary of the Borrower in
excess of $100,000 in aggregate principal amount or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $100,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity, or any event or circumstance shall occur which permits, or with the
lapse of time or the giving of notice or both would permit, the acceleration of
the maturity of any such Indebtedness by the holder or holders thereof; or
(h) The Borrower shall be dissolved, or the Borrower or any Subsidiary of
the Borrower shall become insolvent or bankrupt or shall cease paying its debts
as they mature or shall make an assignment for the benefit of creditors, or a
trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the property of the
Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement,
insolvency or similar proceedings shall be instituted by or against the Borrower
or any such Subsidiary under the laws of any jurisdiction (except for an
involuntary proceeding filed against the Borrower or any Subsidiary of the
Borrower which is dismissed within 60 days following the institution thereof);
or
(i) Any attachment, execution or similar process shall be issued or levied
against any of the property of the Borrower or any Subsidiary and such
attachment, execution or similar process shall not be paid, stayed, released,
vacated or fully bonded within 10 days after its issue or levy; or
(j) Any final uninsured judgment in excess of $100,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction; provided that any such judgment shall not be deemed to constitute
an Event of Default under this clause (j) so long as enforcement of same is
effectively stayed on appeal with adequate reserves having been established and
maintained; and further provided that no such judgment
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<PAGE> 20
will be deemed to constitute an Event of Default under this clause (j) if such
judgment is paid in full within 30 days after the date it is entered (or, if
appealed pursuant to the preceding PROVISO clause, upheld on appeal) and such
payment would not cause any default under any of ss.ss.3.7, 3.8 and/or 3.10,
with compliance being determined on a PRO FORMA basis as at the date of such
payment, whether or not a fiscal quarter-end; or
(k) The Borrower or any Subsidiary of the Borrower shall fail to meet its
minimum funding requirements under ERISA with respect to any employee benefit
plan (or other class of benefit which the PBGC has elected to insure) or any
such plan shall be the subject of termination proceedings (whether voluntary or
involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or
(l) The Security Agreement or any other Loan Document shall for any reason
(other than due to payment in full of all amounts secured or evidenced thereby
or due to discharge in writing by the Bank) not remain in full force and effect;
or
(m) The security interests and liens of the Bank in and on any of the
Collateral shall for any reason (other than due to payment in full of all
amounts secured thereby or due to written release by the Bank) not be fully
perfected liens and security interests; or
(n) At any time, 50% or more of the outstanding shares of any class of
equity securities of the Borrower shall be owned by any Person or by any "group"
(as defined in the Securities Exchange Act of 1934, as amended, and the
regulations thereunder), other than by one or more of the Persons listed on item
5.1(n) of the attached Disclosure Schedule; or
(o) There shall occur any other material adverse change in the condition
(financial or otherwise), operations, properties, assets, liabilities or
earnings of the Borrower.
5.2. RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may exercise any one or more of the following
rights and remedies (all of which shall be cumulative):
(a) Declare the entire unpaid principal amount of the Revolving Note then
outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.
(b) Terminate the revolving financing arrangements provided for by this
letter
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<PAGE> 21
agreement; and the Bank may also terminate all facilities provided for herein
for letters of credit, ACH transactions and/or Foreign Exchange Contracts.
(c) Exercise all rights and remedies hereunder, under the Revolving Note,
under the Security Agreement, under the Pledge and under each and any other
agreement with the Bank; and exercise all other rights and remedies which the
Bank may have under applicable law.
5.3. SET-OFF. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at any time or
from time to time, without presentment, demand, protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this letter agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As further security
for the Obligations, the Borrower also grants to the Bank a security interest
with respect to all its deposits and all securities or other property in the
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the occurrence of any Event of Default, the Bank may exercise all rights and
remedies of a secured party under the Uniform Commercial Code. ANY AND ALL
RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO
ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE
BY THE BANK OF ITS RIGHT OF SET-OFF UNDER THIS SECTION ARE HEREBY KNOWINGLY,
VOLUNTARILY AND IRREVOCABLY WAIVED.
5.4. LETTERS OF CREDIT. Without limitation of any other right or remedy of
the Bank, (i) if an Event of Default shall have occurred and the Bank shall have
accelerated the Revolving Loans or (ii) if this letter agreement and/or the
revolving financing arrangements described herein shall have expired or shall
have been earlier terminated by either the Bank or the Borrower for any reason,
the Borrower will forthwith deposit with the Bank in cash a sum equal to the
total of all then undrawn amounts of all outstanding letters of credit issued by
the Bank for the account of the Borrower. Upon the occurrence of any event
described in clause (i) or clause (ii) of the immediately preceding sentence,
the Bank may also require the Borrower to cash collateralize the outstanding F/X
Exposure and ACH Exposure.
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<PAGE> 22
VI. MISCELLANEOUS
6.1. COSTS AND EXPENSES. The Borrower agrees to pay on demand all costs and
expenses (including, without limitation, reasonable legal fees) of the Bank in
connection with the preparation, execution and delivery of this letter
agreement, the Security Agreement, the Revolving Note and all other instruments
and documents to be delivered in connection with any Revolving Loan or any
letter of credit issued hereunder and/or any of the other Obligations and any
amendments or modifications of any of the foregoing, as well as the reasonable
costs and expenses (including, without limitation, the reasonable fees and
expenses of legal counsel) incurred by the Bank in connection with preserving,
enforcing or exercising, upon default, any rights or remedies under this letter
agreement, the Security Agreement, the Revolving Note and all other instruments
and documents delivered or to be delivered hereunder or in connection herewith
or in connection with any other Obligation, all whether or not legal action is
instituted. In addition, the Borrower shall be obligated to pay any and all
stamp and other taxes payable or determined to be payable in connection with the
execution and delivery of this letter agreement, the Security Agreement, the
Revolving Note and all other instruments and documents to be delivered in
connection with any Obligation. Any fees, expenses or other charges which the
Bank is entitled to receive from the Borrower under this Section shall bear
interest from the date of any demand therefor until the date when paid at a rate
per annum equal to the sum of (i) four (4%) percent PLUS (ii) the per annum rate
otherwise payable under the Revolving Note (but in no event in excess of the
maximum rate permitted by then applicable law).
6.2. CAPITAL ADEQUACY. If the Bank shall have determined that the adoption
or phase-in after the date hereof of any applicable law, rule or regulation
regarding capital requirements for banks or bank holding companies, or any
change therein after the date hereof, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by the Bank with any request or directive of such entity regarding capital
adequacy (whether or not having the force of law) has or would have the effect
of reducing the return on the Bank's capital with respect to the Revolving
Loans, the within-described revolving loan facility and/or letters of credit
issued for the account of the Borrower and/or any of the other Obligations to a
level below that which the Bank could have achieved (taking into consideration
the Bank's policies with respect to capital adequacy immediately before such
adoption, phase-in, change or compliance and assuming that the Bank's capital
was then fully utilized) but for such adoption, phase-in, change or compliance
by any amount deemed by the Bank to be material: (i) the Bank shall promptly
after its determination of such occurrence give notice thereof to the Borrower;
and (ii) the Borrower shall pay forthwith to the Bank as an additional fee such
amount as the Bank certifies to be the amount that will compensate it for such
reduction with respect to the Revolving Loans, the within-described revolving
loan facility and/or such letters of credit and/or any of the other Obligations.
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<PAGE> 23
A certificate of the Bank claiming compensation under this Section shall be
conclusive in the absence of manifest error. Such certificate shall set forth
the nature of the occurrence giving rise to such compensation, the additional
amount or amounts to be paid to it hereunder and the method by which such
amounts were determined. In determining such amounts, the Bank may use any
reasonable averaging and attribution methods. No failure on the part of the Bank
to demand compensation on any one occasion shall constitute a waiver of its
right to demand such compensation on any other occasion and no failure on the
part of the Bank to deliver any certificate in a timely manner shall in any way
reduce any obligation of the Borrower to the Bank under this Section.
6.3. COMMITMENT FEES. The Borrower agrees to pay to the Bank with respect
to the within arrangements for Revolving Loans and letters of credit, on the
last day of each calendar quarter (commencing on December 31, 1998) as long as
the within Revolving Loan and/or letter of credit arrangements are in effect and
on the Expiration Date or date of earlier termination of such Revolving Loan
and/or letter of credit arrangements, a non-refundable commitment fee computed
quarterly in arrears on the daily average unused portion of the Bank's total
revolving commitment during the calendar quarter (or partial calendar quarter)
then ended. Such commitment fee will be payable at a rate of 0.375% per annum
based on such unused portion of the Bank's total revolving commitment and will
be appropriately prorated for any partial calendar quarter. As used herein, the
Bank's "total revolving commitment" will be deemed to be $6,000,000 and the
"unused portion" on any day means that amount by which (x) said $6,000,000
exceeds (y) the total of (1) the aggregate principal amounts of the Revolving
Loans outstanding at that day and (2) the then total undrawn amounts of all
letters of credit issued hereunder and then outstanding, whether such excess
results from the Bank not making Revolving Loans or issuing letters of credit up
to said $6,000,000 amount, from the repayment of Revolving Loans or the
termination of letters of credit or from any other circumstance. In addition, if
the within-described arrangements for Revolving Loans and/or letters of credit
are canceled or terminated prior to the first anniversary of the date of this
letter agreement, by the Borrower for any reason or by the Bank due to the
Borrower's default, the Borrower shall forthwith upon such cancellation or
termination pay to the Bank a sum equal to all of the commitment fees which
would have become due, absent such cancellation or termination, pursuant to the
immediately preceding three sentences with respect to the period beginning on
the date of such cancellation or termination and continuing through such first
anniversary, assuming, for the purposes of this calculation, that no Revolving
Loans or letters of credit would be outstanding during such period. Fees
described in this Section are in addition to any balances and fees required by
the Bank or any of its affiliates in connection with any other services now or
hereafter made available to the Borrower.
6.4. OTHER AGREEMENTS. The provisions of this letter agreement are not in
derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan
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<PAGE> 24
Documents or any such other agreement will be deemed to create any additional
grace period or otherwise derogate from the express terms of each such default
provision. No covenant, agreement or obligation of the Borrower contained
herein, nor any right or remedy of the Bank contained herein, shall in any
respect be limited by or be deemed in limitation of any inconsistent or
additional provisions contained in any of the other Loan Documents or in any
such other agreement.
6.5. GOVERNING LAW. This letter agreement and the Revolving Note shall be
governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.6. ADDRESSES FOR NOTICES, ETC. All notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:
If to the Borrower:
Dragon Systems, Inc.
320 Nevada Street
Newton, MA 02160
Attention: Diane M. Hudson, Chief Financial Officer
with a copy to:
Janet M. Baker, Chief Executive Officer
Dragon Systems, Inc.
320 Nevada Street
Newton, MA 02160
If to the Bank:
Fleet National Bank
High Technology Group
Mail Code: MA OF D07A
One Federal Street
Boston, MA 02110
Attention: Lucie Burke, Vice President
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or
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<PAGE> 25
registered mail, return receipt requested, addressed as aforesaid.
6.7. BINDING EFFECT; ASSIGNMENT; TERMINATION. This letter agreement shall
be binding upon the Borrower, its successors and assigns and shall inure to the
benefit of the Borrower and the Bank and their respective permitted successors
and assigns. The Borrower may not assign this letter agreement or any rights
hereunder without the express written consent of the Bank. The Bank may, in
accordance with applicable law, from time to time assign or grant participations
in this letter agreement, the Revolving Loans, the Revolving Note and/or the
letters of credit issued hereunder and/or any of the other Obligations. Without
limitation of the foregoing generality:
(i) The Bank may at any time pledge all or any portion of its rights
under the Loan Documents (including any portion of the Revolving
Note) to any of the 12 Federal Reserve Banks organized under
Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No
such pledge or the enforcement thereof shall release the Bank
from its obligations under any of the Loan Documents.
(ii) The Bank shall have the unrestricted right at any time and from
time to time, and without the consent of or notice to the
Borrower, to grant to one or more banks or other financial
institutions (each, a "Participant") participating interests in
the Bank's obligation to lend hereunder and/or any or all of the
Revolving Loans held by the Bank hereunder. In the event of any
such grant by the Bank of a participating interest to a
Participant, whether or not upon notice to the Borrower, the Bank
shall remain responsible for the performance of its obligations
hereunder and the Borrower shall continue to deal solely and
directly with the Bank in connection with the Bank's rights and
obligations hereunder. The Bank may furnish any information
concerning the Borrower in its possession from time to time to
prospective assignees and Participants; provided that the Bank
shall require any such prospective assignee or Participant to
agree in writing to maintain the confidentiality of such
information to the same extent as the Bank would be required to
maintain such confidentiality.
The Borrower may terminate this letter agreement and the financing
arrangements made herein by giving written notice of such termination to the
Bank together with payment of the sum described in the penultimate sentence of
ss.6.3; provided that no such termination will release or waive any of the
Bank's rights or remedies or any of the Borrower's obligations under this letter
agreement or any of the other Loan Documents unless and until the Borrower has
paid in full the Revolving Loans and all interest thereon and all fees and
charges payable in connection therewith and all letters of credit issued
hereunder have been terminated.
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<PAGE> 26
6.8. CONSENT TO JURISDICTION. Each of the Bank and the Borrower irrevocably
submits to the exclusive jurisdiction of any Massachusetts court or any federal
court sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the
Revolving Note and/or any of the other Obligations. Each of the Bank and the
Borrower irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of venue of any such
suit, action or proceeding brought in such a court and any claim that any such
suit, action or proceeding has been brought in an inconvenient forum. Each of
the Bank and the Borrower agrees that final judgment in any such suit, action or
proceeding brought in such a court shall be enforced in any court of proper
jurisdiction by a suit upon such judgment, provided that service of process in
such action, suit or proceeding shall have been effected upon the Borrower in
one of the manners specified in the following paragraph of this ss.6.8 or as
otherwise permitted by law.
The Borrower hereby consents to process being served in any suit, action or
proceeding of the nature referred to in the preceding paragraph of this ss.6.8
either (i) by mailing a copy thereof by registered or certified mail, postage
prepaid, return receipt requested, to it at its address set forth in ss.6.6 (as
such address may be changed from time to time pursuant to said ss.6.6) or (ii)
by serving a copy thereof upon it at its address set forth in ss.6.6 (as such
address may be changed from time to time pursuant to said ss.6.6).
6.9. SEVERABILITY. In the event that any provision of this letter agreement
or the application thereof to any Person, property or circumstances shall be
held to any extent to be invalid or unenforceable, the remainder of this letter
agreement, and the application of such provision to Persons, properties or
circumstances other than those as to which it has been held invalid and
unenforceable, shall not be affected thereby, and each provision of this letter
agreement shall be valid and enforced to the fullest extent permitted by law.
6.10. REPLACEMENT NOTE. Upon receipt of an affidavit of an officer of the
Bank as to the loss, theft, destruction or mutilation of the Revolving Note or
of any other Loan Document which is not of public record and, in the case of any
such mutilation, upon surrender and cancellation of such Revolving Note or other
Loan Document, the Borrower will issue, in lieu thereof, a replacement Revolving
Note or other Loan Document in the same principal amount (as to the Revolving
Note) and in any event of like tenor.
6.11. USURY. All agreements between the Borrower and the Bank are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the Revolving Note or otherwise, shall the
amount paid or agreed to be paid to the Bank for the use or the forbearance of
the Indebtedness represented by the Revolving Note exceed the maximum
permissible under applicable law. In this regard, it is expressly agreed that it
is the intent of the Borrower and the Bank, in the execution, delivery and
acceptance of the Revolving Note, to contract in strict compliance with the laws
of The
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<PAGE> 27
Commonwealth of Massachusetts. If, under any circumstances whatsoever,
performance or fulfillment of any provision of the Revolving Note or any of the
other Loan Documents at the time such provision is to be performed or fulfilled
shall involve exceeding the limit of validity prescribed by applicable law, then
the obligation so to be performed or fulfilled shall be reduced automatically to
the limits of such validity, and if under any circumstances whatsoever the Bank
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced by the Revolving Note and not to
the payment of interest. The provisions of this ss.6.11 shall control every
other provision of this letter agreement and of the Revolving Note.
6.12. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS LETTER AGREEMENT, THE REVOLVING NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ENTER INTO THIS LETTER AGREEMENT AND TO MAKE REVOLVING LOANS AND EXTEND
OTHER CREDIT AS CONTEMPLATED HEREIN.
VII. DEFINED TERMS
7.1. DEFINITIONS. In addition to terms defined elsewhere in this letter
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"ACH Exposure" - As defined in ss.1.6.
"Acquisition" - Any purchase or other acquisition made by the Borrower of
all or substantially all of the business or assets of any other corporation or
other entity or any line of business of another corporation or entity, all
whether through the acquisition of stock or assets or otherwise.
"Aggregate Bank Liabilities" - At any time, the sum of (i) the principal
amount of all Revolving Loans then outstanding, PLUS (ii) all then undrawn
amounts of letters of credit issued by the Bank for the account of the Borrower,
PLUS (iii) all amounts then drawn on any such letter of credit which at said
date shall not have been reimbursed to the Bank by the Borrower.
"Borrowing Base" - As determined at any date, 80% of the aggregate
principal amount of the Qualified Receivables of the Borrower then outstanding.
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<PAGE> 28
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday under the laws of the United States of America or The Commonwealth of
Massachusetts applicable to a national bank.
"Capital Base" - At any time, the sum of (i) the consolidated Tangible Net
Worth of the Borrower and Subsidiaries then existing, PLUS (ii) the principal
amount of Subordinated Debt of the Borrower then outstanding (nothing contained
herein being deemed to authorize the incurrence of any additional Subordinated
Debt).
"Collateral" - All property now or hereafter owned by the Borrower or in
which the Borrower now or hereafter has any interest which is described as
"Collateral" in the Security Agreement or in the Pledge or in ss.7.2(b) below.
"Current Liabilities" - All liabilities of the Borrower and/or any
Subsidiary of the Borrower which would properly be shown as current liabilities
on a consolidated balance sheet of the Borrower prepared in accordance with
generally accepted accounting principles consistently applied. Further, "Current
Liabilities" will in any event be deemed to include all Revolving Loans.
"Default" - Any event or circumstance which, with the giving of notice or
the passage of time or both, could become an Event of Default.
"Determination Date" - As defined in ss.3.7.
"ERISA" - The Employee Retirement Income Security Act of 1974, as amended.
"Event of Default" - As defined in ss.5.1.
"Expiration Date" - June 30, 2000, unless extended pursuant to ss.1.3,
which extension may be given or withheld by the Bank in its sole discretion.
"F/X Exposure" - As defined in ss.1.7.
"Indebtedness" - All obligations of a Person, whether current or long-term,
senior or subordinated, which in accordance with generally accepted accounting
principles would be included as liabilities upon such Person's balance sheet at
the date on which Indebtedness, is to be determined, and shall also include
guaranties, endorsements (other than for collection in the ordinary course of
business) or other arrangements whereby responsibility is assumed for the
obligations of others, whether by agreement to purchase or otherwise acquire the
obligations of others, including any agreement, contingent or otherwise, to
furnish funds through the purchase of goods, supplies or services for the
purpose of payment of the obligations of others.
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<PAGE> 29
"Liabilities" - All Indebtedness of the Borrower and/or any of its
Subsidiaries which would properly be shown as liabilities on the face of a
consolidated balance sheet of the Borrower prepared in accordance with generally
accepted accounting principles consistently applied, and not merely in the
footnotes to such balance sheet.
"Loan Documents" - Each of this letter agreement, the Revolving Note, the
Security Agreement, the Pledge and each other instrument, document or agreement
evidencing, securing, guaranteeing or relating in any way to any of the
Revolving Loans or any of the letters of credit issued hereunder or to any
Foreign Exchange Contract or ACH transaction, all whether now existing or
hereafter arising or entered into.
"Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Net Quick Assets" - Such current assets of the Borrower as consist of
cash, cash-equivalents, Receivables (less an allowance for bad debt consistent
with the Borrower's prior experience) and Unbilled Revenue ("Unbilled Revenue"
being used herein in a manner consistent with the use of that term in the
Borrower's financial statements as at December 31, 1997 heretofore delivered to
the Bank).
"Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the Borrower to the Bank in any capacity.
"Obligations" includes, without limitation, the Revolving Loans and obligations
with respect to ACH transactions, letters of credit and Foreign Exchange
Contracts issued hereunder.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.
"Permitted Acquisition" - Any Acquisition made by the Borrower after an
initial public offering which meets all of the following criteria: (1) at the
time of such Acquisition and after giving effect thereto, there is no Default or
Event of Default hereunder; (2) such Acquisition is not opposed by the Board of
Directors of the Person sought to be acquired; (3) after giving effect to such
Acquisition, the Company is in PRO FORMA compliance with each of ss.3.7
(leverage ratio), ss.3.8 (capital base) and ss.3.10 (liquidity), with compliance
with each of said Sections being determined on a PRO FORMA basis as at the date
of such Acquisition, even if not a fiscal quarter-end; (4) such Acquisition
relates to a Person primarily engaged in (or assets primarily used in) the same
line of business as the Borrower; (5) the total amount of cash or other property
(other than stock of the Borrower) expended as consideration for such
Acquisition (taken together with all such other amounts theretofore expended for
the purposes of any Acquisition from and after the date of this letter
agreement) will not exceed an aggregate of $5,000,000; and (6) the value of the
total amount of the shares of stock of the
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Borrower issued as consideration for such Acquisition (taken together with all
other such shares of stock issued for the purposes of any Acquisition from and
after the date of this letter agreement) will not exceed an aggregate of
$20,000,000.
"Person" - An individual, corporation, limited liability company,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Pledge" - As defined in ss.1.1 above.
"Qualified Receivables" - Only those billed Receivables of the Borrower
(determined on the basis of generally accepted accounting principles,
consistently applied) the payment of which is not in dispute which arise out of
BONA FIDE sales made to customers of the Borrower (which customers are located
in the United States and are unrelated to the Borrower) in the ordinary course
of the Borrower's business, which remain unpaid no more than 90 days past the
respective invoice dates of such Receivables and which represent product that
has been shipped to the end-users (including OEMs); provided that the 90-day
period described above will be deemed extended to 120 days with respect to
Receivables arising from product that has been purchased by [Ingram-Micro] or
[Tech Data] and has been shipped by such purchaser to one of its customers to
fulfill a pending order. Unless the Bank in its sole discretion otherwise
determines with respect to any Receivable, a Receivable which would otherwise be
a Qualified Receivable shall be deemed not to be a Qualified Receivable (i) if
the Bank does not have a fully perfected first priority security interest in
such Receivable; (ii) if such Receivable is not free and clear of all interests
in favor of any Person other than the Bank; (iii) if such Receivable is subject
to any deduction, off-set, contra account, counterclaim or condition; (iv) if a
field examination made by the Bank fails to confirm that such Receivable exists
and satisfies all of the criteria set forth herein to be a Qualified Receivable;
(v) if such Receivable is not properly invoiced at the date of sale; (vi) if the
customer or account debtor has disputed liability or made any claim with respect
to the Receivable or the merchandise covered thereby or with respect to any
other Receivable due from said customer to the Borrower; (vii) if the customer
or account debtor has filed a petition for bankruptcy or any other application
for relief under the Bankruptcy Code or has effected an assignment for the
benefit of creditors, or if any petition or any other application for relief
under the Bankruptcy Code has been filed against said customer or account
debtor, or if the customer or account debtor has suspended business, become
insolvent, ceased to pay its debts as they become due, or had or suffered a
receiver or trustee to be appointed for any of its assets or affairs; (viii) if
the customer or account debtor has failed to pay other Receivables so that an
aggregate of 25% of the total Receivables owing to the Borrower by such customer
or account debtor has been outstanding for more than 90 days past their
respective due dates; (ix) if such Receivable is owed by the United States
government or any agency or department thereof (unless assigned to the Bank
under the Federal Assignment of Claims Act); or (x) if the Bank reasonably
believes that collection of such Receivable is insecure or that it may not be
paid by reason of financial inability to pay or otherwise, or that
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<PAGE> 31
such Receivable is not for any reason suitable for use as a basis for borrowing
hereunder. Notwithstanding the first sentence of this definition, the Borrower
may include within "Qualified Receivables" any Receivable which meets all of the
criteria set forth above to be a Qualified Receivable except that the relevant
customer is located outside the United States; provided that such Receivable is
secured by a letter of credit in form and substance satisfactory to the Bank and
issued by a financial institution satisfactory to the Bank or is insured by
Eximbank credit insurance or other credit insurance satisfactory to the Bank.
"Receivables" - All of the Borrower's present and future accounts and
accounts receivable representing a right to payment for goods sold or for
services rendered.
"Revolving Note" - As defined in ss.1.1.
"Senior Liabilities" - All Liabilities which are not Subordinated Debt.
"Subordinated Debt" - Any Indebtedness of the Borrower which is expressly
subordinated, pursuant to a subordination agreement in form and substance
satisfactory to the Bank, to all Indebtedness now or hereafter owed by the
Borrower to the Bank.
"Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its Subsidiaries, directly or indirectly, owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the outstanding
capital stock or other ownership interest having general voting power (under
ordinary circumstances).
"Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding (i) the total intangible assets of such Person and (ii) any assets
representing amounts due from any officer or employee of such Person or from any
Subsidiary of such Person) minus the total liabilities of such Person. Total
intangible assets shall be deemed to include, but shall not be limited to, the
excess of cost over book value of acquired businesses accounted for by the
purchase method, formulae, trademarks, trade names, patents, patent rights and
deferred expenses (including, but not limited to, unamortized debt discount and
expense, organizational expense, capitalized software costs and experimental and
development expenses).
Any defined term used in the plural preceded by the definite article shall
be taken to encompass all members of the relevant class. Any defined term used
in the singular preceded by "any" shall be taken to indicate any number of the
members of the relevant class.
7.2. SECURITY AGREEMENT. (a) The Borrower acknowledges and agrees that the
"Obligations" described in and secured by the Security Agreement include,
without limitation, all of the obligations of the Borrower under the Revolving
Note and/or this letter agreement and/or with respect to any letter of credit
which may be issued by the Bank for the account of the Borrower, as well as
obligations in respect of ACH transactions and Foreign Exchange Contracts.
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<PAGE> 32
(b) The Security Agreement is hereby modified to provide as follows:
(i) That the "Collateral" subject thereto includes, without
limitation and in addition to the Collateral described therein, all of
the Borrower's files, books and records (including, without
limitation, all electronically recorded data) all whether now owned or
existing or hereafter acquired, created or arising. The Borrower
hereby grants to the Bank a security interest in all such Collateral
in order to secure the full and prompt payment and performance of all
of the Obligations.
(ii) That, upon the occurrence of any Event of Default (as
defined in ss.5.1 of this letter agreement), the Bank may, at any
time, notify account debtors that the Collateral has been assigned to
the Bank and that payments by such account debtors shall be made
directly to the Bank. At any time after the occurrence of an Event of
Default, the Bank may collect the Borrower's Receivables, or any of
same, directly from account debtors and may charge the collection
costs and expenses to the Borrower.
This letter agreement is executed, as an instrument under seal, as of
the day and year first above written.
Very truly yours,
DRAGON SYSTEMS, INC.
By
--------------------------------
Name:
Title:
Accepted and agreed:
FLEET NATIONAL BANK
By
----------------------------------
Its
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<PAGE> 33
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries
Item 2.1(b) Stock ownership
Item 2.1(e) Litigation
Item 2.1(j) Collateral locations; record owners
Item 4.1 Existing Indebtedness
Item 4.2 Existing Liens
Item 4.3 Existing Guaranties
Item 4.5 Existing Loans
Item 5.1(n) Permitted 50% Stockholders
<PAGE> 1
Exhibit 19
Subsidiaries of the Registrant
Name Jurisdiction of Incorporation
---- -----------------------------
Dragon Systems FSC, Inc. U.S. Virgin Islands
Dragon Systems GmbH Germany
Dragon Systems Securities, Inc. Massachusetts
Dragon Systems UK Ltd. England
Dragon Systems UK Research & Development Ltd. England
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 5, 1999
