<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------
DIGITALCONVERGENCE.:COM INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 75-2791929
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
<TABLE>
<S> <C>
PATRICK V. STARK
EXECUTIVE VICE PRESIDENT
9101 N. CENTRAL EXPRESSWAY DIGITALCONVERGENCE.:COM INC.
6TH FLOOR 9101 N. CENTRAL EXPRESSWAY
DALLAS, TEXAS 75231 6TH FLOOR
(214) 292-6000 DALLAS, TEXAS 75231
(Address, Including Zip Code, and Telephone Number, (214) 292-6000
including (Name, Address, Including Zip Code, and Telephone Number,
Area Code, of Registrant's Principal Executive Offices) Including Area Code, of Agent For Service)
</TABLE>
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
MARK EARLY DENNIS J. FRIEDMAN
P. GREGORY HIDALGO CLAUDE S. SERFILIPPI
VINSON & ELKINS L.L.P. CHADBOURNE & PARKE LLP
2001 ROSS AVENUE, SUITE 3700 30 ROCKEFELLER PLAZA
DALLAS, TEXAS 75201 NEW YORK, NEW YORK 10112
TELEPHONE: (214) 220-7700 TELEPHONE: (212) 408-5100
FACSIMILE: (214) 220-7716 FACSIMILE: (212) 541-5369
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.01 par value......... $100,000,000 $26,400
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[inside front cover page of the prospectus]
The prospectus has been Internet Enhanced. The inside cover of this
prospectus will contain photographs of consumer products and excerpts from
selected magazines and newspapers, including exposed bar codes. Potential
investors will be able to access the related website either by using our
:Cue:C.A.T. device to swipe the code or by typing the related URL address.
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one (the
"U.S. Prospectus") to be used in connection with an offering in the U.S. and
Canada (the "U.S. Offering") of Common Stock of DigitalConvergence.:Com Inc.
(the "Company") (which includes Common Stock subject to the U.S. Underwriters'
over-allotment option) and one (the "International Prospectus") to be used in
connection with a concurrent international offering outside the U.S. and Canada
(together with the U.S. Offering, the "Offerings") of Common Stock of the
Company (which includes Common Stock subject to the International Managers'
over-allotment option). The U.S. Prospectus and the International Prospectus
will be identical in all respects except for the front cover and back cover
pages of the prospectuses and the information under the caption "Underwriting."
The form of the U.S. Prospectus is included herein and is followed by those
pages to be used in the International Prospectus that differ from those in the
U.S. Prospectus. Each of the pages to be used in the International Prospectus
included herein is labeled "Alternative Page for International Prospectus."
Final forms of such prospectuses will be filed with the Securities and Exchange
Commission pursuant to Rule 424(b).
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
------------------
This is DigitalConvergence.:Com Inc.'s initial public offering of common
stock. DigitalConvergence.:Com Inc. is selling all of the shares in this
offering. The U.S. underwriters are offering shares in the U.S. and Canada
and the international managers are offering shares outside the U.S. and
Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "DGTL."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price.................................... $ $
Underwriting discount.................................... $ $
Proceeds, before expenses, to DigitalConvergence.:Com
Inc........................................................ $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional shares from
DigitalConvergence.:Com Inc. at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
additional shares from DigitalConvergence.:Com Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery on or about ,
2000.
------------------------
JOINT BOOK-RUNNING MANAGERS
MERRILL LYNCH & CO. ING BARINGS
----------------
BANC OF AMERICA SECURITIES LLC BEAR, STEARNS & CO. INC.
----------------
The date of this prospectus is , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 9
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 23
Dividend Policy............................................. 24
Capitalization.............................................. 25
Dilution.................................................... 26
Selected Consolidated Financial Data........................ 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Business.................................................... 37
Management.................................................. 54
Certain Relationships and Related Transactions.............. 61
Security Ownership of Principal Stockholders and
Management................................................ 66
Description of Capital Stock................................ 68
Shares Eligible for Future Sale............................. 74
Certain U.S. Federal Tax Considerations for Non-United
States Holders of Common Stock............................ 76
Underwriting................................................ 79
Legal Matters............................................... 83
Experts..................................................... 83
Where You Can Find More Information......................... 83
Index to Financial Statements............................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
ii
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" AND THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES TO THOSE CONSOLIDATED FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES,
REFERENCES IN THIS PROSPECTUS TO "DIGITALCONVERGENCE.:COM,"
"DIGITALCONVERGENCE," "DIGITAL," "US," "WE" OR "OUR" REFER TO
DIGITALCONVERGENCE.:COM INC.-TM- AND ITS SUBSIDIARIES AND THE TERM "YOU" REFERS
TO A PROSPECTIVE INVESTOR.
UNLESS WE INDICATE OTHERWISE, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE OVER-ALLOTMENT OPTIONS GRANTED TO THE U.S. UNDERWRITERS AND
INTERNATIONAL MANAGERS, ASSUMES THE CONVERSION INTO COMMON STOCK OF EACH
OUTSTANDING SHARE OF OUR PREFERRED STOCK AND GIVES EFFECT TO A FOR ONE
STOCK SPLIT OF OUR OUTSTANDING SHARES OF COMMON STOCK TO BE COMPLETED PRIOR TO
THE COMPLETION OF THIS OFFERING.
DIGITALCONVERGENCE.:COM INC.
We are a company whose technology allows media companies, manufacturers and
virtually all organizations to instantly and easily link their products with web
pages deep within their websites. Until we release our technology, we believe
that it is not possible for these companies to realize the full value of their
Internet efforts, because their websites have to be entered through their front
pages, often making access to a desired web page time-consuming and difficult.
Our :C.R.Q.-TM- software will send an Internet user's web browser to a specific
web page in response to our proprietary digital signal called a ":Cue-SM-"
transmitted by a television broadcast. Our :C.R.Q. software will also send an
Internet user's web browser to a specific web page when an Internet user
utilizes our :Cue:C.A.T.-TM- device to scan our proprietary codes called "Print
:Cues" on print media or to scan existing bar codes on consumer products. We
believe that our technology will empower media companies and corporate
advertisers to enhance their content and to transform television broadcasts or
other electronic media, print media or items bearing Print :Cues or bar codes
into powerful new advertising, promotional or e-commerce opportunities. Our
technology will be free to the public and will allow Internet users to quickly
and easily obtain relevant information and conduct e-commerce activities by
eliminating the input of lengthy website addresses and time-intensive web
navigation.
We intend to initiate a nationwide roll-out of our technology in September
2000 and plan to distribute, free to the public, at least 50 million CD-ROMs
containing our :C.R.Q. software and 50 million :Cue:C.A.T. devices by the end of
2001. To assist in the promotion, marketing and deployment of our technology, we
have established several strategic media, advertising and distribution
partnerships. We expect that our strategic partners will provide promotional
support and distribution capabilities to help build consumer awareness and
adoption of our technology and products. Our media partners include National
Broadcasting Company, Inc., Belo Corp., Forbes Inc., The Milwaukee Journal and
Wired Magazine. These partners have agreed to implement our technology in
television and cable networks, local television broadcasts and print
publications. Forbes Inc., The Milwaukee Journal and Wired Magazine have also
agreed to distribute our products to their subscribers. We expect that these
relationships, taken together, will provide us with broad media exposure in six
of the top ten U.S. media markets and a number of smaller markets, for total
coverage of approximately 40% of U.S. households. In addition, we are in
discussions with broadcast media companies covering approximately an additional
20% of U.S. households to also implement our technology in their television
broadcasts. Additionally, we have partnered with Tandy Corporation to produce
our :Cue:C.A.T. devices and make them available, free to consumers, in over
7,000 RadioShack retail outlets throughout the U.S. In addition, Tandy has
invested in us. Other companies that have made investments in us include
Young & Rubicam, Inc., Belo Corp., The Coca-Cola Company, The E.W. Scripps
Company and Spielberg/Katz Associates, LLC.
1
<PAGE>
MARKET OPPORTUNITY
Companies are investing billions of dollars in the development, execution
and promotion of Internet strategies. The growth in both the number of Internet
users and the volume of e-commerce creates significant challenges and
opportunities for businesses across multiple industries. We believe that our
technology will provide powerful solutions for a number of these companies and
will provide a means to create new revenue opportunities. To quickly establish
our technology on a broad scale, we have targeted the following significant
opportunities:
- BROADCAST AND CABLE MEDIA. In 1998, $47 billion was spent on television
advertising and $91 billion on goods and services purchased through direct
response television programming.
- PRINT MEDIA. In 1998, the following amounts were spent in the following
print media segments:
- $87 billion on goods purchased from print catalogs;
- $40 billion on direct mail advertising;
- $44 billion on newspaper display and classified advertising; and
- $14 billion on advertising in trade and consumer magazines.
- CODED CONSUMER PRODUCTS. There are tens of millions of active bar codes
that are widely used in labeling consumer products in the U.S. Until now,
no widely-adopted technology has emerged that allows a manufacturer to
leverage these codes to link to relevant sites on the Internet.
While the growth of the Internet has attracted Internet users at an
unprecedented pace, the volume of online information has made it increasingly
difficult for users to navigate the Internet effectively and efficiently. Major
corporate websites contain many layers of web pages, which often make finding
relevant information a frustrating and time-consuming experience. As websites
continue to proliferate and grow in size and complexity, we believe that users
will increasingly need a quicker, more direct link to their intended
destinations. Search engines will continue to have useful applications on the
Internet, but we believe that users want a more precise tool that takes them
directly to a specific web page deep within a website.
THE DIGITALCONVERGENCE.:COM SOLUTION
We believe that our technology will provide the solution to the desire of
broadcasters, publishers, merchants and advertisers for a simple, cost-effective
means of leveraging the Internet across all forms of traditional media. In
addition, our technology also addresses the needs of Internet users for a more
satisfying Internet experience. Elements of our solution include Internet
Enhanced-TM- broadcasting, print and coded products, and our Virtual Network, an
"L"-shaped area containing banner advertisements and related information that
will appear on the border of the user's web browser when using our technology.
INTERNET ENHANCED BROADCASTING
A broadcast can be linked to a website, or Internet Enhanced, by simply
embedding a :Cue in the broadcast. Unlike current television content and
advertisements in which a website address is briefly displayed on the television
screen, Internet Enhanced programming will load the web page on a user's web
browser for immediate access or store the web page address for later use. With
our technology, viewers will no longer need to recall and manually enter a
website address. By embedding :Cues in programming, our technology provides
broadcasters and advertisers with a powerful new tool to supplement existing
content and advertisements, which we believe will drive viewers to selected
websites, increase advertising revenue and generate additional e-commerce
opportunities. Accordingly, our technology will offer a platform for
broadcasters to enhance content and advertisers to deliver immediate buying
opportunities to their target consumers. As a result, we believe broadcasters
will be able to command premium rates for Internet Enhanced advertisements.
2
<PAGE>
For example, our technology could be used in the following ways:
- A local television station differentiates its newscast with Internet
Enhanced weather reporting. While reporting the weather, the station
broadcasts a :Cue that directs the viewer's web browser to the
broadcaster's web page that includes detailed forecast information for
each city and town in the viewing area.
- An automobile company inserts a :Cue in a television advertisement, which
launches an Internet user's web browser to a web page designated by the
company. This enables the automobile company to provide more detailed
information on its web page than can be presented in the advertisement,
including specific information on an automobile's features and pricing,
local dealerships and immediate e-commerce opportunities.
We intend to generate our broadcast revenue from:
- fees from the sale of advertising :Cues to broadcast networks, cable
networks and local television stations;
- a fixed fee per sale completed by home shopping networks as a result of
using our :Cues; and
- fees from annual licenses to cable networks for the use of :Cues in
content.
INTERNET ENHANCED PRINT
Our :Cue:C.A.T. device will enable an Internet user to scan our Print :Cues
to link the user to a particular web page designated by the publisher or
corporate advertiser. With the swipe of a :Cue:C.A.T. device, users will be
immediately directed to more detailed information impractical to include in
print copy. Through the use of Internet Enhanced print content, publishers will
be able to drive readers deep in their websites for more detailed information.
In addition, print advertisers will have the ability to create Internet Enhanced
advertisements that place the consumer one swipe away from an e-commerce
opportunity. For example, a computer company can insert a Print :Cue in a
newspaper or magazine advertisement, which launches an Internet user's web
browser to a web page designated by the company. Internet Enhanced print
advertising provides the user with immediate access to more specific information
on the computer's features, pricing and special promotions and provides the
computer company with immediate e-commerce opportunities.
We intend to generate our print revenue from:
- fees from licenses to publishers for the use of Print :Cues for content
enhancement purposes;
- fees from the sale of any advertising Print :Cues in almost any print
media, including newspapers and magazines;
- a fixed fee per sale completed by catalog shoppers as a result of using
our Print :Cues; and
- commissions on increased revenues resulting from the use of Print :Cues in
classified ads.
INTERNET ENHANCED PRODUCTS AND OTHER :CUE:C.A.T. APPLICATIONS
We are completing a massive database that links existing bar codes,
including UPC, ISBN, EAN and other codes, to websites, thereby enabling
manufacturers to utilize their existing product codes for advertising and other
marketing purposes. Our technology will enable a user of the :Cue:C.A.T. device
to scan the bar code on a product, linking the user to a specified web page. For
example, a prescription drug bottle from a pharmacy can include a bar code that
directs the recipient's web browser to the drug manufacturer's website
containing information regarding the illness for which the drug was prescribed,
side effects of the drug, and additional products that may be useful in treating
the illness. Because our :Cue:C.A.T. technology scans substantially all bar
codes and will not require consumer
3
<PAGE>
goods manufacturers to alter labels in any way, our solution is an inexpensive
and unobtrusive way of turning an existing label into a powerful new marketing
tool. In addition, our Print :Cues can be placed on credit cards and other
physical objects that are not normally assigned bar codes. In sum, our
technology allows any product to become Internet Enhanced.
We intend to generate our enhanced product revenue from:
- annual fees for bar codes on consumer products that are Internet Enhanced;
- fees per Print :Cue sold to publishers of free-standing inserts and direct
mail, and sold to manufacturers for use in product manuals; and
- annual fees for Print :Cues used on credit card statements.
THE VIRTUAL NETWORK
Each time our :C.R.Q. software or :Cue:C.A.T. device directs a user's web
browser to a specific web page, an "L"-shaped area called the "Virtual Network"
will appear on the border of the user's Internet web browser. The Virtual
Network will be populated with banner advertisements and a series of tabs that,
when clicked, will display information related to the website being viewed. The
Virtual Network is only visible when an individual is using our technology.
Banner advertisements and tabs will be customized to each user's profile,
displaying information and promotional offers designed to appeal to the
individual's interests. We believe that our Virtual Network, through modest
usage of our :C.R.Q. and :Cue:C.A.T. technology, will generate a significant
number of ad impressions and click-throughs to our advertisers' websites. We
intend to generate revenues from the sale of sponsorships and banner
advertisements on our Virtual Network.
STRATEGY
Our objective is to establish our technology as the primary means for
television and cable networks, local television broadcasters, newspaper,
magazine and catalog publishers, other mass media companies, as well as
corporate advertisers, to link their broadcasts, publications and products to
the Internet. To achieve this objective, we have adopted the following
strategies:
- leverage media relationships in order to support adoption and sustain our
first mover advantage;
- execute a nationwide roll-out of our :C.R.Q. and :Cue:C.A.T. technology;
- establish our technology as the "system standard" on personal computers;
- develop multiple revenue streams from multi-billion dollar advertising
markets;
- develop sophisticated research and data-mining capabilities as a
value-added service to customers; and
- pursue international markets.
RECENT DEVELOPMENTS
PREFERRED STOCK FINANCINGS
In April 2000, we issued 5,929,364 shares of Series B preferred stock and
5,372,593 shares of Series C preferred stock to various investors, including
Belo Corp., The Coca-Cola Company, The E.W. Scripps Company, Spielberg/Katz
Associates, LLC, Tandy Corporation and Young & Rubicam, Inc., for aggregate
consideration of $98.3 million. All outstanding shares of our preferred stock
will be automatically converted into our common stock upon completion of this
offering.
4
<PAGE>
In April 2000, we issued two warrants to an affiliate of National
Broadcasting Company, Inc. to purchase 3,752,445 shares and 4,505,165 shares,
respectively, of our common stock at per share exercise prices of $5.00 and
$10.54, respectively. We are required to issue additional warrants to National
Broadcasting Company, Inc.'s affiliate with a per share exercise price of
$10.54, depending on the number of shares we reserve for issuance under our 1999
Stock Option Plan. The warrants will terminate in April 2005.
OTHER INFORMATION
We were incorporated in Delaware in September 1998 and began operations in
January 1999. Our executive offices are located at 9101 N. Central Expressway,
6th Floor, Dallas, Texas 75231, and our telephone number is (214) 292-6000.
Information contained on any website to which you are directed by this
prospectus does not constitute part of this prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by DigitalConvergence.:Com
U.S. offering................................ shares
International offering....................... shares
Total...................................... shares
Common stock outstanding after the offering.... shares(1)
Use of proceeds................................ We estimate that our net proceeds from this
offering without exercise of over-allotment
options will be approximately $
million. We intend to use these net
proceeds:
- to pay expenses related to the
manufacture and distribution of our
:C.R.Q. CD-ROMs and :Cue:C.A.T.
devices;
- to market and promote the adoption of
our technology by Internet users;
- to purchase additional network server
and support equipment;
- to repay outstanding indebtedness; and
- for general corporate purposes,
including operating expenses, working
capital and other capital
expenditures.
See "Use of Proceeds."
Risk Factors................................... See "Risk Factors" and other information
included in this prospectus for a discussion
of factors that you should carefully
consider before deciding to invest in our
common stock.
Proposed Nasdaq National Market symbol......... DGTL
</TABLE>
- ------------------------
(1) Includes:
- 61,113,150 shares of common stock outstanding immediately before
completion of this offering; and
- 21,360,537 shares of common stock that will be issued upon conversion of
our preferred stock upon completion of this offering.
Excludes:
- 9,245,200 shares of common stock issuable upon the exercise of stock
options granted by us, with exercise prices ranging from $3.31 to $9.37
per share and a weighted average exercise price of $4.17 per share, of
which stock options to purchase up to shares of common stock are
exercisable or will become exercisable within 60 days after the date of
this prospectus; and
- 8,382,350 shares of common stock issuable upon the exercise of warrants
issued by us, with exercise prices ranging from $5.00 to $10.54 per share
and a weighted average exercise price of $7.98 per share, of which all
warrants are immediately exercisable.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes the consolidated statements of operations and
consolidated balance sheet data for our business. In January 1999, we acquired
from Infotainment Telepictures, Inc., our predecessor company for accounting
purposes (the "Predecessor"), our television show NET TALK LIVE! THE INTERNET
TALK SHOW and certain proprietary technology rights. We have included in this
prospectus the financial statements and the notes related thereto of the
Predecessor. The historical results presented below are not necessarily
indicative of the results to be expected for any future period. For a more
detailed explanation of this financial data, see "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto appearing elsewhere in this prospectus.
The unaudited pro forma consolidated balance sheet data gives effect to the
issuance of 48 shares of our Series A preferred stock in January 2000 for cash
consideration of $151,200 and the issuance of 5,929,364 shares of our Series B
preferred stock and 5,372,593 shares of our Series C preferred stock in
April 2000, for cash consideration of $98.3 million and also gives effect to the
use of proceeds therefrom.
The unaudited pro forma, as adjusted, consolidated balance sheet data gives
further effect to the following:
- the automatic conversion of all of our preferred stock into 21,360,537
shares of common stock upon completion of this offering; and
- the sale of shares of common stock in this offering at an assumed
initial public offering price of $ per share after deducting the
estimated underwriting discounts and commissions and our estimated
offering expenses and the application of the net proceeds as set forth
under "Use of Proceeds."
For an explanation of the number of shares used to compute net loss per
share, see Note 2 of the notes to our consolidated financial statements and
Note 2 of the Predecessor financial statements, each appearing elsewhere in this
prospectus.
<TABLE>
PREDECESSOR FINANCIAL DATA
YEAR ENDED DECEMBER 31, YEAR ENDED
----------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues............................... $ 97 $ 109 $ 690 $ 1,636 $ 1,543
Operating expenses:
Production and media costs............... 78 137 591 939 1,012
Selling, general and administrative...... 48 91 284 671 3,921
Depreciation and amortization............ -- 17 41 55 106
Research and development................. -- -- -- 36 410
----------- ----------- ----------- ----------- -----------
Total operating expenses............... 126 245 916 1,701 5,449
----------- ----------- ----------- ----------- -----------
Operating loss............................. (29) (136) (226) (65) (3,906)
Interest income............................ -- -- -- -- 660
Interest expense........................... (3) (14) (17) (24) (731)
----------- ----------- ----------- ----------- -----------
Net loss................................... $ (32) $ (150) $ (243) $ (89) $ (3,977)
=========== =========== =========== =========== ===========
Basic and diluted weighted average common
shares outstanding....................... 25,000 25,000 25,000 25,000 59,507,271
Basic and diluted net loss per common
share.................................... $ (1.30) $ (6.02) $ (9.72) $ (3.54) $ (0.07)
=========== =========== =========== =========== ===========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 45,540 $138,378
Total assets................................................ 46,518 139,356
Long-term liabilities....................................... 9,145 3,521
Convertible preferred stock subject to redemption........... 47,888 146,350
Total stockholders' equity (deficit)........................ (11,246) (11,246)
</TABLE>
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RISK FACTORS
THE VALUE OF AN INVESTMENT IN DIGITALCONVERGENCE.:COM WILL BE SUBJECT TO THE
SIGNIFICANT RISKS INHERENT IN OUR BUSINESS. YOU SHOULD CONSIDER CAREFULLY THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION INCLUDED IN
THIS PROSPECTUS BEFORE YOU DECIDE TO PURCHASE ANY SHARES OF OUR COMMON STOCK. IF
ANY EVENT DESCRIBED BELOW OCCURS, WE COULD BE ADVERSELY AFFECTED IN A MATERIAL
WAY. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE, PERHAPS
SIGNIFICANTLY.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND PROSPECTS.
We have a limited operating history on which to base an evaluation of our
business and prospects. We were formed in September 1998 and did not begin
operations until January 1999. To date, our principal source of revenues has
been our television show NET TALK LIVE! THE INTERNET TALK SHOW. We have not yet
commercially released our :C.R.Q. and :Cue:C.A.T. technology, which we expect to
be our principal source of revenues in the future. Consequently, there is little
historical financial or other information on which to evaluate our business and
prospects. Accordingly, you must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by early stage companies in new
and rapidly evolving markets.
WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL IN IMPLEMENTING OUR BUSINESS
STRATEGY.
Our business model is new. We cannot be certain that our business model will
be successful or that we can achieve or sustain revenue growth or generate any
profits. This business model is unproven and depends upon our ability to, among
other things:
- effectively distribute our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to
millions of individual Internet users;
- generate acceptance of our :C.R.Q. and :Cue:C.A.T. technology by the
broadcast industry, print and media companies, leading consumer companies,
manufacturers, the marketing and advertising industries and individual
Internet users;
- gain advertiser acceptance of our Virtual Network;
- maintain our current relationships with our broadcast, publishing,
manufacturing, retail and marketing partners and enter into agreements
with many additional distribution and promotional partners; and
- generate significant revenues through usage fees, licensing fees and
advertising fees.
INTERNET USERS MAY NOT ADOPT OUR TECHNOLOGY.
To use our technology, Internet users must download or install our :C.R.Q.
software, register as a user of our technology, connect an audio cable from the
television to the computer and plug the :Cue:C.A.T. device into the computer.
Internet users may be unwilling to make these efforts because of their comfort
with existing habits, because of general reticence about technology or the
Internet, because they find the process confusing, burdensome or time-consuming
or for other reasons.
OUR FAILURE TO GAIN BROAD MARKET ACCEPTANCE WOULD RESULT IN OUR BEING UNABLE TO
MARKET AND SELL OUR SERVICES SUCCESSFULLY.
The market for technology allowing the convergence of the Internet with
virtually any form of media or product is new and rapidly evolving. As is
typical for any new, rapidly developing market, demand and market acceptance for
newly introduced technology, products and services are subject to a high level
of uncertainty and risk. The market for our technology may develop more slowly
than
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expected or become saturated with competitors, or our technology may not achieve
or sustain mass media, market or public acceptance.
In order to gain broad market acceptance, we must, among other things:
- successfully implement and execute our business and marketing strategy,
including the commercial release of our :C.R.Q. and :Cue:C.A.T.
technology;
- develop, maintain and enhance our brand recognition;
- continue to develop and upgrade our technology, systems, products and
services;
- respond quickly and effectively to competitive developments;
- generate sufficient revenue to achieve and maintain profitability;
- maintain existing and establish new strategic partnerships; and
- attract, retain and motivate qualified personnel.
We cannot assure you that we will be successful in doing any of the
foregoing or that our technology will gain broad market acceptance. Some or all
of our targeted customers, which include broadcasters, publishers,
manufacturers, merchants and direct marketers, may choose not to use our
technology because Internet users do not adopt our technology, because the cost
of implementing an Internet strategy utilizing our technology exceeds its
perceived or actual benefits or for other reasons that we may not have
anticipated.
OUR FUTURE OPERATING RESULTS ARE UNCERTAIN AND WE ANTICIPATE SIGNIFICANT FUTURE
LOSSES AND NEGATIVE CASH FLOW.
To implement our business strategy, we plan to incur substantial costs to
produce and distribute, free to the public, at least 50 million :C.R.Q.
CD-ROMs and 50 million :Cue:C.A.T. devices by the end of 2001. These costs will
be incurred before we derive significant revenues from this increased spending.
Therefore, we expect significant operating and net losses and negative cash flow
for the foreseeable future. We do not have sufficient cash to indefinitely
sustain these operating losses. Further, we will need to generate significant
revenues if we are to achieve and then maintain profitability. We cannot assure
you that we will be able to do this. Our limited operating history and the
rapidly evolving nature of our industry also make forecasting quarterly results
difficult. Even if we do achieve profitability, we cannot be certain that we can
sustain or increase profitability on a quarterly or annual basis in the future.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We will require substantial additional working capital to fund our business
and the deployment of our :C.R.Q. and :Cue:C.A.T. technology and, therefore,
will need to raise significant additional funds in the future. We cannot be
certain that additional financing will be available to us on favorable terms
when required or at all. If we raise additional funds through the issuance of
equity-related or debt securities, these securities may have rights, preferences
or privileges senior to those of the rights of our common stock and our
stockholders may experience additional dilution.
WE NEED TO DEPLOY OUR TECHNOLOGY RAPIDLY SO THAT IT BECOMES THE MARKET STANDARD.
We believe that we must establish the DigitalConvergence.:Com brand and our
:C.R.Q. and :Cue:C.A.T. products as the leading brand names in our targeted
markets in order for our technology to be widely adopted by Internet users, mass
media sources and advertisers. Such acceptance will be essential to generate
revenues from licensing and :Cue fees. Brand recognition will become
increasingly important as more companies, some with well-established brands,
offer competing products and
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services. We expect that we will need to substantially increase our spending on
programs and marketing in order to create and perpetuate strong brand loyalty
and to ensure that our technology becomes the market standard. We cannot be
certain that our efforts will be successful.
WE ARE DEPENDENT ON THE EFFECTIVE AND RELIABLE PERFORMANCE OF OUR :C.R.Q. AND
:CUE:C.A.T. TECHNOLOGY.
The successful implementation and reliability of our :C.R.Q. and :Cue:C.A.T.
technology on a commercial basis are crucial to our success. Our technology will
not have been tested on a wide-scale basis prior to our launch date in September
2000. Technology and products as complex as ours frequently contain errors and
defects, especially when first introduced to the market. Any errors or defects
discovered in our :C.R.Q. or :Cue:C.A.T. technology after our launch date could:
- result in our failure to achieve mass media, market or public acceptance;
- divert development resources;
- injure our reputation;
- cause customer and Internet user dissatisfaction;
- result in cancellation of strategic partnership, licensing and advertising
agreements; and
- result in legal actions by customers against us.
Any delays caused by technological glitches in our :C.R.Q. or :Cue:C.A.T.
technology could be detrimental to the implementation of our business model and
our overall success.
WE RELY ON OUR STRATEGIC PARTNERS TO DEPLOY AND PROMOTE OUR TECHNOLOGY.
Development of our brand will depend largely on the success of our strategic
partners in providing a high quality interactive Internet experience for
Internet users and enhancing the Internet content and advertising value to
Internet users, which cannot be assured. We expect our strategic partners to
devote significant resources to the promotion and marketing of our technology,
which is important to promote Internet user adoption and acceptance of our
technology. However, most of our strategic partners are not contractually
obligated to do so. To the extent that our strategic partners do not promote and
market our technology or are ineffective in doing so, our efforts to gain broad
market acceptance by Internet users will be materially adversely affected.
WE MAY ENCOUNTER DIFFICULTIES IN ESTABLISHING OR MAINTAINING STRATEGIC
RELATIONSHIPS.
We intend to expand our operations and market presence by entering into
significant additional agreements, investments, joint ventures or other
strategic relationships with third parties, such as our agreements with National
Broadcasting Company, Inc., Belo Corp., Tandy Corporation, Forbes Inc., Wired
Magazine and The Milwaukee Journal. Each relationship will involve risks
commonly encountered in such relationships, which include, among others:
- the difficulty of implementing the relationship;
- the potential disruption of our ongoing business;
- the potential inability of our management to maximize our financial and
strategic position in the relationship;
- additional operating losses and expenses associated with implementing the
terms of the relationship;
- the maintenance of uniform standards, controls and policies; and
- the possible impairment of relationships with existing partners, employees
or customers.
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We cannot assure you that we will be successful in overcoming these risks or any
other problems encountered in connection with these relationships or that we
will be able to enter into any additional relationships on terms and conditions
favorable to us.
OUR DEPENDENCE ON TANDY CORPORATION FOR THE PRODUCTION OF OUR :CUE:C.A.T.
DEVICES COULD ADVERSELY AFFECT US.
Tandy Corporation has agreed to act as a product sourcing manager for the
production of our :Cue:C.A.T. devices until December 31, 2001, and then for
successive one year terms if the agreement is not terminated by either party.
The agreement can be terminated by either party at any time upon 90 days prior
notice. Tandy currently utilizes two manufacturing facilities in Asia with which
it has manufacturing subcontracts for the production of our :Cue:C.A.T. devices.
Any manufacturing disruption caused by the termination of our agreement with
Tandy, the termination of Tandy's subcontracts with the two manufacturing
facilities or other factors would impair our ability to timely distribute a
large quantity of :Cue:C.A.T. devices to the public, which in turn would impair
our ability to implement our business strategy. In addition, if our agreement
with Tandy is terminated for any reason, we may be unable to negotiate another
manufacturing agreement for our :Cue:C.A.T. devices on terms acceptable to us or
at all. Our dependence on Tandy to manage the production of our :Cue:C.A.T.
devices also exposes us to additional risks, including the following:
- reduced control over delivery schedules;
- inadequate quality assurance by Tandy or its manufacturing subcontractors;
- inadequate production capacity during periods of excess demand; and
- misappropriation of our technology.
THE VIRTUAL NETWORK MAY NOT BE ACCEPTED AS AN ADVERTISING MEDIUM.
Many of our customers will likely have only limited experience with the
Internet as an advertising and promotion medium and neither those customers nor
their advertising agencies will likely have devoted a significant portion of
their advertising budgets to Internet-based advertising and promotion in the
past. In order for us to generate substantial revenue from our Virtual Network,
advertisers and advertising agencies must direct a greater portion of their
budgets to the Internet and, specifically, to the use of our Virtual Network.
There can be no assurance that advertisers or advertising agencies will be
persuaded to allocate increased portions of their budgets to Internet-based
advertising, or, if so persuaded, that they will find Internet-based advertising
on our Virtual Network to be effective. Acceptance of the Internet and our
Virtual Network by advertisers and advertising agencies also depends to a large
extent on growth in the number of Internet users, on the development of a large
base of users of our technology having demographic characteristics attractive to
advertisers and on the acceptance of new methods of conducting business and
exchanging information.
WE ARE DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS AND OTHERS MAY INFRINGE UPON
THOSE RIGHTS.
Our success is dependent on the protection of our internally developed
technology, applications and products and on the goodwill associated with our
trademarks, trade names, service marks and other proprietary rights. We rely on
patent, trademark, trade secret and copyright laws, as well as confidentiality
procedures and licensing arrangements, to protect the proprietary technology
that we have developed, but we can give no assurance that such laws or
procedures will provide sufficient protection to us or that others will not
develop technologies that are similar or superior to ours. These risks are
particularly heightened in foreign countries, in which effective patent,
trademark, copyright and trade secret protection may not be available.
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We currently hold three United States patents for our technology and have
filed over 50 patent applications, both in the United States and
internationally, with respect to other aspects of our business. However, there
can be no assurance that our applications will be granted, that any current or
future patents will not be challenged, invalidated or circumvented, or that the
rights granted will provide a competitive advantage for us. Specifically, for a
variety of reasons, our patent applications may be rejected by a country's
patent office and never issue into a patent. Even if some of our patent
applications issue into patents, the legal protection provided by these patents
may not be sufficient to protect the technology described in the patent.
Further, most foreign countries do not give the same patent protection to
patentable inventions as does the United States. The laws of these foreign
countries may place a higher burden on us to prove that our invention is
patentable and may restrict the types of inventions that can be patented. For
example, software based inventions may not be patentable in foreign countries.
The laws may also restrict the scope of protection given to a particular
invention and the legal rights and remedies available to patent holders. These
laws also make it expensive for us to obtain a patent in the first place because
the cost of translating a patent application into a country's native language
and paying maintenance fees to keep the patent enforceable are generally greater
than similar costs in the United States. As a result, obtaining patent
protection for our inventions internationally is generally more difficult and
costly than it is in the United States and often results in less protection than
is available in the United States.
We typically enter into confidentiality and non-disclosure agreements with
our employees and strategic partners in an attempt to control access to our
proprietary technology and information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use our products and
technology without authorization or to develop similar technology independently
through reverse engineering or other means.
While we have filed applications for registration for several of our
trademarks in the United States and internationally, there can be no assurance
that the trademarks described in these applications will ever become registered
trademarks. A country's trademark office can reject a trademark application for
any number of reasons. A rejection can prevent our mark from being registered,
or require us to seek registration of the mark in association with only some of
the products and services originally desired. In addition, while a trademark
application is pending, most countries provide for some period of time during
which a third party can challenge the registration of the mark. A third party
challenge would delay the registration of the mark, and defending the mark
against a challenge would be costly. In addition, registering a trademark in a
foreign country is often more difficult and expensive than registering the same
mark in the United States. Further, if the mark is registered, the legal rights
and remedies available to us in these foreign countries vary greatly from
country to country, and, generally, are less than corresponding rights and
remedies available in the United States. While we attempt to ensure that the
quality of our trademarks and brands are maintained by the licensees of our
trademark and brands, we cannot assure you that the licensees will not take
actions that would adversely affect the value of our proprietary rights or
reputation.
Policing unauthorized use of our proprietary technology and other
intellectual property rights could entail significant expense and could be
difficult or impossible, particularly given the global nature of the Internet
and that the laws of other countries may afford us little or no effective
protection of our intellectual property. In addition, third parties may bring
claims of copyright or trademark infringement against us or claim that our use
of certain technology violates a patent. Furthermore, litigation may be
necessary to enforce our intellectual property rights, to determine the validity
and scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Any claims of infringement, with or without merit,
could:
- be time consuming to defend;
- result in costly litigation;
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- divert management's attention;
- require us to enter into costly royalty or licensing arrangements; and
- prevent us from using or distributing our technology or products.
We license some technology from third parties, including operating systems
and the financial and reporting systems for our business. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of this technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost.
OUR RIGHT TO KEEP INFORMATION COLLECTED IN OUR DATABASES MAY BE CHALLENGED IN
THE FUTURE.
We intend to use our :C.R.Q. and :Cue:C.A.T. technology to develop and
maintain a substantial database of consumer demographic information that our
customers can use with our permission to conduct advertising campaigns. In
particular, we intend to require each user of our technology to provide basic
individual information in order to register and activate our :C.R.Q. software
application. Under our privacy policy, individual user information will not be
made available to outside parties and will be used internally by us only if a
user gives express permission for such use. Some summary demographic data,
however, may be made available to outside parties. Privacy concerns may cause
users to resist providing the personal data necessary to support this profiling
capability. More importantly, even the perception of security and privacy
concerns, whether or not valid, may inhibit Internet user acceptance of our
technology and products. Furthermore, users may bring lawsuits against us
seeking to prohibit us from collecting this data. Even if without merit,
lawsuits could impair Internet user acceptance of our technology and products.
In addition, legal requirements may heighten these concerns if businesses must
notify Internet users that the data captured after visiting certain websites may
be used by marketing entities to direct product promotion and advertising to
that user. We are not aware of any such laws currently in effect in the United
States. Other countries and political entities, such as the European Economic
Community, have adopted these types of laws. We cannot predict how the
international roll-out of our technology will be affected by these types of
laws.
SECURITY BREACHES COULD CAUSE INTERRUPTIONS, DELAYS OR CESSATION OF THE SERVICES
WE PROVIDE.
We must protect our computer systems and network from physical break-ins,
security breaches and other disruptions. Computer break-ins could jeopardize the
security of information stored in and transmitted through our computer systems
and network, which could adversely affect our ability to retain or attract
customers and users, damage our reputation and subject us to litigation.
Although we continue to implement security technology and establish operational
procedures to prevent break-ins, damage and failures, these security measures
may fail. Our insurance coverage may be insufficient to cover losses that may
result from these events.
WE ARE DEPENDENT ON KEY PERSONNEL.
Our future success depends, in significant part, upon the continued service
of our key technical, sales and senior management personnel, particularly J.
Jovan Philyaw, our Chairman and Chief Executive Officer, and Michael N. Garin,
our President and Chief Operating Officer. Mr. Garin has entered into an
employment agreement with us. Mr. Philyaw does not have an employment agreement
with us. See "Management--Employment Agreements." The loss of the services of
one or more of our key personnel could have a material adverse effect on us.
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WE MUST ATTRACT AND RETAIN ADDITIONAL PERSONNEL.
Our future success depends on our ability to attract and retain highly
qualified technical, sales and marketing, customer support, financial and
accounting, and managerial personnel. If our technology is widely adopted, we
will need to hire many additional personnel for all facets of our business.
Competition for personnel in the Internet industry is intense, and there can be
no assurance that we will be able to retain our key personnel or that we can
attract, assimilate or retain other highly qualified personnel in the future. We
expect to experience difficulty in hiring and retaining candidates with
appropriate qualifications. Our failure to successfully hire and retain
candidates with appropriate qualifications could have a material adverse effect
on us.
WE MAY BE UNABLE TO MANAGE OUR GROWTH.
If our technology gains broad market acceptance, we expect to experience
rapid and significant growth of our operations, including the number of our
employees, especially sales and marketing personnel, the geographic scope of our
activities and our service offerings. Any failure to manage growth effectively
could harm our business. We may also experience difficulties meeting the
public's demand for our technology and products. We cannot assure you that our
systems, procedures or controls will be adequate to support the anticipated
growth in our operations.
THE INTEGRATION OF ANY FUTURE ACQUISITIONS MAY BE DIFFICULT AND DISRUPTIVE.
Although we may seek to grow our business through strategic acquisitions
from time to time in the future, we have no immediate plans or current
agreements to acquire any companies or businesses. If we acquire companies in
the future, however, these acquisitions will be subject to numerous risks
commonly encountered in completing and integrating acquisitions, including:
- diversion of management's attention from other business concerns,
including the implementation of our business strategy;
- potential disruption of our ongoing business;
- difficulties associated with assimilating technologies, products,
personnel and operations;
- the assumption of known or unknown liabilities in the acquisition; and
- loss of key personnel of the acquired company or business.
We may not successfully overcome these risks or any other problems encountered
in connection with any future acquisitions.
CAPACITY CONSTRAINTS OF OR SYSTEM FAILURES BY OUR NETWORK INFRASTRUCTURE OR OF
OTHER INTERNET BROWSERS' INFRASTRUCTURE MAY LEAD TO SYSTEM DISRUPTIONS.
The satisfactory performance, reliability and availability of our servers
and network infrastructure and users' web browsers are critical to attracting
and retaining users and maintaining relationships with our customers. System
interruptions that result in the unavailability of our software or slower
response times for users would reduce the number of Internet sites delivered
through the use of our technology and reduce the attractiveness of our products.
Although we intend to expand our network infrastructure, any unexpected increase
in traffic on our infrastructure may require us to further expand and adapt new
network infrastructure. If we are unable to add additional hardware to
accommodate increased traffic on our infrastructure, an unanticipated system
disruption could result, slowing response times. In addition, any disruption to
our infrastructure resulting from a natural disaster or other event could result
in an interruption in our service and impair our reputation. There can be no
assurance that we will be able to expand our network infrastructure on a timely
basis to meet increased demand or protect our network infrastructure from
disruptions.
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OUR CUSTOMERS MAY ENCOUNTER DIFFICULTIES DUE TO INCREASED INTERNET TRAFFIC ON
THEIR WEBSITES.
If our technology is widely adopted by Internet users, our customers may
experience difficulties managing the Internet traffic on their own websites.
They may find it necessary to invest substantial resources in improving their
own network capacity in order to meet the increased demand. If our customers are
unable or unwilling to adequately address the increase in user traffic on their
websites, users may perceive our technology and products as ineffective and may
decrease or stop using our technology.
WE MAY FACE RISKS FROM THE EXPANSION OF OUR OPERATIONS INTERNATIONALLY.
We intend to expand our operations into international markets. As a result,
we will face risks from doing business on an international basis, including,
among other things:
- reduced protection for intellectual property rights in some countries;
- licenses, tariffs and other barriers;
- difficulties in staffing and managing foreign operations;
- political and economic instability;
- potentially adverse tax consequences;
- compliance with a wide variety of complex foreign laws and treaties; and
- variance and unexpected changes in local laws and regulations.
We currently anticipate opening an office in London within the next several
months and plan to establish additional facilities in other parts of the world.
The expansion of our operations into international markets will require
significant management attention and financial resources. We cannot be certain
that our investments in establishing operations in other countries will produce
desired levels of revenue or profitability.
WE ARE DEPENDENT ON CONTINUED GROWTH IN THE USE OF THE INTERNET.
Rapid growth in the use of and interest in the Internet is a recent
phenomenon, and there can be no assurance that acceptance and use of the
Internet will continue to develop or that a sufficient base of users will emerge
to support our customers and thus our business. Our revenues will depend largely
on the widespread acceptance and use of the Internet as a source of information
and entertainment and as a vehicle for commerce in goods and services. Demand
for recently introduced services and products integrating other communication
mediums with the Internet is very uncertain and few proven services and products
exist. To the extent that the Internet continues to experience an increase in
users and frequency of use by consumers resulting in increased bandwidth
demands, there can be no assurance that the infrastructure for the Internet will
be able to support the demands placed upon it. The Internet may not be accepted
as a viable commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity or due to increased government regulation. Changes in the pricing or
quality of, or insufficient availability of, telecommunications services to
support the Internet could also result in higher prices to end users or slower
response times and could adversely affect use of the Internet generally and of
our Internet services particularly. If use of the Internet does not continue to
grow or grows more slowly than expected, or if the Internet infrastructure does
not effectively support the growth that may occur, our business would be
materially adversely affected.
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WE MAY NOT BE ABLE TO IMPROVE THE PERFORMANCE, FEATURES AND RELIABILITY OF OUR
TECHNOLOGY, PRODUCTS AND SERVICES FAST ENOUGH OR AT ALL TO COMPETE EFFECTIVELY
WITH NEW TECHNOLOGY.
The market for our technology, products and services is characterized by
rapid technological developments, frequent new product introductions and
evolving industry standards. The emerging character of this technology and its
rapid evolution will require that we continually improve the performance,
features and reliability of our technology, products and services, particularly
in response to competitive offerings. There can be no assurance that we will be
successful in responding quickly, cost effectively and sufficiently to these
developments. In addition, the widespread adoption of new Internet technologies
or standards could require substantial expenditures by us to modify or adopt our
technology, products and services and could fundamentally affect the character,
viability and frequency of Internet-based advertising and commerce, either of
which could have a material adverse effect on us. New technology or enhancements
offered by us may contain design flaws or other defects that could require
costly modifications or result in a loss of confidence in our technology by
customers and users, either of which could have a material adverse effect on us.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST RELATED TECHNOLOGY, AND
COMPETITIVE PRESSURES COULD HAVE A NEGATIVE IMPACT ON US.
We may be unable to compete successfully against related technology, and
competitive pressures could have a negative impact on us. The market for
Internet convergence technology is new and rapidly evolving, and we expect
competition to intensify significantly in the future as companies further
utilize the advantages of the Internet. We face competition in the Internet
convergence market from existing companies with related technology, including,
among others:
- BarPoint.com, Inc.;
- Code Corporation;
- Digimarc Corp.;
- FastFrog.com;
- MicroCast, Inc.;
- NeoMedia Technologies, Inc.;
- WebTV Networks, Inc.;
- Wink Communications, Inc.; and
- WorldGate Communications, Inc.
We expect competition to increase as current competitors increase the
sophistication of their products and as new competitors enter the market. Some
of our competitors have, and new potential competitors may have:
- more experience deploying Internet convergence software and solutions;
- larger technology staffs;
- larger customer bases;
- more established distribution channels;
- greater brand recognition; and
- greater financial, marketing and other resources than we have.
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In addition, our competitors may be able to develop or offer superior
technology, products or services that achieve greater market and public
acceptance or that have significantly improved functionality as compared to our
existing and future technology, products and services. In addition, as we
develop new products and services, we may begin competing with companies with
whom we have not previously competed. It is also possible that our competitors
will form alliances that may enable them to rapidly increase their market share.
FUTURE GOVERNMENT REGULATIONS OF THE INTERNET COULD DECREASE DEMAND FOR OUR
PRODUCTS AND SERVICES OR INCREASE OUR COST OF CONDUCTING BUSINESS.
Although there are currently few laws and regulations directly applicable to
the Internet, a range of new laws and regulations have been proposed, and could
be adopted, covering issues such as privacy, copyrights, obscene or indecent
communications and the pricing, characteristics and quality of Internet products
and services. In 1996, Congress enacted the Communications Decency Act, which,
among other things, purported to impose criminal penalties on anyone who
distributes "obscene" or "indecent" materials over the Internet. A number of
states have adopted or proposed similar legislation. Although certain provisions
of the Communications Decency Act have been held to be unconstitutional, the
manner in which the act and similar existing or future federal and state laws
will ultimately be interpreted and enforced and their effect on our operations
cannot yet be fully determined. Such laws could subject us to substantial
liability. For example, we do not and cannot practically screen the contents of
the various Internet sites that are accessible with our :C.R.Q. and :Cue:C.A.T.
technology. Restrictive laws or regulations could also dampen the growth of the
Internet generally and decrease the acceptance of the Internet as an advertising
medium, and could, thereby, have a material adverse effect on us. Application to
the Internet of existing laws and regulations governing issues such as property
ownership, libel and personal privacy is also subject to substantial
uncertainty.
The television industry is subject to extensive regulation at the federal,
state and local levels. In addition, legislative and regulatory proposals under
consideration by Congress and federal agencies may materially affect the
industry and our ability to distribute our :C.R.Q. technology to television
broadcasters.
There can be no assurance that current or new government laws and
regulations, or the application of existing laws and regulations, will not:
- subject us to significant liabilities;
- significantly dampen growth in Internet usage;
- prevent us from distributing our technology; or
- otherwise cause a material adverse effect on us.
WE COULD FACE LIABILITY FOR THE CONTENT WE PUBLISH ON OUR WEBSITE OR BROADCAST
ON NET TALK LIVE! THE INTERNET TALK SHOW.
As a publisher, producer and distributor of content on our website and on
NET TALK LIVE! THE INTERNET TALK SHOW, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the materials we publish, produce or
distribute. In addition, because our technology facilitates the downloading of
materials from third-parties' websites, there is a potential that claims will be
made against us for defamation, negligence, copyright or trademark infringement,
personal injury or other theories based on the nature and content of such
materials. Such claims have been brought, and sometimes successfully pressed,
against Internet service providers in the past. Our insurance may not be
adequate to indemnify us for all liability that may be imposed on us.
18
<PAGE>
NO PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS AND OUR STOCK PRICE MAY
FLUCTUATE AFTER THIS OFFERING. AS A RESULT, INVESTORS IN OUR COMMON STOCK MAY
NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING
PRICE.
Prior to this offering, there has been no public market for our common
stock. We will negotiate the initial public offering price with the
underwriters. The initial public offering price may not be indicative of the
price at which the common stock will trade following completion of this
offering. The completion of this offering provides no assurance that an active
trading market for our common stock will develop or, if developed, that it will
be sustained. The market price of our common stock also could be subject to
significant fluctuation and may be influenced by many factors, some of which are
beyond our control, including:
- variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- additions or departures of key personnel;
- sales of common stock in the future;
- fluctuations in stock market price and trading volume, which are
particularly common among highly volatile securities of Internet
companies; and
- investor perceptions of us and the Internet industry.
As a result, investors in our common stock may not be able to resell their
shares at or above the initial offering price. In the past, securities class
action litigation has often been brought against a company following periods of
volatility in the market price of its securities. We may be the target of
similar litigation. Securities litigation could result in substantial costs and
divert our management's attention and resources, which could negatively impact
us.
THE MARKET FOR TECHNOLOGY STOCKS IS VOLATILE.
The stock market in general, and the Nasdaq National Market and the market
for Internet and technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of technology companies. These broad market and
industry factors may have a material adverse effect on the market price of our
common stock, regardless of our operating performance. The trading prices of the
stocks of many technology companies are at or near historical highs and reflect
price-earnings ratios substantially above historical levels. There can be no
assurance that these trading prices and price-earnings ratios will be sustained.
CERTAIN EXISTING STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK.
Following the closing of this offering, our officers, directors and
affiliated entities together will beneficially own approximately % of the
outstanding shares of our common stock ( % if the underwriters'
over-allotment options are exercised in full). As a result, these stockholders
will be able to control all matters requiring stockholder approval and, thereby,
our management and affairs. Matters that typically require stockholder approval
include:
- the election of directors;
- mergers or consolidations;
- the sale of all or substantially all our assets;
19
<PAGE>
- the amendment of our charter; and
- our dissolution.
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock. See "Security Ownership of Principal Stockholders and
Management."
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
After this offering, we will have outstanding shares of common
stock. Sales of a substantial number of shares of common stock in the public
market following this offering could substantially decrease the market price of
our common stock. All the shares sold in this offering will be freely tradeable,
other than those shares sold in this offering to any of our affiliates. The
remaining %, or shares, of our total outstanding shares will become
available for resale in the public market in the near future. In addition, an
affiliate of the National Broadcasting Company, Inc., the holders of shares of
common stock that will be issued upon conversion of the outstanding shares of
preferred stock upon completion of this offering and other holders of our common
stock have the right to require us to register their shares for resale after
180 days following the date of this prospectus. As restrictions on resale end or
upon registration of any such shares for resale, the market price could drop
significantly if the holders of these shares sell them or are perceived by the
market as intending to sell them. See "Shares Eligible for Future Sale."
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the pro forma
book value per share of our common stock. Purchasers of common stock in this
offering will experience immediate and substantial dilution in the pro forma net
tangible book value of their stock of $ per share assuming an initial
offering price for our common stock of $ per share. See "Dilution."
OUR MANAGEMENT'S BROAD DISCRETION IN THE USE OF PROCEEDS OF THIS OFFERING
INCREASES THE RISK THAT WE MAY NOT USE THEM EFFECTIVELY OR THAT WE MAY USE
THEM IN WAYS IN WHICH OUR STOCKHOLDERS OR THE MARKET IN GENERAL MAY NOT AGREE.
We currently plan to use the net proceeds of this offering:
- to pay expenses related to the manufacture and distribution of our :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices;
- to market and promote the adoption of our technology by Internet users;
- to purchase additional network server and support equipment;
- to repay outstanding indebtedness; and
- for general corporate purposes, including operating expenses, working
capital and other capital expenditures.
Depending on future events, we may determine at a later time to use our net
proceeds for different purposes. We cannot assure you that, pending their use,
the proceeds will be invested to yield a favorable return. See "Use of
Proceeds."
WE HAVE NOT PAID DIVIDENDS AND DO NOT ANTICIPATE PAYING ANY DIVIDENDS ON OUR
COMMON STOCK IN THE FORESEEABLE FUTURE.
We currently intend to retain any earnings for the future operation and
development of our business and do not anticipate paying any dividends on our
common stock in the foreseeable future.
20
<PAGE>
Any future dividends may be restricted by any loan agreements that we may enter
into from time to time. See "Dividends."
PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD DISCOURAGE A
TAKEOVER THAT STOCKHOLDERS MAY CONSIDER FAVORABLE.
Our certificate of incorporation and bylaws may discourage, delay or prevent
a merger or acquisition that a stockholder may consider favorable because they:
- authorize the issuance of "blank check" preferred stock;
- provide for a classified board of directors with staggered, three-year
terms;
- prohibit cumulative voting in the election of directors;
- limit the persons who may call special meetings of stockholders;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for nominations for election to the
board of directors or for proposing matters to be approved by stockholders
at stockholder meetings.
Certain provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with us. In addition, purchase rights
distributed pursuant our stockholder rights plan will cause substantial dilution
to any person or group that attempts to acquire us without conditioning the
offer on our redemption of the rights. For a detailed description of the
anti-takeover provisions in our charter documents, stockholder rights plan and
those provisions of Delaware law, see "Description of Capital Stock."
21
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. All statements other
than statements of historical facts contained in this prospectus, including
statements regarding our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. The words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect," and similar expressions, as they
relate to us, are intended to identify forward-looking statements. We have based
these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions, including, among other things:
- our ability to implement our technology on a commercial basis;
- our ability to obtain additional capital to finance the implementation of
our technology on a commercial basis;
- acceptance and adoption of our technology by the mass media, the Internet
convergence market and the public;
- the effectiveness and reliability of our :C.R.Q. and :Cue:C.A.T.
applications;
- the promotion and marketing of our technology by our strategic partners;
- our dependence on intellectual property rights;
- rapid technology changes within our market;
- our ability to compete with related and new technologies in the Internet
convergence market;
- our ability to effectively integrate the operations of any companies that
we may acquire in the future; and
- regulation of the Internet by the government.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this prospectus may not occur and actual
results could differ materially from those anticipated or implied in the
forward-looking statements. "See Risk Factors."
22
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $ million in net proceeds from
the sale of shares of common stock in this offering at an assumed initial
public offering price of $ per share (approximately $ if the
underwriters' over-allotment options are exercised in full), after deducting
underwriting discounts and commissions and estimated offering expenses, which we
expect to be approximately $ .
We currently expect to use the net proceeds of this offering:
- to pay expenses related to the manufacture and distribution of our :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices;
- to market and promote the adoption of our technology by Internet users;
- to purchase additional network server and support equipment;
- to repay outstanding indebtedness to Infotainment Telepictures, Inc.; and
- for general corporate purposes, including operating expenses, working
capital and other capital expenditures.
Depending on future events, we may determine at a later time to use our net
proceeds for different purposes, including future acquisitions of or investments
in strategic businesses or technology. Pending these uses, we intend to invest
the net proceeds in short-term, interest-bearing, investment-grade instruments.
Our promissory note payable to Infotainment Telepictures, Inc. bears
interest at 6.0% per annum. This promissory note and related accrued and unpaid
interest will become due and payable upon completion of this offering. As of the
date of this prospectus, a principal balance of $3.5 million and accrued and
unpaid interest of approximately $ was outstanding.
We believe that, based on our current business plan and related assumptions,
the net proceeds of this offering, cash on hand and cash expected to be
generated by operations will be sufficient to fund our operations and capital
requirements for approximately the next 12 months after completion of this
offering. However, we may be required to seek additional sources of capital
prior to such time if:
- our operating assumptions change or prove to be inaccurate;
- we accelerate or expand the implementation of our business strategy; or
- we pursue future acquisitions of or investments in strategic businesses or
technology.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a further discussion of our
current and future capital requirements and our belief regarding our ability to
meet those requirements.
23
<PAGE>
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock, and we do
not anticipate declaring or paying any dividends on our common stock in the
foreseeable future. We currently intend to retain all future earnings to fund
the development and growth of our business. The payment of any future dividends
will be at the discretion of our board of directors and will depend on our
results of operations, financial condition, capital requirements, and other
factors deemed relevant by our board of directors.
24
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis giving effect to the issuance of 48 shares of our
Series A preferred stock in January 2000, for total cash consideration of
$151,200, the issuance of 5,929,364 shares of our Series B preferred stock
and 5,372,593 shares of our Series C preferred stock in April 2000, for
total cash consideration of $41.7 million and $56.6 million, respectively,
and also gives effect to the use of proceeds therefrom; and
- on a pro forma basis as adjusted to reflect:
- the automatic conversion of 11,317,923 shares of outstanding preferred
stock into 21,360,537 shares of common stock upon completion of this
offering; and
- the sale of shares of common stock in this offering at an assumed
initial public offering price of $ per share after deducting the
estimated underwriting discounts and commissions and our estimated
offering expenses and the application of the net proceeds as set forth
under "Use of Proceeds."
None of the columns set forth below reflects the exercise of:
- 9,245,200 shares of common stock issuable upon the exercise of stock
options granted by us, with exercise prices ranging from $3.31 to $9.37
per share and a weighted average exercise price of $4.17 per share, of
which stock options to purchase up to shares of common stock are
exercisable or will become exercisable within 60 days after the date of
this prospectus; and
- 8,382,350 shares of common stock issuable upon the exercise of warrants
issued by us, with exercise prices ranging from $5.00 to $10.54 per share
and a weighted average exercise price of $7.98 per share, of which all
warrants are immediately exercisable.
You should read this table together with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the consolidated financial statements and the notes thereto appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 45,540 $138,378 $
======== ======== ========
Short-term and long-term debt............................... 9,152 3,529
Series A convertible preferred stock subject to
redemption................................................ 47,888 48,039
Series B convertible preferred stock subject to
redemption................................................ -- 41,683
Series C convertible preferred stock subject to
redemption................................................ -- 56,627
Stockholders' equity (deficit):
Common stock, $0.01 par value; 110,250,000 shares
authorized, 61,113,150 shares issued and outstanding
actual; 125,000,000 shares authorized,
61,113,150 shares issued and outstanding pro forma;
shares authorized, shares issued and
outstanding pro forma as adjusted....................... 611 611
Additional paid-in capital................................ 517 517
Excess of purchase price over Predecessor cost of net
liabilities acquired.................................... (8,397) (8,397)
Accumulated deficit....................................... (3,977) (3,977)
-------- -------- --------
Total stockholders' equity (deficit).................... (11,246) (11,246)
-------- -------- --------
Total capitalization................................ $ 45,794 $138,632 $
======== ======== ========
</TABLE>
25
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering.
Net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares of common stock
then outstanding. Our net tangible book value at December 31, 1999, would have
been $ million, or $ per share of common stock, after giving effect to
the automatic conversion of 11,317,923 shares of outstanding preferred stock
into 21,360,537 shares of common stock upon completion of this offering. After
giving effect to the sale of the shares of common stock in this offering
at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value at December 31, 1999,
would have been $ million, or $ per share. This represents an immediate
increase in the pro forma net tangible book value of $ per share to
existing stockholders and an immediate and substantial dilution of $ per
share to new investors purchasing common stock in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share at December 31, 1999.... $
[Increase] [Decrease] per share attributable to preferred
stock conversion........................................
--------
Pro forma net tangible book value per share before this
offering................................................
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution in pro forma net tangible book value per share to
new investors(1).......................................... $
========
</TABLE>
- ------------------------
(1) If the underwriters' over-allotment option is exercised in full, dilution
per share to new investors will be $ .
The following table summarizes on a pro forma basis as of December 31, 1999,
the total number of shares of common stock purchased from us, the total
consideration paid to us, and the average price per share paid by existing
stockholders and by new investors purchasing shares of common stock in this
offering at an assumed initial public offering price of $ per share and
before deducting underwriting discounts and commissions and estimated offering
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- -------- ----------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Existing stockholders............... % $ % $
Existing stockholders--conversion of
preferred stock...................
New investors.......................
----------- ------- ----------- ------
Total............................... 100.0% $ 100.0%
=========== ======= =========== ======
</TABLE>
The foregoing discussion and tables assume no exercise of outstanding stock
options or warrants. As of the date of this prospectus, there were outstanding:
- stock options granted by us to purchase 9,245,200 shares of common stock
at a weighted average exercise price of $4.17 per share, of which stock
options to purchase up to shares of
26
<PAGE>
common stock are exercisable or will become exercisable within 60 days
after the date of this prospectus; and
- warrants issued by us to purchase 8,382,350 shares of common stock at a
weighted average exercise price of $7.98 per share, of which all warrants
are immediately exercisable.
To the extent that any of these stock options or warrants are exercised, there
will be further dilution to new investors. See "Capitalization" and Note 8 to
our consolidated financial statements included elsewhere in this prospectus.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for the
year ended December 31, 1999, and the consolidated balance sheet data as of
December 31, 1999, are derived from our audited consolidated financial
statements included elsewhere in this prospectus. The selected statements of
operations data for the years ended December 31, 1998 and 1997 and the balance
sheet data as of December 31, 1998 are derived from the audited financial
statements of the Predecessor, included elsewhere in this prospectus. The
balance sheet data as of December 31, 1997 are derived from the audited
financial statements of the Predecessor but are not included in this prospectus.
The selected statement of operations data for the year ended December 31, 1995
and the balance sheet data as of December 31, 1995 and 1996 are derived from our
unaudited financial statements that include, in our opinion, all adjustments,
consisting of only normal recurring adjustments, necessary for fair presentation
of the financial condition at that date and results of operations for such
period.
The historical results presented below are not necessarily indicative of the
results to be expected for any future period. The selected consolidated
financial data should be read in conjunction with our consolidated financial
statements and the notes to those consolidated financial statements, the
Predecessor financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
PREDECESSOR FINANCIAL DATA
YEAR ENDED DECEMBER 31, YEAR ENDED
--------------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues........................................ $ 97 $ 109 $ 690 $ 1,636 $ 1,543
Operating expenses:
Production and media costs........................ 78 137 591 939 1,012
Selling, general and administrative............... 48 91 284 671 3,921
Depreciation and amortization..................... -- 17 41 55 106
Research and development.......................... -- -- -- 36 410
----------- ----------- ----------- ----------- -----------
Total operating expenses........................ 126 245 916 1,701 5,449
----------- ----------- ----------- ----------- -----------
Operating loss...................................... (29) (136) (226) (65) (3,906)
Interest income..................................... -- -- -- -- 660
Interest expense.................................... (3) (14) (17) (24) (731)
----------- ----------- ----------- ----------- -----------
Net loss............................................ $ (32) $ (150) $ (243) $ (89) $ (3,977)
=========== =========== =========== =========== ===========
Basic and diluted weighted average common shares
outstanding....................................... 25,000 25,000 25,000 25,000 59,507,271
Basic and diluted net loss per common share......... $ (1.30) $ (6.02) $ (9.72) $ (3.54) $ (0.07)
=========== =========== =========== =========== ===========
<CAPTION>
PREDECESSOR FINANCIAL DATA
AS OF DECEMBER 31, AS OF
--------------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 143 $ 87 $ -- $ 175 $ 45,540
Total assets........................................ 143 281 273 381 46,518
Accounts payable and accrued liabilities............ 2 11 41 85 722
Short-term borrowings, including current portion of
long-term debt(1)................................. 173 312 227 651 10
Long-term liabilities............................... -- 1 3 3 9,145
Series A convertible preferred stock subject to
redemption........................................ -- -- -- -- 47,888
Accumulated deficit................................. (32) (183) (426) (514) (3,977)
Total stockholders' deficit......................... (32) (183) (426) (514) (11,246)
</TABLE>
- ------------------------------
(1) As of December 31, 1995, 1996 and 1997, short-term borrowings consisted
entirely of indebtedness to an officer of the Predecessor. As of
December 31, 1998, short-term borrowings consisted of $197,919 of
indebtedness to an officer of the Predecessor and $452,900 of advances from
a stockholder of ours.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO AND THE PREDECESSOR FINANCIAL STATEMENTS AND
THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
GENERAL
We are a company whose technology allows media companies, manufacturers and
virtually all organizations to instantly and easily link their products with web
pages deep within their websites. Until we release our technology, we believe
that it is not possible for these companies to realize the full value of their
Internet efforts, because their websites have to be entered through their front
pages, often making access to a desired web page time-consuming and difficult.
Our :C.R.Q. software will send an Internet user's web browser to a specific web
page in response to our proprietary digital signal called a ":Cue" transmitted
by a television broadcast. Our :C.R.Q. software also will send an Internet
user's web browser to a specific web page when an Internet user utilizes our
:Cue:C.A.T. device to scan our proprietary codes called "Print :Cues" on print
media or to scan existing bar codes on consumer products. We believe that our
technology will empower media companies and corporate advertisers to enhance
their content and to transform television broadcasts or other electronic media,
print media or items bearing Print :Cues or bar codes into powerful new
advertising, promotional or e-commerce opportunities. Our technology will be
free to the public and will allow Internet users to quickly and easily obtain
relevant information and conduct e-commerce activities by eliminating the input
of lengthy website addresses and time-intensive web navigation.
From our inception in September 1998 through the end of that year, we had no
operating activity. In January 1999, we acquired from Infotainment
Telepictures, Inc. the television show NET TALK LIVE! THE INTERNET TALK SHOW and
certain proprietary technology rights in exchange for an unsecured promissory
note with a principal amount of $8,000,000. Because of this transaction, we have
included in this prospectus the financial statements of Infotainment
Telepictures, Inc. as our predecessor for accounting purposes. For the year
ended December 31, 1999, we generated limited revenues from our television show
NET TALK LIVE! THE INTERNET TALK SHOW. Since our inception, we have conducted
research, developed our Internet convergence technology and established sales
and distribution outlets for our technology by educating potential partners in
the media and consumer products industries about how to adopt and utilize our
technology. We plan to achieve widespread distribution and adoption of our
technology through the strategic partnerships that we have established with a
major television network, local station groups, cable networks, publishers,
merchants and direct marketers and additional strategic partnerships that we
intend to establish. We intend to initiate a nationwide roll-out of our
technology beginning in September 2000 and plan to distribute, free to the
public, at least 50 million :C.R.Q. CD-ROMs and 50 million :Cue:C.A.T. devices
by the end of 2001.
Although the initial roll-out of our technology will be limited to the
United States, we believe that there is a substantial market for our technology
outside the United States. Our :C.R.Q. and :Cue:C.A.T. technology does not
require foreign language translations or technical modifications to be
compatible with specific broadcasting or recording technology used in foreign
markets. Instead, international broadcasters, publishers, advertisers and
merchants can place our :Cues in any type of electronic or printed medium and
direct Internet users to websites using any language. We intend to expand our
international presence aggressively by adding direct sales and marketing
personnel and establishing strategic relationships with international partners
to capitalize fully on international market opportunities. We have hired a
president of our International Group and anticipate opening an office in London
within the next several months. We intend to commence international deployment
of our technology during 2001.
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<PAGE>
REVENUE SOURCES
We have divided initial applications for our technology into four groups
from which we expect to derive revenue:
- broadcasting and electronic media;
- print media, bar-coded products and other :Cue:C.A.T. applications;
- Internet advertising; and
- database research and marketing.
Our initial pricing model for each application is described below. We will,
however, periodically review our pricing model for each application, and we
expect to make adjustments in our pricing model from time to time.
BROADCASTING AND ELECTRONIC MEDIA. Our :C.R.Q. technology works with any
television broadcast, cable programming, or other electronic media such as DVDs,
videotapes and CD-ROMs, and will offer a range of benefits to broadcasters. With
our :C.R.Q. technology, television and cable broadcasts become an instant and
direct link to the Internet. Broadcasters will be able to offer more engaging
interactive programming to their viewers and more valuable interactive ads to
their corporate advertisers.
We expect to derive our revenue from the following sources:
- fees from the sale of advertising :Cues to broadcast networks, cable
networks and local television stations;
- a fixed fee per sale completed by home shopping networks as a result of
using our :Cues; and
- fees from annual licenses to cable networks for the use of :Cues in
content.
We intend to sell :Cues to networks and television stations, who will resell
them to advertisers. We expect to limit the number of advertising :Cues that
each broadcast network, cable network or local television station can sell for
use in advertising spots each day and to charge a flat fee per :Cue.
Revenues from the sale of advertising :Cues will be recognized upon
notification that the :Cue has been transmitted. Revenues generated from the
sale of :C.R.Q. licenses to cable operators will be recognized ratably over the
respective contract period, which will generally be 18 months.
PRINT MEDIA, BAR CODED PRODUCTS AND OTHER :CUE:C.A.T. APPLICATIONS. By
inserting a Print :Cue in any print media or by linking existing bar codes for
consumer products to websites, our technology enables virtually any consumer
product or any printed media, including magazine articles, catalogs, print
advertisements, newspapers, free-standing inserts, billing invoices, bank
statements and newsletters, to become instantly interactive with the Internet.
With the swipe of a :Cue:C.A.T. device over a Print :Cue or a bar code, a user
can gain immediate access to in-depth information that was not previously
included in the printed version or on the consumer product due to space
limitations. We expect that publishers will be able to attain higher ad revenues
due to increased traffic on the website and generate additional e-commerce
opportunities for their advertisers. We also expect that manufacturers will be
able to transform the billions of consumer products on retailers' shelves into
powerful advertising, promotional and e-commerce opportunities.
For most print applications, we intend to allow publishers to use Print
:Cues at no cost for the first several months after launch, until we have
achieved widespread distribution of our :Cue:C.A.T. devices to Internet users.
We are completing a massive database that links existing UPC, ISBN, EAN and
other bar codes found on consumer products to web pages. We plan to activate
substantially all of these bar
30
<PAGE>
codes when our :Cue:C.A.T. technology is launched and provide manufacturers with
one free year in which to evaluate the results. We expect to derive our revenue
from the following sources:
- after the first few months, fees from licenses to magazine and newspaper
publishers for the use of Print :Cues for content enhancement purposes;
- after the first few months, fees from the sale of any advertising Print
:Cues in any print media, including newspapers and magazines;
- a fixed fee per sale completed by catalog shoppers as a result of using
our Print :Cues;
- annual fees for Print :Cues assigned by credit card issuers to their
cardholders for tracking accounts online;
- fees per Print :Cue sold to publishers of free-standing inserts and direct
mail and sold to manufacturers for use in product manuals;
- after the first anniversary of our launch date, annual fees for bar codes
on consumer products that are Internet Enhanced; and
- commissions on increased revenues resulting from the use of Print :Cues in
classified ads.
Revenues from the sale of advertising Print :Cues will be recognized upon
notification from the respective publisher that the Print :Cues were
incorporated into publications during the applicable publication period.
Revenues generated from the sale of content Print :Cues will be on an annual
license basis, regardless of the number of content Print :Cues used, and will be
recognized ratably over the respective contract period, which is generally
12 months.
Revenues generated from the licensing of bar codes will be based upon a
fixed annual fee per bar code and will be recognized annually on a straight-line
basis.
INTERNET ADVERTISING. Each time our :C.R.Q. software launches a user's
personal computer to a web page, our Virtual Network will border the user's
Internet browser window. The Virtual Network will be populated with banner
advertisements and a series of tabs that, when clicked, will display information
related to that subject. We expect to sell up to eight banner ads along the
Virtual Network's vertical frame. We expect to charge advertisers a fee and will
remit 30% of the total advertising revenues to the agency that will sell the
banner ads on our behalf as well as 10-15% to advertising agencies representing
the corporate advertisers. Revenue from the sale of banner advertisements on the
Virtual Network, net of commissions, will be recognized ratably over the period
in which the advertisements are displayed.
DATABASE RESEARCH AND MARKETING. We intend to require each user of our
technology to provide basic individual information in order to register and
activate our :C.R.Q. and :Cue:C.A.T. technology. Additionally, we plan to offer
promotional and other incentives to encourage users to provide more detailed
individual information. We plan to use this information to develop a substantial
database of demographic information reflecting users' interests and preferences,
and tracking Internet behavior related to :Cues and viewing patterns of Internet
Enhanced content. This information will be used to better tailor our Virtual
Network banner ads and special vendor offers to each user, as well as to
generate summary demographic data reports for advertisers and merchants. These
firms would use our reports and data collection expertise to tailor advertising
campaigns, banner ads and website content to appeal to targeted consumer
segments. Under our privacy policy, individual user information will not be made
available to outside parties and will only be used internally by us with a
user's express permission. Some summary demographic data will be provided to
purchasers of :Cues free of charge. For more complex or detailed demographic
data, we intend to charge advertisers a flat fee per month, plus a small charge
per record.
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EXPENSE COMPONENTS
Costs associated with our business primarily include product costs, selling,
general and administrative expenses, depreciation and amortization and research
and development. Although we expect these costs to continue to increase over
time, we expect each of them to decrease as a percentage of revenues as revenues
increase after we roll out our :C.R.Q. and :Cue:C.A.T. technology.
Product costs consist of the costs of manufacturing and distributing our
:C.R.Q. CD-ROMs and :Cue:C.A.T. devices. Our :C.R.Q. CD-ROMs and :Cue:C.A.T.
devices will be distributed free of charge to the public. In some cases, we
expect that certain of the costs of manufacturing and/or distributing :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices will be borne or defrayed by our strategic
partners and by advertisers who advertise directly on :Cue:C.A.T. devices. Costs
incurred in manufacturing and distributing the :C.R.Q. CD-ROMs and :Cue:C.A.T.
devices will be charged to expense as incurred.
Selling, general and administrative expenses consist of:
- payroll and related expenses for executive, sales and marketing and
administrative personnel;
- corporate facilities expenses;
- professional services expenses;
- maintenance costs for our database and network infrastructure;
- marketing expenses;
- travel expenses; and
- other general corporate expenses.
We expect that in support of the expected growth of our business and our
operations as a public company, selling, general and administrative expenses
will continue to increase for the foreseeable future.
Depreciation and amortization expenses consist primarily of the amortization
of goodwill associated with business acquisitions, as well as fixed asset
depreciation. We anticipate larger depreciation and amortization expenses in the
foreseeable future as we continue to expand our network infrastructure. For
example, we anticipate using a portion of the net proceeds from this offering to
purchase additional network server and support equipment to prepare for the
anticipated launch of our technology in September 2000.
Research and development expenses include costs incurred by us to develop,
enhance, and develop new applications for our technology. These expenses consist
primarily of salaries and benefits for our Technology Group, systems personnel
and consultants. We intend to continue to enhance our technology and to develop
new uses and other products that utilize our technology. Accordingly, we expect
that our product research and development expenses will continue to increase for
the foreseeable future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
REVENUES:
During the year ended December 31, 1999, we derived $1.5 million in revenue
from the sale of advertisements and sponsorships on our show, NET TALK LIVE! THE
INTERNET TALK SHOW. Two customers accounted for approximately 81% and 17% of our
annual revenues, respectively.
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OPERATING EXPENSES:
PRODUCTION AND MEDIA COSTS. Production and media costs were $1.0 million,
or 66%, of revenue for the year ended December 31, 1999. Production and media
costs consist of the personnel and other costs associated with producing,
editing and airing NET TALK LIVE! THE INTERNET TALK SHOW.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were comprised primarily of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
service expenses and other general corporate expenses. These expenses were
$3.9 million, or 254%, of total revenues for the year ended December 31, 1999.
Employee related costs were $2.0 million, or 51%, of the total selling, general
and administrative expenses for the year. We significantly increased our
employee expenses during the fourth quarter of the year when our employee base
increased from approximately 22 at September 30, 1999 to 61 at December 31,
1999. Selling, general and administrative expenses also include $380,300 in
legal fees primarily associated with the filing of patents and trademarks to
enhance our intellectual property and $529,400 in travel costs primarily
incurred in the second half of the year in connection with travel to meetings
with potential customers and investors.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $105,721,
or 7%, of total revenues during the year ended December 31, 1999. We purchased
$616,000 of property and equipment and capitalized software during the year
ended December 31, 1999. The majority of these assets were purchased during the
later portion of the year and did not have a full year of depreciation expense
in the year ended December 31, 1999.
RESEARCH AND DEVELOPMENT. Research and development costs during the year
ended December 31, 1999 were $410,017. These costs primarily consist of payroll
and related expenses associated with technology personnel for the development of
our :C.R.Q. software and :Cue:C.A.T. device.
OTHER INCOME (EXPENSE):
INTEREST INCOME. Interest income of $660,498 was recorded during the year
ended December 31, 1999. The income was earned from the investment of the
proceeds net of fees and cash issuance costs of $48.3 million raised from the
issuance of the Series A preferred stock. These proceeds were primarily received
by us in October, November and December of 1999; therefore, only a few months of
interest was earned on the proceeds.
INTEREST EXPENSE. Interest expense of $731,355 was recorded during the year
ended December 31, 1999. The interest primarily related to the $8.0 million
promissory note issued to the Predecessor in January 1999 for the purchase of
NET TALK LIVE! THE INTERNET TALK SHOW and certain proprietary technology rights.
Additional interest expense related to $2.5 million of debentures issued by us
in January 1999 to certain stockholders.
RESULTS OF OPERATIONS-PREDECESSOR
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES:
The Predecessor's revenues increased 137% from $689,967 in 1997 to
$1,636,422 in 1998. The increase was primarily related to $813,400 in additional
sponsorships sold on the Predecessor's television show, NET TALK LIVE! THE
INTERNET TALK SHOW, in 1998. Additionally, the Predecessor had $259,300 more
revenue related to infomercial productions in 1998 than in 1997.
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OPERATING EXPENSES:
PRODUCTION AND MEDIA COSTS. Production and media costs increased $348,764,
or 59%, from $590,704 in 1997 to $939,468 in 1998. This increase was primarily
related to higher revenues recorded during the year ended December 31, 1998. As
a percentage of revenues, production and media costs decreased from 86% in 1997
to 57% in 1998. The decrease in costs as a percentage of revenues was primarily
related to the higher margin revenue recorded in 1998 related to the sale of
sponsorships on the Predecessor's show, NET TALK LIVE! THE INTERNET TALK SHOW.
There are very few incremental costs associated with the sale of advertising and
sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW in comparison to the costs
associated with the production of an infomercial.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 136% from $284,370 in 1997 to $670,953 in
1998. As a percentage of revenues these expenses were constant at 41%. The
largest increase in selling, general and administrative expenses was related to
employee-related costs which increased by $171,000 from 1997 to 1998. The
increase in employee-related costs comprised 44% of the total increase in
selling, general and administrative expenses for the years ended December 31,
1997 and 1998, and were largely related to supporting the growth of NET TALK
LIVE! THE INTERNET TALK SHOW. Facilities expense, professional service expense
and other general corporate expenses increased from 1997 to 1998 to support the
growth of the Predecessor.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased $14,393 from
$40,515 in 1997 to $54,908 in 1998 primarily due to the addition of certain
studio and phone equipment related to the Predecessor's NET TALK LIVE! THE
INTERNET TALK SHOW.
RESEARCH AND DEVELOPMENT. Research and development costs incurred during
the year ended December 31, 1998 were related to the Predecessor allocating
certain personnel resources toward the development of certain technology
designed to converge the radio, television and Internet mediums.
OTHER INCOME (EXPENSE):
INTEREST EXPENSE. Interest expense is primarily related to accrued interest
on certain advances from an officer of the Predecessor. Additionally, during the
fourth quarter of 1998, the Predecessor issued a note payable to one of our
stockholders. The note was repaid in January 1999 in conjunction with our
purchase of the Predecessor's assets.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity at December 31, 1999 included cash and
cash equivalents of $45.5 million. Since inception, we have financed our cash
requirements for investments in property and equipment and operations primarily
through the sale of $2.5 million of debentures in January 1999 and the sale of
$50.1 million of preferred stock in the fourth quarter of 1999. Working capital
at December 31, 1999 was $45.0 million. At December 31, 1999, we had an
accumulated deficit of $4.0 million.
Our operating activities during the year ended December 31, 1999 utilized
cash of $3.0 million. The net cash utilized during this period was to fund our
growth in employee costs, infrastructure and operations, research and
development and legal costs incurred in registering our intellectual property
rights in the United States and abroad.
Capital expenditures during 1999 consisted of purchases of equipment,
furniture and software of $616,000. A source of cash for investing activities in
1999 included the cash acquired in the acquisition of entities under common
control of $165,278.
In January 1999, we issued a promissory note for $8.0 million to purchase
substantially all of the assets of Infotainment Telepictures, Inc., consisting
of rights, title and interest in certain intellectual
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property and NET TALK LIVE! THE INTERNET TALK SHOW. We made voluntary principal
payments of $1.5 million on this note in October 1999 and $3.0 million in
principal and $584,137 in accrued interest in April 2000. We currently
anticipate using a portion of the proceeds of this offering to repay the
remaining balance of this promissory note.
Net cash provided by financing activities during the year ended
December 31, 1999 was $48.8 million. Net cash provided by financing activities
primarily consisted of $2.5 million of cash proceeds from the issuance of
debentures in January 1999, $48.3 million in cash proceeds, net of fees and cash
issuance costs, from the issuance of Series A preferred stock in September 1999
including $252,000 cash received as a subscription for Series A preferred stock
that was issued subsequent to year end.
Although we currently have no material commitments for capital expenditures,
we anticipate a significant increase in our capital expenditures and lease
commitments during the year ending December 31, 2000, consistent with
anticipated growth in operations, infrastructure and personnel during 2000. This
will include approximately $20 million in anticipated expenditures on hardware
and software to build the network infrastructure necessary to service
anticipated Internet traffic during the first twelve months following our
product launch in September 2000. Additionally, in fiscal 2000, we expect to
spend approximately $1.4 million for costs associated with the build-out and
furnishing of our new corporate offices. Also, during the second half of fiscal
2000 we expect to spend approximately $125.0 million to manufacture and
distribute at least 20 million :C.R.Q. CD-ROMs and 12 million :Cue:C.A.T.
devices by the end of 2000.
In February 2000, we issued a letter of credit to Tandy Corporation for
approximately $15.5 million as security for our payment obligations to Tandy
Corporation for the manufacture of our :Cue:C.A.T. devices.
In April 2000, we issued 5,929,364 shares of Series B preferred stock to
various investors for aggregate consideration of approximately $41.7 million and
5,372,593 shares of Series C preferred stock to various investors for aggregate
consideration of approximately $56.6 million. We have used $6.3 million of the
proceeds to repay a portion of our outstanding indebtedness and intend to use
the remaining proceeds to pay expenses related to the manufacture and
distribution of our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices and for general
corporate purposes.
We currently anticipate that the net proceeds of this offering, together
with cash on hand and cash expected to be generated from operations, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for approximately the next 12 months after the date of this
prospectus. However, we may need to raise additional funds prior to the
expiration of such period if, for example, we accelerate the rollout of our
technology or pursue other acquisitions, or we pursue business or technology
acquisitions or experience operating losses that exceed our current
expectations. In any event, after such time we will need to raise significant
additional capital. If we raise such funds through the issuance of equity,
equity-related or debt securities, such securities may have rights, preferences
or privileges senior to those of the rights of our common stock and our
stockholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on acceptable terms when required,
or at all.
NON-CASH CHARGES
During the second quarter of the year ending December 31, 2000, we
anticipate recording a one-time charge to earnings in the amount of $37.2
million to reflect the difference between the respective issuance price of $7.03
and $10.54 and the estimated fair market value of the Series B and C preferred
stock, respectively, of $11.99, as determined by a contemporaneous independent
appraisal.
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During February and April 2000, we issued 1,128,000 and 595,000 stock
options, respectively, to various employees at exercise prices ranging from
$5.00 to $9.37 per option. The February options were issued at the fair market
value of the common stock on the date of grant. The April options were issued
below the fair market value on the dates of grant. We will recognize
compensation expense for the difference between the fair market value at the
dates of grant of $10.90 per share, as determined by a contemporaneous,
independent appraisal, and the exercise price on the dates of grant. The
compensation will be deferred and will be amortized ratably over the applicable
vesting period for the April stock options.
In April 2000, we issued two warrants to an affiliate of National
Broadcasting Company, Inc. to purchase 3,752,445 and 4,505,165 shares,
respectively, of common stock at per share exercise prices of $5.00 and $10.54,
respectively. We valued the warrants using the Black-Scholes option-pricing
model at $31.7 million and $31.4 million, respectively, based on the following
assumptions:
- volatility of 70.0%;
- risk free interest rate of 6.5%;
- expected life of five years; and
- zero dividend yield.
We recognized a one-time charge to earnings for the fair market value of
these warrants on the date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS
No. 133, which will be effective for us for the fiscal year and quarters
beginning after June 15, 2000, requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. During June 1999, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("FAS") No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT 133. The Statement
defers the effective date of FAS 133 to fiscal 2001. We are evaluating FAS 133
but do not expect the potential effect of adopting the provisions of SFAS
No. 133 to have a significant impact on our financial position, results of
operations, and cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the Commission.
SAB 101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosure related to revenue recognition policies. We
believe that SAB 101 will not have a material effect on our financial
statements.
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BUSINESS
OVERVIEW
We are a company whose technology allows media companies, manufacturers and
virtually all organizations to instantly and easily link their products with web
pages deep within websites. Until we release our technology, we believe that it
is not possible for these companies to realize the full value of their Internet
efforts, because their websites have to be entered through their front pages,
often making access to a desired web page time-consuming and difficult. Our
technology includes our :C.R.Q. software and our :Cue:C.A.T. device, which will
enable a broadcast viewer or reader of print media to immediately access
relevant information or conduct e-commerce activities on a web page deep within
a website without inputting lengthy website addresses or conducting
time-intensive website navigation. Our :C.R.Q. software will respond to a
digital signal, referred to as a ":Cue," currently transmitted through an audio
cable from any television or other electronic media source, and direct a user's
personal computer to open any specified web page regardless of how deep the web
page is within a website. Our :Cue:C.A.T., a hardware device similar in size to
a computer mouse, will enable an Internet user to scan our proprietary codes in
print media, referred to as "Print :Cues," or existing bar codes on consumer
products to link the user to a designated web page. In addition, each time a
user uses our technology to open a web page, our Virtual Network will border the
user's browser. The Virtual Network will display banner advertisements with
special vendor offers targeted to the preferences of each user and will also
have a series of tabs that, when clicked, will display information related to
the specified subject. Our :C.R.Q. and :Cue:C.A.T. technology and our Virtual
Network will be available free to consumers. We believe that our technology will
empower media companies and corporate advertisers to enhance their content and
to transform television broadcasts or other electronic media, print media or
items bearing Print :Cues or bar codes into powerful new advertising,
promotional or e-commerce opportunities.
We plan to achieve widespread distribution and adoption of our technology
through our strategic partnerships with major television and cable networks,
local station groups, magazine and newspaper publishers, merchants and direct
marketers. We intend to initiate a nationwide roll-out of our technology in
September 2000 and plan to distribute, free to the public, at least 50 million
:C.R.Q. CD-ROMs and 50 million :Cue:C.A.T. devices by the end of 2001.
MARKET OPPORTUNITY
The Internet has emerged as a global medium for communications, information
and commerce and is dramatically changing the competitive environment in which
companies operate. Companies are investing billions of dollars in the
development, execution and promotion of Internet strategies. The growth in both
the number of Internet users and the volume of e-commerce creates significant
challenges and opportunities for businesses across multiple industries.
Currently, we believe that advertising for websites through traditional mass
media is limited by an Internet user's ability to recall a website home page
address and, once at the home page, to navigate the website through perhaps
multiple web pages to reach the desired destination. The proliferation of
websites, as well as of web pages within each corporate website, creates a
fundamental challenge of facilitating interaction with Internet users. We
believe that our technology provides powerful solutions for a number of these
challenges as well as a means to take advantage of new opportunities.
BROADCAST MEDIA
Television is one of the most pervasive communications media in society
today. According to Nielsen Media Research, there were approximately 99 million
television households in the United States in August 1999. Television
advertising is generally considered to be one of the most effective methods of
building brand and general consumer awareness of products and services. McCann
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Erickson, Inc., a market research firm, estimates that $47 billion was spent on
television advertising in 1998. Approximately $91 billion of goods and services
were purchased through direct response television programming and advertising in
1998 according to the Direct Marketing Association. Nevertheless, traditional
television broadcasting, cable and direct broadcast satellite television systems
do not provide an integrated means for viewers to respond to programs and
advertisements without the addition of set-top boxes or other add-on
technologies.
Although television is pervasive and effective in reaching mass audiences,
television programmers face several challenges. Advertisers are increasingly
seeking highly targeted marketing programs that will generate measurable returns
on investment. This trend toward targeted marketing is intensifying the pressure
on television programmers to efficiently convert viewers into customers of its
advertising clients. In addition, as the reach and popularity of television has
grown, so too has the amount of programming available to viewers. As television
becomes more fragmented and the competition for viewers increases, networks and
other television programmers must find new ways to attract viewers and increase
viewer loyalty. Viewer loyalty determines network ratings that ultimately
determine advertising spot rates.
We believe that broadcasters view the Internet as an ideal interactive
medium through which they can provide consumers with greater content, appeal to
individualized interests and create opportunities for commerce. Broadcasters are
devoting increasing resources to website development, content and promotion. The
reach of television and growth of the Internet create an opportunity for
broadcasters to drive viewers either to their websites or to the websites of
their advertising clients. According to 24/7 Media, in January 1999, there were
33 million U.S. households connected to the Internet, of which 23 million
households had a computer in the same room as their television set. Furthermore,
18 million households, or 55% of all households connected to the Internet, use
the Internet while watching television.
PRINT MEDIA
Print media permeate the consumer world in the form of newspapers,
magazines, catalogs, coupons and direct mail and represent a larger share of
total advertising and marketing expenditures than broadcast media. According to
industry sources, advertising expenditures made in the following print media
categories in the U.S. in 1998 were:
- $87 billion on goods purchased from print catalogs;
- $40 billion on direct mail advertising;
- $44 billion on newspaper display and classified advertising; and
- $14 billion on advertising in trade and consumer magazines.
Traditional publishers are experiencing competitive pressures from the
electronic distribution of information and content. Information in print is
static and often out of date by the time it reaches the reader; as a result,
consumers increasingly access the Internet for more timely or relevant
information. We believe that publishers are concerned about the growing
competitive threat posed by web-based classified advertising. Classified
advertising accounted for approximately 40% of all advertising revenues for
newspaper publishers in 1998. Publishers are investing heavily in Internet
strategies to leverage content, create cross-selling synergies, maintain
readership and develop new revenue streams.
CONSUMER PRODUCTS
The use of bar codes on consumer products is widespread. These codes appear
on everything from food and other consumer products to drivers' licenses and
prescription drug containers. Currently, there are over 40 different bar code
topologies in commercial use, including UPC, ISBN and EAN. There
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are tens of millions of active bar codes in use. Currently, these bar codes are
used primarily to track inventory, assist in quality control, track product
pricing and perform other internal corporate tasks. To date, no technology has
been widely adopted that connects the millions of bar codes to the Internet.
USER WEB EXPERIENCE
While the growth of the Internet has attracted Internet users at an
unprecedented pace, the volume of online information has made it increasingly
difficult for users to navigate the Internet effectively and efficiently. The
total number of websites on the Internet grew 79% in 1999 to 3.6 million sites.
Internet users currently rely on Internet search engines or directories of
websites and web pages to locate information and make online purchases. Search
engines typically require users to construct keyword or complex search strings
that often result in hundreds or thousands of matches. In addition, we believe
that these methods often result in incomplete searches.
The difficulty of online navigation does not end when the desired website is
found. Once there, users often face the difficult task of searching an
overwhelming amount of information. Major corporate websites contain many layers
of web pages, which often make finding relevant information a frustrating and
time-consuming experience.
As websites continue to proliferate and grow in size and complexity, we
believe that users will increasingly need a quicker, more direct link to their
intended destinations. Search engines will continue to have useful applications
on the Internet, but we believe that users want a more precise tool that takes
them directly to a specific web page deep within a website.
THE DIGITALCONVERGENCE.:COM SOLUTION
Our technology enables companies to implement new Internet strategies that
enhance content, improve the targeting and overall effectiveness of advertising
and generate new revenue sources. Our technology enables users of virtually any
form of media or product to interact instantly and easily with the Internet to
obtain relevant information or conduct e-commerce activities. We believe that
our technology will provide the solution to the desire of broadcasters,
publishers, merchants and advertisers for a simple, cost-effective means of
leveraging the Internet across all forms of traditional media.
INTERNET ENHANCED BROADCASTING
Our :C.R.Q. software responds to a :Cue from any television or other mass
media source and directs a user's personal computer to open any specified web
page within a website. A broadcast can be Internet Enhanced by simply embedding
a :Cue in the broadcast. Unlike current television content and advertisements in
which a website address is briefly displayed on the television screen, Internet
Enhanced programming will load the web page on a user's web browser for
immediate access or store the web page address for later use. With our
technology, viewers will no longer need to recall and manually enter a website
address.
Broadcasters can now offer Internet Enhanced interactive programming to
their viewers and more valuable interactive ads to their advertisers and
advertising agencies. For example, news programming can become instantly
interactive, allowing local stations to enhance their content, capture Internet
advertising revenues and use their scale and promotional muscle to become
significant local portals. Our :C.R.Q. technology is designed to make television
programming more appealing to all viewers and particularly to younger
demographic groups which are highly attractive to advertisers and difficult to
reach. In an era of declining audience ratings and shares, we believe that we
offer broadcasters the means to increase revenue dramatically.
By placing :Cues in their television spots, advertisers can aggregate large
viewing audiences, direct them to specific web pages containing content designed
to reinforce their branding, and offer specific
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promotions and e-commerce opportunities. Accordingly, our technology will offer
a platform for broadcasters to enhance content and advertisers to deliver
immediate buying opportunities to their target consumers. As a result, we
believe broadcasters will be able to demand premium rates for Internet Enhanced
advertisements.
Our technology allows users to take advantage of enhanced content and
e-commerce opportunities without interrupting or overlaying the original
broadcast. These opportunities are experienced on the personal computer,
allowing viewers or groups of viewers to continue watching the broadcast without
disruption.
INTERNET ENHANCED PRINT
Our :Cue:C.A.T. device will enable an Internet user to scan our Print :Cues
to link the user to a particular web page designated by the publisher or
corporate advertiser. A print advertisement can be Internet Enhanced simply by
printing a Print :Cue on the advertisement, which, with a swipe of a :Cue:C.A.T.
device, can immediately direct the reader to in-depth information impractical to
include in the printed version. In this way, publishers gain a powerful new tool
to supplement existing printed content and drive traffic deep in their websites,
thereby increasing advertising revenue on the website and generating additional
e-commerce opportunities. Print advertisers, like their broadcast counterparts,
now have the ability to create ads that place the consumer one swipe away from
an e-commerce transaction.
We believe that newspapers, in particular, are concerned about the growing
competitive threat posed by web-based classified advertising and will now be
able to offer Internet Enhanced classifieds. For example, a Print :Cue placed in
a classified ad can take a reader directly to a web page showing photographs of
a house, car or boat advertised for sale or a job application form for an
advertised employment opportunity.
INTERNET ENHANCED PRODUCTS AND OTHER :CUE:C.A.T. APPLICATIONS
We are completing a massive database that links existing bar codes,
including UPC, ISBN, EAN and other codes, to websites, thereby enabling
manufacturers to utilize their existing product codes for advertising and other
marketing purposes. Our technology can transform any off-the-shelf product into
an interactive advertisement. For example, 15 billion soda cans on store shelves
around the world can be transformed into 15 billion interactive advertising,
promotional and e-commerce opportunities. Because our :Cue:C.A.T. technology
scans substantially all bar codes and will not require consumer goods
manufacturers to alter labels in any way, our solution is an inexpensive and
unobtrusive way of turning an existing label into a powerful new marketing tool.
Manufacturers will be able to offer alternative ideas for consumption of their
products and brand their other products on websites we link to their Internet
Enhanced bar codes. Most importantly, manufacturers will be able to update the
content on the website to ensure that their customers are never exposed to stale
information or expired promotional offers. Our technology can be easily applied
to a wide range of other products, such as prescription drug labels, bank
statements, insurance and brokerage statements, credit cards or instruction
manuals.
KEY ADVANTAGES
We believe that our technology solution represents a revolutionary approach
to marketing. Our solution provides the following key advantages:
- POWERFUL MEANS TO ENABLE MASS MEDIA TO LEVERAGE THE INTERNET. Our
technology allows television broadcasters, television and cable networks,
newspaper, magazine and catalog publishers and other mass media companies
to provide Internet Enhanced programming and advertising. Broadcasters and
publishers do not need to make extensive technology build-outs or
investments
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in order to use our :C.R.Q. or :Cue:C.A.T. technology. We believe that our
:C.R.Q. technology can greatly increase the effectiveness of advertising
in an era of declining market shares and ratings for television
broadcasters and many cable networks. Newspaper and magazine publishers
and direct marketers can deploy :Cue:C.A.T. devices to enhance the power
of advertisements, catalogs and articles to drive online direct sales.
Broadcasters, publishers, merchants and advertisers can use our technology
and our associated database and related services to monitor, measure and
analyze, on a real time basis, the number of confirmed advertising
deliveries for each broadcast of an advertisement and to refine
advertising campaigns quickly to target consumers more effectively.
- ATTRACTIVE TECHNOLOGY FOR INTERNET USERS. Our technology offers Internet
users numerous benefits and complements rather than modifies Internet user
behavior. We plan to make our technology widely available and to
distribute it free to the public. Users can download our :C.R.Q. software
or install a :C.R.Q. CD-ROM or :Cue:C.A.T. device onto a computer easily
and quickly. Once installed, our :C.R.Q. technology links a television
viewer to the Internet instantly upon transmission of an audio :Cue, and a
:Cue:C.A.T. device links a user to the Internet instantly upon the simple
swipe of the :Cue:C.A.T. device over an Internet Enhanced bar code or
Print :Cue on a newspaper, magazine, catalog, prescription drug container,
credit card statement, consumer product or other print advertising medium.
Users have full control over their use of our technology and therefore
view only the Internet-based information and advertising that interests
them. Internet users will benefit from our technology because it enables
them to execute easier, highly targeted Internet searches and navigation,
and allows them to experience Internet Enhanced television and print media
experiences and improved e-commerce opportunities. Furthermore, we believe
that our relationships with broadcasters, publishers, manufacturers and
other licensees of our technology will create applications that appeal to
Internet users and will increase the adoption and usage of our products.
- COMPELLING OPPORTUNITY FOR MERCHANTS. We provide merchants with an
innovative and efficient means to achieve their Internet objectives. Our
technology empowers merchants to instantly link virtually any type of
media or product to the merchants' websites at no cost to the public. We
have designed our :C.R.Q. software to empower merchants to utilize a
single :Cue to direct users to a web page deep within a website depending
on the particular Internet user's individual profile. Our technology takes
users directly to a transaction page without the trouble of clicking
through numerous links or needlessly searching through a website.
STRATEGY
Our objective is to establish our technology as the primary means for
television and cable networks, local television broadcasters, newspaper,
magazine and catalog publishers, other mass media companies, as well as
corporate advertisers, to link their their broadcasts, publications and products
to the Internet. To achieve this objective, we have adopted the following
strategies:
LEVERAGE MEDIA RELATIONSHIPS IN ORDER TO SUPPORT ADOPTION AND SUSTAIN OUR
FIRST MOVER ADVANTAGE
In order to build awareness of our brand and support adoption of our
products, we have established strategic relationships with several
well-established broadcasting and print media companies, including National
Broadcasting Company, Inc., Belo Corp., Forbes Inc., The Milwaukee Journal and
Wired Magazine. We expect that these relationships, taken together, will provide
us with broad media exposure in six of the top ten U.S. media markets and a
number of smaller markets, for total coverage of approximately 40% of U.S.
households. In addition, we are in discussions with broadcast media companies
covering approximately an additional 20% of U.S. households. By coordinating our
distribution strategy with the promotional, advertising and content support of
our media partners, we believe we will be able to attain widespread consumer
awareness of our brand and quickly build
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interest in our technology. Once consumers are introduced to our technology, we
believe they will quickly adopt the technology due to the ease with which it
allows users to access relevant, but difficult to find, websites. As consumer
and media partner usage increases, we believe that the familiarity and ubiquity
of our technology will deter consumers and media partners from adopting
competing products.
We intend to continue to pursue strategic relationships with companies that
can help us establish awareness of our brand and provide further penetration of
our selected media markets. As we continue discussions with additional partners,
we intend to convey to them the unique opportunities that our technology brings
to traditional media companies. Specifically, we intend to highlight that our
technology:
- allows advertisers to direct large numbers of viewers from television
broadcasts and print media directly to specific web pages; and
- provides incremental revenue opportunities through the sale of Internet
Enhanced advertising.
EXECUTE A NATIONWIDE ROLL-OUT OF OUR :C.R.Q. AND :CUE:C.A.T. TECHNOLOGY
We intend to widely distribute our products at no cost to consumers. To meet
this goal, we have entered into strategic relationships to assist in
distributing :C.R.Q. CD-ROMs and :Cue:C.A.T. devices. We have entered into an
agreement with Tandy Corporation in which Tandy has agreed to manufacture and
distribute our products through its over 7,000 owned or franchised RadioShack
retail outlets. Additionally, we have established a distribution arrangement
with Forbes Inc. in which Forbes has agreed to mail our :C.R.Q. and :Cue:C.A.T.
products to its approximately 750,000 subscribers. We have entered into similar
agreements with The Milwaukee Journal and Wired Magazine to distribute our
products to their subscribers. We intend to aggressively pursue additional
strategic partnerships that will assist us in executing the nationwide roll-out
of our :C.R.Q. and :Cue:C.A.T. technology.
ESTABLISH OUR TECHNOLOGY AS THE "SYSTEM STANDARD" ON PERSONAL COMPUTERS
We intend to establish "system standard" strategic relationships with major
computer manufacturers pursuant to which the manufacturers will agree to
pre-install our :C.R.Q. software on, and to include a :Cue:C.A.T. device with,
each personal computer sold. We believe that bundling our products with new
personal computers will expose a greater number of consumers to our technology
and will solidify our position as the market standard.
DEVELOP MULTIPLE REVENUE STREAMS FROM MULTI-BILLION DOLLAR ADVERTISING
MARKETS
Initially we intend to generate revenue through usage fees paid by our print
and television partners. Our technology is also well-suited for other
applications, including radio broadcasting, wireless communications and other
applications. In addition, we intend to derive revenue from banner
advertisements on our Virtual Network. As adoption of our :C.R.Q. and
:Cue:C.A.T. technology grows, we believe other practical applications of our
technology will emerge.
DEVELOP SOPHISTICATED RESEARCH AND DATA-MINING CAPABILITIES AS A VALUE-ADDED
SERVICE TO CUSTOMERS
We intend to require each user of our technology to provide basic individual
information to register and activate our :C.R.Q. and :Cue:C.A.T. technology. In
addition, we will be able to track how many people viewed or interacted with an
advertiser's website as a result of a :Cue. We plan to use this type of
information to develop a substantial database reflecting users' demographic
information, interests and preferences and Internet activity to generate summary
data reports for advertisers and merchants. These firms would use our reports
and data mining capabilities to tailor advertising campaigns, banner ads and
website content to appeal to targeted consumer segments. Under our
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privacy policy, we will not make individual user information available to
outside parties and will use the information internally only with a user's
express permission.
PURSUE INTERNATIONAL MARKETS
We believe that there is a substantial market for our technology outside the
United States. Our :C.R.Q. and :Cue:C.A.T. technology does not require foreign
language translations or technical modifications to be compatible with specific
broadcasting or recording technology used in foreign markets. Instead,
international broadcasters, publishers, advertisers and merchants can place
:Cues in any type of electronic or print medium and direct users to websites
using any language. We intend to expand our international presence aggressively
by adding sales and marketing personnel and establishing strategic relationships
with international partners to capitalize fully on international market
opportunities. We have hired a president for our International Group and
anticipate opening an office in London within the next several months. We intend
to commence international deployment of our technology during 2001.
RECENT DEVELOPMENTS
PREFERRED STOCK FINANCINGS.
In April 2000, we issued 5,929,364 shares of Series B preferred stock and
5,372,593 shares of Series C preferred stock to various investors, including
Belo Corp., The Coca-Cola Company, The E.W. Scripps Company, Spielberg/Katz
Associates, LLC, Tandy Corporation and Young & Rubicam, Inc., for aggregate
consideration of approximately $98.3 million. All outstanding shares of our
preferred stock will be automatically converted into our common stock upon
completion of this offering. We will recognize a one-time expense in the amount
of $37.2 million to reflect the difference between the issuance price of
$7.03 per share for the Series B preferred stock and $10.54 per share for the
Series C preferred stock and the estimated fair market value of the Series B and
C preferred stock of $11.99 per share, as determined by a contemporaneous,
independent appraisal.
In April 2000, we issued two warrants to an affiliate of National
Broadcasting Company, Inc. to purchase 3,752,445 shares and 4,505,165 shares, of
our common stock at per share exercise prices of $5.00 and $10.54, respectively.
We are required to issue additional warrants to National Broadcasting Company,
Inc.'s affiliate with a per share exercise price of $10.54, depending on the
number of shares we reserve for issuance under our 1999 Stock Option Plan. The
warrants will terminate in April 2005. We valued the warrants using the
Black-Scholes option pricing model at $31.7 million and $31.4 million,
respectively. We recognized a one-time charge to earnings for the fair market
value of these warrants on the date of grant.
PRODUCTS AND SERVICES
Our products and services consist of four integrated components:
- :C.R.Q., our software application;
- :Cue:C.A.T. device, a hardware device similar in size to a computer mouse;
- our Virtual Network, an advertising application that borders the Internet
user's browser window; and
- the aggregation, analysis and marketing of targeted consumer demographic
data collected through use of our :C.R.Q. and :Cue:C.A.T. technology and
our Virtual Network.
:C.R.Q.
Our patented :C.R.Q. software will respond to an audio signal, or :Cue, from
any television or other mass media source and direct a user's personal computer
to open any specified web page within a website, regardless of how deep the web
page is within that website. Our :C.R.Q. software will be available for
downloading onto a personal computer from our websites, our strategic partners'
websites
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and promotional CD-ROMs. When initially downloading :C.R.Q. software, a consumer
will be required to register as a user and will be offered incentives to provide
additional personal preference and demographic data. Depending on the amount of
information a user provides, a :Cue will direct a user's personal computer to a
designated web page of particular interest to that user. Our :C.R.Q. software
will listen for the :Cue, which television viewers will hear as a low level tone
one-third of a second in duration. An audio cable connecting the television and
the computer will transmit the signal to the computer. We have also designed a
wireless version of our :C.R.Q. technology in which a wireless transmitter and
receiver replace the audio cable, allowing wireless transmission. We expect to
make our wireless version of our :C.R.Q. software available for sale to
consumers in September 2000. A user may use our :C.R.Q. technology in several
ways. For example, if the user selects the active mode, the :C.R.Q. technology
will immediately launch the computer's web browser to retrieve the targeted web
page. A user may also choose to collect :Cues in a passive mode similar to
receiving e-mail messages and then automatically launch the web browser at a
later time chosen by the user. Our :C.R.Q. software is compatible with all
available web browsers.
:Cues can be embedded in any type of video or audio media, including
television broadcasts, CD-ROMs, DVDs and video tapes, to create Internet
Enhanced broadcasts and commercial advertisements. Through our :C.R.Q.
technology, television and cable broadcasts become an instant and direct link
and gateway to the Internet.
The following are examples of Internet Enhanced commercial advertising,
content and event promotion:
- COMMERCIAL ADVERTISING. A television commercial for a particular
automobile model will contain a :Cue that directs the viewer's web browser
to that model's specific web page within the manufacturer's website. The
web page will include detailed information concerning that model's
features and pricing, dealerships and related Internet sites.
- CONTENT. A local television station may differentiate its newscast with
Internet Enhanced weather reporting. While reporting the weather, the
station will broadcast a :Cue that directs the viewer's web browser to the
broadcaster's web page that includes detailed forecast information for
each city and town in the viewing area.
- EVENT PROMOTION. A television broadcast of a major league baseball game
will contain a :Cue that directs the viewer's web browser to the team's
website. The web page may contain information such as players' statistics
and functionality to purchase tickets and memorabilia.
:CUE:C.A.T.
Our :Cue:C.A.T. device, a hardware device similar in size to a computer
mouse, enables an Internet user to scan bar codes and Print :Cues included on
products and in printed material to link users to a particular website
designated by the manufacturer or publisher. The swipe of a :Cue:C.A.T. device
over a Print :Cue or bar code will direct a user to in-depth information
impractical to include in print copy. To install a :Cue:C.A.T. device, a user
simply installs our :C.R.Q. software and plugs the :Cue:C.A.T. device into his
personal computer.
Our :Cue:C.A.T. device reads substantially all known existing bar code
topologies as well as our proprietary codes that we generate to create Internet
Enhanced print media and products. Through our :Cue:C.A.T. technology,
publishers gain a powerful new tool to supplement existing printed content. In
turn, publishers will be able to attain higher advertising revenue on their
websites and potentially generate additional e-commerce opportunities. Marketers
will be able to transform the billions of consumer products on retailers'
shelves into powerful advertising, promotional and e-commerce opportunities.
Examples of the use of :Cue:C.A.T. devices include the following:
- A newspaper advertisement for a department store's clothing sale will
include a Print :Cue that directs readers' web browsers to the department
store's web page featuring photographs of a complete line of clothing
products and ordering information.
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- A book by a noted author will include a Print :Cue that directs readers to
the author's web page within the publisher's website that features
summaries of the author's other books and ordering information.
- An advertisement for a shampoo or the shampoo bottle itself will include a
bar code that directs the recipient's web browser to the advertiser's web
page containing an interactive form to request a free sample or provide a
coupon for the next purchase.
- A prescription drug bottle from a pharmacy will include a bar code that
directs the recipient's web browser to the drug manufacturer's web page
containing information regarding the illness for which the drug was
prescribed, side effects of the drug, and additional products that may be
useful in treating the illness.
- A credit card statement will include a bar code that directs the card
holder's web browser to the credit card company's web page where the card
holder can file a complaint with the credit card company regarding
erroneous charges or other types of disputes. Additionally, the bar code
could direct the card holder's web browser to the credit card company's
web page containing e-commerce possibilities or transaction history.
THE VIRTUAL NETWORK
Each time our :C.R.Q. software or :Cue:C.A.T. device launches a user's web
browser to a specific web page, an "L"-shaped area called the "Virtual Network"
will appear on the border of the user's Internet web browser window. The Virtual
Network will be populated with banner advertisements and a series of tabs that,
when clicked, will display information related to that subject. The Virtual
Network is only visible when an individual is using our technology. Banner
advertisements and tabs will be customized to each user's profile, displaying
information and promotional offers designed to strongly appeal to the
individual's interests. The Virtual Network will reach mass audiences, allowing
advertisers to offer complementary products via banner advertisements and
providing us with an additional channel to sell sponsorships and banner
advertisements. We believe that with modest usage of our :C.R.Q. and :Cue:C.A.T.
technology, the number of original ad impressions we would generate would exceed
those of the largest websites currently in operation.
DATABASE RESEARCH AND MARKETING
We intend to require each user of our technology to provide basic individual
information in order to register and activate our :C.R.Q. technology.
Additionally, we plan to offer promotional and other incentives to encourage
users to provide more detailed individual information. We plan to use this
information to develop a substantial database of demographic information
reflecting users' interests and preferences, tracking of Internet behavior
related to :Cues, and viewing patterns of Internet Enhanced content. This
information will be used to better tailor our Virtual Network banner ads and
special vendor offers to each user, as well as to generate summary demographic
data reports for advertisers and merchants. These firms would use our reports
and data mining expertise to tailor advertising campaigns, banner ads and
website content to appeal to targeted consumers. Under our privacy policy, we
will not make personal user information available to outside parties and will
only use the information internally with a user's express permission. We will
provide some summary demographic data to purchasers of :Cues free of charge. For
more complex or detailed demographic data, we intend to charge advertisers a
flat fee per month, plus a small charge per record.
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TECHNOLOGY INFRASTRUCTURE
SERVER NETWORK
We will use a network of approximately 25 servers to be housed in several
colocation facilities located throughout the United States. Currently, we have
an agreement with Exodus Communications to house our servers in its facilities.
We selected each of these facilities for its strategic location, network
availability and ability to meet the demands of a 24 hours a day, 7 days a week
environment. We are currently in discussions with a number of other web hosting
services companies, and we expect to finalize an agreement with them prior to
the effective date of this prospectus, at which time we intend to complete the
build-out of our entire server network.
In addition, we designed our system and network architecture specifically to
handle large numbers of simultaneous hits to our customers' website servers that
will result from the widespread use of our :C.R.Q. technology. Our large number
of strategically located servers, combined with ISP caching, provides several
levels of redundancy to prevent traffic bottlenecks and extreme loads on our
customers' website servers. As an additional precaution, we plan to enter into
agreements with content streaming companies that will help our clients and us
deliver content to Internet users more efficiently.
HARDWARE AND SOFTWARE INFRASTRUCTURE
We use Compaq Nonstop-TM- Himalaya-Registered Trademark- servers that offer
availability 24 hours a day, 365 days a year. These servers have the flexibility
to scale systems and solutions as desired and provide open access to our :C.R.Q.
application software.
Our software has been constructed in a highly scalable, easily upgradable
and low-maintenance manner. Developing our software with Microsoft's Visual
Studio-Registered Trademark- C++ offers greater design and maintenance
flexibility and the abundance of trained personnel available in the marketplace.
PROCESS
After our :C.R.Q. software on a user's computer identifies a :Cue from a
media source, the :Cue is then sent to our server network where it is translated
into a URL. This translation process includes both a direct tie in and a lookup
for a more specific website address based on demographic information. Once the
URL is determined, it is transferred back to the Internet user's computer
operating system where the appropriate registered program will launch and
connect to the specified URL. Our technology not only allows the URLs to launch
web browsers to web pages, but it also allows the URLs to launch other
applications.
MARKETING AND PROMOTION
We have designed our marketing and promotion strategy to attain widespread
adoption of our technology by Internet users and to establish strong
partnerships with major networks, local station groups, cable networks,
publishers, merchants and direct marketers. We expect to employ multiple
channels to achieve our goals, including:
USER ADOPTION
- MASS DISTRIBUTION. We intend to initiate a nationwide roll-out of our
technology in the United States beginning in September 2000 and plan to
distribute free to the public at least 50 million :C.R.Q. CD-ROMs and
50 million :Cue:C.A.T. devices by the end of 2001. We intend to distribute
our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices without charge to the public
through the over 7,000 RadioShack retail outlets nationwide, through our
strategic partners and through our websites. For example, Forbes Inc. has
agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its
approximately 750,000 subscribers prior to mailing its September 2000
issue of BEST
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OF THE WEB magazine. Also, Wired Magazine has agreed to mail :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices to its approximately 375,000 subscribers,
and The Milwaukee Journal has agreed to mail :Cue:C.A.T. devices to
subscribers of the Milwaukee Journal Sentinel.
- LEVERAGE STRATEGIC RELATIONSHIPS. We have established strategic
relationships with a major television network, local station groups, cable
networks, publishers and direct marketers. We expect our strategic
partners to promote our technology to consumers by marketing their
programming and printed materials as being Internet Enhanced in order to
increase viewership and readership. We also anticipate that our strategic
partners will aggressively market our technology to their advertisers in
an effort to increase advertising revenues. To assist our strategic
partners in their efforts, we have limited the number of audio :Cues that
will be broadcast in any particular market in order to create demand and
enhance the value of these :Cues.
- TRADITIONAL ADVERTISING. We intend to begin a program of print, radio and
television advertising to create public awareness of our technology. We
will produce television commercials which will be placed in media by our
strategic partners, affiliate kits given to our licensees, and an
infomercial which we will produce and place in appropriate media. We
intend to utilize NET TALK LIVE! THE INTERNET TALK SHOW, which reaches
approximately 550 million homes per week, to develop public interest and
knowledge of our :C.R.Q. and :Cue:C.A.T. technology.
- PROMOTIONS. We intend to engage in commercial giveaways sponsored both by
us and local sponsors and to institute :C.R.Q. Club, an organization of
Internet users who utilize our technology. We anticipate that :C.R.Q. Club
members will receive free gifts from some of our strategic partners and
that membership will encourage consumer loyalty to us.
COMMERCIAL ADOPTION AND MAINTENANCE
- LEVERAGE SENIOR MANAGEMENT RELATIONSHIPS. We have an experienced
management team that has many established relationships with broadcasters,
publishers, manufacturers and direct marketers. We intend to leverage
these relationships to encourage the adoption of our technology, as well
as to establish additional strategic partnerships. See
"Management--Directors and Executive Officers."
- SALES TEAM. In order to assist our strategic partners in executing a
successful launch strategy and to ensure Internet user acceptance, we are
building a diverse and highly skilled executive team to manage the sales
and implementation of our technology by various media-related companies.
The media team consists of executives from the broadcasting, cable, print
and advertising disciplines. In addition to guiding the implementation of
production procedures and the integration of our technology into existing
business practices, our team will provide insight and guidance regarding
local events and roll-outs to maximize Internet user acceptance. We expect
to form five media teams to oversee the sales process for broadcast and
cable networks, local television stations, newspapers and magazines,
studios and production companies and advertising agencies. Each team will
consist initially of a primary manager, as well as up to four account
executives, depending on the needs of our customers.
- STRATEGIC ACCOUNT MANAGEMENT TEAM. We are forming a team to manage the
accounts of our customers. We are employing people with substantial
experience in each market targeted by us, including television
broadcasting, print media, direct marketing and cable networks, to assist
our customers in developing compelling content for their websites. Each of
our customers will be assigned to a strategic account manager. Currently,
we have two strategic account managers and we expect to hire an additional
twelve to fifteen strategic account managers over the next 18 months.
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- INTERACTIVE DATABASE. We are completing a massive database that links
existing UPC, ISBN, EAN and other codes to web pages, thereby enabling
manufacturers to utilize their existing product codes for advertising
purposes. We intend to activate substantially all of these bar codes when
our :Cue:C.A.T. technology is launched and will provide manufacturers with
one free year in which to evaluate the results. At the end of the first
year, we intend to provide manufacturers with the results to demonstrate
the effectiveness of our technology.
- TRADE SHOWS. In order to maintain a high level of visibility among media
partners and corporate clients, we expect to participate in three to four
trade events per year, such as the National Association of Television
Programming Executives conference.
STRATEGIC RELATIONSHIPS
We believe that our strategic relationships provide us with significant
opportunities to gain market acceptance for our technology. We maintain
strategic relationships with, among others, the following companies:
BELO CORP. We entered into an agreement with Belo Corp. on September 29,
1999, under which we granted Belo Corp.'s newspapers and television stations an
exclusive license to deploy our technology for local programming in their
markets. Belo Corp. currently operates 18 television stations in 16 markets
reaching 14% of the total U.S. television audience and owns 7 newspapers in 7
markets.
FORBES INC. We entered into an agreement with Forbes Inc. on January 13,
2000, to launch Internet Enhanced content and advertising in its September 2000
issue of BEST OF THE WEB magazine. Forbes Inc. has agreed to promote this issue
as the first Internet Enhanced business magazine and thereafter to Internet
Enhance FORBES magazines for a one-year period. Forbes Inc. has also agreed to
mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its approximately 750,000
subscribers prior to mailing its September 2000 issue of BEST OF THE WEB
magazine. The term of the agreement ends on August 31, 2001.
NATIONAL BROADCASTING COMPANY, INC. We entered into an agreement with
National Broadcasting Company, Inc. on April 18, 2000, to license our :C.R.Q.
software to National Broadcasting Company, Inc. and certain of its affiliates
for a term ending on March 1, 2002. As part of the agreement, we granted
National Broadcasting Company, Inc.'s owned and operated television stations the
exclusive right to use :Cues in local programs, except in the Dallas market
where Belo Corp. has exclusive rights to use our :C.R.Q. software. The term of
the agreement ends 18 months after our launch date.
TANDY CORPORATION. We entered into an agreement effective on December 6,
1999, with our stockholder Tandy Corporation to act as a product sourcing
manager for the production of our :Cue:C.A.T. devices. Our principal retail
distribution channel for :Cue:C.A.T. devices will be Tandy's owned or franchised
RadioShack retail outlets. As our manufacturing and distribution partner, Tandy
offers substantial advertising strength, a 25,000 person sales force, which will
be trained to conduct :Cue:C.A.T. device demonstrations, and over 7,000 owned or
franchised RadioShack retail outlets located within five minutes of
approximately 94% of the U.S. population. The term of the agreement ends on
December 31, 2001, and will automatically renew for successive one-year terms
unless it is terminated by either party. The agreement can be terminated by
either party at any time upon 90 days prior notice.
WIRED MAGAZINE. We entered into an agreement on February 16, 2000, with
Wired Magazine to launch Internet Enhanced content and advertising in three
consecutive issues commencing with its October 2000 issue. Wired Magazine has
agreed to promote the October 2000 issue as Internet Enhanced and has also
agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its approximately
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375,000 subscribers prior to mailing the October 2000 issue. The term of the
agreement ends on December 31, 2000.
THE MILWAUKEE JOURNAL. We entered into an agreement on February 8, 2000,
with Journal Sentinel Incorporated, an affiliate of The Milwaukee Journal,
granting Journal Sentinel Incorporated the non-exclusive right to acquire Print
:Cues for use within its various publications. Journal Sentinel Incorporated,
Inc. has also agreed to mail :Cue:C.A.T. devices to the subscribers of The
Milwaukee Journal Sentinel. We also entered into an agreement on February 8,
2000, with Journal Broadcast Group, Inc., an affiliate of The Milwaukee Journal,
granting Journal Broadcast Group, Inc. the non-exclusive right to acquire :Cues
for use within television programs and station promotions in the Milwaukee,
Wisconsin area. The terms of these agreements end 18 months after our launch
date.
YOUNG & RUBICAM. By letter agreement, dated September 29, 1999, with
Young & Rubicam, Inc., a principal stockholder of ours, we granted Young &
Rubicam an exclusive right to resell our :C.R.Q. software and :Cue:C.A.T.
devices in the United States for the period of six months after the public
launch of this technology in the United States. The economic terms of this right
are to be negotiated in good faith by Young & Rubicam and us. In addition, we
granted to Young & Rubicam an exclusive right for a period of six months from a
date to be mutually determined by Young & Rubicam and us to resell this
technology outside the United States. The terms of this right are to be
negotiated in good faith by Young & Rubicam and us. We also agreed that, on
economic terms to be negotiated by Young & Rubicam and us, Young & Rubicam will
act as our marketing and sales agent with respect to the deployment of our
technology to our advertising customers or clients.
By a separate letter agreement, also dated September 29, 1999, we granted
Young & Rubicam a right of first refusal on our marketing and communication
assignments to third parties, provided that Young & Rubicam possesses core
competency to handle these assignments. The terms of each assignment are to be
negotiated by Young & Rubicam and us. In addition, we granted Young & Rubicam a
right to receive a percentage of revenues paid to us by clients or licensees of
Young & Rubicam. This percentage will equate to a "finders" or referral fee
customary for blanket licensing agreements or a commission or mark-up on the
Internet Enhancement of individual advertisements that is customary in the
broadcast or entertainment industries. We also agreed to recommend Young &
Rubicam as our preferred provider of marketing and communications services in
response to inquiries from our potential licensees or customers or from those of
Young & Rubicam. The rights described in this paragraph will no longer exist
when Young & Rubicam ceases to own Series A preferred stock, or at least 50% of
the common stock into which Young & Rubicam's Series A preferred stock is
converted upon completion of this offering.
MANUFACTURING AND DISTRIBUTION
Tandy Corporation has agreed to act as a product sourcing manager for the
production of our :Cue:C.A.T. devices until December 31, 2001, and then for
successive one-year terms if the agreement is not terminated by either Tandy or
us. Tandy currently utilizes two manufacturing facilities in Asia, with which it
has manufacturing subcontracts, for our manufacturing needs. Tandy has advised
us that they have the capacity to devote additional manufacturing facilities to
manufacture our :Cue:C.A.T. devices. Our :C.R.Q. CD-ROMs will be manufactured in
at least four locations in the United States. Our :C.R.Q. CD-ROMs and
:Cue:C.A.T. devices will be distributed without charge to consumers. In some
cases, we expect that the costs of manufacturing and/or distributing :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices will be borne or defrayed by our strategic
partners and by advertisers who advertise directly on :Cue:C.A.T. devices.
Our principal retail distribution channel for :Cue:C.A.T. devices and
:C.R.Q. CD-ROMs will be Tandy's over 7,000 owned or franchised RadioShack retail
outlets nationwide. We will also distribute :Cue:C.A.T. devices and :C.R.Q.
software directly to consumers, principally through promotions by our
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strategic partners and other advertisers and merchants. For example,
Forbes Inc. has agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its
approximately 750,000 subscribers prior to mailing its September 2000 issue of
BEST OF THE WEB magazine. We are in discussions with an OEM manufacturer to
bundle our :C.R.Q. software application and :Cue:C.A.T. devices with new
personal computers. We intend to initiate a nationwide roll-out of our
technology beginning in September 2000 and plan to distribute free to consumers
at least 20 million :C.R.Q. CD-ROMs and 12 million :Cue:C.A.T. devices by the
end of 2000. By the end of 2001, we plan to distribute free to consumers at
least an additional 30 million :C.R.Q. CD-ROMs and 38 million :Cue:C.A.T.
devices.
PATENTS AND PROPRIETARY RIGHTS
We rely on a combination of patent, trademark, trade secret, and copyright
laws and contractual agreements to protect our proprietary technology and
intellectual property rights, and our success and ability to compete are
substantially dependent upon our internally developed technology and know-how.
We currently own U.S. Patent No. 5,907,793, entitled "Telephone-based
Interactive Broadcast or Cable Radio or Television Methods and Apparatus," U.S.
Patent No. 5,925,865, entitled "Automated Check Verification and Tracking
System" and U.S. Patent No. 5,594,226, entitled "Automated Check Verification
and Tracking System Using Bar Code Information." In addition, we have filed
approximately 50 other patent applications in the United States, and these
patent applications are currently pending in the United States Patent and
Trademark Office (the "USPTO"). We have also filed foreign counterpart
applications for some of our pending U.S. applications. Some of these foreign
applications have been filed as PCT patent applications, while others have been
filed with the European Patent Office. Additional patent applications have been
filed in South Korea, Japan and Taiwan. To date, we have filed approximately ten
foreign patent applications. Generally, under the laws of most, if not all, of
the countries where we have filed patent applications, a pending patent
application affords very little, if any, legal protection to the invention
described in the application, as legal protection to the invention described in
the patent application only arises after a particular country's patent office
approves the patent application and allows the application to issue into a
patent. There can be no assurance that our pending patent applications will ever
issue into enforceable patents. Also, once a patent application issues into a
patent, there can be no assurance that our patent rights will afford any
significant degree of protection or provide us with a competitive advantage. In
particular, there can be no assurance that any such patents will not be
challenged, invalidated or circumvented in the future.
Failure to maintain the protection afforded by our patents may have a
material adverse effect on our future revenues and ability to become profitable.
Further, there can be no assurance that our patents will ultimately be found to
be valid or enforceable, or that our patent rights will deter others from
developing substantially equivalent or competitive products. In addition, it may
be necessary for us to undertake infringement actions against others. The
defense and prosecution of patent litigation is costly and involves substantial
commitments of management time. Adverse determinations in patent proceedings to
which we are a party could subject us to significant liabilities to third
parties and require us to seek licenses from third parties. Although patent and
intellectual property disputes are often settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to us on satisfactory terms or at all.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent us from manufacturing and
selling our products in one or more markets and would have a material adverse
effect on us.
We also seek to protect our proprietary technology, in part, through
confidentiality and non-disclosure agreements with employees, consultants and
other parties. Our confidentiality agreements with our employees and consultants
also contain industry standard provisions requiring such individuals
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to assign to us without additional consideration any inventions conceived or
reduced to practice by them while employed or retained by us, subject to
customary exceptions. There can be no assurance that our confidentiality and
non-disclosure agreements with employees, consultants and others will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets will not otherwise become known to or independently developed by
competitors.
We have filed applications for registration with the USPTO for several of
the trademarks we use or plan to use in our business. Some of the marks we are
attempting to register with the USPTO include DigitalConvergence-TM-,
DigitalConvergence.Com-TM- and the :C-TM- symbol. We are attempting to register
these marks in association with various products and services provided by us. In
addition, we have filed applications to register these marks mentioned above, as
well as other marks, in the European Community and Japan. We plan on pursuing
the trademark registration applications we have already filed and filing
additional applications as we develop new trademarks. Although we have filed
trademark applications for these marks, we have not received official word that
any of the trademarks described in the various applications will ultimately
become our registered trademarks. While our trademark applications are being
reviewed by the various countries' trademark offices, many events and
circumstances could arise that would prevent a given mark from ultimately being
registered or from being registered in association with all of the products and
services described in the original trademark application.
We have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademarks or copyrighted material,
to third parties. While we attempt to ensure that the quality of our brand is
maintained by such licensees, there can be no assurance that such licensees will
not take actions that would materially adversely affect the value of our
proprietary rights or reputation.
We also rely on certain technology that we license from third parties,
including the suppliers of the operating systems and financial and reporting
system for our business. There can be no assurance that these third-party
technology licenses will continue to be available to us on commercially
reasonable terms. The loss of such technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, which could materially adversely affect our business, results of
operations and financial condition.
We hold the Internet domain name "digitalconvergence.com." Under current
domain name registration practices, no one else can obtain an identical domain
name, but they can obtain a similar name, or the identical name with a country
designation. The relationship between regulations governing domain names and the
laws protecting trademarks and similar proprietary rights is evolving. Domain
names are regulated by Internet regulatory bodies, while trademarks are
enforceable under local national law. In addition, the regulation of domain
names in the United States and in foreign countries is subject to change. There
are plans to establish additional top-level domains, appoint additional domain
name registrars and modify the requirements for holding domain names in
countries in which we conduct business, and we could be unable to prevent
third-parties from acquiring domain names that infringe or otherwise decrease
the value of our domain names or trademarks.
Like other technology-based businesses, we face the risk that we will be
unable to protect our patents and other intellectual property and proprietary
rights, and the risk that we will be found to have infringed the proprietary
rights of others. For an expanded discussion of these risks, see "Risk Factors."
GOVERNMENT REGULATION
We are subject to varying degrees of federal, state, and local regulation,
as well as U.S. and state statutes and common law. The Federal Communications
Commission has established regulations, that, among other things, set
installation and equipment standards for communications systems. Additionally,
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the television industry is subject to extensive regulation at the federal, state
and local levels. Legislative and regulatory proposals under consideration by
Congress and federal agencies may materially affect that industry and our
ability to obtain distribution of our :C.R.Q. and :Cue:C.A.T. technology to
television broadcasters.
As a result of the increasing popularity and use of the Internet, the
Internet is receiving increasing legislative scrutiny. Applicability to the
Internet of existing laws and regulations governing issues such as intellectual
property ownership, copyrights and other intellectual property issues, taxation,
libel, obscenity and consumer privacy is uncertain. For example, in 1996
Congress enacted the Communications Decency Act, which, among other things,
purported to impose criminal penalties on anyone who distributes "obscene" or
"indecent" materials over the Internet. A number of states have adopted or
proposed similar legislation. Although certain provisions of the act have been
held to be unconstitutional, the manner in which the act and similar existing or
future federal and state laws will ultimately be interpreted and enforced and
their effect on our operations cannot yet be fully determined. Such laws could
subject us to substantial liability. Restrictive laws or regulations could also
dampen the growth of the Internet generally and decrease the acceptance of the
Internet as an advertising medium, and could, thereby, have a material adverse
effect on us.
In addition, it is possible that laws and regulations may be modified or
adopted at the federal, state and local levels related to issues such as
consumer privacy, defamation, network access, pricing, taxation, content
regulation, characteristics and quality of products and services, advertising
and intellectual property ownership and infringement. The application of
modified or new legislation or regulations to our products and services could
expose us to liability, increase our cost of doing business, and adversely
affect consumer or advertiser acceptance of our product. In sum, new or modified
legislation or regulation could have a material adverse effect on us.
To the extent that we do business in foreign countries or otherwise fall
within the jurisdiction of foreign countries, we could become subject to foreign
regulation and laws. Certain countries, such as some of the members of the
European Community, have passed Internet privacy and consumer protection laws
which are stricter than those in the United States. The application of foreign
legislation or regulations to our products and services could expose us to
liability, increase our cost of doing business, and adversely affect consumer or
advertiser acceptance of our product.
To our knowledge, there are currently no investigations, inquiries,
citations, fines or allegations of violations or noncompliance against us
pending before any government agencies or third parties. Whether noncompliance
may be discovered at some future time is unknown. Although the likelihood of
this risk is currently unknown, if noncompliance were to be found, it could
result in civil or criminal penalties, including monetary fines and injunctions,
as well as negative publicity. Such penalties could have a material adverse
effect on us.
COMPETITION
We believe that our technology is unique and innovative. As a result, we
believe that we currently have no direct competition because of the low cost and
ease of use of our technology and our use of two devices rather than
multi-tasking on a television. However, we have identified several related
technologies in the area of media convergence. In broadcasting and electronic
media, interactive set-top box companies, including WebTV Networks, Inc., Wink
Communications, Inc., WorldGate Communications, Inc. and MicroCast, Inc.,
attempt to link television programming and the Internet. We believe that our
technology should be perceived as complementary and not competitive to these
products and services because it can be used in conjunction with set-top boxes.
However, we also believe that our "two-device" solution is more likely to be
widely accepted by the public than a "one-box" solution because our solution
does not require the public to change habits or make additional monetary
investments. Viewers can continue to receive one-way information via the
passive, public
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medium of their televisions, while using their personal computer to establish
interactive one-on-one relationships with advertisers and content providers.
In print media, companies such as BarPoint.com, Inc., Digimarc Corp.,
FastFrog.com, NeoMedia Technologies, Inc. and Code Corporation have created
technology enabling users to use scanners to access relevant web pages. We
believe that these technologies will not compete effectively with our technology
for a number of reasons, including our superior product features, our low
manufacturing costs and deployment to the public without charge.
We expect that competition will increase as other established and emerging
companies enter the Internet convergence market and as new products and
technologies are introduced. Increased competition may result in price
reductions and loss of market share, either of which could materially adversely
affect us. See "Risk Factors--Competition."
FACILITIES
We lease 38,000 square feet in Dallas, 3,120 square feet in Addison, Texas,
and occupy approximately 5,500 square feet in New York. We believe that our
current facilities are adequate to meet our needs for the foreseeable future.
EMPLOYEES
As of March 31, 2000, we had 94 full-time employees and 28
part-time/temporary employees. Of our full-time employees, 30 are in sales and
marketing, 23 are in research and development and 41 are in general and
administrative positions. Most of our part-time/temporary employees assist us in
matching bar codes to websites. We consider our employee relations to be good.
LEGAL PROCEEDINGS
We are a co-defendant, with Infotainment Telepictures, Inc. in a lawsuit
pending in state court in Dallas, Texas. The plaintiff, Nissi Cosmetics, Inc.,
alleges that Infotainment Telepictures breached a 1997 contract for the creation
of two websites, two infomercials, and two direct response spots for the
advertising and marketing of certain of Nissi Cosmetics' body color, or
self-tanning, products. Nissi Cosmetics also alleges we were the "alter ego" of
Infotainment Telepictures in committing the alleged breaches. Nissi Cosmetics
seeks recovery of $585,000 paid to defendants, and unspecified damages for "lost
profits." We filed a general denial and intend to vigorously defend the matter.
Under the terms of our asset purchase agreement with Infotainment Telepictures,
Infotainment has agreed to indemnify us for any costs, expenses, liabilities or
other losses we may incur in connection with this matter.
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this prospectus, we are not aware of any legal proceedings pending or
threatened that we expect would have a material adverse effect on us.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our
executive officers and directors as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- -----------------------------------------------------
<S> <C> <C>
J. Jovan Philyaw............... 35 Chairman of the Board and Chief Executive Officer
Michael N. Garin............... 53 President, Chief Operating Officer and Director
Patrick V. Stark............... 45 Executive Vice President and Director
Scott P. Carlin................ 44 President of the Media Group
Gregory D. Lerman.............. 54 President of the Interactive Group
Douglas L. Davis............... 33 President of the Technology Group
Stuart B. Graber............... 46 President of the International Group
Donald E. Welsh................ 56 President of the Publishing Group
William S. Leftwich............ 50 Vice President, Chief Financial Officer and Secretary
Blaine L. Thacker.............. 56 Chief Strategy Officer
Jeffrey A. Glickman............ 48 President of DigitalDemographics.:Com Inc.
John G. Huncke................. 47 Executive Vice President of the Media Group
William O. Hunt................ 66 Director
Michael H. Jordan.............. 63 Director
Jack A. Turpin................. 69 Director
</TABLE>
J. Jovan Philyaw founded us in September 1998. Prior to founding us,
Mr. Philyaw created NET TALK LIVE! THE INTERNET TALK SHOW in September 1996 and
served as its Executive Producer and host from September 1996 to February 2000.
Since December of 1997, Mr. Philyaw has served as the President and Chief
Executive Officer of Infotainment Telepictures, Inc., the predecessor company
that produced NET TALK LIVE! THE INTERNET TALK SHOW, before we acquired these
predecessor rights. Mr. Philyaw served as Executive Vice President and Chief
Marketing Officer of Internet America, an Internet service provider, from
September 1995 to September 1996.
Michael N. Garin joined us as our President and Chief Operating Officer in
August 1999. From 1989 to 1999, Mr. Garin served as the global head of Media and
Communications for Furman Selz and ING Barings LLC after ING Barings acquired
Furman Selz in October 1997. Mr. Garin also served on the management committee
and board of directors of Furman Selz from 1993 to 1997. Mr. Garin holds a
masters degree in Philosophy and Arts from the New School of Social Research,
New York, and an A.B. in Economics from Harvard College.
Patrick V. Stark joined us as our Executive Vice President on December 31,
1999. Mr. Stark became one of our directors in September 1998. Mr. Stark was a
shareholder/director at the law firm of Kane, Russell, Coleman & Logan, P.C. in
Dallas, Texas, from January 1992 until he joined us. Mr. Stark holds a law
degree from Georgetown University Law Center and a B.A. in Spanish from Arizona
State University.
Scott P. Carlin joined us as the President of our Media Group in August
1999. From June 1995 until he joined us, he served as Executive Vice President
of Warner Bros. Domestic Television Distribution and Executive Vice President,
Telepictures Distribution. From March 1991 to June 1995, Mr. Carlin served as
Senior Vice President, Sales, Warner Bros. Domestic Television Distribution.
Mr. Carlin holds a B.A. in communications from the University of Colorado.
Gregory D. Lerman joined us as the President of our Interactive Group in
August 1999. Prior to joining us, Mr. Lerman served as President of E-Commerce
for Paxson Communications, which owns and operates television broadcast
stations, from February 1999 to October 1999 and Executive Vice President and
General Manager of Valuevision International, an integrated direct marketing
company,
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from January 1998 to February 1999. From January 1997 to September 1997,
Mr. Lerman served as President and Chief Operating Officer of Kent and Spiegel
Direct, a television direct marketing firm. Within one year after Mr. Lerman
left Kent and Spiegel Direct, the company filed for bankruptcy. From
January 1995 to December 1996, Mr. Lerman was retired. From October 1989 to
December 1994, he served as Executive Vice President of Fingerhut
Companies, Inc., a catalog direct marketer. Mr. Lerman holds a B.A. in history
from the University of Minnesota.
Douglas L. Davis joined us as the President of our Technology Group in
December 1999. Prior to joining us, he was employed by Internet America, an
Internet service provider, where he served as Executive Vice President and Chief
Operating Officer from July 1996 to December 1999 and as Chief Technology
Officer from January 1996 to July 1996. Mr. Davis was head of research and
development at Internet America from November 1995 to January 1996. From July
1990 to November 1995, Mr. Davis was a Director of Computer Operations for the
School of Engineering and Applied Science of Southern Methodist University.
Stuart B. Graber joined us as the President of our International Group in
December 1999. Mr. Graber served as Chief Executive of Music Choice Europe, a
digital audio company part-owned by Time Warner, British Sky Broadcasting, Sony
and EMI, from October 1993 to December 1999. Mr. Graber holds a masters degree
in international communications from Brooklyn College and a B.A. in journalism,
broadcasting and administration from the University of Maryland.
Donald E. Welsh joined us as the President of our Publishing Group in
January 2000. Prior to joining us, Mr. Welsh, who has been in publishing for
thirty years, was Chairman of Group XXVII Communications from August 1997 to
December 1999. From March 1995 to March 1997, he was Executive Vice President of
Marvel Publications. From March 1990 to March 1996, he served as chairman of the
Welsh Publishing Group. Mr. Welsh holds an A.B. from Columbia University and a
J.D. from Cleveland Marshall School of Law.
William S. Leftwich joined us as our Vice President, Chief Financial Officer
and Secretary in May 1999. From March 1995 to May 1999, he served as Chief
Financial Officer for ViewCast.com (formerly MultiMedia Access Corporation), a
company that develops and sells streaming video products and desktop video
conferencing products. From January 1993 to March 1995, he served as Chief
Financial Officer of Integrated Security Systems, Inc., a provider of fully
integrated building security systems. Mr. Leftwich holds a B.B.A. in Accounting
from Texas A&M University and is a certified public accountant.
Blaine L. Thacker joined us as our Chief Strategy Officer in October 1999.
Prior to joining us, Mr. Thacker served as Executive Vice President of Sterling
Communications, Inc., an international systems integration firm, from August
1998 to September 1999. Prior to that, Mr. Thacker was the Vice President of
Sales and Marketing for Digital Network Access, an Internet service provider,
from September 1997 to August 1998. He served as President of Choice Com, Inc.,
a competitive local exchange carrier, from March 1997 until August 1997 after
acting as British Telecom's Vice President of Global Sales for its Information
Technology outsourcing business from May 1993 until January 1997. Mr. Thacker
has over 30 years of executive level experience with companies such at AT&T,
General Electric, and Oracle. He holds an M.B.A. from Western New England
College and a B.B.A. in marketing and finance from the University of Oklahoma.
Jeffrey A. Glickman joined us as the President of
DigitalDemographics.:Com Inc., our subsidiary that collects and sells
demographic data, in December 1999. Prior to joining us, Mr. Glickman served as
President of World Class Marketing, a database marketer, from March 1995 to
December 1999. Mr. Glickman holds a Ph.D. in reproductive endocrinology from the
University of Western Ontario, an M.Sc. in embryology from McGill University and
a B.S. in marine biology from McGill University.
John G. Huncke joined us as the Executive Vice President of our Media Group
in January 2000. Prior to joining us, Mr. Huncke served as General Counsel of
Universal Pictures from June 1998 to
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December 1999. From January 1995 to June 1998, Mr. Huncke served as General
Counsel and Chief Operating Officer of Polygram Television, a television
production and distribution company. From January 1987 to January 1995,
Mr. Huncke served as Executive Vice President and General Counsel for ITC
Entertainment Group, a motion picture production and distribution company.
Mr. Huncke holds a J.D. from the University of Southern California and a B.S.
from the University of Notre Dame.
William O. Hunt has served as one of our directors since January 1999.
Mr. Hunt has served as Chairman of the Board of Internet America since May 1995.
Mr. Hunt has also served as Chairman of the Board of Intellicall Inc., a company
that provides telephone network switching and other services, since 1992.
Mr. Hunt served as President and Chief Executive Officer of Intellicall from
December 1992 to May 1998. Mr. Hunt also currently holds directorships in Andrew
Corporation, American Homestar Corporation and Mobility Electronics, Inc.
Mr. Hunt holds an M.B.A. and a B.B.A. from the University of North Texas.
Michael H. Jordan has served as one of our directors since August 1999.
Mr. Jordan has served as Chairman of Luminant Worldwide Corporation, a leading
provider of Internet and electronic commerce professional services, since
September 1999. He also serves as Chairman and Chief Executive Officer of
EOriginal Inc., an electronic commerce company that provides secure documents.
Mr. Jordan retired in December 1998 as Chairman and Chief Executive Officer of
CBS Corporation (formerly Westinghouse Electric Corporation), positions he had
held since June 1993. Mr. Jordan is also a member of the Boards of Directors of
Aetna Inc., Dell Computer Corp. and Marketwatch.com. Mr. Jordan is a member of
the President's Export Council; is the Chairman of the U.S.-Japan Business
Council; is the Chairman of The College Fund/UNCF; and is the Chairman of the
Policy Board of the Americans for the Arts.
Jack A. Turpin has served as one of our directors since January 1999.
Mr. Turpin founded Hall-Mark Electronics Corporation, an electronics
distribution firm, in 1962 and served as its Chairman of the Board until its
sale in 1993. Mr. Turpin holds a B.S. in electrical engineering from Rice
University.
Pursuant to an amendment to our certificate of incorporation that will
become effective upon consummation of the offering, our Board of Directors will
be classified into three classes of directors, denoted as Class I, Class II and
Class III. Messrs. Hunt and Garin will be Class I directors, Messrs. Turpin and
Stark will be Class II directors, and Messrs. Philyaw and Jordan will be
Class III directors. The term of the Class I directors will expire at the 2001
annual meeting of our stockholders, the term of the Class II directors will
expire at the 2002 annual meeting of our stockholders and the term of the
Class III directors will expire at the 2003 annual meeting of our stockholders.
BOARD COMPENSATION
Directors who are also our officers, employees or affiliates do not receive
compensation for their services as directors. Each non-employee director is
entitled to an award of stock options to purchase 15,000 shares of our common
stock, when he becomes a non-employee director, at an exercise price equal to
the fair market value of our common stock on the date of grant. Additionally,
each non-employee director in office following each annual stockholders' meeting
is entitled to an award of stock options to purchase 8,000 shares of common
stock at an exercise price equal to the fair market value of our common stock on
the date of grant. In each case, the stock options granted to the non-employee
directors are fully vested on the date of grant. Directors are entitled to
reimbursement of their reasonable out-of-pocket expenses in connection with
their travel to and attendance at meetings of the board of directors or
committees thereof.
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INDEMNIFICATION OF DIRECTORS
We have entered into agreements to indemnify our directors and officers.
Under these agreements, we are obligated to indemnify our directors and officers
to the fullest extent permitted under Delaware General Corporate Law for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by them in any action or proceeding arising out of their services as a
director or officer. We believe that these agreements are necessary to attract
and retain qualified directors and officers.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
compensation of our chief executive officer and our other most highly paid
executives serving in such capacity at the end of 1999 whose total annual salary
and bonus exceeded $100,000 in 1999. These three individuals are referred to in
this prospectus as our "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) (#) ($)
- --------------------------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
J. Jovan Philyaw ........................ $230,500 $150,000 $ -- $ -- $ --
Chief Executive Officer and
Chairman of the Board
Michael N. Garin ........................ 100,000 -- -- 2,677,500 --
President and Chief Operating Officer
Scott P. Carlin ......................... 62,500 150,000 -- 1,102,500 18,900(1)
President--Media Group
</TABLE>
- ------------------------
(1) This number represents reimbursement of Mr. Carlin for moving expenses.
The following table provides information regarding stock options granted to
our Named Executive Officers during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------- GRANT DATE
PERCENT OF VALUE
TOTAL OPTIONS ------------
NUMBER OF GRANTED TO EXERCISE PRICE GRANT DATE
SECURITIES UNDERLYING EMPLOYEES IN OR BASE PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED (#) FISCAL YEAR ($/SHARE) DATE VALUE ($)(1)
- ---- --------------------- ------------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
J. Jovan Philyaw............. -- -- $ -- -- $ --
Michael N. Garin............. 157,500(2) 2.0% 3.31 8/2/09 123,323
2,520,000(3) 33.2% 3.31 8/16/09 1,973,160
Scott P. Carlin.............. 1,102,500(3) 14.5% 3.31 8/16/09 863,258
</TABLE>
- ------------------------
(1) The present value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: dividend yield of 0% for all years; expected volatility of
0.10%; risk-free interest rate of 5.40% to 6.10%; and expected life of five
years.
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(2) 25% of the stock options became exercisable on August 2, 1999, the date of
grant, and 25% of the stock options will become exercisable on each
anniversary of the date of grant until they become fully exercisable.
(3) 25% of the stock options became exercisable on August 16, 1999, the date of
grant, and 25% of the stock options will become exercisable on each
anniversary of the date of grant until they become fully exercisable.
The following table provides summary information with respect to stock
options held by our Named Executive Officers as of December 31, 1999. The value
of unexercised in-the-money options is based on an assumed initial public
offering price of $ , less the exercise price payable for the shares.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF THE UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Jovan Philyaw...... -- $ -- -- -- $ $
Michael N. Garin...... -- -- 669,375 2,008,125
Scott P. Carlin....... -- -- 275,625 826,875
</TABLE>
COMMITTEES OF THE BOARD
Our board of directors has established an audit committee and a compensation
committee. Our board has no nominating committee or other committee performing
similar functions at this time.
AUDIT COMMITTEE. The audit committee is comprised of Messrs. Hunt, Jordan
and Turpin. The audit committee reports on its activities to the board of
directors and is responsible for reviewing:
- the scope and timing of the audit and non-audit services performed by our
independent accountants;
- the appropriateness of our accounting policies;
- the adequacy of our financial controls; and
- the reliability of the financial information we report to the public.
COMPENSATION COMMITTEE. The compensation committee is comprised of
Messrs. Hunt, Jordan and Turpin. The primary functions of the compensation
committee are to:
- provide a general review of our compensation and benefit plans to
determine if they meet corporate objectives;
- evaluate and make recommendations regarding our chief executive officer's
compensation; and
- review our chief executive officer's recommendations regarding the:
- compensation of all of our other officers;
- granting of awards under our benefit plans; and
- adoption of, and changes to, our major compensation policies and
practices.
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<PAGE>
EMPLOYMENT AGREEMENTS
MICHAEL N. GARIN. On August 16, 1999, we entered into a three-year
employment agreement with Michael N. Garin which provides that he will serve as
our President and Chief Operating Officer. The employment agreement provides for
annual compensation of $400,000, which amount will be increased upon completion
of this offering to an amount commensurate to that paid by comparable companies
at comparable stages of development. Mr. Garin's employment agreement provides
for an annual bonus at the discretion of the board. In addition, the employment
agreement provides that Mr. Garin is eligible to participate in all benefit
programs for which employees and/or senior executives are generally eligible.
Under his employment agreement, we may terminate Mr. Garin's services for cause
or without cause. If Mr. Garin is terminated without cause or if we breach the
employment agreement, Mr. Garin will be entitled to receive his base salary for
the remainder of his term of employment in a lump sum payment. The employment
agreement also contains confidentiality provisions.
SCOTT P. CARLIN. On August 16, 1999, we entered into an employment
agreement with Scott P. Carlin which, as amended, provides that he will serve as
President of our Media Group for three years. We paid Mr. Carlin a $150,000
signing bonus. Mr. Carlin's employment agreement provides for annual
compensation of $250,000, which amount will be increased to a level negotiated
in good faith upon completion of this offering. Mr. Carlin's employment
agreement provides for an annual bonus at the discretion of the board. In
addition, his employment agreement provides that he is eligible to participate
in all benefit programs for which employees and/or senior executives are
generally eligible. Under his employment agreement, we may terminate
Mr. Carlin's services for cause or without cause. If Mr. Carlin is terminated
without cause or if we breach the employment agreement, Mr. Carlin will be
entitled to receive his base salary for the remainder of his term of employment
in a lump sum payment. Mr. Carlin's employment agreement also contains
confidentiality provisions.
STOCK OPTION PLAN
We adopted our 1999 Stock Option Plan on September 1, 1999. A total of
12,375,000 shares of common stock are authorized for issuance under the plan, as
amended. The plan provides for grants of incentive stock options to our
employees, including officers and employee-directors, and for grants of
nonstatutory stock options to our employees, consultants and nonemployee
directors. The purposes of the plan are:
- to attract and retain the best available personnel for positions of
substantial responsibility;
- to provide additional incentive to our employees and consultants; and
- to promote the success of our business.
Our compensation committee administers the plan. Our compensation committee
will designate the individuals to receive the options, the number of shares
subject to options, and the terms and conditions of each option.
While our compensation committee determines the terms of options granted
under the plan, the term of any incentive stock option cannot exceed ten years
from the date of grant and any incentive stock option granted to an employee who
possesses more than ten percent of the total combined voting power of all
classes of our shares within the meaning of Section 422(b)(6) of the Internal
Revenue Code cannot be exercisable after the expiration of five years from the
date of grant.
While the compensation committee determines the exercise price of options
granted under the plan, an option's exercise price cannot be less than the fair
market value of a share of common stock on the date the option is granted,
subject to adjustments. Further, the exercise price of any incentive stock
option granted to an employee who possesses more than ten percent of the total
combined voting power of all classes of our shares within the meaning of
Section 422(b)(6) of the Internal Revenue
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<PAGE>
Code must be at least 110% of the fair market value of the underlying share at
the time the option is granted. The exercise price of options granted under the
plan will be paid in full in a manner prescribed by our compensation committee.
EMPLOYEE STOCK PURCHASE PLAN
We adopted our Employee Stock Purchase Plan in April 2000. A total of
1,000,000 shares of common stock are authorized for issuance under the plan. The
plan provides for the grant of stock options to certain eligible employees. The
purpose of the plan is to provide eligible employees with an incentive to
advance the interests of the company by providing an opportunity to purchase
stock of the company at a favorable price. The plan is administered by our
compensation committee.
Any eligible employee may elect to participate in the plan by authorizing
our compensation committee to make payroll deductions to pay the exercise price
of an option at such time and in such manner as prescribed by our compensation
committee. Such payroll deduction may be a specific amount or a designated
percentage to be determined by the employee, but such specific amount may not be
less than an amount established by us and such designated percentage may not
exceed an amount of eligible compensation established by us from which the
deduction is made. In no event will an employee be granted an option under the
plan that would permit him to purchase stock with a fair market value in excess
of $25,000, or to purchase more than 10,000 shares, in a period established by
us.
There will be two six-month offering periods in each calendar year. The date
of grant and the date of exercise for the first option period is January 1 and
June 30, respectively, and the date of grant and date of exercise for the second
option period is July 1 and December 31, respectively. The first offering period
of the plan will commence on the date we close this offering, and will conclude
on December 31, 2000. The exercise price of options granted under the plan is an
amount equal to the lesser of 85% of the fair market value of the stock on the
date of exercise or on the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, Messrs. Hunt, Jordan and Turpin are members of our compensation
committee. Mr. Hunt is the general partner of B&G Partnership, Ltd. and BCG
Partnership, Ltd., which are both our stockholders. Mr. Turpin is the sole
managing director of JAT FIVE, LTD., one of our stockholders. See "Certain
Relationships and Related Transactions."
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PREFERRED STOCK FINANCINGS
The following information summarizes private placement transactions in which
we sold shares of preferred stock to our directors and 5% stockholders and
persons and entities associated with our directors and those stockholders. Each
share of Series A preferred stock will convert into 630 shares of common stock
and each share of Series B and Series C preferred stock will convert into one
share of common stock upon completion of this offering.
SERIES A FINANCING. From September 29, 1999 to January 14, 2000, we issued
15,966 shares of Series A preferred stock to various investors, including
Young & Rubicam, Inc., Belo Enterprises, Inc., DING.com LLC and ING Capital LLC,
for aggregate consideration of approximately $50.3 million, or $3,150 per share.
A trust of our President of the Publishing Group, Donald E. Welsh, invested
$200,000 in our Series A preferred stock through DING.com LLC. In addition, the
spouse of our president, Michael N. Garin, invested $500,000 in our Series A
preferred stock through DING.com LLC.
SERIES B FINANCING. In April 2000, we issued 5,929,364 shares of Series B
preferred stock to various investors, including Belo Corp., Young & Rubicam,
Inc., The Coca-Cola Company, The E.W. Scripps Company, Spielberg/Katz
Associates, LLC and Tandy Corporation, for aggregate consideration of
approximately $41.7 million, or $7.03 per share.
SERIES C FINANCING. In April 2000, we issued 5,372,593 shares of Series C
preferred stock to various investors, including Belo Corp., Young & Rubicam,
Inc., The Coca-Cola Company, The E.W. Scripps Company and Tandy Corporation, for
aggregate consideration of approximately $56.6 million, or $10.54 per share.
The following table summarizes the private placement transactions in which
we sold preferred stock to our directors and 5% beneficial stockholders and
persons and entities affiliated with our directors and those stockholders.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
---------------------------------
DIRECTORS, 5% BENEFICIAL SERIES A SERIES B SERIES C
STOCKHOLDERS AND AFFILIATED ENTITIES PREFERRED PREFERRED PREFERRED
- ------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Belo Corp................................................... 3,970 1,422,474 1,897,532
Young & Rubicam, Inc........................................ 6,350 380,986 508,222
</TABLE>
WARRANTS
We issued a warrant, dated September 29, 1999, to Belo Enterprises, Inc., an
affiliate of Belo Corp., to purchase 124,740 shares of our common stock at an
exercise price of $5.00 per share. The warrants will terminate on September 29,
2004. See "Business--Strategic Relationships."
We issued two warrants in April 2000, to an affiliate of National
Broadcasting Company, Inc., our strategic partner, to purchase 3,752,445 shares
and 4,505,165 shares, respectively, of our common stock at per share exercise
prices of $5.00 and $10.54, respectively. We are required to issue additional
warrants to National Broadcasting Company, Inc.'s affiliate with a per share
exercise price of $10.54, depending on the number of shares we reserve for
issuance under our 1999 Stock Option Plan. The warrants will terminate in
April 2005. See "Business--Strategic Relationships."
STOCK PURCHASE AGREEMENT
We entered into a stock purchase agreement, dated September 29, 1999, under
which we sold the Series A preferred stock. Under the stock purchase agreement,
we agreed:
- to provide periodically financial and other information to the holders;
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<PAGE>
- not to engage in certain transactions without the prior consent of the
holders of at least two-thirds of the outstanding shares of Series A
preferred stock;
- as long as at least 1,900 shares of Series A preferred stock remain
outstanding, at any time that Michael Jordan is not our director, to
nominate to our board of directors one nominee designated by the majority
of the holders of such shares of our Series A preferred stock; and
- to give each investor in our Series A preferred stock preemptive rights
for new issuances of any shares of our capital stock, excluding issuances
of common stock in this offering (these investors waived this right in
connection with the issuance of the Series B preferred stock and Series C
preferred stock).
These provisions in the stock purchase agreement were terminated in April 2000.
STOCKHOLDERS AGREEMENTS
We entered into an agreement among stockholders, dated January 28, 1999,
with J. Jovan Philyaw, our Chairman of the Board and Chief Executive Officer;
JAT III, L.L.C.; B&G Partnership, Ltd.; and BCG Partnership, Ltd. William Hunt,
our director, is the general partner of B&G Partnership, Ltd. and BCG
Partnership, Ltd. Jack A. Turpin, also our director, is the sole managing
director of JAT III, L.L.C. This agreement was terminated on September 29, 1999.
We entered into an amended and restated stockholders agreement, dated
April 25, 2000, with J. Jovan Philyaw, Michael N. Garin, our President and Chief
Operating Officer, Patrick V. Stark, our Executive Vice President, an affiliate
of the National Broadcasting Company, Inc., B&G Partnership, Ltd., BCG
Partnership, Ltd., JAT FIVE, LTD., for whom Jack A. Turpin is the sole managing
director, Young & Rubicam, Inc., Belo Enterprises, Inc. and A.H. Belo
Foundation, affiliates of Belo Corp., and each of the other holders of preferred
stock. The stockholders agreement contains:
- a right of first refusal, exercisable by the stockholders who are parties
to the stockholders agreement and then us, to purchase any of our
securities proposed to be transferred by Messrs. Philyaw, Garin or Stark
and the right of those other stockholders to participate on a pro rata
basis in any transfer of securities by Messrs. Philyaw, Garin or Stark;
- our agreement to nominate a representative of the preferred stock holders
to our board of directors if, at any time, Michael Jordan is not our
director and at least 3,791,900 shares of our preferred stock remain
outstanding;
- our agreement to provide financial and other information to the holders;
- our agreement not to engage in certain transactions without the prior
consent of the holders of at least two-thirds of each class of preferred
stock; and
- preemptive rights for each preferred stockholder for new issuances of
shares of our capital stock, excluding issuances of common stock in this
offering.
This agreement will automatically terminate upon the completion of this
offering.
REGISTRATION RIGHTS AGREEMENTS
We entered into a registration rights agreement, dated January 28, 1999,
with JAT III, L.L.C., B&G Partnership, Ltd. and BCG Partnership, Ltd. This
agreement was terminated on September 29, 1999.
An affiliate of the National Broadcasting Company, Inc. and holders of our
preferred stock and other stockholders, including B&G Partnership, Ltd., BCG
Partnership, Ltd., JAT FIVE, LTD., Belo Enterprises, Inc., Young & Rubicam, Inc.
and A.H. Belo Foundation are entitled under an amended
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<PAGE>
and restated agreement with us, dated April 25, 2000, to the following
registration rights for the shares of common stock held by them or issuable upon
conversion of our preferred stock or upon exercise of outstanding warrants to
purchase our common stock:
- at any time after 180 days from the date of completion of this offering,
the holders of these registrable securities, other than the affiliate of
the National Broadcasting Company, Inc., may require, on three occasions
only, that we use our best efforts to register for public resale at least
ten percent of the aggregate amount of registrable securities that were
outstanding on April 25, 2000;
- at any time after 180 days from the date of completion of this offering,
the affiliate of the National Broadcasting Company, Inc. may require, on
up to three occasions only, that we use our best efforts to register for
public resale at least 15% of the aggregate amount of common stock
issuable upon full exercise of the affiliate of the National Broadcasting
Company, Inc.'s warrants;
- until the tenth anniversary of this offering, if we register any common
stock, either for our own account or for the account of other security
holders, the holders of registrable securities are entitled to include
their shares of common stock in the registration, subject to the ability
of the underwriters to limit the number of shares included in the offering
in view of market conditions; and
- the holders of registrable securities with a fair market value of not less
than $10,000,000 may require us to use our best efforts to register the
securities on a Form S-3 registration statement or any successor form
after we become eligible to use the form.
In most cases, we will bear all registration expenses other than
underwriting discounts and commissions. All demand registration rights terminate
when a holder is entitled to sell all of its registrable securities under
Rule 144(k) under the Securities Act.
BELO CORP. AGREEMENT
By letter agreement dated September 29, 1999, with Belo Corp., a strategic
partner and principal beneficial stockholder, we have granted Belo Corp.'s
newspapers and television stations an exclusive license to deploy our technology
in their markets. We intend to enter into licensing agreements with each of Belo
Corp.'s newspapers and television stations under which we will be paid a
licensing fee, the amount of which will be negotiated in good faith, provided
that each newspaper and television station will be entitled to the lowest
licensing fee paid to us by other newspapers or televisions stations having
comparable circulation levels or broadcasting in comparable markets. Belo Corp.
has agreed to advertise our technology in its newspapers and on its television
stations.
YOUNG & RUBICAM, INC. AGREEMENT
By letter agreement dated September 29, 1999, with Young & Rubicam, Inc., a
principal stockholder of ours, we granted Young & Rubicam an exclusive right to
resell our :C.R.Q. software and :Cue:C.A.T. devices in the United States for the
period of six months after the public launch of this technology in the United
States. The economic terms of this right are to be negotiated in good faith by
Young & Rubicam and us. In addition, we granted to Young & Rubicam an exclusive
right for a period of six months from a date to be mutually determined by
Young & Rubicam and us to resell this technology outside the United States. The
terms of this right are to be negotiated in good faith by Young & Rubicam and
us. We also agreed that, on economic terms to be negotiated by Young & Rubicam
and us, Young & Rubicam will act as our marketing and sales agent with respect
to the deployment of our technology to our advertising customers or clients.
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<PAGE>
By a separate letter agreement, also dated September 29, 1999, we granted
Young & Rubicam a right of first refusal on our marketing and communication
assignments to third parties, provided that Young & Rubicam possesses core
competency to handle these assignments. The terms of each assignment are to be
negotiated by Young & Rubicam and us. In addition, we granted Young & Rubicam a
right to receive a percentage of revenues paid to us by clients or licensees of
Young & Rubicam. This percentage will equate to a "finders" or referral fee
customary for blanket licensing agreements or a commission or mark-up on the
Internet Enhancement of individual advertisements that is customary in the
broadcast or entertainment industries. We also agreed to recommend Young &
Rubicam as our preferred provider of marketing and communications services in
response to inquiries from our potential licensees or customers or from those of
Young & Rubicam. The rights described in this paragraph will no longer exist
when Young & Rubicam ceases to own Series A preferred stock, or at least 50% of
the common stock into which Young & Rubicam's Series A preferred stock is
converted upon completion of this offering.
ISSUANCE OF COMMON STOCK AND DEBENTURES
On January 28, 1999, we sold 15,750,000 shares of common stock for a cash
purchase price of $2,500 and issued 8.0% Debentures, Series 1999A with an
aggregate principal amount of $2,500,000. In particular, we sold:
- 3,150,000 shares of common stock and $500,000 in aggregate principal
amount of the debentures to B&G Partnership, Ltd.;
- 3,150,000 shares of common stock and $500,000 in aggregate principal
amount of the debentures to BCG Partnership, Ltd.; and
- 9,450,000 shares of common stock and $1,500,000 in aggregate principal
amount of the debentures to JAT III, L.L.C. These shares have been
transferred to JAT FIVE, LTD., an affiliate of JAT III, L.L.C.
No interest payments are required to be paid on the debentures through the
second anniversary of their issuance unless otherwise determined by our board of
directors. Any unpaid interest will then be added to the principal amount of the
debentures. Any remaining principal balance and any accrued and unpaid interest
will be due and payable in full upon completion of this offering. In
April 2000, we fully paid the principal amount and all accrued interest on each
of the debentures.
EMPLOYEE STOCKHOLDERS AGREEMENT
We entered into a stockholders agreement, dated January 29, 1999, with
various stockholders, including William S. Leftwich, our Chief Financial
Officer. This agreement provides that the parties to the agreement, should they
desire to sell their stock, shall first offer the stock to us. This agreement
will automatically terminate upon the completion of this offering.
OTHER TRANSACTIONS
On January 4, 1999, we completed the acquisition of the rights to produce
our television show NET TALK LIVE! THE INTERNET TALK SHOW and certain
proprietary technology rights from Infotainment Telepictures, Inc. for a
promissory note with a principal amount of $8,000,000. We also assumed certain
liabilities in connection with this acquisition, including post-closing
liabilities associated with the Nissi Cosmetics litigation. Infotainment
Telepictures, Inc. has agreed to indemnify us for any costs, expenses,
liabilities or other losses we may incur in connection with the Nissi Cosmetics
litigation. See "Business--Legal Proceedings." J. Jovan Philyaw was the
President and Chief Executive Officer of Infotainment Telepictures, Inc., a
company owned by his father. The promissory note bears interest at 6.0% per
annum. No interest payments are required to be made through the second
anniversary of the
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<PAGE>
note. Any unpaid interest will then be added to the principal amount of the
note. Any remaining principal balance and any accrued and unpaid interest will
be due and payable in full upon completion of this offering. See "Use of
Proceeds." We paid $1,500,000 and $3,000,000 of the principal amount of the note
in 1999 and 2000, respectively. We paid $584,137 in accrued interest on the note
in 2000.
In connection with our acquisition of Infotainment Telepictures, Inc. in
January 1999, we assumed a loan payable to Jack A. Turpin in the principal
amount of $452,900, plus accrued and unpaid interest of $6,819. In January 2000,
Mr. Turpin loaned us an additional $147,090 for operating capital expenditures.
We repaid the principal amount of the loans, plus $10,770 in interest, in
January 2000.
We entered into a stock purchase agreement, dated May 17, 1999, with William
S. Leftwich under which Mr. Leftwich purchased 472,500 shares of our common
stock. We have the right, subject to limitations, to repurchase Mr. Leftwich's
shares purchased under the agreement if he ceases for any reason to be employed
by us.
Each of our executive officers and employees has entered into a proprietary
rights and information agreement regarding the ownership of inventions developed
in his or her capacity as our employee and the confidentiality of our
proprietary information. Each of our directors has entered into a nondisclosure
agreement.
Patrick V. Stark was a shareholder/director of the law firm of Kane,
Russell, Coleman & Logan, P.C. until December 31, 1999 and became of counsel as
of January 1, 2000. During 1999 and during the first quarter of 2000, we paid
Kane, Russell, Coleman & Logan, P.C. $135,000 and $21,000, respectively, for
legal services.
We have entered into indemnification agreements with each of our executive
officers and directors.
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SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our common stock as of , 2000, after giving effect to
the automatic conversion of 11,317,923 shares of outstanding preferred stock
into 21,360,537 shares of common stock upon completion of this offering and as
adjusted to reflect the sale of the common stock in this offering by:
- each security holder known by us to own beneficially more than 5% of our
common stock;
- each of our directors;
- each of our executive officers; and
- all directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Unless otherwise indicated, the persons or
entities included in this table have sole voting and investment power with
respect to all the shares of common stock beneficially owned by them, subject to
applicable community property laws. The number of shares beneficially owned by a
person includes shares of common stock that are subject to stock options or
warrants that are either currently exercisable or exercisable within 60 days
after , 2000. These shares are also deemed outstanding for the
purpose of computing the percentage of outstanding shares owned by the person.
These shares are not deemed outstanding, however, for the purpose of computing
the percentage ownership of any other person.
<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK
BENEFICIALLY OWNED
SHARES OF COMMON STOCK ----------------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE THE OFFERING AFTER THE OFFERING
- ------------------------ ---------------------- ------------------- ------------------
<S> <C> <C> <C>
Belo Corp.(1)........................... 5,945,847 % %
JAT FIVE, LTD.(2)....................... 9,765,000 % %
National Broadcasting Company,
Inc.(3)............................... 8,257,610 % %
Young & Rubicam, Inc.(4)................ 4,889,708 % %
J. Jovan Philyaw........................ 40,950,000 % %
Michael N. Garin(5)..................... 1,438,750 % %
Patrick V. Stark(6)..................... 730,000 * *
Gregory D. Lerman(7).................... 551,250 * *
Scott P. Carlin(7)...................... 551,250 * *
Douglas L. Davis(7)..................... 117,810 * *
Stuart B. Graber(7)..................... 157,500 * *
Donald E. Welsh(8)...................... 7,112 * *
William S. Leftwich..................... 472,500 * *
Blaine L. Thacker....................... -- * *
Jeffrey A. Glickman..................... -- * *
John G. Huncke.......................... -- * *
William O. Hunt(9)...................... 6,615,000 % %
Michael H. Jordan(7).................... 78,750 * *
Jack A. Turpin(10)...................... 9,765,000 % %
All directors and executive officers as
a group (15 persons).................. 61,434,922 % %
</TABLE>
- ------------------------
* Less than one percent (1%).
(1) Consists of (i) 5,267,773 shares issuable upon conversion of the shares of
our preferred stock held of record by Belo Enterprises, Inc., (ii) 553,334
shares issuable upon conversion of the shares of
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our preferred stock held of record by A.H. Belo Foundation and (iii)
124,740 shares issuable upon exercise of outstanding warrants held by Belo
Enterprises, Inc. Belo Enterprises, Inc. and A.H. Belo Foundation are both
indirect wholly-owned subsidiaries of Belo Corp. The address of Belo Corp.
is Silverside Carr Executive Center, 501 Silverside Road, Suite 401,
Wilmington, Delaware 19809.
(2) Address: 8201 Preston Road, Suite 310, Dallas, Texas 75225.
(3) Consists solely of shares issuable upon exercise of outstanding warrants
held by an affiliate of the National Broadcasting Company, Inc. National
Broadcasting Company, Inc.'s address is 30 Rockefeller Plaza, 46th Floor,
New York, New York 10112.
(4) Address: 285 Madison Avenue, New York, New York 10017.
(5) Consists solely of shares issuable upon exercise of stock options that have
already vested or will vest within 60 days. This number does not include
shares of common stock which may be attributable to Torunn Garin, the wife
of Mr. Garin, due to her passive investment in DING.com LLC, a stockholder
of ours. Mr. Garin disclaims beneficial ownership of these shares. See
"Certain Relationships and Related Transactions".
(6) Includes 257,500 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(7) Consists solely of shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(8) Consists solely of shares issuable upon conversion of 7,112 shares of
Series B preferred stock owned by Bourne Welsh, the wife of Mr. Welsh. This
number does not include shares of common stock which may be attributable to
Mr. Welsh, due to his trust's passive investment in DING.com LLC, a
stockholder of ours. Mr. Welsh disclaims beneficial ownership of these
shares.
(9) Consists of 3,150,000 shares held of record by B&G Partnership, Ltd. and
3,465,000 shares held of record by BCG Partnership, Ltd. Mr. Hunt is the
general partner of each of these partnerships. Mr. Hunt disclaims
beneficial ownership of these shares.
(10) Consists of 9,765,000 shares held of record by JAT FIVE, LTD. Mr. Turpin
serves as the sole managing director of this entity. Mr. Turpin disclaims
beneficial ownership of these shares.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of shares of common stock,
par value $0.01 per share, and 27,000,000 shares of preferred stock, par value
$0.01 per share. 16,000 shares of preferred stock are designated as Series A
preferred stock, 12,100,000 shares of preferred stock are designated as
Series B preferred stock, and 3,300,000 shares of preferred stock are designated
as Series C preferred stock. As of the date of this prospectus,
(i) shares of common stock were issued and outstanding, (ii) 15,966
shares of Series A preferred stock were issued and outstanding, (iii) 5,929,364
shares of Series B preferred stock were issued and outstanding, and
(iv) 5,372,593 shares of Series C preferred stock were issued and outstanding.
In addition, (i) shares of common stock were reserved for issuance
under our stock option plan, (ii) shares of common stock were
reserved for issuance under our stock purchase plan, (iii) shares of
common stock were reserved for issuance upon exercise of outstanding warrants,
and (iv) 21,360,537 shares of common stock were reserved for issuance upon
conversion of all outstanding shares of preferred stock. All of our outstanding
shares of preferred stock will be converted automatically into common stock upon
completion of this offering.
The following description of our capital stock and certain provisions of our
certificate of incorporation and bylaws are summaries and are qualified by
reference to our certificate of incorporation and bylaws, copies of which have
been filed with the SEC as exhibits to the registration statement of which this
prospectus is a part. The descriptions of the common stock and preferred stock
reflect changes to our capital structure that will occur upon the closing of the
offering in accordance with the terms of the certificate of incorporation.
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. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends that may be declared by our board of directors,
subject to any preferential dividend rights of outstanding preferred stock. In
the event of our liquidation, dissolution or winding up, holders of common stock
will be entitled to receive proportionately any of our assets remaining after
the payment of liabilities and subject to the prior rights of any outstanding
preferred stock. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. Our outstanding shares of common stock are, and
the shares offered by us in this offering will be, when issued and paid for,
fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into 21,360,537 shares of common stock and automatically
returned to our authorized, unissued and undesignated shares of preferred stock.
Thereafter, our board of directors will have the authority, without further
action by the stockholders, to issue up to 27,000,000 shares of preferred stock
in one or more series and to designate the rights, preferences, privileges and
restrictions of each series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting power
of the common stock, impairing the liquidation rights of the common stock or
delaying or preventing our change in control without further action by the
stockholders. We have no present plans to issue any shares of preferred stock
after the completion of this offering.
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WARRANTS
As of the date of this prospectus, there were outstanding warrants to
purchase shares of our common stock at a weighted average exercise
price of $ per share. See "Certain Relationships and Related Transactions."
REGISTRATION RIGHTS
An affiliate of the National Broadcasting Company, Inc., holders of our
preferred stock and other stockholders are entitled under an agreement with us
to the following registration rights for the shares of common stock held by them
or issuable upon conversion of our preferred stock or upon exercise of
outstanding warrants to purchase our common stock:
- at any time after 180 days from the date of this offering, the holders of
these registrable securities, other than the affiliate of the National
Broadcasting Company, Inc., may require, on three occasions only, that we
use our best efforts to register for public resale at least ten percent of
the aggregate amount of registrable securities that were outstanding on
April 25, 2000;
- at any time after 180 days from the date of this offering, National
Broadcasting Company, Inc.'s affiliate may require, on up to three
occasions only, that we use our best efforts to register for public resale
at least 15% of the aggregate amount of common stock issuable upon full
exercise of its warrants;
- until the tenth anniversary of this offering, if we register any common
stock, either for our own account or for the account of other security
holders, the holders of registrable securities are entitled to include
their shares of common stock in such registration, subject to the ability
of the underwriters to limit the number of shares included in the offering
in view of market conditions; and
- the holders of registrable securities with a fair market value of not less
than $10,000,000 may require us to use our best efforts to register the
securities on a Form S-3 registration statement or any successor form
after we become eligible to use such form.
In most cases, we will bear all registration expenses other than
underwriting discounts and selling commissions. All demand registration rights
terminate at such time as a holder is entitled to sell all of its registrable
securities under Rule 144(k) under the Securities Act.
DESCRIPTION OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
CLASSIFIED BOARD OF DIRECTORS
Our bylaws provide that the board of directors shall be divided into three
classes of two or three directors each, with each class elected for three-year
terms expiring in successive years. Section 141 of the Delaware General
Corporation Law provides that, in the case of a corporation having a staggered
board, holders of a majority of the shares then entitled to vote in an election
of directors may remove a director only for cause. Our certificate of
incorporation defines "cause" as (i) a final conviction of a felony involving
moral turpitude or (ii) willful misconduct that is materially and demonstrably
injurious economically to us. No act, or failure to act, by a director will be
considered "willful" unless committed in bad faith and without a reasonable
belief that the act or failure to act was in the best interest of us or any of
our affiliates. "Cause" will not exist unless and until we have delivered to the
director a written notice of the act or failure to act that constitutes "cause"
and the director has not cured the act or omission within 90 days after the
delivery of the notice. The effect of this may be to restrict the ability of
stockholders to remove directors from our board of directors. Our certificate of
incorporation also allows the board of directors to fix the number of directors
in the bylaws.
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STOCKHOLDER MEETINGS AND PROPOSALS
Our bylaws provide that special meetings of stockholders generally can be
called only by the chairman of the board, the chief executive officer, the
president or our board of directors. There are advance notice procedures for the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors as well as for other stockholder proposals
to be considered at annual stockholder meetings. In general, notice of intent to
nominate a director or raise business at annual meetings must be received by us
not less than 90 nor more than 120 days before the meeting. The notice must
contain certain information concerning the person to be nominated or the matters
to be brought before the meeting and concerning the stockholder submitting the
proposal. These provisions may preclude a nomination for the election of
directors or preclude the conduct of business at a particular annual meeting if
the proper procedures are not followed. Furthermore, these provisions may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the company, even if the conduct of the solicitation or attempt might be
beneficial to us and our stockholders.
STOCKHOLDER ACTION
Our certificate of incorporation does not allow stockholders to act by
written consent without a meeting. Our certificate of incorporation requires the
affirmative vote of the holders of not less than eighty percent of our shares
entitled to vote in an election of directors to amend or repeal this prohibition
of stockholder action by written consent. The effect of this provision is to
restrict stockholders' ability to circumvent the notice requirements relating to
an annual meeting. Our certificate of incorporation and bylaws do allow
stockholders to amend our bylaws.
BUSINESS COMBINATION UNDER DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless:
- the board of directors approved the transaction in which the stockholder
became an interested stockholder prior to the date the interested
stockholder attained that status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding shares owned by persons who are
directors and also officers; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the holders of at least 66 2/3% of our outstanding voting
stock which is not owned by the interested stockholder.
A "business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior to the determination of interested
stockholder status, did own, 15% or more of a corporation's voting stock.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Our certificate of incorporation provides that no director will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
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- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of laws;
- for unlawful payment of a dividend or unlawful stock purchase or stock
redemption; and
- for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions is to eliminate our rights and the rights of
our stockholders, through stockholder derivative suits on our behalf, to recover
monetary damages against a director for breach of fiduciary duty as a director,
including breaches resulting from grossly negligent behavior, except in the
situations described above.
STOCKHOLDER RIGHTS PLAN
We anticipate that, immediately upon completion of this offering, our board
of directors will declare, pursuant to a rights agreement, a dividend
distribution of one common share purchase right for each outstanding share of
our common stock. Each right will entitle the registered holder to purchase from
us one thousandth of a share of our Series A Junior Participating Preferred
Stock, par value $.01 per share, at a price per share to be determined by our
board with the advice of our financial advisor about the long-term prospects for
our value, subject to adjustment. Each thousandth of a junior preferred share
will be economically equivalent to one share of our common stock. The purchase
price is expected to be significantly higher than the trading price of our
common stock. Therefore, the dividend will have no initial value and no impact
on our financial statements. The following summary of the rights does not
purport to be complete and is qualified in its entirety by reference to the
rights agreement, which is an exhibit to the registration statement of which
this prospectus is a part.
Initially, the rights will be attached to all certificates representing
shares of our common stock then outstanding, and no separate certificates
representing the rights will be distributed. Subject to extension by a majority
of our continuing directors (as defined in the rights agreement) acting on our
behalf, the rights will separate from our common stock upon the distribution
date, which is defined as the earlier of (a) ten days following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding shares of our common stock (any of the foregoing persons
being an acquiring person), or (b) ten business days following the commencement
of a tender offer or exchange offer that would result in a person or group
beneficially owning 15% or more of such outstanding shares of our common stock.
Until the distribution date, (i) the rights will be evidenced by our common
stock certificates and will be transferred with and only with our common stock
certificates, (ii) all certificates representing shares of our common stock will
contain a notation incorporating the rights agreement by reference and
(iii) the surrender for transfer of any certificate for our common stock
outstanding will also constitute the transfer of the rights associated with our
common stock represented by that certificate. As soon as practicable after the
distribution date, separate certificates evidencing the rights will be mailed to
holders of record of our common stock.
The rights are not exercisable until the distribution date and will expire
ten years after consummation of this offering, unless earlier redeemed by us.
In the event that, at any time following the distribution date, (a) we are
the surviving corporation in a merger or combination with an acquiring person
and our shares of common stock shall remain outstanding and not be changed or
exchanged, (b) a person becomes the beneficial owner of 15% or more of the then
outstanding shares of our common stock, or (c) an acquiring person engages in
one or more "self-dealing" transactions as set forth in the rights agreement,
each holder of a right will thereafter have the right to receive, upon exercise,
junior preferred shares (or, in certain circumstances, our common stock, cash,
property or other securities of ours) having a value equal to two times the
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exercise price of the right. For example, at an exercise price of $100.00 per
right, each right not owned by an acquiring person following an event described
above would entitle its holder to purchase from us $200.00 worth of junior
preferred shares (or in certain circumstances, our common stock, cash, property
or other securities of ours) for $100.00. Assuming that our common stock had a
current market price per share of $20.00 at that time, the holder of each valid
right would be entitled to purchase ten one-thousandths of junior preferred
shares for $100.00. Notwithstanding the foregoing, following the occurrence of
any of the events set forth in this paragaph, all rights that are, or (under
certain circumstances specified in the rights agreement) were, beneficially
owned by an acquiring person will be null and void. However, rights are not
exercisable following the occurrence of any of the events set forth above until
such time as the rights are no longer redeemable by us as set forth below.
In the event that, at any time following the date that a person has become
an acquiring person (a shares acquisition date), (a) we are acquired in a merger
or other combination transaction in which we are not the surviving entity,
(b) we consolidate with or merge with or into any other person pursuant to which
we are the surviving entity but all or a part of the shares of our common stock
are changed into or exchanged for stock of another person or cash or other
property or (c) 50% or more of our assets or earning power is sold or
transferred, each holder of a right (except rights that previously have been
voided as described above) shall thereafter have the right to receive, upon
exercise, common stock or other securities of the acquiring company having a
value equal to two times the exercise price of the right.
The purchase price payable and the number of junior preferred shares or
other securities or property issuable upon exercise of the rights are subject to
adjustment from time to time to prevent dilution (a) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, our common
stock, (b) upon the grant to holders of our common stock of certain rights or
warrants to subscribe for our common stock or convertible securities at less
than the current per-share market price of our common stock or (c) upon the
distribution to holders of our common stock of evidences of indebtedness or
assets of ours (excluding regular periodic cash dividends at a rate approved by
the majority of continuing directors of ours or dividends payable in our common
stock) or of subscription rights or warrants (other than those referred to
above).
With certain exceptions, no adjustment to the purchase price will be
required until cumulative adjustments require an adjustment of at least one
percent to the purchase price. Upon the exercise of a right, we will not be
required to issue fractional junior preferred shares or fractional shares of our
common stock (other than fractions in multiples of one-thousandth of a junior
preferred share) and, in lieu thereof, an adjustment in cash may be made based
on the market price of the junior preferred shares or our common stock on the
last trading date prior to the date of exercise.
At any time until 15 business days following the shares acquisition date, we
may redeem the rights in whole, but not in part, at a price of $.01 per right,
payable in cash. Immediately upon the action of our board of directors ordering
redemption of the rights, the rights will terminate and the only right of the
holders of rights will be to receive the $.01 redemption price.
Until a right is exercised, the holder thereof, as such, will have no rights
as a stockholder of ours, including, without limitation, the right to vote or to
receive dividends. While the distribution of the rights will not be taxable to
stockholders or to us, stockholders may, depending upon the circumstances,
recognize taxable income in the event that any of the rights are exercised for
our common stock (or other consideration) or for common stock or other
securities of the acquiring company as set forth above.
Any of the provisions of the rights agreement, other than those provisions
relating to the principal economic terms of the rights, may be amended by our
board of directors before the distribution date, and no stockholder approval
will be sought for noneconomic amendments to the rights agreement except as
required by law or by the rules of any national securities exchange or trading
system on which
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our common stock is then listed. After the distribution date, the provisions of
the rights agreement may be amended by our board of directors to cure any
ambiguity, to make changes that do not adversely affect the interests of holders
of rights (excluding the interests of any acquiring person) or to shorten or
lengthen any time period under the rights agreement; provided, however, that no
amendment to adjust the time period governing redemption may be made when the
rights are not redeemable.
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to any person or group that attempts to acquire us without
conditioning the offer on our redemption of the rights. The rights should not
interfere with any merger or other business combination approved by our board of
directors because the board of directors may, at its option, at any time before
the close of business on the earlier of the 15th day following the shares
acquisition date or ten years after the adoption of the rights agreement, redeem
all, but not less than all, of the then outstanding rights at $.01 per right.
LISTING
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "DGTL."
TRANSFER AGENT AND REGISTRAR
The transfer agent for our common stock is ChaseMellon Shareholder Services,
LLC.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of our common stock. After this offering
is completed, the number of shares available for future sale into the public
markets will be subject to legal and contractual restrictions, some of which are
described below. The lapsing of these restrictions will permit sales of
substantial amounts of our common stock in the public market or could create the
perception that these sales could occur, which could adversely affect the market
price for our common stock. These factors could also make it more difficult to
raise funds through future offerings of common stock.
After this offering, shares of common stock will be outstanding
( shares if the U.S. underwriters and international managers exercise their
over-allotment options in full). Of these shares,
- the shares sold in this offering, plus any shares issued upon
exercise of the U.S. underwriters' and international managers'
over-allotment options, will be freely tradable without restriction under
the Securities Act, unless purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act; and
- the remaining shares of common stock that will be outstanding after
this offering will be "restricted securities" within the meaning of
Rule 144 of the Securities Act.
Upon the closing of this offering, we intend to file one or more
registration statements under the Securities Act to register the shares of
common stock to be issued under our 1999 Stock Option Plan and our Employee
Stock Purchase Plan and, as a result, all shares of common stock acquired upon
exercise of stock options granted under our stock option plan or stock purchase
plan will also be freely tradable under the Securities Act unless purchased by
our affiliates.
Restricted securities generally may be sold only if they are registered
under the Securities Act or are sold pursuant to an exemption from registration,
such as the exemptions provided by Rules 144 and 701 under the Securities Act,
which are summarized below. Subject to the lock-up agreements described below,
shares held by our affiliates that are not restricted securities may be sold
subject to compliance with Rule 144 of the Securities Act without regard to the
prescribed holding period under Rule 144. Our executive officers and directors
and certain existing stockholders have agreed, with exceptions, not to sell or
transfer any common stock for 180 days after the date of this prospectus without
first obtaining the written consent of Merrill Lynch. Specifically, these
persons have agreed not to directly or indirectly:
- offer, pledge, sell or contract to sell any common stock;
- sell any option or contract to purchase any common stock;
- purchase any option or contract to sell any common stock;
- grant any option, right or warrant for the sale of any common stock;
- lend or otherwise dispose of or transfer any common stock;
- request or demand that we file a registration statement related to the
common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.
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Following the lock-up period, the number of shares of common stock that will
become eligible for sale in the public market under Rule 144 under the
Securities Act will be as follows:
- Beginning 180 days after the date of this prospectus, approximately
shares will be eligible for sale; and
- At various times thereafter upon the expiration of the applicable holding
periods, approximately shares will become eligible for sale.
Some of our stockholders have the right to require us to register shares of
common stock for resale in some circumstances. See "Description of Capital
Stock--Registration Rights."
In general, under Rule 144 as currently in effect, any person or persons
whose shares are aggregated, including an affiliate, who has beneficially owned
restricted securities for a period of at least one year is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of:
- one percent of the then outstanding shares of common stock, which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
the notice of the sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to provisions relating to notice and
manner of sale and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares for at least two years, including the holding
period of any prior owner other than an "affiliate," is entitled to sell the
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act may be
relied upon for the resale of our common stock originally issued by us before
the date of this prospectus to our employees, directors, officers, consultants
or advisers under written compensatory benefit plans, including our 1999 Stock
Option Plan, or contracts relating to the compensation of such persons. Shares
of our common stock issued in reliance on Rule 701 are "restricted securities"
and, beginning 90 days after the date of this prospectus, may be sold by
non-affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with the one-year holding period,
in each case subject to the lock-up agreements.
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CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a summary of the material United States federal income and
estate tax consequences of the ownership and disposition of common stock
generally applicable to non-United States holders. Subject to the discussion
below under "Estate Tax," a non-United States holder is any beneficial owner of
common stock that, for United States federal income tax purposes, is a
non-resident alien individual, a foreign corporation, a foreign partnership or a
foreign estate or trust as such terms are defined in the Internal Revenue Code
of 1986, as amended. This discussion is based on the Internal Revenue Code,
existing, proposed and temporary regulations promulgated thereunder, and
administrative and judicial interpretations, all as of the date of this
prospectus, and all of which are subject to change either retroactively or
prospectively. This discussion does not address all aspects of United States
federal income and estate taxation that may be relevant to non-United States
holders in light of their particular circumstances and does not address any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction or the application of any particular tax treaty. Further, it does
not consider non-United States holders subject to special tax treatment under
the United States federal income tax laws including banks, insurance companies,
dealers in securities and holders of securities held as a part of a "straddle,"
"hedge" or "conversion transaction." PROSPECTIVE INVESTORS ARE URGED TO CONSULT
THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL INCOME
AND OTHER TAX CONSEQUENCES, AND THE NON-UNITED STATES TAX CONSEQUENCES, OF
OWNING AND DISPOSING OF COMMON STOCK.
DIVIDENDS
Subject to the discussion below (including the discussion of backup
withholding), any dividend paid to a non-United States holder generally will be
subject to United States withholding tax at a rate of 30% of the gross amount of
the dividend or such lower rate as may be specified by any applicable tax
treaty. For purposes of determining whether tax is required to be withheld under
United States Treasury Regulations currently in effect we ordinarily will
presume that dividends paid to a holder with an address in a foreign country are
paid to a resident of such country absent knowledge that such presumption is not
warranted. Under such regulations, dividends paid to a holder with an address
within the United States generally will be presumed to be paid to a holder who
is not a non-United States holder and will not be subject to the 30% (or lower
treaty rate) withholding tax, unless we have actual knowledge that the holder is
a non-United States holder. Under final United States Treasury Regulations,
scheduled to become effective January 1, 2001, however, a non-United States
holder who wishes to claim the benefit of an applicable treaty rate would be
required to satisfy applicable certification and other requirements, which would
include the requirement that the non-United States holder file with us a United
States Internal Revenue Service Form W-8 which provides the holder's name and
address. In the case of a non-United States holder that is a foreign
partnership, the certification requirements would generally be applied to the
partners of the partnership.
Dividends received by a non-United States holder that are effectively
connected with a United States trade or business conducted by such non-United
States holder (or, if a tax treaty applies, that are attributable to a permanent
establishment in the United States maintained by such non-United States holder)
are exempt from withholding tax if the non-United States holder files an IRS
Form W-8ECI (or, prior to January 1, 2001, an IRS Form 4224) with the payor.
However, such effectively connected dividends are subject to regular United
States federal income tax. Effectively connected dividends received by a
corporate non-United States holder may be subject to an additional "branch
profits tax" at a rate of 30% (or such lower rate as may be specified by an
applicable tax treaty) of such corporate non-United States holder's effectively
connected earnings and profits for the taxable year, subject to certain
adjustments.
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A non-United States holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-United States holder generally will not be subject to United States
federal income tax with respect to gain realized upon the sale or other
disposition of common stock unless: (1) such gain is effectively connected with
a United States trade or business of the non-United States holder (or, if a tax
treaty applies, attributable to a permanent establishment in the United States
maintained by such non-United States holder); (2) the non-United States holder
is an individual who holds the common stock as a capital asset, is present in
the United States for a period or periods aggregating 183 days or more during
the taxable year in which such sale or disposition occurs, and certain other
conditions are met; (3) the non-United States holder is an individual subject to
tax pursuant to the provisions of United States tax law applicable to certain
United States expatriates; or (4) we are or have been a "United States real
property holding corporation" for United States federal income tax purposes at
any time within the shorter of the five-year period preceding such disposition
of such holder's common stock and such holder's holding period and certain other
conditions are met. We believe that we are not and have never been, and we do
not believe that we will become, a "United States real property holding
corporation" for United States federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report to the IRS the amount of dividends paid, the name
and address of the recipient, and the amount, if any, of tax withheld. A similar
report is sent to the recipient. Pursuant to tax treaties or other agreements,
the IRS may make its reports available to tax authorities in the recipient's
country of residence.
For payments made before January 1, 2001, backup withholding generally will
not apply to dividends paid to holders at an address outside the United States
(unless we have knowledge that the holder is a United States person). Unless we
have actual knowledge that a holder is a non-United States holder, dividends
paid during such period to a holder at an address within the United States may
be subject to backup withholding at a rate of 31% if the holder (1) is not a
corporation or other "exempt recipient" as defined in Treasury Regulations and
(2) fails to provide a correct taxpayer identification number and other
information to us. For payments made after December 31, 2000, non-United States
holder that is not an "exempt recipient" generally will be subject to backup
withholding at a rate of 31%, rather than withholding at a 30% rate or lower
treaty rate discussed above, unless such non-United States holder certifies as
to its foreign status (which certification may be made on IRS Form W-8).
Proceeds from the disposition of common stock by a non-United States holder
effected by or through a United States office of a broker will be subject to
information reporting and to backup withholding at a rate of 31% of the gross
proceeds unless such non-United States holder certifies under penalties of
perjury as to, among other things, its address and status as a non-United States
holder or otherwise establishes an exemption. Generally, United States
information reporting and backup withholding will not apply to a payment of
disposition proceeds if the transaction is effected outside the United States by
or through a non-United States office of a broker. However, if such broker is,
for United States federal income tax purposes, a United States person, a
"controlled foreign corporation," a foreign person who derives 50% or more of
its gross income for certain periods from the conduct of a United States trade
or business, or, for payments after December 31, 2000, a partnership with
certain connections to the United States, information reporting (but not backup
withholding) will apply unless (1) such broker has documentary evidence in its
files that the holder is a non-United States holder and certain other conditions
are met or (2) the holder otherwise establishes an exemption. Under final
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United States Treasury Regulations, effective January 1, 2001, a non-United
States holder generally would not be subject to backup withholding if the
beneficial owner certifies to such owner's foreign status on a valid Form W-8
filed with us.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If backup withholding results in an overpayment of United States
income taxes, a refund may be obtained, provided the required documents are
filed with the IRS.
ESTATE TAX
An individual non-United States holder who is treated as the owner of common
stock at the time of such individual's death or has made certain lifetime
transfers of an interest in common stock will be required to include the value
of such common stock in such individual's gross estate for United States federal
estate tax purposes and may be subject to United States federal estate tax,
unless an applicable tax treaty provides otherwise. For United States federal
estate tax purposes, a "non-United States holder" is an individual who is
neither a citizen nor a domiciliary of the United States. Whether an individual
is considered a "domiciliary" of the United States for estate tax purposes is
generally determined on the basis of all of the facts and circumstances.
78
<PAGE>
UNDERWRITING
GENERAL
We are offering our shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, ING Barings LLC, Banc of America Securities
LLC and Bear, Stearns & Co. Inc. are acting as U.S. representatives of the U.S.
underwriters named below. Subject to the terms and conditions described in a
U.S. purchase agreement among us and the U.S. underwriters, and concurrently
with the sale of shares to the international managers, we have agreed
to sell to the U.S. underwriters, and the U.S. underwriters severally have
agreed to purchase from us, the number of shares listed opposite their names
below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
ING Barings LLC.............................................
Banc of America Securities LLC..............................
Bear, Stearns & Co. Inc.....................................
-----------
Total.....................................................
===========
</TABLE>
We have also entered into an international purchase agreement with the
international managers, for whom Merrill Lynch International, ING Barings
Limited, as agent for ING Bank, N.V., London Branch, Bank of America
International Limited and Bear, Stearns International Limited are acting as lead
managers, for sale of the shares outside the U.S. and Canada. Subject to the
terms and conditions in the international purchase agreement, and concurrently
with the sale of shares to the U.S. underwriters pursuant to the U.S.
purchase agreement, we have agreed to sell to the international managers, and
the international managers severally have agreed to purchase from us,
shares. The initial public offering price per share and the total underwriting
discount per share are identical under the U.S. purchase agreement and the
international purchase agreement.
The U.S. underwriters and the international managers have agreed to purchase
all of the shares sold under the U.S. and international purchase agreements if
any of these shares are purchased. If an underwriter defaults, the U.S. and
international purchase agreements provide that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreements may be
terminated. The closings for the sale of shares to be purchased by the U.S.
underwriters and the international managers are conditioned on one another.
We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the U.S. underwriters and international
managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its
79
<PAGE>
online brokerage customers. An electronic prospectus is available on the website
maintained by Merrill Lynch. Other than the prospectus in electronic format, the
information on the Merrill Lynch website relating to this offering is not a part
of this prospectus.
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us that the U.S. underwriters propose
initially to offer the shares to the public at the initial public offering price
set forth on the cover page of this prospectus and to dealers at that price less
a concession not in excess of $ per share. The U.S. underwriters may
allow, and the dealers may reallow, a discount not in excess of $ per
share to other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to us. The information assumes either no exercise
or full exercise by the U.S. underwriters and the international managers of
their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTIONS WITH OPTIONS
--------- --------------- ------------
<S> <C> <C> <C>
Public offering price................................... $ $ $
Underwriting discount................................... $ $ $
Proceeds, before expenses, to DigitalConvergence.:Com... $ $ $
</TABLE>
The total expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by us.
OVER-ALLOTMENT OPTIONS
We have granted an option to the U.S. underwriters to purchase up to
additional shares at the public offering price less the underwriting
discount. The U.S. underwriters may exercise this option for 30 days from the
date of this prospectus solely to cover any over-allotments. If the U.S.
underwriters exercise this option, each will be obligated, subject to conditions
contained in the purchase agreements, to purchase a number of additional shares
proportionate to that U.S. underwriter's initial amount reflected in the above
table.
We have also granted an option to the international managers, exercisable
for 30 days from the date of this prospectus, to purchase up to
additional shares to cover any over-allotments on terms similar to
those granted to the U.S. underwriters.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the U.S. underwriters and the international
managers may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom
they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement. Similarly, the international
managers and any dealer to whom they sell shares will not offer to sell or sell
shares to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement.
80
<PAGE>
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, approximately % of the shares offered by this
prospectus for sale to some of our employees and persons having business
relationships with us. If these persons purchase reserved shares, the number of
shares available for sale to the general public will be reduced accordingly. Any
reserved shares that are not orally confirmed for purchase within one business
day of the pricing of this offering will be offered by the underwriters to the
general public on the same terms as the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and certain existing
stockholders have agreed, with exceptions, not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining the
written consent of Merrill Lynch. Specifically, we and these other persons have
agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "DGTL."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development, and
81
<PAGE>
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible
that after the offering the shares will not trade in the public market at or
above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters from bidding for and purchasing our common stock. However, the U.S.
representatives may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters makes any representation that U.S. representatives or the
lead managers will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
OTHER RELATIONSHIPS
ING Barings LLC has performed investment banking and financial advisory
services for us in the past for which it has received customary fees and may, in
the future, perform similar services for us and receive additional compensation
from us for those services. In connection with our private placement of
Series A preferred stock in September 1999, ING Barings LLC received a placement
fee of approximately $1.7 million in December 1999 for acting as placement
agent. In addition, ING Barings LLC and DING.com LLC, an entity affiliated with
ING Barings, purchased 1,587 and 2,875 shares of Series A preferred stock,
respectively, in our Series A financing for a purchase price of $4,999,050 and
$9,056,250, respectively. The shares held by ING Barings LLC and DING.com LLC
will convert automatically into 999,810 and 1,811,250 shares of our common
stock, respectively, upon completion of this offering.
82
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Vinson & Elkins L.L.P., Dallas, Texas. Vinson & Elkins
L.L.P. owns 39,118 shares of our Series B preferred stock. In addition, Jeffrey
A. Chapman, a partner of Vinson & Elkins L.L.P., owns 5,040 shares of our common
stock and 3,556 shares of our Series B preferred stock. Various legal matters in
connection with the common stock offered by this prospectus will be passed upon
for the underwriters by Chadbourne & Parke LLP.
EXPERTS
The consolidated financial statements of DigitalConvergence.:Com Inc. as of
December 31, 1999 and for the year then ended included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. The financial statements of Infotainment
Telepictures, Inc. as of December 31, 1998 and for the years ended December 31,
1998 and 1997 included in this prospectus have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the common stock we are offering by this prospectus.
This prospectus is a part of that registration statement. As allowed by SEC
rules, this prospectus does not include all of the information contained in the
registration statement or the exhibits to the registration statement. You should
refer to the registration statement and its exhibits for additional information.
When we complete this offering, we will be required to file annual,
quarterly and special reports, proxy statements and other information with the
SEC. You can obtain our SEC filings, including the registration statement, over
the Internet at the SEC's website at HTTP://WWW.SEC.GOV. You may also read and
copy any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center,
Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of
these documents at prescribed rates by writing to the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0300 for further information on the operation of the
public reference facilities. Our filings are also expected to be available at
the office of the Nasdaq National Market. For further information on obtaining
copies of our public filings at the Nasdaq National Market, you should call
(212) 656-5060.
83
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
--------
<S> <C>
DIGITALCONVERGENCE.:COM INC.
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet as of December 31, 1999.......... F-3
Consolidated Statement of Operations for the year ended
December 31, 1999......................................... F-4
Consolidated Statement of Stockholders' Deficit for the year
ended December 31, 1999................................... F-5
Consolidated Statement of Cash Flows for the year ended
December 31, 1999......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
INFOTAINMENT TELEPICTURES, INC. (PREDECESSOR)
Report of Independent Accountants........................... F-21
Balance Sheet as of December 31, 1998....................... F-22
Statements of Operations for the years ended December 31,
1997 and 1998............................................. F-23
Statements of Changes in Stockholder's Deficit for the years
ended December 31, 1997 and 1998.......................... F-24
Statements of Cash Flows for the years ended December 31,
1997 and 1998............................................. F-25
Notes to Financial Statements............................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
DigitalConvergence.:Com Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, stockholders' deficit and cash flows
present fairly, in all material respects, the financial position of
DigitalConvergence.:Com Inc. (the "Company") at December 31, 1999, and the
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
April 27, 2000
F-2
<PAGE>
DIGITALCONVERGENCE.:COM INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,539,823
Accounts receivable....................................... 31,847
Prepaid expenses and other................................ 90,482
------------
Total current assets.................................. 45,662,152
Property and equipment, net................................. 469,991
Intangibles, net............................................ 79,365
Other assets................................................ 306,859
------------
Total assets.......................................... $ 46,518,367
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 357,818
Accrued liabilities....................................... 363,998
Current portion of capital lease obligations.............. 9,780
------------
Total current liabilities............................. 731,596
------------
Long-term debt to related parties (net of unamortized
discount of $515,871)..................................... 8,484,129
Accrued interest on long-term debt.......................... 639,541
Capital lease obligation.................................... 18,911
Other liabilities........................................... 2,475
Series A convertible preferred stock subject to
redemption................................................ 47,887,725 --
Stockholders' equity (deficit):
Common stock, $.01 par value, 110,250,000 shares
authorized; 61,113,150 shares issued and outstanding;
71,141,490 shares issued and outstanding pro forma...... 611,132 711,415
Additional paid-in capital................................ 517,325 48,304,767
Excess of purchase price over Predecessor cost of net
liabilities
acquired................................................ (8,397,389) (8,397,389)
Accumulated deficit....................................... (3,977,078) (3,977,078)
------------ -----------
Total stockholders' equity (deficit).................. (11,246,010) 36,641,715
------------ -----------
Total liabilities and stockholders' equity
(deficit)......................................... $ 46,518,367 $46,518,367
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DIGITALCONVERGENCE.:COM INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Revenues.................................................... $ 1,542,800
-----------
Costs and expenses:
Production and media costs................................ 1,012,407
General and administrative expenses....................... 3,920,876
Depreciation and amortization............................. 105,721
Research and development costs............................ 410,017
-----------
Total operating expenses................................ 5,449,021
-----------
Operating loss.......................................... (3,906,221)
Other income (expense):
Interest income........................................... 660,498
Interest expense.......................................... (731,355)
-----------
Total other expense..................................... (70,857)
-----------
Net loss.............................................. $(3,977,078)
===========
Basic and diluted weighted average common shares
outstanding............................................... 59,507,271
===========
Basic and diluted net loss per common share................. $ (0.07)
===========
Pro forma basic and diluted weighted average common shares
outstanding (unaudited)................................... 69,535,611
===========
Pro forma basic and diluted net loss per common share
(unaudited)............................................... $ (0.06)
===========
Supplemental pro forma basic and diluted weighted average
common shares outstanding (unaudited).....................
===========
Supplemental pro forma basic and diluted net loss per common
share (unaudited).........................................
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DIGITALCONVERGENCE.:COM INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------ EXCESS OF PURCHASE
NUMBER COMMON STOCK ADDITIONAL PRICE OVER PREDECESSOR ACCUMULATED
OF SUBSCRIPTION PAID-IN COST OF NET DEFICIT/RETAINED
SHARES AMOUNT RECEIVABLE CAPITAL LIABILITIES ACQUIRED EARNINGS
---------- -------- ------------ ----------- ---------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1998......................... 41,422,500 $414,225 (1,000) $ (413,225) -- $ --
Issuance of common stock..... 19,690,650 196,907 -- 407,053 -- --
Purchase of assets on January
4
(see Note 1)............... -- -- -- -- (8,397,389) --
Cash received on common stock
subscription............... -- -- 1,000 -- -- --
Employee compensation
(see Note 8)............... -- -- -- 132,188 -- --
Warrants issued in connection
with preferred stock
issuance
(see Note 6)............... -- -- -- 391,309 -- --
Net loss..................... -- -- -- -- (3,977,078)
---------- -------- ------- ----------- ----------- -----------
Balances as of
December 31, 1999............ 61,113,150 $611,132 $ -- $ 517,325 (8,397,389) $(3,977,078)
========== ======== ======= =========== =========== ===========
<CAPTION>
TOTAL
------------
<S> <C>
Balances as of December 31,
1998......................... $ --
Issuance of common stock..... 603,960
Purchase of assets on January
4
(see Note 1)............... (8,397,389)
Cash received on common stock
subscription............... 1,000
Employee compensation
(see Note 8)............... 132,188
Warrants issued in connection
with preferred stock
issuance
(see Note 6)............... 391,309
Net loss..................... (3,977,078)
------------
Balances as of
December 31, 1999............ $(11,246,010)
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DIGITALCONVERGENCE.:COM INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,977,078)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred revenue from acquisition (see Note 1)........ (156,000)
Depreciation and amortization......................... 105,721
Accretion of discount on long-term debt to related
parties (see Note 5)................................ 84,963
Noncash compensation expense (see Note 8)............. 132,188
Changes in operating assets and liabilities:
Accounts receivable................................. (31,847)
Prepaid expenses.................................... (65,283)
Other assets........................................ (304,259)
Accounts payable.................................... 357,818
Accrued expense..................................... 886,264
-----------
Net cash used in operating activities............. (2,967,513)
-----------
Cash flows from investing activities:
Purchases of property and equipment....................... (397,277)
Cash acquired in acquisition of entities under common
control................................................. 165,278
Purchase of intangibles................................... (80,246)
-----------
Net cash used in investing activities............. (312,245)
-----------
Cash flows from financing activities:
Proceeds from long-term debt from related party (see Note
5)...................................................... 2,500,000
Payment of long-term debt to related party (see Note 5)... (1,500,000)
Proceeds from sale of common and preferred stock, net of
costs and placement fees................................ 48,283,161
Proceeds from stockholder................................. 147,090
Repayments to stockholder................................. (610,670)
-----------
Net cash provided by financing activities......... 48,819,581
-----------
Net increase in cash and cash equivalents................... 45,539,823
Cash and cash equivalents at beginning of year.............. --
-----------
Cash and cash equivalents at end of year.................... $45,539,823
===========
Supplemental disclosure of cash flows:
Cash paid during the year for interest.................... $ --
===========
Cash paid during the year for income taxes................ $ --
===========
Non-cash investing activities:
Predecessor net liabilities acquired, net of cash
acquired............................................ $ 523,296
Non-cash financing activities:
Issuance of promissory note to Predecessor............ $ 8,000,000
Issuance cost on Series A preferred stock (see Note
6).................................................. $ 391,309
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company was incorporated in the state of Delaware in September 1998
under the name of DigitalConvergence.:Com Inc. ("Digital" or "the Company") at
which time the founder was issued 41,422,500 shares of common stock for $1,000.
The accompanying financial statements include the consolidated accounts of
Digital and its wholly owned subsidiary, DigitalDemographics.:Com Inc.
(collectively, "the Company" or "Digital"). The Company had no operating
activity until January 4, 1999 when the Company entered into an Asset Purchase
Agreement (the "Purchase Agreement" or the "Acquisition") with Infotainment
Telepictures, Inc. ("Infotainment" or the "Predecessor"). Pursuant to the
Purchase Agreement, the Company purchased all of the rights, title and interest
in and to the trade names, trademarks, designs, copyrights, patents pending,
patents filed and other intellectual property, all of the rights in and to the
radio and television show known as NET TALK LIVE! THE INTERNET TALK SHOW
including, but not limited to, all prior and future programming, all trademarks,
copyrights, creative materials, designs and other intellectual property, all
rights, title and interest in and to the furniture, fixtures and equipment, and
certain liabilities ("the Assets") from the Predecessor.
The aggregate purchase price for the Assets was $8,000,000 in the form of a
promissory note, bearing interest at the rate of 6% per annum ("Promissory
Note"). As the owner of a majority of the Company's common stock on the date of
the Acquisition was part of a control group that controlled Infotainment, the
Acquisition was accounted for as an acquisition of entities under common
control. Accordingly, the assets and liabilities acquired were recorded at the
Predecessor's historical cost, and the excess of the purchase price was charged
to additional paid in capital in the amount of $8,397,389.
At inception, the Company's Certificate of Incorporation authorized
63,000,000 shares of common stock, par value $0.01, and 10,000 shares of
preferred stock, par value $0.01. In September 1999, the Board of Directors
approved an amendment to the Certificate of Incorporation to increase the number
of authorized shares of common and preferred stock to 110,250,000 and 30,000,
respectively.
The Company has developed technology that can link almost any form of media
or product instantly with the Internet. The Company's Internet convergence
technology enables users to access relevant content and conduct e-commerce
instantly without inputting lengthy website addresses or conducting
time-intensive website navigation. To date, the Company has not launched the
convergence technology; therefore, no revenues have been recorded from the
technology. The Company intends to initiate a full-scale roll out of the
technology beginning in September 2000.
In May 1999, DigitalDemographics.:Com Inc. ("DigitalDemographics") was
formed as a Delaware corporation. The Company purchased all of the 1,000 issued
and outstanding shares of DigitalDemographics for $1,000 in May 1999.
DigitalDemographics was established as a data mining company, but has had no
operations to date.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accounts of the Company and its consolidated subsidiary are included in
the consolidated financial statements after elimination of significant
intercompany accounts and transactions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the date of acquisition to be cash equivalents.
F-7
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to five years. Leasehold
improvements are amortized over the life of the underlying lease using the
straight-line method. Expenditures for maintenance and repairs, as well as minor
renewals, are charged to operations as incurred, while betterments and major
renewals are capitalized. Any gain or loss resulting from the retirement or sale
of an asset is credited or charged to operations.
The Company evaluates long-lived assets to be held and used in the business,
or to be disposed of, for impairment whenever events or changes in circumstances
indicate that the net book value of the asset may not be recoverable. An
impairment is determined by comparing expected future cash flows (undiscounted
and before interest) to the net book value of the assets. If impairment exists,
the amount of impairment is measured as the difference between the net book
value of the assets and the estimated fair value of the related assets. The
Company believes that no impairment of property or equipment existed at
December 31, 1999.
CAPITALIZED SOFTWARE
All costs incurred in the internal development of computer software, which
will be provided free to Internet users, are expensed until a product design and
a working model of the software have been tested and completed in accordance
with Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED ("FAS 86").
Thereafter, any further development or production costs are capitalized until
the software is placed into service. In the event unamortized software costs
exceed the net realizable value of the software, the excess is expensed in the
period the excess is determined. During the year ended December 31, 1999, no
software costs were capitalized, as the Company did not incur significant
development costs after the point at which a product design and working model of
the software had been completed. At December 31, 1999, capitalized software is
comprised of software purchased from third parties used in the operations of the
Company and is reflected in "Intangibles" on the Balance Sheet.
REVENUE RECOGNITION
Revenue derived from the sale of advertising spots and sponsorships during
NET TALK LIVE! THE INTERNET TALK SHOW is recognized upon broadcast of the show
in which the advertisement or sponsorship is aired. In cases where payment is
received prior to the airing of the advertisement or sponsorship, the Company
defers recognition of the corresponding revenue until the advertisement or
sponsorship has been aired. For the year ended December 31, 1999, two customers
accounted for approximately 17% and 81% of the Company's revenues, respectively.
CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances exceeding federally insured limits in a
money market fund. However, management believes the fund is of high credit
quality and considers any exposure from concentrations of credit risk to be
limited.
The Company's revenue primarily relates to the sale of advertising spots and
sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW. The Company performs
ongoing credit evaluations of its customers'
F-8
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial condition and, generally, requires no collateral from its customers.
Credit losses have been within management's expectations and adequate allowance
for any uncollectible trade receivables are maintained.
INCOME TAXES
The Company presents income taxes pursuant to Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("FAS 109"). FAS 109
uses an asset and liability approach to account for income taxes, wherein
deferred taxes are provided for book and tax basis differences for assets and
liabilities. In the event differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities result in deferred tax
assets, an evaluation of the probability of being able to realize the future
benefits indicated by such assets is required. A valuation allowance is provided
for a portion or all of the deferred tax assets when there is sufficient
uncertainty regarding the Company's ability to recognize the benefits of the
assets in future years.
ADVERTISING COSTS
Advertising and promotion-related expenses are charged to operations in the
period incurred. Advertising expense for the year ended December 31, 1999 was
approximately $13,500.
RESEARCH AND DEVELOPMENT
Research and development costs are primarily costs incurred to develop,
enhance and develop new applications for our technology. Research and
development expenses are charged to operations in the period incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments reflected in the
consolidated balance sheet at December 31, 1999 approximate their respective
fair values.
PRO FORMA SERIES A CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION
(UNAUDITED)
Effective upon the closing of this offering, the outstanding shares of
Series A convertible preferred stock subject to redemption will automatically
convert into approximately 10,028,340 shares of Common Stock. This conversion
assumes the shares related to the preferred stock subscription will also convert
into Common Stock as of December 31, 1999 (see Note 6). The pro forma effects of
this transaction are unaudited and have been reflected in the accompanying pro
forma balance sheet as of December 31, 1999.
NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average number of
shares of common stock outstanding. Diluted net loss per share is computed based
on the weighted average outstanding shares and the effect of dilutive potential
common shares. For the year ended December 31, 1999, basic and diluted net loss
per share are equal because the Company's potential common shares of 17,687,880
were anti-dilutive.
F-9
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1999 is
computed using the weighted average number of common shares outstanding,
including the conversion of the Company's Series A preferred stock into shares
of the Company's Common Stock effective upon the closing of the Company's
initial public offering, as if such conversion occurred on January 1, 1999. The
resulting pro forma adjustment includes an increase in the weighted average
shares used to compute the basic net loss per share by 10,028,340 shares.
SUPPLEMENTAL PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Supplemental pro forma net loss per share for the year ended December 31,
1999 adjusts pro forma net loss per share to relect the assumed issuance of
shares of Common Stock (based upon the expected initial offering price of
$ per share) to fund the $3.5 million cash payment of debt plus accrued
interest to the Predecessor. The resulting supplemental pro forma adjustment
includes an increase in the weighted average shares used to compute the pro
forma basic net loss per share by shares.
STOCK SPLITS
A 630-for-one stock split of the Company's common stock was effective on
January 3, 2000. All references in the consolidated financial statements to
common stock shares, share prices, per share amounts, options and warrants have
been adjusted retroactively for this stock split.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("FAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. Pro forma disclosure of net loss based on the provisions of
FAS 123 is presented in Note 8. For financial reporting purposes, the Company
has elected to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related
Interpretations.
COMPREHENSIVE INCOME
In 1998, Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME ("FAS 130") was issued. FAS 130 requires separate financial
statement disclosure of comprehensive income, which encompasses changes in net
asset values derived from activity from both owner and non-owner sources. There
were no items that qualify for treatment as components of comprehensive income
for the year ended December 31, 1999.
SEGMENT INFORMATION
In 1998, Statement of Financial Accounting Standards No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("FAS 131") was issued.
FAS 131 supercedes Statement of Financial Accounting Standards No. 14, FINANCIAL
REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE,replacing the "industry"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing
F-10
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
performance as the source of the Company's reportable segments. FAS 131 also
requires disclosures about products and services, geographic areas, and major
customers. The adoption of FAS 131 did not affect the results of operations or
financial position of the Company. For the year ended December 31, 1999,
management assessed the Company's performance and made operating decisions as
one reportable segment.
UNCERTAINTIES AND THE USE OF ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133, which
will be effective for us for the fiscal year and quarters beginning after
June 15, 2000, requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. During June 1999, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL
OF THE EFFECTIVE DATE OF FASB STATEMENT 133. The Statement defers the effective
date of SFAS 133 to fiscal 2001. Management is evaluating SFAS 133 but does not
expect the potential effect of adopting the provisions of SFAS No. 133 to have a
significant impact on our financial position, results of operations, and cash
flows.
In December 1999, the Commission issued Staff Accounting Bulletin ("SAB")
No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the Commission. SAB 101 outlines the basic criteria that must be met
to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. Management believes that SAB 101 will not have a material
effect on our financial statements.
F-11
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1999 follows:
<TABLE>
<CAPTION>
ESTIMATED
LIFE
---------
<S> <C> <C>
Computer and office equipment........................... $ 393,991 3 Years
Studio and phone equipment.............................. 213,250 5 Years
Furniture and fixtures.................................. 55,844 5 Years
Leasehold improvements.................................. 24,577 Various
---------
Gross property and equipment............................ 687,662
Less: accumulated depreciation.......................... (217,671)
---------
Property and equipment, net............................. $ 469,991
=========
</TABLE>
Assets recorded under capital leases, primarily consisting of computer
equipment, are recorded at the lower of the present value of future minimum
lease payments or the fair value of the assets. Total gross assets recorded
under capital lease in 1999 amounted to $42,244, and accumulated amortization
was $5,867. Amortization of assets under capital lease is included in
depreciation and amortization expense. Future minimum lease payments and related
interest are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
2000........................................................ $13,159
2001........................................................ 13,159
2002........................................................ 7,172
-------
Aggregate minimum lease payments............................ 33,490
Less: amount representing interest.......................... 4,799
Less: current portion....................................... 9,780
-------
Long-term capital lease obligation.......................... $18,911
=======
</TABLE>
The interest rate of the capital lease is 12.59%. Interest expense on the
capital lease for the year ended December 31, 1999 was $1,597.
4. ACCRUED LIABILITIES
A summary of accrued liabilities follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Accrued travel costs........................................ $ 87,820
Accrued legal costs......................................... 31,000
Accrued accounting costs.................................... 20,000
Accrued payroll and taxes................................... 110,456
Accrued franchise tax....................................... 75,752
Other accruals.............................................. 38,970
--------
$363,998
========
</TABLE>
F-12
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT
In January 1999, the Company issued a promissory note for $8,000,000,
bearing interest at the rate of 6% per annum, as consideration for the
Acquisition. Accrued interest thereon is payable on a quarterly basis beginning
March 31, 2001. All or a portion of the promissory note will be repaid if
certain events occur. In any event, all principal and interest amounts for the
promissory note will be fully paid during 2002 and 2003, and the note will be
paid in full by January 31, 2004. In October 1999, the Company voluntarily
repaid $1,500,000 of the promissory note.
Also in January 1999, the Company entered into a Common Stock and Debenture
Purchase Agreement in which the Company issued 15,750,000 shares of common stock
and $2,500,000 of the Company's 8.0% Debentures, Series 1999A (the "Debentures")
for total proceeds of $2,502,500. The proceeds were allocated to the stock and
the debenture based on their relative fair value. The portion of the proceeds
allocated to the debenture amounted to $1,899,166 and resulted in a discount of
$600,834, which reflects an effective interest rate of 15% and will be accreted
over the life of the debenture using the effective interest method. The accrued
interest on the Debentures will be paid on a quarterly basis beginning
March 31, 2001. The unpaid accrued interest balance will be added to the
principal balance beginning January 28, 2001, and the principal and interest
will be paid on a quarterly basis beginning March 31, 2002 and ending
December 31, 2003. If certain events occur, all or a portion of the Debentures
will be repaid at an earlier date.
Principal payments on the Company's debt in 2000, 2001, 2002, 2003 and 2004
are estimated to be $0, $0, $4,699,064, $4,699,064 and $0, respectively.
6. SERIES A CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION
In September 1999, the Company's Board of Directors unanimously approved the
issuance of Series A convertible preferred stock to certain outside investors
pursuant to the Stock Purchase Agreement. In November 1999, 15,838 shares of the
Series A preferred stock were issued to various investors for $3,150 per share
for total gross proceeds in the amount of $49,889,700 subject to issuance costs
of $2,253,975. In December 1999, the Company received $252,000 for 80 additional
shares of Series A preferred stock at $3,150 per share. The cash received in
December 1999 was classified as Series A preferred stock subscribed, as the
share certificates were not issued by December 31, 1999.
Following is a summary of the Series A convertible preferred stock subject
to redemption issued by the Company as of December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES
DATE CASH RECEIPT SHARES ISSUED AND TOTAL CARRYING
SERIES ISSUED DATE DESIGNATED OUTSTANDING PROCEEDS VALUE
- --------------------- -------------- -------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
A November 1999 Various 27,000 15,838 $49,889,700 $47,635,725
A -- December 1999 -- -- 252,000 252,000
----------- -----------
$50,141,700 $47,887,725
=========== ===========
</TABLE>
The carrying value of the Series A preferred stock represents proceeds from
the sale of the stock and proceeds from the preferred stock subscription of
$252,000, net of issuance costs of $2,253,975.
The Series A preferred stock subject to redemption has a par value of $0.01
per share and has a liquidation preference over the Company's common stock. In
certain situations, including a change in control, the holders of this Series A
preferred stock can deem the event a liquidation of the Company.
F-13
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SERIES A CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION (CONTINUED)
As a result, these shares have been classified as temporary equity on the
balance sheet. The holders of the Series A preferred stock are entitled to
receive dividends when and if declared by the Company's Board of Directors and
at any time that dividends are declared on the Company's common stock. Each
share of Series A preferred stock is convertible, at the option of the holder,
at any time on or after the date of issuance, into 630 shares of common stock at
the Conversion Price, as defined in the Certificate of Designation of Series A
preferred stock. The initial Conversion Price of these shares is equal to the
issuance price of $3,150 per share. The shares convert automatically into common
stock upon the election of the holders of at least two-thirds of the then
outstanding Series A preferred stock or the closing of a firm commitment
underwritten public offering which raises gross proceeds of at least
$75,000,000, and whereby the aggregate value of the shares of common stock
issuable on conversion of each share of Series A preferred stock is at least two
times the conversion value.
In connection with the issuance of the Series A preferred stock, the Company
issued a warrant to purchase 124,740 shares of the Company's common stock to one
of the investors as a finder's fee for attracting additional investors. The
exercise price of the warrant is $5.00 per share and the warrant expires on
September 29, 2004. The warrant is exercisable immediately. The Company valued
the warrant using the Black-Scholes option-pricing model. The value of the
warrant on the date of grant was $391,309 using the following assumptions:
(1) volatility of 70%; (2) risk-free rate of interest of 5.79%; (3) fair market
value of the common stock on date of grant of $5.00 per share; (4) expected life
of five years; and (5) zero dividend yield.
7. STOCKHOLDERS' EQUITY (DEFICIT)
In conjunction with the incorporation of the Company on September 25, 1998,
the founder purchased 41,422,500 shares of common stock for $1,000. As discussed
in Note 5 in January 1999, 15,750,000 shares of common stock, along with
debentures, were issued to outside investors for $2,502,500 and $603,834 of the
proceeds, were allocated to additional paid-in capital as a discount to debt.
Additionally, in January 1999 certain employees and outside investors of the
Company purchased 3,468,150 shares of common stock for $550.50. An officer of
the Company purchased an additional 472,500 shares of common stock in May 1999
for $75.
8. STOCK-BASED COMPENSATON
In August 1999, the Board of Directors of the Company approved the adoption
of the Company's 1999 Stock Option Plan ("1999 Plan"). In September 1999, the
stockholders of the Company approved the 1999 Plan. Under the 1999 Plan, the
Company is authorized to grant options to purchase 9,450,000 shares of the
Company's common stock to key employees of the Company or eligible
non-employees, as defined by the 1999 Plan. Options granted under the 1999 Plan
may be in the form of incentive stock options or nonqualified stock options.
Options granted under the 1999 Plan generally expire ten years from date of
grant.
The Compensation Committee of the Board of Directors ("Committee")
administers the 1999 Plan and determines the number and the terms of
exercisability of options granted. The exercise price of the options granted
under the 1999 Plan is fixed by the Committee on the date of grant of the
options and equals at least one hundred percent of the fair market value of the
Company's common stock on the date of grant. The options granted under the 1999
Plan may be fulfilled with authorized and unissued shares of common stock,
issued shares of the Company's common stock held in treasury, or issued shares
of common stock reacquired by the Company in each situation as the Committee may
determine from time to time.
F-14
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK-BASED COMPENSATON (CONTINUED)
As discussed in Note 2, the Company has adopted the disclosure only
provisions of FAS 123 for options issued to employees. Had compensation cost for
the option issuances to employees under the Company's 1999 Plan been determined
based on the fair value provisions of FAS 123, the Company's net loss and net
loss per share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
PRO FORMA
1999
-----------
<S> <C>
Net loss--as reported....................................... $(3,977,078)
Net loss--pro forma......................................... $(5,377,568)
Basic and diluted net loss per common share--as reported.... $ (0.07)
Basic and diluted net loss per common share--pro forma...... $ (0.09)
</TABLE>
The pro forma disclosures provided are not likely to be representative of
the effects on reported net loss for future years due to future grants and the
vesting requirements of the Company's stock options issued under the 1999 plan.
The weighted average fair value for options granted to employees under the
1999 Plan was $0.96 in 1999. The fair value of each option granted is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used:
<TABLE>
<S> <C>
Dividend yield.............................................. --
Expected volatility......................................... 0.0%
Risk-free rate of return.................................... 5.6%
Expected life............................................... 5 Yrs.
</TABLE>
The following table summarizes activity under the Company's 1999 Plan during
the year ended December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF WTD. AVG.
OPTIONS EXER. PRICE
--------- -----------
<S> <C> <C>
Options outstanding at beginning of year............... -- --
Options granted........................................ 7,585,200 $3.88
Options exercised...................................... -- --
Options canceled....................................... -- --
--------- -----
Options outstanding at end of year..................... 7,585,200 $3.88
--------- -----
Options exercisable at end of year..................... 1,575,000 $3.65
========= =====
</TABLE>
The following table summarizes information for stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER OF OPTIONS WTD. AVG. REMAINING LIFE WTD. AVG. EXER. PRICE
- -------------- ----------------- ------------------------ ---------------------
<S> <C> <C> <C>
$3.31 5,040,000 9.61 $3.31
$5.00 2,545,200 9.88 $5.00
</TABLE>
9. INCOME TAXES
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. The net deferred tax asset has
been fully reserved because realization is
F-15
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
not considered more likely than not. The tax effects of temporary differences
that give rise to significant portions of the deferred tax assets are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 1,575,000
Intangible assets......................................... 2,888,000
Other..................................................... 11,000
-----------
Gross deferred tax assets............................... 4,474,000
Deferred tax liabilities:
Depreciation.............................................. 5,000
-----------
Net deferred tax assets..................................... 4,469,000
Valuation allowance......................................... (4,469,000)
-----------
Deferred tax balance........................................ $ --
===========
</TABLE>
When realization of the deferred tax asset is more likely than not to occur,
the benefit related to the asset purchase from Infotainment of approximately
$2,888,000 will be credited to additional paid-in capital.
The provision for income taxes is different than the amount computed using
the applicable statutory federal income tax rate with the difference for each
year summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Federal tax benefit at statutory rate....................... (34)%
State taxes, net of federal benefit......................... (3)%
Permanent differences....................................... (2)%
Adjustment due to increase in valuation allowance........... 35%
---
Provision for income taxes.................................. 0%
===
</TABLE>
As of December 31, 1999, the Company has available net operating loss
carryforwards totaling approximately $4,261,000 which expire beginning in 2019.
Utilization of net operating loss carryforwards may be limited by ownership
changes which may have occured or could occur in the future.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
On November 18, 1999, the Company entered into a ten-year lease for its new
corporate facilities located in Dallas, Texas commencing in 2000 and expiring in
2010. The Company may cancel the lease effective in the 84(th) month of the
lease term in accordance with the lease provisions, subject to a cancellation
fee, and renew the lease for two additional 5-year terms.
Additionally, the Company is obligated by the end of the third year of the
lease, if not elected earlier, to acquire additional space in the building for
an additional rental expense of approximately
F-16
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$320,000 per year. The Company expects to spend approximately $1.5 million
during 2000 in completing the build-out and improvements in the new corporate
offices.
In December 1999, the Company entered into a sub-lease agreement to provide
for temporary office space in Dallas, Texas. Under the terms of the lease, the
Company will pay $11,500 per month. The lease expires on November 30, 2000;
provided, however, that the lease can be terminated upon 30 days written notice.
In January 2000, the Company entered into a lease for additional temporary
office space in Dallas, Texas. The lease expires in May 2000, unless terminated
earlier under certain provisions to the lease agreement. The Company will pay
approximately $57,700 under the lease during 2000.
The Company has an additional noncancelable lease for other Dallas, Texas
facilities that expires in 2001. Rent expense totaled $56,600 during the year
ended December 31, 1999 related to this facility lease and various other
equipment operating leases. Total future minimum payments under all operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, OPERATING LEASE
- ------------ ---------------
<S> <C>
2000........................................................ $ 839,593
2001........................................................ 842,500
2002........................................................ 877,800
2003........................................................ 1,213,000
2004........................................................ 1,213,000
Thereafter.................................................. 6,921,750
-----------
Total minimum lease payments................................ $11,907,643
===========
</TABLE>
In December 1999, the Company entered into a manufacturing and marketing
agreement with Tandy Corporation ("Tandy") under which the Company granted Tandy
a limited, royalty-free, nonexclusive, revocable worldwide license to
(1) manufacture the Company's patented Cue:C.A.T. devices (2) market and sell
Cue:C.A.T. devices and :C.R.Q. software, and (3) use Cue:C.A.T. and :C.R.Q.
technology in Tandy's RadioShack.com web site in order to incorporate the
Company's Intellectual Property into Tandy's Internet web site. Under the
agreement, the Company is obligated to purchase at least 1,000,000 component
parts from Tandy. During February 2000, the Company placed an order for
2,000,000 component parts and has issued a letter of credit to Tandy for
approximately $15.5 million. Upon shipment of the product to the Company, the
Company will pay Tandy $15.5 million in cash and cancel the underlying letter of
credit. The manufacturing and marketing agreement is effective through
December 31, 2001 with an automatic one year renewal absent proper nonrenewable
notice.
The Predecessor has agreed to indemnify the Company from any costs,
expenses, liabilities or other losses in connection with lawsuits related to the
Predecessor.
CONTINGENCIES
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be made
and such expenditures can be reasonably estimated. In the opinion of
F-17
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect on the financial position, results of the
operations or cash flows of the Company.
On January 29, 1999, the Predecessor entered into individual agreements with
certain independent contractors who had provided services to the Predecessor for
the period from 1996 through early 1999. Certain of these contractors are now
employees of the Company. According to the contract agreements, the Predecessor
agreed to pay future cash bonuses to the individuals contingent upon the
occurrence of (1) the finalization of an initial public offering whereby the
Company raises a net amount of proceeds of at least $30 million and (2) the
receipt of at least $8 million in cash collections by the Company prior to the
date of an initial public offering which raises a net amount of proceeds of at
least $30 million. As a result of the $1,500,000 voluntary repayment of the
Promissory Note by the Company in October 1999, management of the Predecessor
elected to prepay a certain percentage of these bonuses in the amount of
approximately $132,000 even though the conditions of the bonus agreements had
not been satisfied. The payments remain the property of the contractors
regardless of whether the conditions of the bonus agreements are met. The
Company accounted for these transactions as if they were a compensating plan
adopted by the Company with an offsetting contribution to capital. As of the
date of this report, the Predecessor remains liable for an additional
$1,000,000, contingent upon the satisfaction of the stipulated conditions of the
bonus agreements.
11. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) defined contribution retirement plan ("401(k)
Plan") covering all employees who have completed at least one month of service.
The 401(k) Plan allows eligible employees to defer receipt of up to twenty
percent of their annual compensation (not to exceed $10,000 per calendar year)
and contribute such amounts to various investment funds. Eligible employees may
elect to participate at the beginning of any quarter after their hire date.
Employee contributions vest immediately.
The Company makes matching contributions of twenty-five percent of the
employees' annual contributions, not to exceed eight percent of the employee's
annual pay. The Company's matching contributions vest on a pro rata basis over
five years. During the year ended December 31, 1999, the Company contributed
approximately $6,500 to the 401(k) Plan.
12. SUBSEQUENT EVENTS
In January 2000, the Company issued 128 shares of Series A Convertible
Preferred Stock to various investors for aggregate consideration of $403,000, of
which $252,000 in cash was received prior to year-end.
During February and April 2000, the Company issued 1,128,000 and 595,000
stock options, respectively, to various employees at strike prices ranging from
$5.00 to $9.37 per option. The February options were issued at fair market value
of the common stock on the date of grant, and the April options were issued
below fair market value of the common stock on the dates of grant. The Company
will recognize compensation expense related to the April options for the
difference between the fair market value of the common stock at the date of
grant and the respective strike prices, which will be amortized over the
applicable vesting period.
F-18
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
In April 2000, the Company issued 5,929,364 shares of Series B Convertible
Preferred Stock to various investors for aggregate consideration of
approximately $41.7 million. The Series B Convertible Preferred Stock has a par
value of $0.01 per share and has liquidation preference over the Company's
common stock. The holders of the Series B Convertible Preferred Stock are
entitled to receive dividends when and if declared by the Company's board of
directors and at any time that dividends are declared on the Company's common
stock. Each share of Series B Convertible Preferred Stock is convertible, at the
option of the holder, at any time on or after the date of issuance, into one
share of common stock upon the election of the holders of at least two-thirds of
the then outstanding Series B Convertible Preferred Stock or the closing of a
firm commitment underwritten public offering which raises gross proceeds of at
least $75,000,000, and whereby the aggregate value of the Company on a
pre-initial public offering basis is at least $750,000,000.
In April 2000, the Company issued 5,372,593 shares of Series C Convertible
Preferred Stock to various investors for aggregate consideration of
approximately $56.6 million. The Series C Convertible Preferred Stock has a par
value of $0.01 per share and has liquidation preference over the Company's
common stock. The holders of the Series C Convertible Preferred Stock are
entitled to receive dividends when and if declared by the Company's board of
directors and at any time that dividends are declared on the Company's common
stock. Each share of Series C Convertible Preferred Stock is convertible, at the
option of the holder, at any time on or after the date of issuance, into one
sharecommon stock upon the election of the holders of at least two-thirds of the
then outstanding Series C Convertible Preferred Stock or the closing of a firm
commitment underwritten public offering which raises gross proceeds of at least
$75,000,000 and whereby the aggregate value of the Company on a pre-initial
public offering basis is at least $750,000,000.
During the second quarter of the year ended December 31, 2000, the Company
recorded a one-time charge to earnings in the amount of $37.2 million to reflect
the difference between the issuance price and the fair market value of the
Series B and C preferred stock, as determined by a contemporaneous, independent
appraisal.
In April 2000, the Company issued two warrants to an affiliate of National
Broadcasting Company, Inc. The first warrant is exercisable to purchase up to
3,752,445 shares of Common Stock at a per share exercise price of $5.00. The
second warrant is exercisable to purchase up to 4,505,165 shares of Common
Stock, plus an additional number of shares of Common Stock equal to 5% of any
shares of Series B Preferred or Series C Preferred issued by the Company after
the date of the Agreement., at a per share exercise price of $10.54. The
exercise price for the first warrant is subject to adjustment if the aggregate
market value of shares of Common Stock outstanding immediately after the closing
of the Company's initial public offering is less than $350,000,000, determined
utilizing the per share offering price in the Company's initial public offering.
The exercise price for the second warrant is subject to reduction if the
aggregate market value of shares of Common Stock outstanding immediately after
the closing of the Company's initial public offering is less than $750,000,000,
determined utilizing the per share offering price in the Company's initial
public offering. The number of shares issuable upon the exercise of each warrant
and the exercise of price of each warrant is subject to adjustment in the event
of, among other things, a stock split, reclassification or merger, issuance of
additional shares of Common Stock, issuance of options or convertible securities
and payment of dividends or other distribution. Both of the warrants will expire
in April 2005.
F-19
<PAGE>
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
The Company valued the warrants using the Black-Scholes option-pricing
model. The fair value of the first warrant on the date of grant was
$31.7 million, and the fair value of the second warrant was $31.4 million using
the following assumptions: 1) volatility of 70.0%, 2) risk-free rate of interest
of 6.5%, 3) fair market value of the common stock on date of grant of per share,
4) expected life of five years and 5) zero dividend yield. The Company will
recognize a one-time expense for the fair market value of the warrants.
The Company adopted the Employee Stock Purchase Plan in April 2000. A total
of 1,000,000 shares of common stock are authorized for issuance under the plan.
The plan provides for the grant of stock options to certain eligible employees.
The purpose of the plan is to provide eligible employees with an incentive to
advance the interests of the Company by providing an opportunity to purchase
stock of the Company at a favorable price. The plan is administered by the
Company's Compensation Committee.
In April 2000, the Company repaid $3,000,000 in principal and $584,137 in
interest related to the promissory note. In addition, the Company repaid the
$2,500,000 of debentures and all related accrued interest.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Infotainment Telepictures, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholder's deficit, and cash flows present fairly,
in all material respects, the financial position of Infotainment
Telepictures, Inc. (the "Company") at December 31, 1998 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
February 29, 2000, except as to
Note 11 which is as of April 27, 2000
F-21
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998
---------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 174,953
Accounts receivable....................................... --
Deferred production costs................................. --
Prepaid expenses.......................................... 22,725
Deferred tax assets....................................... 2,846
---------
Total current assets.................................. 200,524
Property and equipment, net............................... 177,554
Other assets.............................................. 2,600
---------
Total assets.......................................... $ 380,678
=========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 85,299
Deferred revenue.......................................... 156,000
Advances from officer..................................... 197,919
Notes payable............................................. 452,900
---------
Total current liabilities............................... 892,118
Deferred tax liability.................................... 2,846
---------
Total liabilities....................................... 894,964
Stockholder's deficit:
Common stock, no par value, 25,000 shares authorized,
issued and outstanding.................................. --
Accumulated deficit....................................... (514,286)
---------
Total stockholder's deficit........................... (514,286)
---------
Total liabilities and stockholder's deficit......... $ 380,678
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Sales....................................................... $ 689,967 1,636,422
Cost and expenses:
Production costs.......................................... 590,704 939,468
Selling, general and administrative....................... 284,370 670,953
Depreciation.............................................. 40,515 54,908
Research and development.................................. -- 35,771
--------- -----------
Operating loss.......................................... (225,622) (64,678)
--------- -----------
Interest expense.......................................... 17,272 23,754
--------- -----------
Net loss................................................ $(242,894) $ (88,432)
========= ===========
Weighted average shares outstanding......................... 25,000 25,000
========= ===========
Basic and diluted net loss per share........................ $ (9.72) $ (3.54)
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDER'S
SHARES STOCK DEFICIT DEFICIT
-------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996........................ 25,000 -- (182,960) (182,960)
Net loss............................................ -- (242,894) (242,894)
------ ------- --------- ---------
Balance at December 31, 1997........................ 25,000 (425,854) (425,854)
Net loss............................................ -- (88,432) (88,432)
------ ------- --------- ---------
Balance at December 31, 1998........................ 25,000 $ -- $(514,286) $(514,286)
====== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(242,894) $ (88,432)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 40,515 54,908
Deferred revenue...................................... 288,200 (272,000)
Barter transactions (see Note 2 and 7) (17,000) (2,400)
Changes in operating assets and liabilities:
Accounts receivable................................. (38,462) 63,300
Deferred production costs........................... (4,743) 51,505
Prepaid expenses.................................... -- (22,725)
Other assets........................................ -- (2,600)
Accounts payable and accrued expenses............... 29,648 44,536
--------- ---------
Net cash used in operating activities............. 55,264 (173,908)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................ (57,538) (74,681)
--------- ---------
Net cash used in investing activities............. (57,538) (74,681)
--------- ---------
Cash flows from financing activities:
Borrowings on line of credit.............................. -- 587,900
Repayment of line of credit............................... -- (135,000)
Advances from officer..................................... (84,928) (29,530)
--------- ---------
Net cash provided by financing activities......... (84,928) 423,370
--------- ---------
Net increase in cash and cash equivalents................... (87,202) 174,781
Cash and cash equivalents at beginning of year.............. 87,374 172
--------- ---------
Cash and cash equivalents at end of year.................... $ 172 $ 174,953
========= =========
Supplemental disclosure of cash flows:
Cash paid during the year for interest.................... $ -- $ 6,818
========= =========
Cash paid during the year for income taxes................ $ -- $ --
========= =========
For disclosure of non-cash transactions see Note 7.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Company was incorporated in the state of Nevada in 1993 under the name
"Gunn Industries." Since inception, the Company has been owned by a sole
shareholder. By decision of the Board of Directors held on January 2, 1998, the
name of the Company was changed to Infotainment Telepictures, Inc.
("Infotainment" or the "Company"). Infotainment is a media company focused on
providing original radio, television and Internet programming relating to
information technologies and the Internet and the production of infomercials for
third parties for the sale of goods and services. The Company's properties
include the radio and television program, NET TALK LIVE! THE INTERNET TALK SHOW,
and the related Internet site. Revenues are derived from the sale of radio,
television and Internet advertising and sponsorships on THE NET TALK LIVE! THE
INTERNET TALK SHOW and revenue and royalties from the production of infomercials
for third parties. In January 1999, substantially all of the Company's assets
and liabilities were sold to DigitalConvergence.:Com Inc. ("Digital") (see
Note 11).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with maturities of three
months or less at date of acquisition to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to five years.
The Company evaluates long-lived assets to be held and used in the business
for impairment whenever events or changes in circumstances indicate that the net
book value of the asset may not be recoverable. An impairment is determined by
comparing expected future cash flows (undiscounted and before interest) to the
net book value of the assets. If impairment exists, the amount of impairment is
measured as the difference between the net book value of the assets and the
estimated fair value of the related assets. Based on its most recent analysis,
the Company believes that no impairment of property or equipment existed at
December 31, 1998.
CONCENTRATION OF CREDIT RISK
The Company's revenue and accounts receivable primarily relate to the sale
of advertising spots and sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW
and the production of infomercials. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. Credit losses have been within management's
expectations and adequate allowances for any uncollectible trade receivables are
maintained.
Substantially all of the Company's accounts receivable are derived from
sales to one customer in each of the years ended December 31, 1997 and 1998.
Historically, the Company has not incurred material credit related losses.
F-26
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are primarily costs incurred to develop,
enhance and develop new applications for our technology. Research and
development costs are charged to expense in the period incurred.
ADVERTISING COSTS
Advertising and promotion-related expenses are charged to operations when
incurred. Advertising expense for 1997 and 1998 was approximately $0 and
$10,031, respectively.
INCOME TAXES
Deferred income taxes are recorded to reflect the future tax consequences of
temporary differences between the tax and financial bases of assets and
liabilities based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect the taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
REVENUE RECOGNITION
Revenue derived from the sale of advertising spots and sponsorships during
NET TALK LIVE! THE INTERNET TALK SHOW is recognized upon broadcast of the show
in which the advertisement or sponsorship is aired. In cases where payment is
received prior to the airing of the advertisement or sponsorship, the Company
defers recognition of the corresponding revenue until the advertisement or
sponsorship has been aired.
Revenue derived from the production of infomercials is recognized when
production is complete and the master is delivered to the customer, which is
less than one year. Payments received in advance and costs incurred for
production are deferred until completion of the related infomercial. Infomercial
royalty revenue is recognized upon the sale of goods and/or services by the
customer.
BARTER TRANSACTIONS
The Company trades advertisements and sponsorships on NET TALK LIVE! THE
INTERNET TALK SHOW and Internet site in exchange for goods and services. Barter
transactions are recorded at the fair market value of the goods and services
provided or received, whichever is lower. Barter revenues are recognized in the
period the advertisement or sponsorship is aired. If a barter agreement extends
over the end of any accounting period, an asset or a liability is recorded based
on the fair value of the related goods or services earned or to be provided at
such period end. Historically, the goods and services provided and received have
been exchanged in the same 30-day period. Therefore, advertising and sponsorship
revenues are generally offset by an equal amount of production costs and/or
property and equipment.
In January 2000, the Emerging Issues Task Force ("EITF") released Issue
No. 99-17, "Accounting for Advertising Barter Transactions," which is effective
for transactions occurring after January 20, 2000. Management does not expect
adoption of the EITF to have a material impact on its operations and financial
position.
F-27
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of
shares of common stock outstanding and common equivalent shares. For the years
ended December 31, 1997 and 1998, there were 25,000 shares of common stock
issued and outstanding. Basic and diluted net loss per share are equal because
the Company had no potentially dilutive shares outstanding during the years
ended December 31, 1997 and 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximate their respective fair values.
UNCERTAINTIES AND THE USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1998
---------
<S> <C>
Computer equipment.......................................... $ 53,280
Production equipment........................................ 205,036
Phone equipment............................................. 8,214
Furniture and fixtures...................................... 23,856
---------
Property and equipment, gross............................... 290,386
Less accumulated depreciation............................... (112,832)
---------
Property and equipment, net................................. $ 177,554
=========
</TABLE>
F-28
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of accounts payable and accrued expenses follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998
------------
<S> <C>
Accounts payable............................................ $21,515
Federal taxes............................................... 63,327
Other accruals.............................................. 457
-------
$85,299
=======
</TABLE>
5. NOTES PAYABLE
During 1998, the Company borrowed $587,900 through a line of credit with an
investor of Digital at an interest rate of 8.0%, of which $135,000 was repaid in
the same year. The note was unsecured. The remaining amount of the borrowings
were repaid in 1999 in connection with the sale of the Company's assets and
liabilities to Digital (see Note 11).
6. INCOME TAXES
Income tax expense on income before income taxes consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Current provision:
Federal............................................... $ -- $ --
State................................................. -- --
Deferred provision...................................... (74,838) (22,848)
Valuation allowance..................................... 74,838 22,848
-------- --------
Total income tax benefit................................ $ -- $ --
======== ========
</TABLE>
Reconciliations of the U.S. corporate income tax rate and the effective tax
rate on loss before income taxes are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- --------
<S> <C> <C>
U.S. corporate tax rate 34% 34%
Loss before taxes...................................... $(242,894) $(88,432)
--------- --------
Tax benefit at statutory rates......................... $ (82,584) $(30,067)
Tax effect of non income tax penalties................. 6,222 6,920
Tax effect of meals and entertainment.................. 1,524 299
Increase in valuation allowance........................ 74,838 22,848
--------- --------
Total income tax benefit............................... $ -- $ --
========= ========
</TABLE>
F-29
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The components of the deferred tax asset and liability as of December 31,
1998 are as follows.
<TABLE>
<CAPTION>
1998
---------
<S> <C>
ASSETS:
Net operating losses........................................ $ 158,692
Other temporary differences................................. 2,489
Valuation allowance......................................... (158,335)
---------
Deferred tax assets......................................... 2,846
=========
LIABILITIES:
Differences between book and tax basis of property and
equipment................................................. 2,846
=========
Deferred tax liability...................................... 2,846
---------
Net deferred tax asset (liability).......................... $ --
=========
</TABLE>
The expiration date of the net operating losses is as follows:
<TABLE>
<CAPTION>
EXPIRATION
AMOUNT DATE
-------- ----------
<S> <C> <C>
$ 32,480 2010
148,854 2011
225,563 2012
59,843 2019
--------
$466,740
========
</TABLE>
7. BARTER TRANSACTIONS
During the periods presented, in exchange for advertisements and
sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW, the Company has primarily
received radio and television airtime to broadcast the show.
For the years ended December 31, 1997 and 1998, barter transactions are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- --------
<S> <C> <C>
Revenues............................................... $ 293,275 $ 48,930
Expenses............................................... (276,275) (46,530)
Property and equipment................................. (17,000) (2,400)
--------- --------
Total.................................................. $ -- $ --
========= ========
</TABLE>
The decrease of barter transactions from 1997 and 1998 results from new
broadcast contracts with other radio and television stations by which the
Company generally pays cash to the stations for the value of the air time.
F-30
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LEASES
The Company has a noncancelable lease for facilities that expires in 2001.
Future minimum lease payments under the lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
- -------------------------------------------------- ---------
<S> <C>
1999.............................................. $31,200
2000.............................................. 31,200
2001.............................................. 10,300
-------
Total minimum lease payments...................... $72,700
=======
</TABLE>
Rental expense from operating leases amounted to $17,000, and $20,275 for
the years ended December 31, 1997, and 1998, respectively. These expenses
include $17,000, and $0, respectively resulting from a barter transaction (see
Note 7).
9. MAJOR CUSTOMERS AND CONTRACTS
CUSTOMERS
For the year ended December 31, 1997, two customers accounted for
approximately 28.0% and 63.1% of the Company's total revenues, respectively.
For the year ended December 31, 1998, three customers, accounted for
approximately 26.5%, 25.3% and 24.9% of the Company's total revenues,
respectively.
CONTRACTS
In June 1997, the Company entered into a contract with Nissi
Cosmetics, Inc. ("Nissi") to produce two infomercials, two direct response spots
and two web sites for the advertising and marketing of a Nissi product. The
Company received a flat fee for its services.
In December 1997, the Company entered into a contract with Computer
City, Inc. ("Computer City") for Computer City to become a broadcast sponsor of
NET TALK LIVE! THE INTERNET TALK SHOW. This contract, which terminated after six
months, provided for sponsorship of the show, including commercial spots within
the show, as well as the linking and co-branding of the respective company's web
sites and personal appearances by the cast members of the show. The Company
received a per show fee for these services.
In December 1997, the Company entered into a contract with GTE
Internetworking for GTE Internetworking to become a broadcast sponsor of NET
TALK LIVE! THE INTERNET TALK SHOW This one-year contract provided for
sponsorship of the show, including commercial spots within the show, as well as
the linking and co-branding of the respective company's web sites. The Company
received a per show fee for these services.
In December 1997, the Company entered into a contract with The Associates
for The Associates to become a broadcast sponsor of NET TALK LIVE! THE INTERNET
TALK SHOW. This sixteen-week contract provided for sponsorship of the show,
including commercial spots within the show, and the development of a web site
for The Associates' product. The Company received a per show fee for these
services.
F-31
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MAJOR CUSTOMERS AND CONTRACTS (CONTINUED)
In December 1998, the Company entered into a contract with Microsoft
Corporation ("Microsoft") to produce and air two commercial spots on its NET
TALK LIVE! THE INTERNET TALK SHOW each week for a minimum of sixteen weeks, as a
part of Microsoft's "watch and win" marketing campaign. For these services, the
Company received a flat fee plus various production and modification fees.
10. RELATED PARTY TRANSACTIONS
Included in current liabilities on the accompanying balance sheet is an
advance from a director of the Company for $197,919 for the year ended
December 31, 1998.
11. SUBSEQUENT EVENTS
On January 4, 1999, the Company entered into an Asset Purchase Agreement
(the "Agreement") pursuant to which the Company sold substantially all of its
assets and certain liabilities to Digital. The transaction will be accounted for
as a business acquisition of entities under common control. In accordance with
the Agreement, the Company sold all of its rights, title and interest in and to
the trade names, trademarks, designs, copyrights, patents pending, patents filed
and other intellectual property, all of the Company's rights in and to the radio
and television show known as NET TALK LIVE! THE INTERNET TALK SHOW including,
but not limited to, all prior and future programming, all trademarks,
copyrights, creative materials, designs and other intellectual property, and all
of the Company's right, title and interest in and to the furniture, fixtures and
equipment ("the Assets").
The aggregate purchase price for the Assets was $8,000,000, payable in the
form of a promissory note, bearing interest at the rate of 6% per annum
("Promissory Note"). The promissory note and accrued interest thereon is payable
on a quarterly basis to the Company beginning March 31, 2001. All or a portion
of the Promissory Note will be repaid if certain events occur. In any event, all
principal and interest amounts for the Promissory Note will be fully paid to the
Company by January 31, 2004. During the month of October 1999, Digital repaid
$1,500,000 of the promissory note. During the month of April 2000, Digital
repaid $3,000,000 of principal and $584,137 of interest on the promissory note.
On January 29, 1999, the Company entered into individual agreements with
certain independent contractors who had provided services to the Company for the
period from 1996 through early 1999. According to the contract agreements, the
Company agrees to pay future cash bonuses to the individuals contingent upon the
occurrence of two events including (1) the finalization of an initial public
offering whereby Digital raises a net amount of proceeds of at least
$30 million and (2) the receipt of at least $8 million in cash collections by
Digital prior to the date of an initial public offering which raises a net
amount of proceeds of at least $30 million. As a result of the $1,500,000
voluntary repayment of the promissory note by Digital in October 1999,
management elected to prepay a certain percentage of these bonuses in the amount
of approximately $132,000 even though the conditions of the bonus agreements had
not been satisfied. The payments remain the property of the contractors
regardless of whether the conditions of the bonus agreements are met. As of the
date of this report, the Company remains liable for an additional $1,000,000,
contingent upon the satisfaction of the stipulated conditions of the bonus
agreements.
F-32
<PAGE>
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS (CONTINUED)
LEGAL PROCEEDINGS
In September 1999, the Company became a co-defendant in a lawsuit pending in
state court in Dallas, Texas. The plaintiff, Nissi Cosmetics, Inc., alleges that
the Company breached a 1997 contract for the creation of two websites, two
informercials, and two direct response spots for the advertising and marketing
of certain of Nissi Cosmetics' body color, or self-tanning, products. Nissi
Cosmetics seeks recovery of $585,000 paid to defendants, and unspecified damages
for "lost profits." The Company filed a general denial and intends to vigorously
defend the matter. In the opinion of management, the ultimate resolution of any
such claims would not have a material adverse impact on the financial position
of the Company.
F-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
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.
SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
ING BARINGS
BANC OF AMERICA SECURITIES LLC
BEAR, STEARNS & CO. INC.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
------------------
This is DigitalConvergence.:Com Inc.'s initial public offering of common
stock. DigitalConvergence.:Com Inc. is selling all of the shares in this
offering. The international managers are offering shares outside the U.S.
and Canada and the U.S. underwriters are offering shares in the U.S. and
Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "DGTL."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE OF THIS PROSPECTUS.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price.................................. $ $
Underwriting discount.................................. $ $
Proceeds, before expenses, to DigitalConvergence.:Com
Inc.................................................. $ $
</TABLE>
The international managers may also purchase up to an additional
shares from DigitalConvergence.:Com Inc. at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The U.S. underwriters may similarly purchase up to an aggregate
of an additional shares from Digital Convergence.:Com Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery on or about
, 2000.
--------------------
JOINT BOOK-RUNNING MANAGERS
MERRILL LYNCH INTERNATIONAL ING BARINGS LIMITED
--------------------
BANK OF AMERICA INTERNATIONAL LIMITED BEAR, STEARNS INTERNATIONAL LIMITED
--------------------
The date of this prospectus is , 2000
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
GENERAL
We are offering our shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S. underwriters.
Merrill Lynch International, ING Barings Limited, as agent for ING Bank, N.V.,
London Branch, Bank of America International Limited and Bear, Stearns
International Limited are acting as lead managers of the international managers
named below. Subject to the terms and conditions described in an international
purchase agreement among us and the international managers, and concurrently
with the sale of shares to the U.S. underwriters, we have agreed to sell
to the international managers, and the international managers severally and not
jointly have agreed to purchase from us, the number of shares listed opposite
their names below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGER OF SHARES
--------------------- -----------
<S> <C>
Merrill Lynch International.................................
ING Barings Limited, as agent for ING Bank, N.V., London
Branch....................................................
Bank of America International Limited.......................
Bear, Stearns International Limited.........................
-----------
Total...................................................
===========
</TABLE>
We have also entered into a U.S. purchase agreement with the U.S.
underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, ING
Barings LLC, Banc of America Securities LLC and Bear, Stearns & Co. Inc. are
acting as U.S. representatives, for sale of the shares in the U.S. and Canada.
Subject to the terms and conditions set forth in the U.S. purchase agreement,
and concurrently with the sale of shares to the international managers
pursuant to the international purchase agreement, we have agreed to sell to the
U.S. underwriters, and the U.S. underwriters severally have agreed to purchase
from us, shares. The initial public offering price per share and the total
underwriting discount per share are identical under the international purchase
agreement and the U.S. purchase agreement.
The international managers and the U.S. underwriters have agreed to purchase
all of the shares sold under the international and U.S. purchase agreements if
any of these shares are purchased. If an underwriter defaults, the U.S. and
international purchase agreements provide that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreements may be
terminated. The closings for the sale of shares to be purchased by the
international managers and the U.S. underwriters are conditioned on one another.
We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the international managers and the
U.S. underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its
1
<PAGE>
online brokerage customers. An electronic prospectus is available on the website
maintained by Merrill Lynch. Other than the prospectus in electronic format, the
information on the Merrill Lynch website relating to this offering is not a part
of this prospectus.
COMMISSIONS AND DISCOUNTS
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering price
set forth on the cover page of this prospectus and to dealers at that price less
a concession not in excess of $ per share. The international managers may
allow, and the dealers may re-allow, a discount not in excess of $ per share
to other dealers. After the initial public offering, the public offering price,
concessions and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to us. The information assumes either no exercise
or full exercise by the international managers and the U.S. underwriters of
their over-allotment options.
<TABLE>
<CAPTION>
PER WITHOUT WITH
SHARE OPTIONS OPTIONS
----------- ----------- -----------
<S> <C> <C> <C>
Public offering price...................................... $ $ $
Underwriting discount...................................... $ $ $
Proceeds, before expenses, to us........................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by us.
OVER-ALLOTMENT OPTIONS
We have granted an option to the international managers to purchase up to
additional shares at the public offering price less the underwriting
discount. The international managers may exercise this option for 30 days from
the date of this prospectus solely to cover any over-allotments. If the
international managers exercise this option, each will be obligated, subject to
conditions contained in the purchase agreements, to purchase a number of
additional shares proportionate to that international manager's initial amount
reflected in the above table.
We have also granted an option to the U.S. underwriters, exercisable for
30 days from the date of this prospectus, to purchase up to
additional shares to cover any over-allotments on terms similar to
those granted to the international managers.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the international managers and the U.S.
underwriters may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the international managers and any dealer to
whom they sell shares will not offer to sell or sell shares to U.S. or Canadian
persons or to persons they believe intend to resell to U.S. or Canadian persons,
except in the case of transactions under the intersyndicate agreement.
Similarly, the U.S. underwriters and any dealer to whom they sell shares will
not offer to sell or sell shares to persons who are non-U.S. or non-Canadian
persons or to persons they believe intend to resell to persons who are non-U.S.
or non-Canadian persons, except in the case of transactions under the
intersyndicate agreement.
2
<PAGE>
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and certain existing
stockholders have agreed, with exceptions, not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining the
written consent of Merrill Lynch, Pierce & Co. Specifically, we and these other
individuals have agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "DGTL."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible
that after the offering the shares will not trade in the public market at or
above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
3
<PAGE>
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters from bidding for and purchasing our common stock. However, the U.S.
representatives may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters makes any representation that the U.S. representatives or
lead managers will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
UK SELLING RESTRICTIONS
Each international manager has agreed that
- it has not offered or sold and will not offer or sell any shares of common
stock to persons in the United Kingdom, except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses
or otherwise in circumstances which do not constitute an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance
of common stock to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements)(Exemptions)
Order 1996 as amended by the Financial Services Act 1986 (Investment
Advertisements)(Exemptions) Order 1997 or is a person to whom such
document may otherwise lawfully be issued or passed on.
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to us or shares of our common stock in any jurisdiction
where action for that purpose is required. Accordingly, the shares of our common
stock may not be offered or sold, directly or indirectly, and neither this
prospectus nor any other offering material or
4
<PAGE>
advertisements in connection with the shares of common stock may be distributed
or published, in or from any country or jurisdiction, except in compliance with
any applicable rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price on the cover page of this
prospectus.
OTHER RELATIONSHIPS
ING Barings LLC has performed investment banking and financial advisory
services for us in the past for which it has received customary fees and may, in
the future, perform similar services for us and receive additional compensation
from us for those services. In connection with our private placement of
Series A preferred stock in September 1999, ING Barings LLC received a placement
fee of approximately $1.7 million in December 1999 for acting as placement
agent. In addition, ING Barings LLC and DING.com LLC, an entity affiliated with
ING Barings, purchased 1,587 and 2,875 shares of Series A preferred stock,
respectively, in our Series A financing for a purchase price of $4,999,050 and
$9,056,250, respectively. The shares held by ING Barings LLC and DING.com LLC
will convert automatically into 999,810 and 1,811,250 shares of our common
stock, respectively, upon completion of this offering.
5
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
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.
SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH INTERNATIONAL
ING BARINGS LIMITED
BANK OF AMERICA INTERNATIONAL LIMITED
BEAR, STEARNS INTERNATIONAL LIMITED
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by DigitalConvergence.:Com in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 26,400
NASD filing fee............................................. 10,500
Nasdaq National Market Listing Fee.......................... *
Printing and engraving costs................................ *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer Agent and Registrar fees........................... *
Miscellaneous expenses...................................... *
----------------
Total..................................................... $ *
================
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may 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 (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees)), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
The Company's Amended and Restated Certificate of Incorporation provides for
the indemnification of directors to the fullest extent permitted by the DGCL. In
addition, as permitted by
II-1
<PAGE>
the DGCL, the Amended and Restated Certificate of Incorporation provides that
directors of the company shall have no personal liability to the company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except (1) for any breach of the director's duty of loyalty to the company or
its stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (3) under Section 174 of the
DGCL or (4) for any transaction from which a director derived an improper
personal benefit.
The Company's By-laws provides for the indemnification of all current and
former directors and all current or former officers to the fullest extent
permitted by the DGCL.
DigitalConvergence.:Com has entered into indemnification agreements with its
directors and executive officers, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to all securities issued or sold by
DigitalConvergence.:Com in the last three years and not registered under the
Securities Act. Each of the transactions described below was conducted in
reliance upon the exemption from registration provided in Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder. Each of the
certificates representing DigitalConvergence.:Com's securities issued in
connection with such transaction contains a restrictive legend. The information
provided in this Item takes into account a 630 for 1 stock split of the common
stock effected on January 3, 2000 and a for one stock split of the
common stock that will occur prior to the completion of this offering.
On September 25, 1998, DigitalConvergence.:Com sold 41,422,500 shares of
common stock of DigitalConvergence.:Com (the "Common Stock") to J. Jovan Philyaw
for a purchase price of $1,000.
On January 28, 1999, DigitalConvergence.:Com sold 3,150,000 shares of Common
Stock to B&G Partnership, Ltd. for a purchase price of $500.
On January 28, 1999, DigitalConvergence.:Com sold 3,150,000 shares of Common
Stock to BCG Partnership, Ltd. for a purchase price of $500.
On January 28, 1999, DigitalConvergence.:Com sold 9,450,000 shares of Common
Stock to JAT III, L.L.C. for a purchase price of $1,500.
On January 29, 1999, DigitalConvergence.:Com sold 315,000 shares of Common
Stock to BCG Partnership, Ltd. for a purchase price of $50.
On January 29, 1999, DigitalConvergence.:Com sold 315,000 shares of Common
Stock to JAT III, L.L.C. for a purchase price of $50.
On January 29, 1999, DigitalConvergence.:Com sold 850,500 shares of Common
Stock to Dave Mathews for a purchase price of $135.
On January 29, 1999, DigitalConvergence.:Com sold 567,000 shares of Common
Stock to Brad Smith for a purchase price of $90.
On January 29, 1999, DigitalConvergence.:Com sold 472,500 shares of Common
Stock to Laura Lewis for a purchase price of $75.
On January 29, 1999, DigitalConvergence.:Com sold 346,500 shares of Common
Stock to Luis Vallecillo for a purchase price of $55.
On January 29, 1999, DigitalConvergence.:Com sold 157,500 shares of Common
Stock to Kurt Boxdorfer for a purchase price of $25.
II-2
<PAGE>
On January 29, 1999, DigitalConvergence.:Com sold 78,750 shares of Common
Stock to Jeff Harris for a purchase price of $12.50.
On January 29, 1999, DigitalConvergence.:Com sold 78,750 shares of Common
Stock to Brandon Brown for a purchase price of $12.50.
On January 29, 1999, DigitalConvergence.:Com sold 220,500 shares of Common
Stock to Kozette Hedger for a purchase price of $35.
On January 29, 1999, DigitalConvergence.:Com sold 47,250 shares of Common
Stock to Georgia Foy for a purchase price of $7.50.
On January 29, 1999, DigitalConvergence.:Com sold 18,900 shares of Common
Stock to Mike Simeone for a purchase price of $3.
On May 17, 1999, DigitalConvergence.:Com sold 472,500 shares of Common Stock
to William Leftwich for a purchase price of $75.
Between September 28, 1999 and January 14, 2000, DigitalConvergence.:Com
sold 2,875 shares of Series A Convertible Preferred Stock (the "Series A
Convertible Preferred Stock") to DING.com LLC for a purchase price of
$9,056,250.
On September 30, 1999, DigitalConvergence.:Com sold 3,970 shares of
Series A Convertible Preferred Stock to Belo Enterprises, Inc. for a purchase
price of $12,505,500.
On October 1, 1999, DigitalConvergence.:Com sold 6,350 shares of Series A
Convertible Preferred Stock of DigitalConvergence.:Com to Young & Rubicam Inc.
for a purchase price of $20,002,500.
On October 1, 1999, DigitalConvergence.:Com sold 1,587 shares of Series A
Convertible Preferred Stock to ING Capital LLC for a purchase price of
$4,999,050.
On October 15, 1999, DigitalConvergence.:Com sold 318 shares of Series A
Convertible Preferred Stock to Michael H. Anderson for a purchase price of
$1,001,700.
On October 18, 1999, DigitalConvergence.:Com sold 318 shares of Series A
Convertible Preferred Stock to Ingram Capital, Inc. for a purchase price of
$1,001,700.
On October 29, 1999, DigitalConvergence.:Com sold 318 shares of Series A
Convertible Preferred Stock to LJBB Investment Group LP for a purchase price of
$1,001,700.
On November 3, 1999, DigitalConvergence.:Com sold 16 shares of Series A
Convertible Preferred Stock to Robert D. Hamman for a purchase price of $50,400.
On November 3, 1999, DigitalConvergence.:Com sold 16 shares of Series A
Convertible Preferred Stock to Robert D. Hamman as Trustee for the Robert D.
Hamman CLU, Inc. Profit Sharing Plan for a purchase price of $50,400.
On November 5, 1999, DigitalConvergence.:Com sold 198 shares of Series A
Convertible Preferred Stock to Digital Investment Partners for a purchase price
of $623,700.
On April 25, 2000, DigitalConvergence.:Com sold 5,929,364 shares of
Series B Convertible Preferred Stock to accredited investors, as that term is
defined in Rule 501(a) of Regulation D promulgated under the Securities Act, for
an aggregate purchase price of $41.7 million.
On April 25, 2000, DigitalConvergence.:Com sold 5,372,593 shares of
Series C Convertible Preferred Stock to accredited investors, as that term is
defined in Rule 501(a) of Regulation D promulgated under the Securities Act, for
an aggregate purchase price of $56.6 million.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <C> <S>
*1.1 -- Form of Underwriting Agreement
+2.1.1 -- Asset Purchase Agreement, dated January 4, 1999, by and
between DigitalConvergence.:Com and Infotainment
Telepictures, Inc.
+2.1.2 -- First Amendment to Asset Purchase Agreement, dated
January 4, 1999, by and between DigitalConvergence.:Com and
Infotainment Telepictures, Inc.
*2.1.3 -- Second Amendment to Asset Purchase Agreement, dated
April , 2000, by and between DigitalConvergence.:Com and
Infotainment Telepictures, Inc.
+3.1 -- Form of Second Amended and Restated Certificate of
Incorporation
+3.2 -- Form of Amended and Restated Bylaws
*4.1 -- Form of Common Stock Certificate
+4.2 -- Amended Certificate of Designation of Series A Convertible
Preferred Stock
+4.3 -- Certificate of Designation of Series B Convertible Preferred
Stock
+4.4 -- Certificate of Designation of Series C Convertible Preferred
Stock
*4.5 -- First Amended and Restated Registration Rights Agreement,
dated April 25, 2000, by and among DigitalConvergence.:Com
and the security holders named therein
*4.6 -- First Amended and Restated Stockholders Agreement, dated
April 25, 2000, by and among DigitalConvergence.:Com and the
security holders named therein
*5.1 -- Opinion of Vinson & Elkins L.L.P.
+10.1 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Michael N. Garin
+10.2 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Gregory D. Lerman
+10.3.1 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Scott P. Carlin
+10.3.2 -- First Amendment to Employment Agreement, dated as of
August 16, 1999, by and between DigitalConvergence.:Com and
Scott P. Carlin
+10.4 -- Employment Agreement, dated as of January 3, 2000, by and
between DigitalConvergence.:Com and Donald E. Welsh
+10.5 -- Employment Agreement, dated as of December 15, 1999, by and
between DigitalConvergence.:Com and Douglas L. Davis
+10.6 -- Employment Agreement, dated as of January 1, 2000, by and
between DigitalConvergence.:Com and Patrick V. Stark
*10.7 -- License Agreement, dated , 2000, by and between
DigitalConvergence.:Com and Belo Corp.
+10.8.1 -- Warrant Agreement, dated September 29, 1999, by and between
DigitalConvergence.:Com and Belo Enterprises, Inc.
+10.8.2 -- Warrant Certificate No. 1, dated September 29, 1999, for the
purchase of DigitialConvergence.:Com common stock by Belo
Enterprises, Inc.
*10.9 -- Licensing Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com Inc. and National
Broadcasting Company, Inc.
*10.10.1 -- Warrant Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com and National Broadcasting
Company, Inc.
*10.10.2 -- Warrant Certificate No. 1, dated April 18, 2000, for the
purchase of DigitalConvergence.:Com common stock by National
Broadcasting Company, Inc.
*10.11 -- Warrant Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com Inc. and National
Broadcasting Company, Inc.
*10.12 -- Warrant Certificate No. 1, dated April 18, 2000, for the
purchase of DigitalConvergence.:Com common stock by National
Broadcasting Company, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <C> <S>
+10.13 -- Promissory Note, dated January 4, 1999, by and between
DigitalConvergence.:Com and Infotainment Telepictures, Inc.
+10.14 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and JAT III L.L.C.
+10.15 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and B&G Partnership, Ltd.
+10.16 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and BCG Partnership, Ltd.
+10.17 -- Form of Indemnification Agreement for directors and officers
of DigitalConvergence.:Com
+10.18.1 -- DigitalConvergence.:Com Inc. 1999 Stock Option Plan
*10.18.2 -- First Amendment to the DigitalConvergence.:Com Inc. 1999
Stock Option Plan
*10.19 -- DigitalConvergence.:Com Inc. Employee Stock Purchase Plan
+10.20 -- Stock Purchase Agreement, dated May 17, 1999, by and between
DigitalConvergence.:Com and William S. Leftwich
+10.21 -- Form of Proprietary Rights and Information Agreement
+10.22 -- Manufacturing and Marketing Agreement, effective as of
December 6, 1999, by and between DigitalConvergence.:Com and
Tandy Corporation
+10.23 -- Print Publishing Agreement, dated January 13, 2000, by and
between DigitalConvergence.:Com and Forbes, Inc.
+10.24 -- Print License Agreement, dated February 16, 2000, by and
between DigitalConvergence.:Com and Wired Magazine
*10.25 -- Print License Agreement, dated as of February 8, 2000, by
and between DigitalConvergence.:Com and Journal Sentinel
Incorporated
*10.26 -- Broadcast Station Agreement, dated as of February 8, 2000,
by and between DigitalConvergence.:Com and Journal Broadcast
Group, Inc.
+21.1 -- Subsidiaries of DigitalConvergence.:Com
+23.1 -- Consent of PricewaterhouseCoopers LLP
*23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1)
+24.1 -- Power of Attorney (included in signature page)
+27.1 -- Financial Data Schedule
</TABLE>
- ------------------------
+ Filed herewith
* To be filed by amendment
II-5
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
The following reports of independent accountants and financial statement
schedules are included in this Registration Statement:
- Report of Independent Accountants on Financial Statement Schedule of
DigitalConvergence.:Com Inc.
- Report of Independent Accountants on Financial Statement Schedule of
Infotainment Telepictures, Inc.
- Valuation and Qualifying Accounts of DigitalConvergence.:Com Inc. for the
year ended December 31, 1999
- Valuation and Qualifying Accounts of Infotainment Telepictures, Inc. for
the years ended December 31, 1997 and 1998
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 14, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by 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.
(b) To provide to the underwriter(s) at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter(s) to permit prompt delivery to each
purchaser.
(c) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the day of April, 2000.
<TABLE>
<S> <C> <C>
DIGITALCONVERGENCE.:COM INC.
By: /s/ MICHAEL N. GARIN
-----------------------------------------
Michael N. Garin
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael N. Garin, Patrick V. Stark and
William S. Leftwich and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including pre- and post-effective amendments) to this Registration Statement
and any additional registration statement pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact and agents or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. JOVAN PHILYAW
------------------------------------------- Chief Executive Officer and April 28, 2000
J. Jovan Philyaw Chairman of the Board
/s/ MICHAEL N. GARIN
------------------------------------------- President, Chief Operating April 28, 2000
Michael N. Garin Officer and Director
/s/ WILLIAM S. LEFTWICH
------------------------------------------- Chief Financial Officer April 28, 2000
William S. Leftwich
/s/ PATRICK V. STARK
------------------------------------------- Director April 28, 2000
Patrick V. Stark
/s/ MICHAEL H. JORDAN
------------------------------------------- Director April 28, 2000
Michael H. Jordan
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM O. HUNT
------------------------------------------- Director April 28, 2000
William O. Hunt
/s/ JACK A. TURPIN
------------------------------------------- Director April 28, 2000
Jack A. Turpin
</TABLE>
II-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
DigitalConvergence.:Com Inc.
Our audits of the consolidated financial statements referred to in our
report dated April 27, 2000 appearing in this Registration Statement on Form S-1
of DigitalConvergence.:Com Inc. also included an audit of the financial
statement schedule listed in such Registration Statement. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
April 27, 2000
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Infotainment Telepictures, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 29, 2000, except as to Note 11 which is as of April 27,
2000 appearing in this Registration Statement on Form S-1 of
DigitalConvergence.:Com Inc. also included an audit of the financial statement
schedules listed in such Registration Statement. In our opinion, these financial
statement schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 29, 2000
S-2
<PAGE>
SCHEDULE II
DIGITALCONVERGENCE.:COM INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1999
Income tax valuation allowance.................... $ 158 $4,311 $ -- $4,469
====== ====== ======= ======
</TABLE>
(a) This schedule should be read in conjunction with the
Digitalconvergence.:Com Inc. audited consolidated financial statements and
related notes thereto.
S-3
<PAGE>
SCHEDULE II
INFOTAINMENT TELEPICTURES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
Income tax valuation allowance.................... $ 61 $74 $-- $135
==== === === ====
1998
Income tax valuation allowance.................... $135 $23 $-- $158
==== === === ====
</TABLE>
(a) This schedule should be read in conjunction with the Infotainment
Telepictures, Inc. audited financial statements and related notes thereto.
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <C> <S>
*1.1 -- Form of Underwriting Agreement
+2.1.1 -- Asset Purchase Agreement, dated January 4, 1999, by and
between DigitalConvergence.:Com and Infotainment
Telepictures, Inc.
+2.1.2 -- First Amendment to Asset Purchase Agreement, dated
January 4, 1999, by and between DigitalConvergence.:Com and
Infotainment Telepictures, Inc.
*2.1.3 -- Second Amendment to Asset Purchase Agreement, dated
April , 2000, by and between DigitalConvergence.:Com and
Infotainment Telepictures, Inc.
+3.1 -- Form of Second Amended and Restated Certificate of
Incorporation
+3.2 -- Form of Amended and Restated Bylaws
*4.1 -- Form of Common Stock Certificate
+4.2 -- Amended and Restated Certificate of Designation of Series A
Convertible Preferred Stock
+4.3 -- Certificate of Designation of Series B Convertible Preferred
Stock
+4.4 -- Certificate of Designation of Series C Convertible Preferred
Stock
*4.5 -- First Amended and Restated Registration Rights Agreement,
dated April 25, 2000, by and among DigitalConvergence.:Com
and the security holders named therein
*4.6 -- First Amended and Restated Stockholders Agreement, dated
April 25, 2000, by and among DigitalConvergence.:Com and the
security holders named therein
*5.1 -- Opinion of Vinson & Elkins L.L.P.
+10.1 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Michael N. Garin
+10.2 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Gregory D. Lerman
+10.3.1 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Scott P. Carlin
+10.3.2 -- First Amendment to Employment Agreement, dated as of
August 16, 1999, by and between DigitalConvergence.:Com and
Scott P. Carlin
+10.4 -- Employment Agreement, dated as of January 3, 2000, by and
between DigitalConvergence.:Com and Donald E. Welsh
+10.5 -- Employment Agreement, dated as of December 15, 1999, by and
between DigitalConvergence.:Com and Douglas L. Davis
+10.6 -- Employment Agreement, dated as of January 1, 2000, by and
between DigitalConvergence.:Com and Patrick V. Stark
*10.7 -- License Agreement, dated , 2000, by and between
DigitalConvergence.:Com and Belo Corp.
+10.8.1 -- Warrant Agreement, dated September 29, 1999, by and between
DigitalConvergence.:Com and Belo Enterprises, Inc.
+10.8.2 -- Warrant Certificate No. 1, dated September 29, 1999, for the
purchase of DigitialConvergence.:Com common stock by Belo
Enterprises, Inc.
*10.9 -- Licensing Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com Inc. and National
Broadcasting Company, Inc.
*10.10.1 -- Warrant Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com and National Broadcasting
Company, Inc.
*10.10.2 -- Warrant Certificate No. 1, dated April 18, 2000, for the
purchase of DigitalConvergence.:Com common stock by National
Broadcasting Company, Inc.
*10.11 -- Warrant Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com Inc. and National
Broadcasting Company, Inc.
*10.12 -- Warrant Certificate No. 1, dated April 18, 2000, for the
purchase of DigitalConvergence.:Com common stock by National
Broadcasting Company, Inc.
+10.13 -- Promissory Note, dated January 4, 1999, by and between
DigitalConvergence.:Com and Infotainment Telepictures, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <C> <S>
+10.14 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and JAT III L.L.C.
+10.15 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and B&G Partnership, Ltd.
+10.16 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and BCG Partnership, Ltd.
+10.17 -- Form of Indemnification Agreement for directors and officers
of DigitalConvergence.:Com
+10.18.1 -- DigitalConvergence.:Com Inc. 1999 Stock Option Plan
*10.18.2 -- First Amendment to the DigitalConvergence.:Com Inc. 1999
Stock Option Plan
*10.19 -- DigitalConvergence.:Com Inc. Employee Stock Purchase Plan
+10.20 -- Stock Purchase Agreement, dated May 17, 1999, by and between
DigitalConvergence.:Com and William S. Leftwich
+10.21 -- Form of Proprietary Rights and Information Agreement
+10.22 -- Manufacturing and Marketing Agreement, effective as of
December 6, 1999, by and between DigitalConvergence.:Com and
Tandy Corporation
+10.23 -- Print Publishing Agreement, dated January 13, 2000, by and
between DigitalConvergence.:Com and Forbes, Inc.
+10.24 -- Print License Agreement, dated February 16, 2000, by and
between DigitalConvergence.:Com and Wired Magazine
*10.25 -- Print License Agreement, dated as of February 8, 2000, by
and between DigitalConvergence.:Com and Journal Sentinel
Incorporated
*10.26 -- Broadcast Station Agreement, dated as of February 8, 2000,
by and between DigitalConvergence.:Com and Journal Broadcast
Group, Inc.
+21.1 -- Subsidiaries of DigitalConvergence.:Com
+23.1 -- Consent of PricewaterhouseCoopers LLP
*23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1)
+24.1 -- Power of Attorney (included in signature page)
+27.1 -- Financial Data Schedule
</TABLE>
- ------------------------
+ Filed herewith
* To be filed by amendment
<PAGE>
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the "Agreement") is entered into
effective this 4th day of January, 1999 by and between Infotainment
Telepictures, Inc., a Nevada corporation ("Seller"), and Digital Convergence.com
Inc., a Delaware corporation ("Buyer").
WITNESSETH:
WHEREAS, Seller owns all rights to produce that certain television show
commonly known as "Net Talk Live!" (the "Business"); and
WHEREAS, the parties hereto desire to enter into this Agreement for the
purchase of the Business and all assets associated therewith; and
NOW, THEREFORE, for and in consideration of the mutual understandings,
promises and covenants contained herein (including the recitals set forth
above), the parties hereto agree as follows:
I. TERMS OF PURCHASE AND SALE; CLOSING.
1.1 PURCHASE AND SALE OF CERTAIN ASSETS OF SELLER.
(i) Upon the basis of the representations and warranties and
subject to the terms and conditions of this Agreement, Buyer agrees to
purchase and acquire from Seller, and Seller agrees to sell, convey,
transfer, assign, and deliver to Buyer, on or before the Closing Date
(as defined in Section 1.6 hereof) the Assets, free and clear of any
pledge, lien, claim or other encumbrance of any kind whatsoever,
against receipt on the Closing Date and thereafter of the Purchase
Price as specified in Section 1.3 hereof.
(ii) The term "Assets" shall mean:
(i) all of Seller's right, title and interest in
and to the trade names, trade marks, designs
and other Intellectual Property described on
Schedule I hereto;
(ii) all of Seller's right, title and interest in
and to the furniture, fixtures and equipment
("FF&E") listed on Schedule II hereto; and
(iii) all related goodwill with regard to any of
the foregoing.
(iii) It is the intention of the Buyer and Seller to convey
all assets relating to the Business whether or not specifically
designated herein.
<PAGE>
1.2 EXCLUDED ASSETS. Buyer shall not purchase from Seller, and Seller
shall not sell to Buyer, any assets which are not described on Section 1.1 (the
"Excluded Assets").
1.3 PURCHASE PRICE. The aggregate purchase price (the "Purchase Price")
for the Assets shall be Eight Million dollars ($8,000,000) and shall be paid on
the Closing Date by Buyer's execution and delivery of Buyer's promissory note
(the "Promissory Note") in the original principal amount of Eight Million
dollars ($8,000,000), bearing interest at the rate of six percentage (6 %) per
annum and being in the form attached hereto as EXHIBIT "A" .
1.4 LIABILITIES ASSUMED. Buyer agrees to assume those liabilities set
forth on Schedule III to this Agreement. Except for those liabilities expressly
assumed, Buyer does not assume any obligation or liability of Seller.
1.5 INSTRUMENTS OF TRANSFER AND CONVEYANCE.
(i) The sale, conveyance, transfer, assignment and delivery of
the Assets, as herein provided, shall be effected by delivery by Seller
on the Closing Date of hereto (i) an assignment of Intellectual
Property in substantially the form attached hereto as EXHIBIT "B", (ii)
a Bill of Sale in substantially the form attached hereto as EXHIBIT
"C", and (iii) any such other bills of sale, endorsements, assignments,
certificates, drafts, checks or other instruments of transfer and
conveyance as Buyer shall reasonably deem necessary to vest in Buyer
good and marketable title to the Assets. Such instruments of transfer
and conveyance shall contain warranties as to marketable title and that
such Assets are free and clear of all pledges, liens, options, security
interests, mortgages, claims, charges or other encumbrances of any kind
whatsoever.
(ii) Seller agrees that it will from time to time after the
Closing Date, upon the request of Buyer, promptly do, execute,
acknowledge and deliver, and will cause to be done, executed,
acknowledged and delivered, all such further instruments, certificates,
assignments, transfers, conveyances, powers of attorney, assurances and
other documents, as may be reasonably necessary or advisable to assure
or confirm Buyer's free and clear title to and interest in, or to
enable Buyer to deal with and dispose of, any of the Assets.
1.6 CLOSING. The closing hereunder (the "Closing") shall be held at the
offices of Kane, Russell, Coleman & Logan, P.C., 3700 Thanksgiving Tower, 1601
Elm Street, Dallas, Texas 75202 as of the effective date of this Agreement, or
at such other time and place as the parties may agree upon (the "Closing Date").
At the Closing: (a) Seller will execute and deliver to Buyer the instruments of
transfer and conveyance as are required pursuant to Section 1.5 above; (b) Buyer
will execute and deliver to Seller an Assumption of Liabilities relating to any
liabilities set forth in Section 1.4 above; and (c) each party will execute and
deliver to the others such other agreements, certificates, assignments, consents
and other documents as are required or specified in this Agreement or as may
reasonably be requested by the other party to evidence compliance with the terms
hereof. Simultaneously with the deliveries contemplated herein, Seller will use
its best efforts
2
<PAGE>
and take all such other action as may be reasonably necessary to put Buyer in
possession and control of the Assets.
II. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller represents and warrants to Buyer as follows:
2.1 CORPORATE STATUS. Seller is a corporation duly organized, validly
existing and in good standing under the laws of Nevada and has all necessary
corporate power and authority to carry on its business as now conducted and to
own or lease and operate its properties, and to execute, deliver and perform its
obligations hereunder.
2.2 AUTHORITY FOR AGREEMENT. This Agreement constitutes the valid and
legally binding obligation of Seller and the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary action on the part of the board of directors
and all shareholders (listed on Schedule IV) of Seller, will not conflict with
or result in any violation of, or default under, any provisions of the charter
or bylaws of Seller, will not conflict with or result in any violation of, or
default with respect to, any mortgage, indenture, lease, agreement or other
instrument affecting the Assets or to which Seller or its affiliates is a party,
or by which Seller or its affiliates is bound, and will not require the consent
or approval or notice to any person or any governmental agency.
2.3 PROPERTIES. Seller has good, valid and marketable title to the
Assets subject to no liens, encumbrances, security interests or mortgages
whatsoever. The legal and beneficial interests in the Assets are owned
exclusively by Seller.
2.4 TAXES. Seller has paid all federal, state and local income, sales,
use, value-added, payroll, franchise and withholding taxes due and owing as a
result of the operation of the Business prior to the Closing.
2.5 LITIGATION. There is no pending or threatened litigation or
governmental or administrative proceeding to which Seller is a party or by which
the Business or the Assets may be adversely affected.
2.6 BROKERS, FINDERS, ETC. No broker, finder or other financial
consultant has acted on behalf of Seller or its affiliates in connection with
the transactions contemplated by this Agreement and all negotiations relative to
this Agreement have been carried on directly without the intervention of any
such third party.
3
<PAGE>
III. REPRESENTATIONS AND WARRANTIES OF BUYER.
3.1 CORPORATE STATUS. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas. Buyer has
full power and authority to execute and deliver this Agreement on Buyer's
behalf, and to perform its obligations hereunder.
3.2 AUTHORITY FOR AGREEMENT. Buyer has all necessary power and
authority to execute and deliver this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the Board of
Directors of Buyer. No notice, consent, approval, order or authorization of, or
registration, declaration or filing with, any person or entities, or with any
governmental authority is required in connection with the execution and delivery
of this Agreement or the consummation by Buyer of the transactions contemplated
hereby or thereby.
3.3 BROKERS. FINDERS, ETC. No broker, finder or other financial
consultant has acted on behalf of Buyer or its affiliates in connection with the
transactions contemplated by this Agreement and all negotiations relative to
this Agreement have been carried on directly without the intervention of any
such third party.
IV. INDEMNIFICATION.
4.1 INDEMNIFICATION. Seller covenants and agrees to indemnify and hold
Buyer harmless from and against any and all losses, liabilities, damages,
demands, claims, suits, actions, judgments or causes of action, assessments,
costs and expenses, including, without limitation, interest, penalties,
attorneys' fees, any and all expenses incurred in investigating, preparing or
defending against any litigation, commenced or threatened, in writing or any
other claim, and any and all amounts paid in settlement of any claim asserted in
writing or litigation (each a "Loss") asserted against, resulting to, imposed
upon, or incurred or suffered by Buyer, directly or indirectly, as a result of
or arising from the operation of Seller or Business prior to the Closing Date,
other than as otherwise contemplated herein. To the extent Buyer suffers any
Loss under this Section 4.1, or has identified a loss but has not quantified the
dollar value thereof, Buyer may withhold and off-set any payments due to Seller
under this Agreement or the Promissory Note to compensate (to the extent of any
such payment due) Seller for any such Loss.
V. MISCELLANEOUS PROVISIONS.
5.1 ENTIRE AGREEMENT. This Agreement, together with all the schedules
and exhibits hereto, constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written, of the parties, and there are no warranties,
representations or other agreements between the parties in connection with the
subject matter hereof except as specifically set forth herein.
4
<PAGE>
5.2 AMENDMENT. This Agreement may be amended by the parties hereto at
any time, but only by an instrument in writing duly executed and delivered on
behalf of each of the parties hereto.
5.3 HEADINGS. The section headings are not to be considered part of
this Agreement and are included solely for convenience and are not intended to
be full or accurate descriptions of the contents thereof. References to Sections
are to portions of this Agreement unless the context requires otherwise.
5.4 EXHIBITS, ETC. Exhibits and schedules referred to in this Agreement
are in integral part of and are incorporated in this Agreement by reference.
5.5 ASSIGNMENT: SUCCESSORS AND ASSIGNS. All of the terms and provisions
of this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective transferees, successors and assigns.
5.6 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or sent Federal Express or other reputable overnight courier, postage
prepaid or by certified mail, return receipt requested:
(i) if to Seller:
Infotainment Telepictures, Inc.
4264 Kellway Circle
Addison, Texas 75244
Attn: President
(ii) if to the Buyer:
Digital Convengence.com Inc.
4264 Kellway Circle
Addison, Texas 75244
Attn: President
5.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
5.8 SEVERABILITY. The provisions of this Agreement are severable, and
in the event that any one or more provisions are deemed illegal or
unenforceable, the remaining provisions shall remain in full force and effect.
5.9 COUNTERPARTS. This Agreement may be executed simultaneously in any
number of 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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IN WITNESS WHEREOF, the parties hereby have duly executed this
Agreement as of the day and year first above written.
SELLER
INFOTAINMENT TELEPICTURES, INC.
By: /s/ J. Jovan Philyaw
------------------------------
Its: President - Secretary
------------------------------
BUYER
DIGITAL CONVERGENCE.COM INC.
By: /s/ J. Jovan Philyaw
------------------------------
Its: President - Secretary
------------------------------
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<PAGE>
FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
The First Amendment to Asset Purchase Agreement (the "First Amendment")
is entered into effective this 4th day of January, 1999 by and between
Infotainment Telepictures, Inc., a Nevada corporation ("Seller"), and
DigitalConvergence.com Inc., a Delaware corporation ("Buyer").
WHEREAS, Seller and Buyer have entered into that certain Asset Purchase
Agreement dated of even date herewith (the "Base Agreement"), and
WHEREAS, the parties hereto desire to enter into this First Amendment
for the purpose of clarifying the parties' rights and obligations regarding
certain assets and liabilities of the Seller.
NOW THEREFORE, for and in consideration of mutual understanding,
promises and covenants contained herein, the parties hereto agree as follows:
1. The term "Assets", as defined in Section 1.1(b), in addition to the
assets contemplated in the Base Agreement, shall include all of
Seller's rights in and to the various contractual relationships (the
"Contract Rights") by and between Seller and Nissi Cosmetics, Inc.
("Nissi") entered into by Seller in connection with the direct
marketing and promotion of Nissi's Baytan products;
2. Buyer and Seller hereby agree that the liabilities to be assumed by
Buyer, as set forth in Schedule III to the Base Agreement and as
contemplated in Section 1.4 of the Base Agreement, shall be limited
to those liabilities incurred by Seller in its ordinary course of
business on or prior to the Closing Date, and any such liabilities
incurred by Seller from and after the Closing Date relating only to
the Nissi Contract Rights; and
3. All provisions of the Base Agreement not otherwise modified herein
shall remain in full force and effect.
Executed as of the date first set forth above.
INFOTAINMENT TELEPICTURES, INC.
a Nevada corporation
By: /s/ J. Jovan Philyaw
----------------------------------
Its:
----------------------------------
DIGITALCONVERGENCE.COM INC.
By: /s/ J. Jovan Philyaw
----------------------------------
Its: C.E.O.
----------------------------------
<PAGE>
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DIGITALCONVERGENCE.:COM INC.
DigitalConvergence.:Com Inc. (the "Corporation") is a corporation
organized and existing under and by virtue of the Delaware General Corporation
Law. Pursuant to the provisions of Section 242 and Section 245 of the Delaware
General Corporation Law, the Corporation adopts the following Second Amended and
Restated Certificate of Incorporation (this "Certificate of Incorporation"). The
original Certificate of Incorporation was filed with the Delaware Secretary of
State on September 25, 1998, which original Certificate of Incorporation was
amended by the Certificate of Amendment thereto filed with the Delaware
Secretary of State on September 28, 1999, the Certificate of Designation of
Series A Convertible Preferred Stock of DigitalConvergence.:Com Inc. thereto
filed with the Delaware Secretary of State on September 30, 1999, the Amended
and Restated Certificate of Incorporation filed with the Delaware Secretary of
State on December 15, 1999, the Amendment to the Amended and Restated
Certificate of Incorporation filed with the Delaware Secretary of State on
April , 2000, the Certificate of Designation of Series B Preferred Stock of
DigitalConvergence.:Com thereto filed with the Delaware Secretary of State on
___________, 2000, and the Certificate of Designation of Series C Preferred
Stock of DigitalConvergence.:Com thereto filed with the Delaware Secretary of
State on ___________, 2000 (as so amended, the "Original Certificate of
Incorporation").
This Certificate of Incorporation (including, without limitation,
EXHIBIT A, EXHIBIT B and EXHIBIT C hereto), which further amends and restates
the Original Certificate of Incorporation, was duly adopted as of ___________,
2000 in accordance with the provisions of Sections 228, 242 and 245 of the
Delaware General Corporation Law.
The provisions of the Original Certificate of Incorporation are hereby
further amended and restated to read in their entirety as follows:
FIRST: The name of the Corporation is DigitalConvergence.:Com Inc.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 9 East Loockerman Street in the City of Dover, County of
Kent. The name and address of its registered agent is National Registered
Agents, Inc., 9 East Loockerman Street, Dover, Delaware 19901.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the Delaware General
Corporation Law.
<PAGE>
FOURTH:
I. SHARES AUTHORIZED. The total number of shares of all classes
of stock which the Corporation shall have authority to issue is __________
shares, of which __________ shares shall be common stock, par value $.01 per
share (the "Common Stock"), and __________ shares shall be preferred stock, par
value $.01 per share (the "Preferred Stock").
II. CONVERSION. Effective ____________, 2000 (the "Effective
Date"), each share of Common Stock (the "Converted Common Stock") outstanding
immediately prior thereto shall, without any action on the part of the holder
thereof, be converted into, and deemed for all purposes to be, _________ shares
of Common Stock. The executive officers of the Corporation or their designees
shall use the Effective Date as the record date for determining the holders of
record of the Converted Common Stock. The executive officers of the Corporation
or their designees shall issue to such holders of record certificates, endorsed
with such legends as are required or are appropriate, representing _________
shares of Common Stock for every one share of the Converted Common Stock as
shall be registered on the Corporation's stock transfer records for such holder.
The executive officers, or their designees, shall enter the fact of the issuance
of the new certificates for Common Stock in the appropriate name or names of the
holders of such shares on the Corporation's stock records and transfer books.
III. DESIGNATIONS: The following are the powers, designations,
preferences and rights, and the qualifications, limitations or restrictions
thereof, of each class of stock of the Corporation:
A. PREFERRED STOCK:
The Preferred Stock may be issued in one or more series. The
Board of Directors of the Corporation (the "Board of Directors") is hereby
authorized to issue the shares of Preferred Stock in each series and to fix from
time to time before issuance the number of shares to be included in any series
and the designation, relative powers, preferences and rights and qualifications,
limitations or restrictions of all shares of such series. The authority of the
Board of Directors with respect to each series shall include, without limiting
the generality of the foregoing, the determination of any or all of the
following:
1. the number of shares of any series and the
designations to distinguish the shares of such series from the shares of all
other series;
2. the voting powers, if any, of such shares in the
series and whether such voting powers are full or limited;
3. the redemption provisions, if any, applicable to such
series, including the redemption price or prices to be paid;
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4. whether dividends, if any, shall be cumulative or
noncumulative, the dividend rate of such series, and the dates and preferences
of dividends on such series;
5. the rights of such series upon the voluntary or
involuntary dissolution of, or upon any distribution of the assets of, the
Corporation;
6. the provisions, if any, pursuant to which the shares
of such series are convertible into, or exchangeable for, shares of any other
class or classes or of any other series of the same or any other class or
classes of stock, or any other security, of the Corporation or any other
corporation, and price or prices or the rates of exchange applicable thereto;
7. the right, if any, to subscribe for or to purchase
any securities of the Corporation or any other corporation;
8. the provisions, if any, of a sinking fund applicable
to such series; and
9. any other relative, participating, optional or other
special powers, preferences, rights, qualifications, limitations or restrictions
thereof;
all as shall be determined from time to time by the Board of Directors and as
shall be stated in a resolution or resolutions providing for the issuance of
such Preferred Stock (a "Preferred Stock Designation").
Holders of Preferred Stock shall not be entitled to receive notice of
any meeting of stockholders at which they are not entitled to vote.
B. COMMON STOCK. The Common Stock shall be subject to the express
terms of the Preferred Stock and any series thereof as set forth in one or more
Preferred Stock Designations.
FIFTH: From time to time the Corporation may issue its authorized
shares for such consideration per share (not less than the par value thereof) as
may be fixed by the Board of Directors. Shares so issued for which the
consideration shall have been paid or delivered to the Corporation shall be
deemed fully paid stock and shall not be liable to any further call or
assessment thereon, and the holders of such shares shall not be liable for any
further payments in respect of such shares.
No holder of any shares of any class or series shall as such holder
have any preemptive right to subscribe for or purchase any other shares or
securities of any class or series, whether now or hereafter authorized, which at
any time may be offered for sale or sold by the Corporation.
Each holder of record of the Common Stock of the Corporation shall be
entitled to one vote for every share of Common Stock outstanding in his or its
name on the books of the Corporation.
3
<PAGE>
SIXTH: The number, classification and terms of the Board of Directors
of the Corporation and the procedures to elect directors and to remove directors
shall be as follows:
1. Except as otherwise fixed by or pursuant to the
provisions of this Certificate of Incorporation relating to the rights of the
holders of Preferred Stock to elect directors under specified circumstances, the
number of directors shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the then authorized
number of directors of the Corporation (as determined in accordance with the
bylaws (the "Bylaws")). No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. No director
need be a stockholder.
2. Subject to the rights of holders of any subsequently
issued class or series of Preferred Stock, the directors of the Corporation
shall be divided by the Board of Directors into three classes (the "Classified
Directors") with the first class ("Class I"), second class ("Class II") and
third class ("Class III") each to consist as nearly as practicable of an equal
number of directors. The term of office of the Class I directors shall expire at
the 2001 annual meeting of stockholders, the term of office of the Class II
directors shall expire at the 2002 annual meeting of stockholders, and the term
of office of the Class III directors shall expire at the 2003 annual meeting of
stockholders, with each director to hold office until his or her successor shall
have been duly elected and qualified. At each annual meeting of stockholders,
Classified Directors elected to succeed those Classified Directors whose terms
then expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election.
3. The directors of the Corporation need not be elected
by written ballot unless the bylaws otherwise provide.
4. A director of the Corporation may be removed only for
cause. For purposes of removal of a director of the Corporation, "cause" shall
mean (a) a final conviction of a felony involving moral turpitude or (b) willful
misconduct that is materially and demonstrably injurious economically to the
Corporation. For purposes of this definition of "cause," no act, or failure to
act, by a director shall be considered "willful" unless committed in bad faith
and without a reasonable belief that the act or failure to act was in the best
interest of the Corporation or any Affiliate of the Corporation. "Cause" shall
not exist unless and until the Corporation has delivered to the director a
written notice of the act or failure to act that constitutes "cause" and such
director shall not have cured such act or omission within 90 days after the
delivery of such notice. As used in this Certificate of Incorporation,
"Affiliate" has the meaning given such term under Rule 12b-2 of the Securities
Exchange Act of 1934, as amended.
SEVENTH: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized:
(1) To make, alter or repeal the Bylaws;
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<PAGE>
(2) To authorize and cause to be executed mortgages and
liens upon the real and personal property of the Corporation;
(3) To set apart out of any of the funds of the
Corporation available for dividends a reserve or reserves for any proper purpose
and to abolish any such reserve in the manner in which it was created; and
(4) By a majority of the whole Board of Directors, to
designate one or more committees, each committee to consist of two or more of
the directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. Any such committee, to
the extent provided in the resolution creating the committee or in the Bylaws,
shall have and may exercise the powers of the Board of Directors in the
management of the business and affairs of the Corporation and may authorize the
seal of the Corporation to be affixed to all papers which may require it;
provided, however, that the Bylaws may provide that in the absence or
disqualification of any member of such committee or committees the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
EIGHTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under Section 79 of Title 8 of the Delaware Code, order a
meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
NINTH: Meetings of the stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statute) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws. Election of directors need not be by
written ballot unless the Bylaws shall so provide.
5
<PAGE>
TENTH: No action required to be taken or that may be taken at any
meeting of holders of Common Stock may be taken without a meeting, and the power
of holders of Common Stock to consent in writing, without a meeting, to the
taking of any action is specifically denied. Notwithstanding any other
provisions of this Certificate of Incorporation or any provision of law that
might otherwise permit a lesser or no vote, but in addition to any affirmative
vote of the holders of any particular class or series of the capital stock of
the Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of not less than eighty percent of the shares of
the Corporation then entitled to be voted in an election of directors, voting
together as a single class, shall be required to amend or repeal, or to adopt
any provision inconsistent with, this Article Tenth.
ELEVENTH: The Corporation is to have perpetual existence.
TWELFTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon the
stockholders of the Corporation herein are granted subject to this reservation.
THIRTEENTH: No contract or transaction between the Corporation and one
or more of its directors, officers, or stockholders or between the Corporation
and any Person (as hereinafter defined) in which one or more of its directors,
officers, or stockholders are directors, officers, or stockholders, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the Board of Directors or committee which authorizes the contract or
transaction, or solely because his vote is counted for such purpose, if: (i) the
material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; (ii) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or (iii) the contract or transaction is
fair as to the Corporation as of the time it is authorized, approved, or
ratified by the Board of Directors, a committee thereof, or the stockholders.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which authorizes
the contract or transaction. "Person" as used herein means any corporation,
partnership, limited liability company, association, firm, trust, joint venture,
political subdivision or instrumentality.
FOURTEENTH: The Corporation shall indemnify any Person who was, is, or
is threatened to be made a party to a proceeding (as hereinafter defined) by
reason of the fact that he (i) is or was a director or officer of the
Corporation or (ii) while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint
6
<PAGE>
venture, sole proprietorship, trust, employee benefit plan, or other enterprise,
to the fullest extent permitted under the General Corporation Law of the State
of Delaware, as the same exists or may hereafter be amended. Such right shall be
a contract right and as such shall run to the benefit of any director or officer
who is elected and accepts the position of director or officer of the
Corporation or elects to continue to serve as a director or officer of the
Corporation while this Article Fourteenth is in effect. Any repeal or amendment
of this Article Fourteenth shall be prospective only and shall not limit the
rights of any such director or officer or the obligations of the Corporation
with respect to any claim arising from or related to the services of such
director or officer in any of the foregoing capacities prior to any such repeal
or amendment to this Article Fourteenth. Such right shall include the right to
be paid by the Corporation expenses incurred in investigating or defending any
such proceeding in advance of its final disposition to the maximum extent
permitted under the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended. If a claim for indemnification or
advancement of expenses hereunder is not paid in full by the Corporation within
sixty (60) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim, and if successful in whole or in part,
the claimant shall also be entitled to be paid the expenses of prosecuting such
claim. It shall be a defense to any such action that such indemnification or
advancement of costs of defense is not permitted under the General Corporation
Law of the State of Delaware, but the burden of proving such defense shall be on
the Corporation. Neither the failure of the Corporation (including its Board of
Directors or any committee thereof, independent legal counsel, or stockholders)
to have made its determination prior to the commencement of such action that
indemnification of, or advancement of costs of defense to, the claimant is
permissible in the circumstances nor an actual determination by the Corporation
(including its Board of Directors or any committee thereof, independent legal
counsel, or stockholders) that such indemnification or advancement is not
permissible shall be a defense to the action or create a presumption that such
indemnification or advancement is not permissible. In the event of the death of
any Person having a right of indemnification under the foregoing provisions,
such right shall inure to the benefit of his or her heirs, executors,
administrators, and personal representatives. The rights conferred above shall
not be exclusive of any other right which any Person may have or hereafter
acquire under any statute, bylaw, resolution of stockholders or directors,
agreement, or otherwise.
The Corporation may additionally indemnify any employee or agent of the
Corporation to the fullest extent permitted by law.
Without limiting the generality of the foregoing, to the extent
permitted by then applicable law, the grant of mandatory indemnification
pursuant to this Article Fourteenth shall extend to proceedings involving the
negligence of such Person.
As used herein, the term "proceeding" means any threatened, pending, or
completion action, suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, or
proceeding, and any inquiry or investigation that could lead to such an action,
suit, or proceeding.
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FIFTEENTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware; or (iv) for any transaction from which the director
derived an improper personal benefit. Any repeal or amendment of this Article
Fifteenth by the stockholders of the Corporation shall be prospective only, and
shall not adversely affect any limitation on the personal liability of a
director of the Corporation arising from an act or omission occurring prior to
the time of such repeal or amendment. In addition to the circumstances in which
a director of the Corporation is not personally liable as set forth in the
foregoing provisions of this Article Fifteenth, a director shall not be liable
to the Corporation or its stockholders to such further extent as permitted by
any law hereafter enacted, including without limitation any subsequent amendment
to the General Corporation Law of the State of Delaware.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, I have hereunto set my hand and seal, the ____ day
of ________________, 2000.
DIGITALCONVERGENCE.:COM INC.
By:_______________________________________
Name:_____________________________________
Title:____________________________________
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<PAGE>
EXHIBIT A
AMENDED CERTIFICATE OF DESIGNATION
OF SERIES A CONVERTIBLE PREFERRED STOCK
OF
DIGITALCONVERGENCE.:COM INC.
See Exhibit 4.2.
<PAGE>
EXHIBIT B
CERTIFICATE OF DESIGNATION
OF SERIES B CONVERTIBLE PREFERRED STOCK
OF
DIGITALCONVERGENCE.:COM INC.
See Exhibit 4.3.
<PAGE>
EXHIBIT C
CERTIFICATE OF DESIGNATION
OF SERIES C CONVERTIBLE PREFERRED STOCK
OF
DIGITALCONVERGENCE.:COM INC.
See Exhibit 4.4.
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
DIGITALCONVERGENCE.:COM INC.
These Bylaws are subject to, and governed by, the General Corporation
Law of the State of Delaware (the "Delaware General Corporation Law") and the
certificate of incorporation (as the same may be amended and restated from time
to time) of DigitalConvergence.:Com Inc., a Delaware corporation (the
"Corporation"). In the event of a direct conflict between the provisions of
these Bylaws and the mandatory provisions of the Delaware General Corporation
Law or the provisions of the certificate of incorporation of the Corporation,
such provisions of the Delaware General Corporation Law or the certificate of
incorporation of the Corporation, as the case may be, will be controlling.
ARTICLE I
OFFICES
Section 1. DELAWARE OFFICE. The office of the Corporation within the
State of Delaware shall be in the City of Dover, County of Kent.
Section 2. OTHER OFFICES. The Corporation may also have an office or
offices and keep the books and records of the Corporation, except as may
otherwise be required by law, in such other place or places, either within or
without the State of Delaware, as the Board of Directors of the Corporation (the
"Board") may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. All meetings of stockholders of the
Corporation shall be held at the office of the Corporation in the State of
Delaware or at such other place, within or without the State of Delaware, as may
from time to time be fixed by the Board or specified or fixed in the respective
notices or waivers of notice thereof.
Section 2. ANNUAL MEETINGS. The annual meeting of stockholders of the
Corporation for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held annually on such
date and at such time as may be fixed by the Board. Except as otherwise
permitted by law, no stockholder of the Corporation shall require the Board to
call an annual meeting of stockholders of the Corporation. At such meeting, the
stockholders shall elect directors and transact such other business as may
properly be brought before the meeting.
<PAGE>
Section 3. SPECIAL MEETINGS. Special meetings of stockholders, unless
otherwise provided by law, may be called at any time only by the Chairman of the
Board, the Chief Executive Officer, the President, or the Board pursuant to a
resolution adopted by a majority of the then authorized number of directors (as
determined in accordance with Section 2 of Article III of these Bylaws).
Section 4. NOTICE. Written or printed notice stating the place, day,
and time of each meeting of the stockholders and, in case of a special meeting,
the purpose or purposes for which the meeting is called shall be delivered not
less than ten (10) nor more than sixty (60) days before the date of the meeting,
either personally or by mail, by or at the direction of the Chief Executive
Officer, the President, the Secretary, or the officer or person(s) calling the
meeting, to each stockholder of record entitled to vote at such meeting. If such
notice is to be sent by mail, it shall be directed to each stockholder at his
address as it appears on the records of the Corporation, unless he shall have
filed with the Secretary of the Corporation a written request that notices to
him be mailed to some other address, in which case it shall be directed to him
at such other address. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall attend such meeting in person
or by proxy and shall not, at the beginning of such meeting, object to the
transaction of any business because the meeting is not lawfully called or
convened, or who shall, either before or after the meeting, submit a signed
waiver of notice, in person or by proxy.
Section 5. NOTICE OF STOCKHOLDER BUSINESS AT ANNUAL MEETING. (a) At an
annual meeting of the stockholders, only such business shall be conducted as
shall have been brought before the meeting pursuant to the Corporation's notice
of meeting, by or at the direction of a majority of the members of the Board, or
by any stockholder of the Corporation who is a stockholder of record at the time
of giving of notice provided for in this Bylaw, who shall be entitled to vote at
such meeting, and who complies with the notice procedures set forth in paragraph
(b) of this Bylaw.
(b) For business to be properly brought before an annual
meeting by a stockholder pursuant to clause (iii) of paragraph (a) of this
Bylaw, the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than ninety (90) days nor more than one hundred twenty
(120) days prior to the first anniversary of the preceding year's annual
meeting; PROVIDED, HOWEVER, that in the event that the date of the meeting is
changed by more than thirty (30) days from such anniversary date, notice by the
stockholder to be timely must be received no later than the close of business on
the tenth day following the earlier of the day on which notice of the date of
the meeting was mailed or public disclosure of the meeting date was made. A
stockholder's notice to the Secretary with respect to business to be brought at
an annual meeting shall set forth (1) the nature of the proposed business with
reasonable particularity, including the exact text of any proposal to be
presented for adoption, and the reasons for conducting that business at the
annual meeting, (2) with respect to each such stockholder, that stockholder's
name and address (as they appear on the records of the Corporation), business
address and telephone number, residence address and telephone number, and the
number of shares of each class of capital
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stock of the Corporation beneficially owned by that stockholder and (3) any
interest of the stockholder in the proposed business.
(c) Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Bylaw. The chairman of an
annual meeting shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting and in accordance with
the procedures prescribed by these Bylaws, and if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Nothing in this Bylaw shall relieve
a stockholder who proposes to conduct business at an annual meeting from
complying with all applicable requirements, if any, of the Securities Exchange
Act of 1934 (the "Exchange Act"), and the rules and regulations thereunder.
Section 6. QUORUM. At each meeting of stockholders of the Corporation,
the holders of a majority of the shares of capital stock of the Corporation
issued and outstanding and entitled to vote shall be present or represented by
proxy to constitute a quorum for the transaction of business, except as
otherwise provided by law.
Section 7. ADJOURNMENTS. In the absence of a quorum at any meeting of
stockholders or any adjournment or adjournments thereof, the chairman of the
meeting or a majority in interest of those present or represented by proxy and
entitled to vote may adjourn the meeting from time to tithe until a quorum shall
be present or represented by proxy. At any such adjourned meeting at which a
quorum shall be present or represented by proxy, any business may be transacted
which might have been transacted at the meeting as originally called if a quorum
had been present or represented by proxy thereat.
Section 8. ORDER OF BUSINESS. The order of business at all meetings of
stockholders shall be as determined by the chairman of the meeting.
Section 9. VOTING. Except as otherwise provided in the Certificate of
Incorporation, at each meeting of stockholders, every stockholder of the
Corporation shall be entitled to one vote for every share of capital stock
standing in his name on the stock records of the Corporation (i) at the time
fixed pursuant to Section 6 of Article VII of these Bylaws as the record date
for the determination of stockholders entitled to vote at such meeting, or (ii)
if no such record date shall have been fixed, then at the close of business on
the date next preceding the day on which notice thereof shall be given. At each
meeting of stockholders, all matters (except in cases where a larger vote is
required by law or by the certificate of incorporation of the Corporation or
these Bylaws) shall be decided by a majority of the votes cast at such meeting
by the holders of shares present or represented by proxy and entitled to vote
thereon, a quorum being present.
Section 10. INSPECTORS. For each election of directors by the
stockholders and in any case in which it shall be advisable, in the opinion of
the Board, that the voting upon any other matter shall be conducted by
inspectors of election, the Board shall appoint two inspectors of election. If,
for any
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such election of directors or the voting upon any such other matter, any
inspector appointed by the Board shall be unwilling or unable to serve, or if
the Board shall fail to appoint inspectors, the chairman of the meeting shall
appoint the necessary inspector or inspectors. The inspectors so appointed,
before entering upon the discharge of their duties, shall be sworn faithfully to
execute the duties of inspectors with strict impartiality, and according to the
best of their ability, and the oath so taken shall be subscribed by them. Such
inspectors shall determine the number of shares outstanding and the voting power
of each, the number of shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes or ballots,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes or ballots, determine the result,
and do such acts as are proper to conduct the election or vote with fairness to
all stockholders. On request of the chairman of the meeting or any stockholder
entitled to vote thereat, the inspectors shall make a report in writing of any
challenge, question or matter determined by them and shall execute a certificate
of any fact found by them. No director or candidate for the office of director
shall act as an inspector of election of directors. Inspectors need not be
stockholders.
Section 11. CERTAIN RULES OF PROCEDURE RELATING TO STOCKHOLDER
MEETINGS. All stockholder meetings, annual or special, shall be governed in
accordance with the following rules:
(a) Only stockholders of record will be permitted to
present motions from the floor at any meeting of stockholders.
(b) The chairman of the meeting shall preside over and
conduct the meeting in a fair and reasonable manner, and all questions of
procedure or conduct of the meeting shall be decided solely by the chairman of
the meeting. The chairman of the meeting shall have all power and authority
vested in a presiding officer by law or practice to conduct an orderly meeting.
Among other things, the chairman of the meeting shall have the power to adjourn
or recess the meeting, to silence or expel persons to ensure the orderly conduct
of the meeting, to declare motions or persons out of order, to prescribe rules
of conduct and an agenda for the meeting, to impose reasonable time limits on
questions and remarks by any stockholder, to limit the number of questions a
stockholder may ask, to limit the nature of questions and comments to one
subject matter at a time as dictated by any agenda for the meeting, to limit the
number of speakers or persons addressing the chairman of the meeting or the
meeting, to determine when the polls shall be closed, to limit the attendance at
the meeting to stockholders of record, beneficial owners of stock who present
letters from the record holders confirming their status as beneficial owners,
and the proxies of such record and beneficial holders, and to limit the number
of proxies a stockholder may name.
Section 12. REQUESTS FOR STOCKHOLDER LIST AND CORPORATION RECORDS.
Stockholders shall have those rights afforded under the General Corporation Law
of the State of Delaware to inspect a list of stockholders and other related
records and make copies or extracts therefrom. Such request shall be in writing
in compliance with Section 220 of the General Corporation Law of the State of
Delaware. In addition, any stockholder making such a request must agree that any
information so inspected, copied or extracted by the stockholder shall be kept
confidential, that any copies or
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extracts of such information shall be returned to the Corporation and that such
information shall only be used for the purpose stated in the request.
Information so requested shall be made available for inspecting, copying or
extracting at the principal executive offices of the Corporation. Each
stockholder desiring a photostatic or other duplicate copies of any of such
information requested shall make arrangements to provide such duplicating or
other equipment necessary in the city where the Corporation's principal
executive offices are located. Alternative arrangements with respect to this
Section 12 may be permitted in the discretion of the Chief Executive Officer of
the Corporation or by vote of the Board.
ARTICLE III
DIRECTORS
Section 1. POWERS. The business of the Corporation shall be managed
under the direction of the Board. The Board may exercise all such authority and
powers of the Corporation and do all such lawful acts and things as are not by
law or otherwise directed or required to be exercised or done by the
stockholders.
Section 2. NUMBER, ELECTION AND TERMS. The authorized number of
directors may be determined from time to time by vote of a majority of the then
authorized number of directors; provided however, that such number shall not be
less than one or more than nine. No decrease in the number of directors
constituting the Board shall shorten the term of any incumbent director.
Section 3. NOMINATION OF DIRECTOR CANDIDATES. (a) Only persons who are
nominated in accordance with the procedures set forth in these Bylaws shall be
eligible to serve as directors. Nominations of persons for election to the Board
may be made at a meeting of stockholders (i) by or at the direction of the Board
or (ii) by any stockholder of the Corporation who is a stockholder of record at
the time of giving notice provided for in this Bylaw, who shall be entitled to
vote for the election of directors at the meeting and who complies with the
notice procedures set forth in this Bylaw.
(b) Nominations by stockholders shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation (i) in the case of an annual
meeting, not less than ninety (90) days nor more than one hundred twenty (120)
days prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
changed by more than thirty (30) days from such anniversary date, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the earlier of the day on which notice of the
date of the meeting was mailed or public disclosure of the date of the meeting
was made, and (ii) in the case of a special meeting at which directors are to be
elected, not later than the close of business on the 10th day following the
earlier of the day on which notice of the date of the meeting was mailed or
public disclosure of the date of the meeting was made. Such stockholder's notice
shall set forth (1) as to
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each person whom the stockholder proposes to nominate for election or reelection
as a director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Exchange Act
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (2) as to the stockholder
giving the notice (A) the name and address, as they appear on the Corporation's
books, of such stockholder and (B) the class and number of shares of the
Corporation which are beneficially owned by such stockholder and also which are
owned of record by such stockholder; and (3) as to the beneficial owner, if any,
on whose behalf the nomination is made, (A) the name and address of such person
and (B) the class and number of shares of the Corporation which are beneficially
owned by such person. At the request of the Board, any person nominated by the
Board for election as a director shall furnish the Secretary of the Corporation
that information required to be set forth in the stockholder's notice of
nomination which pertains to the nominee. Notwithstanding any of the notice
provisions stated in this paragraph to the contrary, in the event that the
number of directors to be elected to the Board is increased and there is no
public disclosure naming all of the nominees for director or specifying the size
of the increased Board made by the Corporation at least one hundred (100) days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Bylaw shall also be considered timely, but
only with respect to nominees for any new positions created by such increase, if
it shall be delivered to the principal executive offices of the Corporation not
later than the close of business on the 10th day following the day on which such
public disclosure is first made by the Corporation.
(c) Notwithstanding anything in these Bylaws to the
contrary, no person shall be eligible to serve as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Bylaw. The
chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by these Bylaws, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded. Nothing is
this Bylaw shall relieve stockholders from complying with all applicable
requirements, if any, of the Exchange Act, and the rules and regulations
thereunder.
Section 4. ELECTION. At each meeting of stockholders for the election
of directors at which a quorum is present, the persons receiving a plurality of
the votes cast shall be elected directors.
Section 5. PLACE OF MEETINGS. Meetings of the Board shall be held at
the Corporation's office in the State of Delaware or at such other place, within
or without such state, as the Board may from time to time determine or as shall
be specified or fixed in the notice or waiver of notice of any such meeting.
Section 6. REGULAR MEETINGS. Regular meetings of the Board shall be
held in accordance with a yearly meeting schedule as determined by the Board; or
such meetings may be held on such
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other days and at such other times as the Board may from time to time determine.
Notice of regular meetings of the Board need not be given except as otherwise
required by these Bylaws.
Section 7. SPECIAL MEETINGS. Special meetings of the Board may be
called by the Chief Executive Officer and shall be called by the Secretary at
the request of any two of the other directors.
Section 8. NOTICE OF MEETINGS. Notice of each special meeting of the
Board (and of each regular meeting for which notice thereof shall be required),
stating the time, place and purposes thereof; shall be mailed to each director,
addressed to him at his residence or usual place of business, or shall be sent
to him by telex, cable or telegram so addressed, or shall be given personally or
by telephone, on twenty-four hours notice, or such shorter notice as the person
or persons calling such meeting may deem necessary or appropriate in the
circumstances.
Section 9. QUORUM AND MANNER OF ACTS. The presence of at least a
majority of the authorized number of directors shall be necessary and sufficient
to constitute a quorum for the transaction of business at any meeting of the
Board or a committee thereof. If a quorum shall not be present at any meeting of
the Board or a committee thereof, a majority of the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present. Except where a
different vote is required by law the act of a majority of the directors present
at any meeting at which a quorum shall be present shall be the act of the Board.
Any action required or permitted to be taken by the Board may be taken without a
meeting if all the directors consent in writing to the adoption of a resolution
authorizing the action. The resolution and the written consents thereto by the
directors shall be filed with the minutes of the proceedings of the Board. Any
one or more directors may participate in any meeting of the Board by means of a
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at a meeting of the Board.
Section 10. RESIGNATION. Any director may resign at any time by giving
written notice to the Corporation; provided, however, that written notice to the
Board, the Chairman of the Board, the Chief Executive Officer or the Secretary
shall be deemed to constitute notice to the Corporation. Such resignation shall
take effect upon receipt of such notice or at any later time specified therein
and, unless otherwise specified therein, acceptance of such resignation shall
not be necessary to make it effective.
Section 11. COMPENSATION OF DIRECTORS. The Board may provide for the
payment to any of the directors of a specified amount for services as a director
or member of a committee of the Board, or of a specified amount for attendance
at each regular or special Board meeting or committee meeting, or of both, and
all directors shall be reimbursed for expenses of attendance at any such
meeting; PROVIDED, HOWEVER, that nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
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Section 12. VACANCIES, ADDITIONAL DIRECTORS AND REMOVAL FROM OFFICE.
Vacancies in the Board resulting from death, resignation, retirement,
disqualification, removal from office or other cause and newly-created
directorships resulting from any increase in the authorized number of directors
shall be filled by a majority vote of the remaining directors then in office,
though less than a quorum, or by the sole remaining director, and each director
so chosen shall receive the classification of the vacant directorship to which
he or she has been appointed or, if it is a newly created directorship, shall
receive the classification that at least a majority of the Board designates and
shall hold office until the first meeting of stockholders held after his
election for the purpose of electing directors of that classification and until
his or her successor is elected and qualified or until his or her earlier death,
resignation or removal from office. If there are no directors in office (or
where holders of any class or classes or series thereof are entitled to elect
one or more directors, there are no directors of such class in office), an
election of directors may be held in the manner provided by statute. Any
director may be removed, but only for "cause" as defined in the certificate of
incorporation of the Corporation, by the holders of a majority of the shares
then entitled to vote at an election of directors at any special meeting of
stockholders duly called and held for such purpose.
Section 13. ACTION WITHOUT MEETING. Unless otherwise restricted by the
certificate of incorporation of the Corporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board, or of any
committee thereof as provided in Article IV of these Bylaws, may be taken
without a meeting, if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
Section 14. CORPORATE GOVERNANCE.
(a) Without the approval of the Board of the Corporation,
the Corporation agrees that it will not undertake any of the following actions:
(i) issue any additional shares of common stock
of the Corporation or any additional instruments, options or rights
entitling the holder thereof to acquire shares of common stock;
(ii) merge, consolidate, reorganize or sell all
or substantially all of the assets of the Corporation on a consolidated
basis;
(iii) fail to keep accurate books and records in
accordance with generally accepted accounting principles; or
(iv) approve any annual or long term strategic
plan, annual operating budget or capital expenditure budget or policy.
(b) The Board shall annually appoint an Audit Committee,
Compensation Committee and such other committees as the Board determines
necessary or advisable, the members
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of which shall be appointed in accordance with the provisions of Article IV of
these Bylaws. The Board shall establish and adopt a charter for each such
committee.
ARTICLE IV
COMMITTEES OF THE BOARD
Section 1. DESIGNATION, POWERS AND NAME. The Board may, by resolution
passed by a majority of the whole Board, designate one or more committees,
including, if they shall so determine, an Executive Committee, each such
committee to consist of one or more of the directors of the Corporation. If an
Audit Committee or a Compensation Committee is designated, each such committee
shall consist of one or more directors of the Corporation who are not employees
of the Corporation. The committee shall have and may exercise such of the powers
of the Board in the management of the business and affairs of the Corporation as
may be provided in such resolution; PROVIDED, HOWEVER, that no such committee
shall have the power or authority in reference to amending the certificate of
incorporation of the Corporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board, fix the designations and any of the preferences
or rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the Corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending the Bylaws of the Corporation; and, provided further,
that, unless the resolution establishing the committee expressly so provides, no
such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. The committee may authorize the seal of the
Corporation to be affixed to all papers which may require it. The Board may
designate one or more directors as alternate member(s) of any committee, who may
replace any absent or disqualified member at any meeting.
Section 2. MINUTES. Each committee of directors shall keep regular
minutes of its proceedings and report the same to the Board when required.
Section 3. COMPENSATION. Members of special or standing committees may
be allowed compensation for attending committee meetings, if the Board shall so
determine.
Section 4. ACTION BY CONSENT; PARTICIPATION BY TELEPHONE OR SIMILAR
EQUIPMENT. Unless the Board shall otherwise provide, any action required or
permitted to be taken by any committee may be taken without a meeting if all
members of the committee consent in writing to the adoption of a resolution
authorizing the action. The resolution and the written consents thereto by the
members of the committee shall be filed with the minutes of the proceedings of
the committee.
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Unless the Board shall otherwise provide, any one or more members of any such
committee may participate in any meeting of the committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation by such means
shall constitute presence in person at a meeting of the committee.
Section 5. CHANGES IN COMMITTEES; RESIGNATIONS; REMOVALS. The Board
shall have power, by the affirmative vote of a majority of the authorized number
of directors, at any time to change the members of, to fill vacancies in, and to
discharge any committee of the Board. Any member of any such committee may
resign at any time by giving notice to the Corporation, provided, however, that
notice to the Board, the Chairman of the Board, the Chief Executive Officer, the
Chairman of such committee or the Secretary shall be deemed to constitute notice
to the Corporation. Such resignation shall take effect upon receipt of such
notice or at any later time specified therein; and, unless otherwise specified
therein, acceptance of such resignation shall not be necessary to make it
effective. Any member of any such committee may be removed at any time, either
with or without cause by the affirmative vote of a majority of the authorized
number of directors at any meeting of the Board called for that purpose.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Corporation shall be a
Chairman of the Board (if such office is created by resolution adopted by the
Board), a Chief Executive Officer, a President, one or more Vice Presidents (any
one or more of whom may be designated Executive Vice President or Senior Vice
President), a Secretary and a Treasurer. The Board may appoint such other
officers and agents, including Assistant Vice Presidents, Assistant Secretaries
and Assistant Treasurers, as it shall deem necessary, who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined by the Board. Any two or more offices, other than the
offices of President and Secretary, may be held by the same person. No officer
shall execute, acknowledge, verify or countersign any instrument on behalf of
the Corporation in more than one capacity, if such instrument is required by
law, by these Bylaws or by any act of the Corporation to be executed,
acknowledged, verified or countersigned by two or more officers. The Chairman of
the Board shall be elected from among the directors. With the foregoing
exceptions, none of the other officers need be a director, and none of the
officers need be a stockholder of the Corporation unless otherwise required by
the certificate of incorporation of the Corporation.
Section 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation
shall be elected annually by the Board at its first regular meeting held after
the annual meeting of stockholders or as soon thereafter as conveniently
practicable. Each officer shall hold office until his successor shall have been
elected or appointed and shall have qualified or until his death or the
effective date of his resignation or removal, or until he shall cease to be a
director in the case of the Chairman of the Board.
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Section 3. REMOVAL AND RESIGNATION. Any officer or agent elected or
appointed by the Board may be removed without cause by the affirmative vote of a
majority of the Board whenever, in its judgment, the best interests of the
Corporation shall be served thereby, but such removal shall be without prejudice
to the contractual rights, if any, of the person so removed. Any officer may
resign at any time by giving written notice to the Corporation. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 4. VACANCIES. Any vacancy occurring in any office of the
Corporation by death, resignation, removal or otherwise, may be filled by the
Board for the unexpired portion of the term.
Section 5. SALARIES. The salaries of all officers and agents of the
Corporation shall be fixed by the Board or pursuant to its direction; and no
officer shall be prevented from receiving such salary by reason of his also
being a director.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board (if such
office is created by resolution adopted by the Board and who may also hold the
office of President or other offices) shall have such duties as the Board may
prescribe. In the Chairman's absence, such duties shall be attended to by the
Chief Executive Officer.
Section 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
preside at all meetings of the Board and at all meetings of the stockholders.
The Chief Executive Officer shall, subject to the Board, have general executive
charge, management, and control of the properties and operations of the
Corporation in the ordinary course of its business, with all such powers with
respect to such properties and operations as may be reasonably incident to such
responsibilities. The Chief Executive Officer shall have the power to appoint
and remove subordinate officers, agents and employees, including Assistant
Secretaries and Assistant Treasurers, except that the President may not remove
those elected or appointed by the Board. The Chief Executive Officer shall keep
the Board and the Executive Committee (if any) fully informed and shall consult
them concerning the business of the Corporation. The Chief Executive Officer may
sign, with the Secretary or another officer of the Corporation thereunto
authorized by the Board, certificates for shares of the Corporation and any
deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments,
the issue or execution of which shall have been authorized by resolution of the
Board, except in cases where the signing and execution thereof has been
expressly delegated by these Bylaws or by the Board to some other officer or
agent of the Corporation, or shall be required by law to be otherwise executed.
The Chief Executive Officer shall vote, or give a proxy to any other officer of
the Corporation to vote, all shares of stock of any other corporation standing
in the name of the Corporation. If the Board has not elected a Chairman of the
Board or in the absence, inability to act or refusal to act of the Chairman of
the Board, the Chief Executive Officer shall exercise all of the powers and
discharge all of the duties of the Chairman of the Board. As between the
Corporation and third parties, any action taken by the Chief Executive Officer
in the performance of the duties of the Chairman of the Board shall be
conclusive evidence that there is no Chairman of the Board or that the Chairman
of the Board is absent or unable to act.
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Section 8. PRESIDENT. The President shall perform such duties and
exercise such powers as usually appertain to such title and such other duties as
may be prescribed by the stockholders, the Board or the Executive Committee (if
any) from time to time. In the absence of the Chief Executive Officer, or in the
event of his inability or refusal to act, the President shall perform the duties
and exercise the powers of the Chief Executive Officer.
Section 9. VICE PRESIDENTS. In the absence of the President, or in the
event of his inability or refusal to act, the Executive Vice President (or in
the event there shall be no Vice President designated Executive Vice President,
any Vice President designated by the Board) shall perform the duties and
exercise the powers of the President. Any Vice President may sign, with the
Secretary or Assistant Secretary, certificates for shares of the Corporation and
any deeds, bonds, mortgages, contracts, checks, notes, drafts or other
instruments, the issue or execution of which shall have been authorized by
resolution of the Board, except in cases where the signing and execution thereof
has been expressly delegated by these Bylaws or by the Board to some other
officer or agent of the Corporation, or shall be required by law to be otherwise
executed. The Vice Presidents shall perform such other duties as from time to
time may be assigned to them by the Chairman of the Board (if any), the Chief
Executive Officer, the President, the Board or the Executive Committee (if any).
Section 10. SECRETARY. The Secretary shall (a) record the proceedings
of the meetings of the stockholders, the Board and committees of directors in
the permanent minute books of the Corporation kept for that purpose; (b) see
that all notices are duly given in accordance with the provisions of these
Bylaws and as required by law; (c) be custodian of the corporate records and of
the seal of the Corporation, and see that the seal of the Corporation or a
facsimile thereof is affixed to all certificates for shares of the Corporation
prior to the issue thereof and to all documents, the execution of which on
behalf of the Corporation under its seal is duly authorized in accordance with
the provisions of these Bylaws; (d) keep or cause to be kept a register of the
post office address of each stockholder which shall be furnished by such
stockholder; (e) sign with the Chairman of the Board (if any), the Chief
Executive Officer, the President, or an Executive Vice President or Vice
President, certificates for shares of the Corporation and any deeds, bonds,
mortgages, contracts, checks, notes, drafts or other instruments, the issue or
execution of which shall have been authorized by resolution of the Board, except
in cases where the signing and execution thereof has been expressly delegated by
these Bylaws or by the Board to some other officer or agent of the Corporation,
or shall be required by law to be otherwise executed; (f) have general charge of
the stock transfer books of the Corporation; and (g) in general, perform all
duties normally incident to the office of Secretary and such other duties as
from time to time may be assigned by the Chairman of the Board (if any), the
Chief Executive Officer, the President, the Board or the Executive Committee (if
any).
Section 11. TREASURER. If required by the Board, the Treasurer shall
give a bond for the faithful discharge of his or her duties in such sum and with
such surety or sureties as the Board shall determine. The Treasurer shall (a)
have charge and custody of and be responsible for all funds and securities of
the Corporation; receive and give receipts for monies due and payable to the
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Corporation from any source whatsoever and deposit all such monies in the
name of the Corporation in such banks, trust companies or other depositories
as shall be selected in accordance with the provisions of Section 4 of
Article VI of these Bylaws; (b) prepare, or cause to be prepared, for
submission at each regular meeting of the Board, at each annual meeting of
the stockholders, and at such other times as may be required by the Board,
the Chairman of the Board (if any), the Chief Executive Officer, the
President or the Executive Committee (if any), a statement of financial
condition of the Corporation in such detail as may be required; (c) sign with
the Chairman of the Board (if any), the Chief Executive Officer, the
President, or an Executive Vice President or Vice President, certificates for
shares of the Corporation and any deeds, bonds, mortgages, contracts, checks,
notes, drafts or other instruments, the issue or execution of which shall
have been authorized by resolution of the Board, except in cases where the
signing and execution thereof has been expressly delegated by these Bylaws or
by the Board to some other officer or agent of the Corporation, or shall be
required by law to be otherwise executed; and (d) in general, perform all the
duties incident to the office of Treasurer and such other duties as from time
to time may be assigned by the Chairman of the Board (if any), the Chief
Executive Officer, the President, the Board or the Executive Committee (if
any).
Section 12. ASSISTANT SECRETARY OR TREASURER. The Assistant Secretaries
and Assistant Treasurers shall, in general, perform such duties as shall be
assigned to them by the Secretary or the Treasurer, respectively, or by the
Chairman of the Board (if any), the President, the Board or the Executive
Committee (if any). The Assistant Secretaries and Assistant Treasurers shall, in
the absence of the Secretary or Treasurer, respectively, or in their respective
inability or refusal to act, perform all functions and duties which such absent
officers may delegate, but such delegation shall not relieve the absent officer
from the responsibilities and liabilities of their office. The Assistant
Secretaries may sign, with the Chairman of the Board (if any), the Chief
Executive Officer, the President or Executive Vice President or Vice President,
certificates for shares of the Corporation and any deeds, bonds, mortgages,
contracts, checks, notes, drafts or other instruments, the issue or execution of
which shall have been authorized by a resolution of the Board, except in cases
where the signing and execution thereof has been expressly delegated by these
Bylaws or by the Board to some other officer or agent of the Corporation, or
shall be required by law to be otherwise executed. The Assistant Treasurers
shall respectively, if required by the Board, give bonds for the faithful
discharge of their duties in such sums and with such sureties as the Board shall
determine.
ARTICLE VI
CONTRACTS, CHECKS, LOANS, DEPOSITS, ETC.
Section 1. CONTRACTS. The Board may authorize any officer or officers,
agent or agents, in the name and on behalf of the Corporation, to enter into any
contract or to execute and deliver any instrument, which authorization may be
general or confined to specific instances; and, unless so authorized by the
Board, no officer, agent or employee shall have any power or authority to bind
the Corporation by any contract or engagement or to pledge its credit or to
render it liable pecuniarily for any purpose or for any amount.
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<PAGE>
Section 2. CHECKS, ETC. All checks, drafts, bills of exchange or other
orders for the payment of money out of the funds of the Corporation, and all
notes or other evidences of indebtedness of the Corporation, shall be signed in
the name and on behalf of the Corporation in such manner as shall from time to
time be authorized by the Board, which authorization may be general or confined
to specific instances.
Section 3. LOANS. No loan shall be contracted on behalf of the
Corporation, and no negotiable paper shall be issued in its name, unless
authorized by the Board, which authorization may be general or confined to
specific instances. All bonds, debentures, notes and other obligations or
evidences of indebtedness of the Corporation issued for such loans shall be
made, executed and delivered as the Board shall authorize.
Section 4. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as may be selected by or in
the manner designated by the Board. The Board or its designees may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as may be deemed expedient.
ARTICLE VII
CAPITAL STOCK
Section 1. STOCK CERTIFICATES. Each stockholder shall be entitled to
have, in such form as shall be approved by the Board, a certificate or
certificates signed by the Chief Executive Officer or the President and by
either the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary (except that, when any such certificate is countersigned by a transfer
agent or registered by a registrar other than the Corporation itself or any
employee, the signatures of any such officers may be facsimiles, engraved or
printed), which may be sealed with the seal of the Corporation (which seal may
be a facsimile, engraved or printed), certifying the number of shares of capital
stock of the Corporation owned by such stockholder. In case any officer who has
signed or whose facsimile signature has been placed upon any such certificate
shall have ceased to be such officer before such certificate is issued, such
certificate may be issued by the Corporation with the same effect as if he were
such officer at the date of its issue.
Section 2. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make or cause to have prepared or made, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept
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<PAGE>
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder of the Corporation who is present.
Section 3. STOCK LEDGER. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 2 of this Article VII or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 4. TRANSFERS OF CAPITAL STOCK. Transfers of shares of capital
stock of the Corporation shall be made only on the stock records of the
Corporation by the holder of record thereof or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the Corporation or the transfer agent thereof, and only on surrender of the
certificate or certificates representing such shares, properly endorsed or
accompanied by a duly executed stock transfer power. The Board may make such
additional rules and regulations as it may deem expedient concerning the issue
and transfer of certificates representing shares of the capital stock of the
Corporation.
Section 5. LOST CERTIFICATES. The Board may direct a new certificate to
be issued in place of any certificate theretofore issued by the Corporation
alleged to have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming the certificate of stock to be lost, stolen
or destroyed. When authorizing such issue of a new certificate, the Board may,
in its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed certificate, or his legal
representative, to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 6. FIXING OF RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividends or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board may fix, in advance, a
record date, which shall not be more than sixty (60) days nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board may fix a new record date for the
adjourned meeting.
Section 7. BENEFICIAL OWNERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
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<PAGE>
ARTICLE VIII
DIVIDENDS
Section 1. DECLARATION. Dividends upon the capital stock of the
Corporation, subject to the provisions of the certificate of incorporation of
the Corporation, if any, may be declared by the Board at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or in
shares of capital stock, subject to the provisions of the certificate of
incorporation of the Corporation.
Section 2. RESERVE. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board from time to time, in their absolute discretion, think proper
as a reserve or reserves to meet contingencies or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the Board shall think conducive to the interests of the Corporation,
and the directors may modify or abolish any such reserve in the manner in which
it was created.
ARTICLE IX
SEAL
The Corporation's seal shall be circular in form and shall include the
name of the Corporation, the state and year of its incorporation, and the word
"Seal."
ARTICLE X
WAIVER OF NOTICE
Whenever any notice is required by law, the certificate of
incorporation of the Corporation or these Bylaws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders, directors, or
members of a committee of directors need be specified in any written waiver of
notice.
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<PAGE>
ARTICLE XI
AMENDMENTS
These Bylaws may be amended or supplemented in any respect at any time,
either (a) at any meeting of stockholders, provided that any amendment or
supplement proposed to be acted upon at any such meeting shall have been
described or referred to in the notice of such meeting, or (b) at any meeting of
the Board; provided that any amendment or supplement proposed to be acted upon
at any such meeting shall have been described or referred to in the notice of
such meeting or an announcement with respect thereto shall have been made at the
last previous Board meeting, and further provided that no amendment or
supplement adopted by the Board shall vary or conflict with any amendment or
supplement adopted by the stockholders.
[Remainder of page intentionally left blank]
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<PAGE>
I, the undersigned, being the Secretary of the Corporation DO HEREBY
CERTIFY THAT the foregoing are the Bylaws of said Corporation, as adopted by the
Board of said Corporation on the ______ day of ______________, 2000.
______________________________
William S. Leftwich, Secretary
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<PAGE>
AMENDED CERTIFICATE OF DESIGNATION
OF SERIES A CONVERTIBLE PREFERRED STOCK
of
DIGITALCONVERGENCE.:COM INC.
Section 1. DESIGNATION AND AMOUNT; OTHER SERIES OF PREFERRED.
(a) SERIES A PREFERRED.
There shall be a series of the Corporation's Preferred Stock
designated as "Series A Convertible Preferred Stock" (the "Series A
Preferred") and the number of shares of such series shall be sixteen thousand
(16,000). Each share of Series A Preferred is referred to herein as a "Share"
and, collectively, the "Shares." Immediately after a Qualified Public Offering
(as defined in Section 4(b) hereof), all authorized and unissued shares of
Series A Preferred shall be returned to the status of authorized, unissued and
undesignated shares of the Corporation's Preferred Stock, and all such shares
shall no longer be governed by this Certificate of Designation.
(b) OTHER SERIES OF PREFERRED.
The Corporation has also designated a Series B Convertible Preferred
Stock (the "Series B Preferred") and a Series C Convertible Preferred Stock
(the "Series C Preferred").
Section 2. DIVIDENDS AND DISTRIBUTIONS.
The holders of Shares of Series A Preferred shall be entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event that the Corporation declares
or pays any dividends upon the common stock, par value $0.01 per share, of the
Corporation (the "Common Stock") (whether payable in cash, securities or other
property), the Corporation shall also declare and pay to the holders of the
Series A Preferred at the same time that it declares and pays such dividends
to the holders of the Common Stock, the dividends which would have been
declared and paid with respect to the Common Stock issuable upon conversion of
the Series A Preferred pursuant to Section 4 hereof had all of the outstanding
Shares been so converted immediately prior to the record date for such
dividend, or if no record date is fixed, the date as of which the record
holders of Common Stock entitled to such dividends are to be determined. No
dividend shall be paid on or declared and set apart for the Shares for any
dividend period unless at
<PAGE>
the same time a like proportionate dividend for the same dividend period,
determined on an as-converted basis, shall be paid on or declared and set
apart for the shares of Series B Preferred and Series C Preferred.
Section 3. LIQUIDATION RIGHTS.
In the event of any liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary (a "Liquidation"), subject to
the pari passu rights of the Series B Preferred and the Series C Preferred set
forth in Section 3(d) below, distributions shall be made to the holders of
Series A Preferred in respect of such Series A Preferred before any amount
shall be paid to the holders of any other class or series of capital stock of
the Corporation in the following manner:
(a) SERIES A PREFERRED.
The holders of the Series A Preferred shall be entitled to
receive an amount equal to (i) the Conversion Value PLUS any declared but
unpaid dividends and (ii) the holders of Series A Preferred shall be entitled
to share ratably, on an "as if converted" basis, in all remaining assets and
surplus funds along with the holders of Common Stock (and any other class of
capital stock of the Corporation which has such "as if converted" status with
respect to a Liquidation).
(b) EVENTS DEEMED A LIQUIDATION.
For purposes of this Section 3, the holders of a majority of
the Shares may elect to have treated as a Liquidation the consolidation or
merger of the Corporation with or into any other corporation or the sale or
other transfer in a single transaction or a series of related transactions of
all or substantially all of the assets of the Corporation, or any other
reorganization of the Corporation, unless the stockholders of the Corporation
immediately prior to any such transaction are holders of a majority of the
voting securities of the surviving or acquiring corporation immediately
thereafter with comparable rights with respect to their respective classes of
shares (and for purposes of this calculation equity securities which any
stockholder or the Corporation owned immediately prior to such merger or
consolidation as a stockholder of another party to the transaction shall be
disregarded).
(c) VALUATION OF SECURITIES AND PROPERTY.
In the event the Corporation proposes to distribute assets
other than cash in connection with any Liquidation, the value of the assets to
be distributed to the holders of Shares of Series A Preferred shall be
determined in good faith by the Board of Directors. Any securities not subject
to contractual restrictions on free marketability shall be valued as follows:
(i) if traded on a national securities exchange or
the Nasdaq National
<PAGE>
Market System ("Nasdaq"), the value shall be deemed to be the
average of the security's closing prices on such exchange or
Nasdaq over the thirty (30) trading day period ending three
(3) days prior to the distribution;
(ii) if actively traded over-the-counter (other than
Nasdaq), the value shall be deemed to be the average of the
closing bid prices over the thirty (30) day period
ending three (3) days prior to the distribution; or
(iii) if there is no active public market, the value
shall be the fair market value thereof as determined in good
faith by the Board of Directors.
The method of valuation of securities subject to contractual
restrictions on free marketability shall be adjusted to make
an appropriate discount from the market value determined as
above in clauses (i), (ii) or (iii) to reflect the fair
market value thereof as determined in good faith by the
Board of Directors. The holders of at least 50% of the
outstanding Series A Preferred shall have the right to
challenge any determination by the Board of Directors of
fair market value pursuant to this Section 3(c), in which
case the determination of fair market value shall be made by
an independent appraiser selected jointly by the Board of
Directors and such holders, the cost of such appraisal to be
borne equally by the Corporation and such holders. If the
Board of Directors and such holders cannot agree on an
independent appraiser, each shall select an independent
appraiser and such two independent appraisers shall select
one independent appraiser to make such determination.
(d) PARI PASSU LIQUIDATION PRIORITY OF SERIES A
PREFERRED, SERIES B PREFERRED AND SERIES C
PREFERRED.
Notwithstanding any other term or provision hereof, the
Series A Preferred, Series B Preferred and Series C Preferred shall rank on a
pari passu basis in the event of any Liquidation. If the proceeds from a
Liquidation are not sufficient to pay to the holders of the Series A
Preferred, Series B Preferred and Series C Preferred the full preference
amount set forth in paragraph 3(a)(i) of the respective Certificates of
Designation for such shares, then such holders shall instead be entitled to
receive the entire assets and funds of the Corporation legally available for
distribution, which assets and funds shall be distributed ratably among the
holders of the Series A Preferred, the Series B Preferred and the Series C
Preferred in proportion to the full amount to which each holder would
otherwise be entitled as set forth in paragraph 3(a)(i) of the respective
Certificates of Designation for such shares.
Section 4. CONVERSION.
The holders of Series A Preferred have conversion rights as follows
(the "Conversion Rights"):
<PAGE>
(a) RIGHT TO CONVERT.
Each Share of Series A Preferred shall initially be
convertible, at the option of the holder thereof, at any time on or after the
date of issuance thereof, into the number of fully paid and nonassessable
shares of Common Stock which results from dividing the Conversion Price (as
hereinafter specified) per share in effect at the time of conversion into the
per share Conversion Value in effect at the time of conversion. The initial
Conversion Price of the Series A Preferred shall be $3,150 per share, and the
Conversion Value of the Series A Preferred shall be $3,150 per share. The
initial Conversion Price of the Series A Preferred shall be subject to
adjustment from time to time as provided in Section 4(d) hereof. The
Conversion Value shall not be subject to adjustment (except in connection with
a stock split, stock dividend, combination, recapitalization or other such
adjustment). Upon conversion, all declared but unpaid dividends on the Series
A Preferred so converted shall be paid in cash, to the extent permitted by
applicable law (and if not then permitted by applicable law, at such time as
the Corporation is permitted by applicable law to pay any such dividends).
(b) AUTOMATIC CONVERSION.
Each Share of Series A Preferred shall automatically be
converted into shares of Common Stock upon (i) the election of the holders of
at least two-thirds of the then outstanding Shares of Series A Preferred or
(ii) the closing of a firm commitment underwritten public offering of Common
Stock pursuant to an effective registration statement under the Securities Act
of 1933 in which: (A) the gross proceeds equal or exceed $75,000,000 and (B)
the aggregate market value of the Common Stock of the Corporation immediately
prior to the closing of the underwritten public offering, but assuming the
conversion of each then outstanding share of the Corporation's Preferred Stock
(and determined utilizing the offering price in such underwriting), equals or
exceeds $750,000,000 (a "Qualified Public Offering"). Upon conversion, all
declared but unpaid dividends on the Series A Preferred shall be paid in cash,
to the extent permitted by applicable law (and if not then permitted by
applicable law, at such time as the Corporation is permitted by applicable law
to pay any such dividends).
(c) MECHANICS OF CONVERSION.
Before any holder of Series A Preferred shall be entitled to
convert the same into shares of Common Stock and to receive certificates
therefor, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the principal office of the Corporation or of any
transfer agent for the Series A Preferred, and shall give written notice to
the Corporation at such office that such holder elects to convert the same;
provided, however, that in the event of an automatic conversion pursuant to
Section 4(b) hereof, the outstanding Shares of Series A Preferred shall be
converted automatically without any further action by the holders of such
Shares and whether or not the certificates representing such Shares are
surrendered to the Corporation or its transfer agent; and provided further
that the Corporation shall not be obligated
<PAGE>
to issue certificates evidencing the shares of Common Stock issuable upon such
automatic conversion unless and until the certificates evidencing such Shares
of Series A Preferred are either delivered to the Corporation or its transfer
agent as provided above, or the holder notifies the Corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The Corporation shall as soon as practicable after such delivery, or after
such agreement and indemnification, issue and deliver at such office to such
holder of Series A Preferred, a certificate or certificates for the number of
shares of Common Stock to which he or she shall be entitled as aforesaid and a
check payable to the holder in the amount of any declared but unpaid dividends
payable pursuant to Section 2 hereof, if any. Such conversion shall be deemed
to have been made immediately prior to the close of business on the date of
such surrender of the Shares of Series A Preferred to be converted, or, in the
case of automatic conversion, immediately prior to the occurrence of the event
leading to such automatic conversion, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date. If the Corporation fails to pay all such dividends
within twenty (20) days of the date of conversion, the holder entitled to such
dividends may elect to have the Corporation issue to such holder, in lieu of
such cash payment, additional shares of Common Stock calculated by dividing
the total amount payable on such date by the Conversion Value.
(d) ADJUSTMENTS TO CONVERSION PRICE.
(i) SPECIAL DEFINITIONS.
For purposes of this Section 4(d), the following
definitions shall apply:
(1) "OPTIONS" shall mean rights,
options or warrants to subscribe for, purchase or otherwise acquire either
Common Stock or Convertible Securities, other than the warrants issued to
National Broadcasting Company, Inc. pursuant to the Warrant Agreements,
entered into in April of 2000.
(2) "CONVERTIBLE SECURITIES" shall
mean any evidences of indebtedness, shares or other securities convertible
into or exchangeable for Common Stock.
(3) "ADDITIONAL SHARES OF COMMON
STOCK" shall mean all shares of Common Stock issued (or, pursuant to Section
4(d)(iii), deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable: (A) upon
conversion of Shares or any other shares of the Corporation's Preferred Stock;
(B) as a dividend or distribution on any shares of the Corporation's Preferred
Stock, including the Shares; (C) in a transaction described in Section
4(d)(vi); (D) pursuant to any stock option plan, stock purchase plan, stock
award plan or stock incentive plan of the Corporation in any amount less than
fifteen percent (15%) of the fully diluted Common Stock and the Corporation's
Preferred
<PAGE>
Stock on an as-converted basis; (E) the issuance of warrants to National
Broadcasting Company, Inc. pursuant to the Warrant Agreements, both entered
into in April of 2000, or shares of Common Stock issuable upon exercise
thereof; (F) upon the exercise or conversion of warrants or options
outstanding on the Original Issue Date; or (G) by way of dividend or other
distribution on shares of Common Stock excluded from the definition of
Additional Shares of Common Stock by the foregoing clauses (A), (B), (C), (D),
(E), (F) or this clause (G).
(4) "ORIGINAL ISSUE DATE" shall mean the
date on which the first Share of Series A Preferred was issued.
(ii) ADJUSTMENT OF CONVERSION PRICE RESULTING
FROM ISSUANCE OF ADDITIONAL SHARES.
No adjustment in the Conversion Price of the Series
A Preferred shall be made in respect of the issuance of Additional Shares of
Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Corporation is less than the
Conversion Price for the Series A Preferred in effect on the date of, and
immediately prior to, such issue.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF
COMMON STOCK.
In the event the Corporation at any time or from
tim to time after the Original Issue Date shall issue any Options (other than
Options under the Corporation's Stock Option Plan that upon exercise would not
constitute Additional Shares of Common Stock) or Convertible Securities or
shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities then
the maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the exercise of
such Options and conversion or exchange of such Convertible Securities shall
be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case such a record date shall have been fixed, as of the
close of business on such record date, provided that Additional Shares of
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 4(d)(v) hereof) of such Additional
Shares of Common Stock would be less than the Conversion Price in effect on
the date of and immediately prior to such issue, or such record date, as the
case may be, and provided further that in any such case in which Additional
Shares of Common Stock are deemed to be issued:
(1) except as provided in Section
4(d)(iii)(2), no further adjustment in the Conversion Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common Stock upon
the exercise of such Options or conversion or exchange of such Convertible
Securities;
<PAGE>
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any change in the consideration payable to the Corporation, or change in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof (other than under or by reason of provisions designed to
protect against dilution), the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto)
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities; and
(3) no readjustment pursuant to clause
(2) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (A) the Conversion Price on the original
adjustment date or (B) the Conversion Price that would have resulted from any
issuance of Additional Shares of Common Stock between the original adjustment
date and such readjustment date.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON
ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK.
In the event the Corporation shall issue Additional
Shares of Common Stock (including Additional Shares of Common Stock deemed to
be issued pursuant to Section 4(d)(iii)) without consideration or for a
consideration per share less than the Conversion Price in effect on the date
of and immediately prior to such issue, then and in each such event the
Conversion Price of the Series A Preferred shall be reduced to a price
(calculated to the nearest cent) determined by multiplying such Conversion
Price of the Series A Preferred by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issue plus the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price of
the Series A Preferred, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued.
(v) DETERMINATION OF CONSIDERATION.
For purposes of this Section 4(d), the
consideration received by the Corporation for the issue of any Additional
Shares of Common Stock shall be00 computed as follows:
(1) CASH AND PROPERTY:
(A) insofar as it consists of cash, such
consideration shall be computed at the aggregate amount of cash received by
the Corporation; (B) insofar as it consists of property other than cash, such
consideration shall be computed at the fair value thereof at the
<PAGE>
time of such issue, as determined by the Board of Directors in the good faith
exercise of its reasonable business judgment; and (C) in the event Additional
Shares of Common Stock are issued together with other shares or securities or
other assets of the Corporation for consideration which covers both, such
consideration shall be the proportion of such consideration so received,
computed as provided in clauses (A) and (B) above, as determined by the Board
of Directors in the good faith exercise of its reasonable business judgment.
(2) OPTIONS AND CONVERTIBLE SECURITIES.
The consideration per share received by
the Corporation for Additional Shares of Common Stock deemed to have been
issued pursuant to Section 4(d)(iii), relating to Options and Convertible
Securities, shall be determined by dividing (A) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment
of such consideration) payable to the Corporation upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, or in
the case of Options for Convertible Securities, the exercise of such Options
for Convertible Securities and the conversion or exchange of such Convertible
Securities, by (B) the maximum number of shares of Common Stock (as set forth
in the instruments relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such number) issuable upon the exercise
of such Options or the conversion or exchange of such Convertible Securities.
(vi) OTHER ADJUSTMENTS.
(1) SUBDIVISIONS, COMBINATIONS, OR OF
COMMON STOCK.
In the event the outstanding shares of
Common Stock shall be subdivided, combined or consolidated, by stock split,
stock dividend, combination or like event, into a greater or lesser number of
shares of Common Stock, the Conversion Price of the Series A Preferred in
effect immediately prior to such subdivision, combination, consolidation or
stock dividend shall, concurrently with the effectiveness of such subdivision,
combination or consolidation, be proportionately adjusted.
(2) RECLASSIFICATIONS.
In the case, at any time after the date
hereof, of any capital reorganization or any reclassification of the stock of
the Corporation (other than as a result of a stock dividend or subdivision,
split-up or combination of shares), or the consolidation or merger of the
Corporation with or into another person (other than a consolidation or merger
(A) in which the Corporation is the continuing entity and which does not
result in any change in the Common Stock or (B) which is treated as a
Liquidation pursuant to Section 3(b) above), the Shares of
<PAGE>
Series A Preferred shall, after such reorganization, reclassification,
consolidation or merger be convertible into the kind and number of shares of
stock or other securities or property of the Corporation or otherwise to which
such holder would have been entitled if immediately prior to such
reorganization, reclassification, consolidation or merger such holder had
converted his Shares of Series A Preferred into Common Stock. The provisions
of this clause 4(d)(vi)(2) shall similarly apply to successive
reorganizations, reclassifications, consolidations or mergers.
(e) CERTIFICATE AS TO ADJUSTMENTS.
Upon the occurrence of each adjustment or readjustment of
the Conversion Price of the Series A Preferred pursuant to this Section 4, the
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series A Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the written request at any time of any
holder of Series A Preferred, furnish or cause to be furnished to such holder
a like certificate setting forth (i) such adjustments and readjustments, if
any, (ii) the Conversion Price of the Series A Preferred at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon the conversion of
the Series A Preferred.
(f) STATUS OF CONVERTED STOCK.
In case any Shares of Series A Preferred shall be converted
pursuant to Section 4 hereof, the Shares so converted shall be returned to the
status of authorized, unissued and undesignated shares of the Corporation's
Preferred Stock, and all such shares shall no longer be governed by this
Certificate of Designation.
(g) FRACTIONAL SHARES.
In lieu of any fractional shares in the aggregate to which
the holder of Series A Preferred would otherwise be entitled upon conversion,
the Corporation shall pay cash equal to such fraction multiplied by the fair
market value of one share of Common Stock as determined by the Board of
Directors in the good faith exercise of its reasonable business judgment.
(h) MISCELLANEOUS.
(i) All calculations under this Section 4
shall be made to the nearest cent or to the nearest one hundredth (1/100) of a
share, as the case may be.
(ii) The holders of at least 50% of the outstanding
Series A Preferred shall have the right to challenge any determination by the
Board of Directors of fair market value pursuant to this Section 4, in which
case such determination of fair market value shall be made by an independent
appraiser selected jointly by the Board of Directors and such holders, the
cost
<PAGE>
of such appraisal to be borne equally by the Corporation and such holders. If
the Board of Directors and such holders cannot agree on an independent
appraiser, each shall select an independent appraiser and such two independent
appraisers shall select one independent appraiser to make such determination.
(iii) No adjustment in the Conversion Price of the
Series A Preferred will be made if such adjustment would result in a change in
such Conversion Price of less than $0.01. Any adjustment of less than $0.01
which is not made shall be carried forward and shall be made at the time of
and together with any subsequent adjustment which, on a cumulative basis,
amounts to an adjustment of $0.01 or more in such Conversion Price.
(i) NO IMPAIRMENT.
The Corporation will not through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 4 and in the
taking of all action as may be necessary or appropriate in order to protect
the conversion rights of the holders of Series A Preferred against impairment.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion of the Shares of Series A
Preferred, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Shares of
Series A Preferred. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding Shares of Series A Preferred, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
Section 5. VOTING RIGHTS.
(a) GENERAL.
Except as otherwise required by law, by Section 5(b) hereof
or by Section 8 hereof, the holder of each Share of Series A Preferred will be
entitled to vote on all matters with the Common Stock as a single class, and
not as a separate class or series. Each Share of Series A Preferred will
entitle the holder to the number of votes per share equal to the full number
of shares of Common Stock into which each Share of Series A Preferred is
convertible on the record date for such vote. The holders of Series A
Preferred shall receive notice of and shall be
<PAGE>
entitled to attend in person or by proxy any meeting of the holders of Common
Stock.
(b) VOTING FOR DIRECTORS.
The holders of the Series A Preferred shall otherwise also
be entitled to vote in the election of directors pursuant to the terms of
Section 5(a) above. In addition, for so long as at least 3,791,900 shares of
the Corporation's Preferred Stock remain outstanding, at any time when Michael
Jordan is not a director of the Corporation, the holders of at least a
majority of the shares of the Corporation's Preferred Stock, voting as a
single class, shall be entitled to nominate and elect one (1) director. Any
vacancy on the Board occurring because of the death, resignation or removal of
Michael Jordan or a director elected by the holders of the Corporation's
Preferred Stock, shall be filled by the vote or written consent of the holders
of a majority of the shares of the Corporation's Preferred Stock. A director
nominated and elected by the holders of the Corporation's Preferred Stock may
be removed from the Board with or without cause by the vote or consent of the
holders of the outstanding class with voting power entitled to elect him or
her in accordance with the Delaware General Corporation Law.
Section 6. NOTICES OF RECORD DATE.
In the event of any taking by the Corporation of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right,
the Corporation shall mail to each holder of Series A Preferred, at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the anticipated amount and character of such
dividend, distribution or right.
Section 7. NOTICES.
Any notice required by the provisions of this Certificate to be given
to the holders of Series A Preferred shall be deemed given when deposited in
the United States mail, postage prepaid, and addressed to each holder of
record at such holder's address appearing on the books of the Corporation.
Section 8. APPROVAL OF CERTAIN TRANSACTIONS WHILE ANY SERIES A
PREFERRED IS OUTSTANDING.
So long as not less than 1,900 Shares of Series A Preferred are
outstanding, the Corporation shall not, without first obtaining the written
approval of the holders of at least two-thirds of the Series A Preferred then
outstanding, voting as a separate class, take any action that:
(a) amends, alters or repeals the Corporation's Bylaws or
Amended and
<PAGE>
Restated Certificate of Incorporation so as to adversely affect the
preferences, special rights or other powers of Shares of Series A Preferred;
(b) increases or decreases the authorized number of
Shares of Series A Preferred;
(c) creates any new class or series of shares that has a
preference over or is on a parity with the Series A Preferred with respect to
voting, dividends or liquidation preferences (except that the Corporation may
create and issue the Series B Preferred and the Series C Preferred and may
grant voting rights to shares of a series of preferred stock which have the
right to vote with holders of Common Stock on an as-converted basis, but in
any event not in preference to Shares of Series A Preferred);
(d) reclassifies stock into shares having a preference over
or parity with the Series A Preferred with respect to voting, dividends or
liquidation preferences (except that the Corporation may grant voting rights
to shares of a series of preferred stock which have the right to vote with
holders of Common Stock on an as-converted basis, but in any event not in
preference to Shares of Series A Preferred);
(e) authorizes any dividend or other distribution (other
than a stock dividend) with respect to the Corporation's Preferred Stock or
the Common Stock (other than cash dividends payable to the holders of Series A
Preferred);
(f) repurchases any shares of capital stock of the
Corporation other than the purchase of Common Stock from employees acquired
pursuant to any stock option plan, stock purchase plan, stock award plan or
other incentive plan of the Corporation or the purchase of Common Stock
pursuant to contractual rights to repurchase shares of Common Stock held by
employees, directors or consultants of the Corporation or its subsidiaries
upon termination of their employment or services or pursuant to the exercise
of a contractual right of first refusal, call right or other purchase option
held by the Corporation; provided that in the event the Corporation
repurchases any such shares from one or more employees pursuant to this
Section 8(f), the aggregate value of such permitted repurchases shall not
exceed $1,000,000 (exclusive of any amount of indebtedness owed to the
Corporation by an officer or employee that is canceled or rescinded as part of
a repurchase) in any twelve (12) month period;
(g) increases the number of directors of the
Corporation to greater than seven (7) persons;
(h) other than Options or shares purchasable on the exercise
of Options, offer Additional Shares of Common Stock at an issue price that is
less than the fair market value for such shares as of the date of issuance;
(i) offer or issue any equity security that has a
preference over, more
<PAGE>
favorable terms than, or is on a parity with the Series A Preferred with
respect to voting, dividends, liquidation preferences or any other material
term or condition; provided, however, the Corporation may create and issue the
Series B Preferred and the Series C Preferred; or
(j) effects the consolidation or merger of the Corporation
with or into any other corporation or business entity (other than with or into
a wholly owned domestic subsidiary of the Corporation), the sale or other
transfer in a single transaction or a series of related transactions of all or
substantially all of the assets of the Corporation, or the liquidation,
dissolution, winding-up or reorganization of the Corporation.
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<PAGE>
CERTIFICATE OF DESIGNATION
OF SERIES B CONVERTIBLE PREFERRED STOCK
of
DIGITALCONVERGENCE.:COM INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, the undersigned, Patrick V. Stark and William S. Leftwich, the
Executive Vice President and Secretary, respectively, of
DigitalConvergence.:Com Inc., a Delaware corporation (the "Corporation"),
pursuant to Section 151 of the General Corporation Law of the State of
Delaware, do hereby make this Certificate of Designation and do hereby state
and certify that, pursuant to the authority expressly vested in the Board of
Directors of the Corporation by the Amended and Restated Certificate of
Incorporation of the Corporation, the Board of Directors by written consent
unanimously adopted the following resolutions providing for the issuance of a
series of the Corporation's Preferred Stock designated as the Series B
Convertible Preferred Stock:
RESOLVED, that the Board of Directors of the Corporation, in
accordance with the provisions of its Amended and Restated Certificate of
Incorporation, does hereby provide for the issue of a series of the
Corporation's Preferred Stock, and does hereby fix and herein state the
designation and amount thereof and the voting powers, preferences and
relative, participating, optional and other special rights of the shares of
such series, and the qualifications, limitations or restrictions thereof as
follows:
Section 1. DESIGNATION AND AMOUNT; OTHER SERIES OF PREFERRED.
(a) SERIES B PREFERRED.
There shall be a series of the Corporation's Preferred Stock
designated as "Series B Convertible Preferred Stock" (the "Series B
Preferred") and the number of shares of such series shall be twelve million
one-hundred thousand (12,100,000). Each share of Series B Preferred is
referred to herein as a "Share" and, collectively, the "Shares." Immediately
after a Qualified Public Offering (as defined in Section 4(b) hereof), all
authorized and unissued shares of Series B Preferred shall be returned to the
status of authorized, unissued and undesignated shares of the Corporation's
Preferred Stock, and all such shares shall no longer be governed by this
Certificate of
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<PAGE>
Designation.
(b) OTHER SERIES OF PREFERRED.
The Corporation has also designated a Series A Convertible Preferred
Stock (the "Series A Preferred") and a Series C Convertible Preferred Stock
(the "Series C Preferred").
Section 2. DIVIDENDS AND DISTRIBUTIONS.
The holders of Shares of Series B Preferred shall be entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event that the Corporation declares
or pays any dividends upon the common stock, par value $0.01 per share, of the
Corporation (the "Common Stock") (whether payable in cash, securities or other
property), the Corporation shall also declare and pay to the holders of the
Series B Preferred at the same time that it declares and pays such dividends
to the holders of the Common Stock, the dividends which would have been
declared and paid with respect to the Common Stock issuable upon conversion of
the Series B Preferred pursuant to Section 4 hereof had all of the outstanding
Shares been so converted immediately prior to the record date for such
dividend, or if no record date is fixed, the date as of which the record
holders of Common Stock entitled to such dividends are to be determined. No
dividend shall be paid on or declared and set apart for the Shares for any
dividend period unless at the same time a like proportionate dividend for the
same dividend period, determined on an as-converted basis, shall be paid on or
declared and set apart for the shares of Series A Preferred and Series C
Preferred.
Section 3. LIQUIDATION RIGHTS.
In the event of any liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary (a "Liquidation"), subject to
the pari passu rights of the Series A Preferred and the Series C Preferred set
forth in Section 3(d) below, distributions shall be made to the holders of
Series B Preferred in respect of such Series B Preferred before any amount
shall be paid to the holders of any other class or series of capital stock of
the Corporation in the following manner:
(a) SERIES B PREFERRED.
The holders of the Series B Preferred shall be entitled to
receive an amount equal to (i) the Conversion Value PLUS any declared but
unpaid dividends and (ii) the holders of Series B Preferred shall be entitled
to share ratably, on an "as if converted" basis, in all remaining assets and
surplus funds along with the holders of Common Stock (and any other class of
capital stock of the Corporation which has such "as if converted" status with
respect to a Liquidation).
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<PAGE>
(b) EVENTS DEEMED A LIQUIDATION.
For purposes of this Section 3, the holders of a majority of
the Shares may elect to have treated as a Liquidation the consolidation or
merger of the Corporation with or into any other corporation or the sale or
other transfer in a single transaction or a series of related transactions of
all or substantially all of the assets of the Corporation, or any other
reorganization of the Corporation, unless the stockholders of the Corporation
immediately prior to any such transaction are holders of a majority of the
voting securities of the surviving or acquiring corporation immediately
thereafter with comparable rights with respect to their respective classes of
shares (and for purposes of this calculation equity securities which any
stockholder or the Corporation owned immediately prior to such merger or
consolidation as a stockholder of another party to the transaction shall be
disregarded).
(c) VALUATION OF SECURITIES AND PROPERTY.
In the event the Corporation proposes to distribute assets
other than cash in connection with any Liquidation, the value of the assets to
be distributed to the holders of Shares of Series B Preferred shall be
determined in good faith by the Board of Directors. Any securities not subject
to contractual restrictions on free marketability shall be valued as follows:
(i) if traded on a national securities exchange
or the Nasdaq National Market System ("Nasdaq"), the value shall be deemed to
be the average of the security's closing prices on such exchange or Nasdaq
over the thirty (30) trading day period ending three (3) days prior to the
distribution;
(ii) if actively traded over-the-counter (other
than Nasdaq), the value shall be deemed to be the average of the closing bid
prices over the thirty (30) day period ending three (3) days prior to the
distribution; or
(iii) if there is no active public market, the
value shall be the fair market value thereof as determined in good faith by
the Board of Directors.
The method of valuation of securities subject to contractual restrictions on
free marketability shall be adjusted to make an appropriate discount from the
market value determined as above in clauses (i), (ii) or (iii) to reflect the
fair market value thereof as determined in good faith by the Board of
Directors. The holders of at least 50% of the outstanding Series B Preferred
shall have the right to challenge any determination by the Board of Directors
of fair market value pursuant to this Section 3(c), in which case the
determination of fair market value shall be made by an independent appraiser
selected jointly by the Board of Directors and such holders, the cost of such
appraisal to
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<PAGE>
be borne equally by the Corporation and such holders. If the Board of
Directors and such holders cannot agree on an independent appraiser, each
shall select an independent appraiser and such two independent appraisers
shall select one independent appraiser to make such determination.
(d) PARI PASSU LIQUIDATION PRIORITY OF SERIES A PREFERRED,
SERIES B PREFERRED AND SERIES C PREFERRED.
Notwithstanding any other term or provision hereof, the Series A
Preferred, Series B Preferred and Series C Preferred shall rank on a pari
passu basis in the event of any Liquidation. If the proceeds from a
Liquidation are not sufficient to pay to the holders of the Series A
Preferred, Series B Preferred and Series C Preferred the full preference
amount set forth in paragraph 3(a)(i) of the respective Certificates of
Designation for such shares, then such holders shall instead be entitled to
receive the entire assets and funds of the Corporation legally available for
distribution, which assets and funds shall be distributed ratably among the
holders of the Series A Preferred, the Series B Preferred and the Series C
Preferred in proportion to the full amount to which each holder would
otherwise be entitled as set forth in paragraph 3(a)(i) of the respective
Certificates of Designation for such shares.
Section 4. CONVERSION.
The holders of Series B Preferred have conversion rights as follows
(the "Conversion Rights"):
(a) RIGHT TO CONVERT.
Each Share of Series B Preferred shall initially be
convertible, at the option of the holder thereof, at any time on or after the
date of issuance thereof, into the number of fully paid and nonassessable
shares of Common Stock which results from dividing the Conversion Price (as
hereinafter specified) per share in effect at the time of conversion into the
per share Conversion Value in effect at the time of conversion. The initial
Conversion Price of the Series B Preferred shall be $7.03 per share, and the
Conversion Value of the Series B Preferred shall be $7.03 per share. The
initial Conversion Price of the Series B Preferred shall be subject to
adjustment from time to time as provided in Section 4(d) hereof. The
Conversion Value shall not be subject to adjustment (except in connection with
a stock split, stock dividend, combination, recapitalization or other such
adjustment). Upon conversion, all declared but unpaid dividends on the Series
B Preferred so converted shall be paid in cash, to the extent permitted by
applicable law (and if not then permitted by applicable law, at such time as
the Corporation is permitted by applicable law to pay any such dividends).
(b) AUTOMATIC CONVERSION.
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<PAGE>
Each Share of Series B Preferred shall automatically be
converted into shares of Common Stock upon (i) the election of the holders of
at least two-thirds of the then outstanding Shares of Series B Preferred or
(ii) the closing of a firm commitment underwritten public offering of Common
Stock pursuant to an effective registration statement under the Securities Act
of 1933 in which: (A) the gross proceeds equal or exceed $75,000,000 and (B)
the aggregate market value of the Common Stock of the Corporation immediately
prior to the closing of the underwritten public offering, but assuming the
conversion of each then outstanding share of the Corporation's Preferred Stock
(and determined utilizing the offering price in such underwriting), equals or
exceeds $750,000,000 (a "Qualified Public Offering"). Upon conversion, all
declared but unpaid dividends on the Series B Preferred shall be paid in cash,
to the extent permitted by applicable law (and if not then permitted by
applicable law, at such time as the Corporation is permitted by applicable law
to pay any such dividends).
(c) MECHANICS OF CONVERSION.
Before any holder of Series B Preferred shall be entitled to
convert the same into shares of Common Stock and to receive certificates
therefor, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the principal office of the Corporation or of any
transfer agent for the Series B Preferred, and shall give written notice to
the Corporation at such office that such holder elects to convert the same;
provided, however, that in the event of an automatic conversion pursuant to
Section 4(b) hereof, the outstanding Shares of Series B Preferred shall be
converted automatically without any further action by the holders of such
Shares and whether or not the certificates representing such Shares are
surrendered to the Corporation or its transfer agent; and provided further
that the Corporation shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon such automatic conversion unless and
until the certificates evidencing such Shares of Series B Preferred are either
delivered to the Corporation or its transfer agent as provided above, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall as soon as
practicable after such delivery, or after such agreement and indemnification,
issue and deliver at such office to such holder of Series B Preferred, a
certificate or certificates for the number of shares of Common Stock to which
he or she shall be entitled as aforesaid and a check payable to the holder in
the amount of any declared but unpaid dividends payable pursuant to Section 2
hereof, if any. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the Shares of
Series B Preferred to be converted, or, in the case of automatic conversion,
immediately prior to the occurrence of the event leading to such automatic
conversion, and the person or persons entitled to receive the shares of Common
Stock issuable
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<PAGE>
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. If the Corporation fails
to pay all such dividends within twenty (20) days of the date of conversion,
the holder entitled to such dividends may elect to have the Corporation issue
to such holder, in lieu of such cash payment, additional shares of Common
Stock calculated by dividing the total amount payable on such date by the
Conversion Value.
(d) ADJUSTMENTS TO CONVERSION PRICE.
(i) SPECIAL DEFINITIONS.
For purposes of this Section 4(d), the following
definitions shall apply:
(1) "OPTIONS" shall mean rights,
options or warrants to subscribe for, purchase or otherwise acquire either
Common Stock or Convertible Securities, other than the warrants issued to
National Broadcasting Company, Inc. pursuant to the Warrant Agreements, both
entered into in April of 2000.
(2) "CONVERTIBLE SECURITIES" shall
mean any evidences of indebtedness, shares or other securities convertible
into or exchangeable for Common Stock.
(3) "ADDITIONAL SHARES OF COMMON
STOCK" shall mean all shares of Common Stock issued (or, pursuant to Section
4(d)(iii), deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable: (A) upon
conversion of Shares or any other shares of the Corporation's Preferred Stock;
(B) as a dividend or distribution on any shares of the Corporation's Preferred
Stock, including the Shares; (C) in a transaction described in Section
4(d)(vi); (D) pursuant to any stock option plan, stock purchase plan, stock
award plan or stock incentive plan of the Corporation in any amount less than
fifteen percent (15%) of the fully diluted Common Stock and the Corporation's
Preferred Stock on an as-converted basis; (E) the issuance of warrants to
National Broadcasting Company, Inc. pursuant to the Warrant Agreements, both
entered into in April of 2000, or shares of Common Stock issuable upon
exercise thereof; (F) upon the exercise or conversion of warrants or options
outstanding on the Original Issue Date; or (G) by way of dividend or other
distribution on shares of Common Stock excluded from the definition of
Additional Shares of Common Stock by the foregoing clauses (A), (B), (C), (D),
(E), (F) or this clause (G).
(4) "ORIGINAL ISSUE DATE" shall mean
the date on which the first Share of Series B Preferred was issued.
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<PAGE>
(ii) ADJUSTMENT OF CONVERSION PRICE RESULTING
FROM ISSUANCE OF ADDITIONAL SHARES.
No adjustment in the Conversion Price of the Series
B Preferred shall be made in respect of the issuance of Additional Shares of
Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Corporation is less than the
Conversion Price for the Series B Preferred in effect on the date of, and
immediately prior to, such issue.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF
COMMON STOCK.
In the event the Corporation at any time or from
time to time after the Original Issue Date shall issue any Options (other than
Options under the Corporation's Stock Option Plan that upon exercise would not
constitute Additional Shares of Common Stock) or Convertible Securities or
shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities then
the maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the exercise of
such Options and conversion or exchange of such Convertible Securities shall
be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case such a record date shall have been fixed, as of the
close of business on such record date, provided that Additional Shares of
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 4(d)(v) hereof) of such Additional
Shares of Common Stock would be less than the Conversion Price in effect on
the date of and immediately prior to such issue, or such record date, as the
case may be, and provided further that in any such case in which Additional
Shares of Common Stock are deemed to be issued:
(1) except as provided in Section
4(d)(iii)(2), no further adjustment in the Conversion Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common Stock upon
the exercise of such Options or conversion or exchange of such Convertible
Securities;
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any change in the consideration payable to the Corporation, or change in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof (other than under or by reason of provisions designed to
protect against dilution), the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto)
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect
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<PAGE>
such increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities; and
(3) no readjustment pursuant to clause
(2) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (A) the Conversion Price on the original
adjustment date or (B) the Conversion Price that would have resulted from any
issuance of Additional Shares of Common Stock between the original adjustment
date and such readjustment date.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON
ISSUANC OF ADDITIONAL SHARES OF COMMON STOCK.
In the event the Corporation shall issue Additional
shares of Common Stock (including Additional Shares of Common Stock deemed to
be issued pursuant to Section 4(d)(iii)) without consideration or for a
consideration per share less than the Conversion Price in effect on the date
of and immediately prior to such issue, then and in each such event the
Conversion Price of the Series B Preferred shall be reduced to a price
(calculated to the nearest cent) determined by multiplying such Conversion
Price of the Series B Preferred by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issue plus the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price of
the Series B Preferred, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued.
(v) DETERMINATION OF CONSIDERATION.
For purposes of this Section 4(d), the
consideration received by the Corporation for the issue of any Additional
Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY:
(A) insofar as it consists of cash, such
consideration shall be computed at the aggregate amount of cash received by
the Corporation; (B) insofar as it consists of property other than cash, such
consideration shall be computed at the fair value thereof at the time of such
issue, as determined by the Board of Directors in the good faith exercise of
its reasonable business judgment; and (C) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, such
consideration shall be the proportion of such consideration so received,
computed as provided in clauses
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(A) and (B) above, as determined by the Board of Directors in the good faith
exercise of its reasonable business judgment.
(2) OPTIONS AND CONVERTIBLE SECURITIES.
The consideration per share received by
the Corporation for Additional Shares of Common Stock deemed to have been
issued pursuant to Section 4(d)(iii), relating to Options and Convertible
Securities, shall be determined by dividing (A) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment
of such consideration) payable to the Corporation upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, or in
the case of Options for Convertible Securities, the exercise of such Options
for Convertible Securities and the conversion or exchange of such Convertible
Securities, by (B) the maximum number of shares of Common Stock (as set forth
in the instruments relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such number) issuable upon the exercise
of such Options or the conversion or exchange of such Convertible Securities.
(vi) OTHER ADJUSTMENTS.
(1) SUBDIVISIONS, COMBINATIONS, OR
CONSOLIDATIONS OF COMMON STOCK.
In the event the outstanding shares of
Common Stock shall be subdivided, combined or consolidated, by stock split,
stock dividend, combination or like event, into a greater or lesser number of
shares of Common Stock, the Conversion Price of the Series B Preferred in
effect immediately prior to such subdivision, combination, consolidation or
stock dividend shall, concurrently with the effectiveness of such subdivision,
combination or consolidation, be proportionately adjusted.
(2) RECLASSIFICATIONS.
In the case, at any time after the date
hereof, of any capital reorganization or any reclassification of the stock of
the Corporation (other than as a result of a stock dividend or subdivision,
split-up or combination of shares), or the consolidation or merger of the
Corporation with or into another person (other than a consolidation or merger
(A) in which the Corporation is the continuing entity and which does not
result in any change in the Common Stock or (B) which is treated as a
Liquidation pursuant to Section 3(b) above), the Shares of Series B Preferred
shall, after such reorganization, reclassification, consolidation or merger be
convertible into the kind and number of shares of stock or other securities or
property of the
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Corporation or otherwise to which such holder would have been entitled if
immediately prior to such reorganization, reclassification, consolidation or
merger such holder had converted his Shares of Series B Preferred into Common
Stock. The provisions of this clause 4(d)(vi)(2) shall similarly apply to
successive reorganizations, reclassifications, consolidations or mergers.
(e) CERTIFICATE AS TO ADJUSTMENTS.
Upon the occurrence of each adjustment or readjustment of
the Conversion Price of the Series B Preferred pursuant to this Section 4, the
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series B Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the written request at any time of any
holder of Series B Preferred, furnish or cause to be furnished to such holder
a like certificate setting forth (i) such adjustments and readjustments, if
any, (ii) the Conversion Price of the Series B Preferred at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon the conversion of
the Series B Preferred.
(f) STATUS OF CONVERTED STOCK.
In case any Shares of Series B Preferred shall be converted
pursuant to Section 4 hereof, the Shares so converted shall be returned to the
status of authorized, unissued and undesignated shares of the Corporation's
Preferred Stock, and all such shares shall no longer be governed by this
Certificate of Designation.
(g) FRACTIONAL SHARES.
In lieu of any fractional shares in the aggregate to which
the holder of Series B Preferred would otherwise be entitled upon conversion,
the Corporation shall pay cash equal to such fraction multiplied by the fair
market value of one share of Common Stock as determined by the Board of
Directors in the good faith exercise of its reasonable business judgment.
(h) MISCELLANEOUS.
(i) All calculations under this Section 4 shall
be made to the nearest cent or to the nearest one hundredth (1/100) of a
share, as the case may be.
(ii) The holders of at least 50% of the
outstanding Series B Preferred shall have the right to challenge any
determination by the Board of Directors
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of fair market value pursuant to this Section 4, in which case such
determination of fair market value shall be made by an independent appraiser
selected jointly by the Board of Directors and such holders, the cost of such
appraisal to be borne equally by the Corporation and such holders. If the
Board of Directors and such holders cannot agree on an independent appraiser,
each shall select an independent appraiser and such two independent appraisers
shall select one independent appraiser to make such determination.
(iii) No adjustment in the Conversion Price of the
Series B Preferred will be made if such adjustment would result in a change in
such Conversion Price of less than $0.01. Any adjustment of less than $0.01
which is not made shall be carried forward and shall be made at the time of
and together with any subsequent adjustment which, on a cumulative basis,
amounts to an adjustment of $0.01 or more in such Conversion Price.
(i) NO IMPAIRMENT.
The Corporation will not through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 4 and in the
taking of all action as may be necessary or appropriate in order to protect
the conversion rights of the holders of Series B Preferred against impairment.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion of the Shares of Series B
Preferred, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Shares of
Series B Preferred. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding Shares of Series B Preferred, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
Section 5. VOTING RIGHTS.
(a) GENERAL.
Except as otherwise required by law, by Section 5(b) hereof
or by Section
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8 hereof, the holder of each Share of Series B Preferred will be entitled to
vote on all matters with the Common Stock as a single class, and not as a
separate class or series. Each Share of Series B Preferred will entitle the
holder to the number of votes per share equal to the full number of shares of
Common Stock into which each Share of Series B Preferred is convertible on the
record date for such vote. The holders of Series B Preferred shall receive
notice of and shall be entitled to attend in person or by proxy any meeting of
the holders of Common Stock.
(b) VOTING FOR DIRECTORS.
The holders of the Series B Preferred shall otherwise also
be entitled to vote in the election of directors pursuant to the terms of
Section 5(a) above. In addition, for so long as at least 3,791,900 shares of
the Corporation's Preferred Stock remain outstanding, at any time when Michael
Jordan is not a director of the Corporation, the holders of at least a
majority of the shares of the Corporation's Preferred Stock, voting as a
single class, shall be entitled to nominate and elect one (1) director. Any
vacancy on the Board occurring because of the death, resignation or removal of
Michael Jordan or a director elected by the holders of the Corporation's
Preferred Stock, shall be filled by the vote or written consent of the holders
of a majority of the shares of the Corporation's Preferred Stock. A director
nominated and elected by the holders of the Corporation's Preferred Stock may
be removed from the Board with or without cause by the vote or consent of the
holders of the outstanding class with voting power entitled to elect him or
her in accordance with the Delaware General Corporation Law.
Section 6. NOTICES OF RECORD DATE.
In the event of any taking by the Corporation of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right,
the Corporation shall mail to each holder of Series B Preferred, at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the anticipated amount and character of such
dividend, distribution or right.
Section 7. NOTICES.
Any notice required by the provisions of this Certificate to be given
to the holders of Series B Preferred shall be deemed given when deposited in
the United States mail, postage prepaid, and addressed to each holder of
record at such holder's address appearing on the books of the Corporation.
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<PAGE>
Section 8. APPROVAL OF CERTAIN TRANSACTIONS WHILE ANY SERIES B
PREFERRED IS OUTSTANDING.
So long as not less than 1,800,000 Shares of Series B Preferred are
outstanding, the Corporation shall not, without first obtaining the written
approval of the holders of at least two-thirds of the Series B Preferred then
outstanding, voting as a separate class, take any action that:
(a) amends, alters or repeals the Corporation's Bylaws or
Amended and Restated Certificate of Incorporation so as to adversely affect
the preferences, special rights or other powers of Shares of Series B
Preferred;
(b) increases or decreases the authorized number of Shares
of Series B Preferred;
(c) creates any new class or series of shares that has a
preference over or is on a parity with the Series B Preferred with respect to
voting, dividends or liquidation preferences (except that the Corporation may
create and issue the Series A Preferred and the Series C Preferred and may
grant voting rights to shares of a series of preferred stock which have the
right to vote with holders of Common Stock on an as-converted basis, but in
any event not in preference to Shares of Series B Preferred);
(d) reclassifies stock into shares having a preference over
or parity with the Series B Preferred with respect to voting, dividends or
liquidation preferences (except that the Corporation may grant voting rights
to shares of a series of preferred stock which have the right to vote with
holders of Common Stock on an as-converted basis, but in any event not in
preference to Shares of Series B Preferred);
(e) authorizes any dividend or other distribution (other
than a stock dividend) with respect to the Corporation's Preferred Stock or
the Common Stock (other than cash dividends payable to the holders of Series B
Preferred);
(f) repurchases any shares of capital stock of the
Corporation other than the purchase of Common Stock from employees acquired
pursuant to any stock option plan, stock purchase plan, stock award plan or
other incentive plan of the Corporation or the purchase of Common Stock
pursuant to contractual rights to repurchase shares of Common Stock held by
employees, directors or consultants of the Corporation or its subsidiaries
upon termination of their employment or services or pursuant to the exercise
of a contractual right of first refusal, call right or other purchase option
held by the Corporation; provided that in the event the Corporation
repurchases any such shares from one or more employees pursuant to this
Section 8(f), the aggregate value of such permitted repurchases shall not
exceed $1,000,000 (exclusive of any amount of indebtedness owed to the
Corporation by an officer or employee that
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is canceled or rescinded as part of a repurchase) in any twelve (12) month
period;
(g) increases the number of directors of the Corporation to
greater than seven (7) persons;
(h) other than Options or shares purchasable on the exercise
of Options, offer Additional Shares of Common Stock at an issue price that is
less than the fair market value for such shares as of the date of issuance;
(i) offer or issue any equity security that has a preference
over, more favorable terms than, or is on a parity with the Series B Preferred
with respect to voting, dividends, liquidation preferences or any other
material term or condition; provided, however, the Corporation may create and
issue the Series A Preferred and the Series C Preferred; or
(j) effects the consolidation or merger of the Corporation
with or into any other corporation or business entity (other than with or into
a wholly owned domestic subsidiary of the Corporation), the sale or other
transfer in a single transaction or a series of related transactions of all or
substantially all of the assets of the Corporation, or the liquidation,
dissolution, winding-up or reorganization of the Corporation.
[Remainder of this page intentionally left blank]
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IN WITNESS WHEREOF, this Certificate of Designation is hereby
executed by the undersigned officer of DigitalConvergence.:Com Inc., as of
this 19th day of April, 2000.
DIGITALCONVERGENCE.:COM INC.
By: /s/ Patrick V. Stark
-----------------------------------
Patrick V. Stark
Executive Vice President
ATTEST:
By: /s/ William S. Leftwich
----------------------------------------
Name: William S. Leftwich
Title: Secretary
<PAGE>
CERTIFICATE OF DESIGNATION
OF SERIES C CONVERTIBLE PREFERRED STOCK
of
DIGITALCONVERGENCE.:COM INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, the undersigned, Patrick V. Stark and William S. Leftwich, the
Executive Vice President and Secretary, respectively, of
DigitalConvergence.:Com Inc., a Delaware corporation (the "Corporation"),
pursuant to Section 151 of the General Corporation Law of the State of
Delaware, do hereby make this Certificate of Designation and do hereby state
and certify that, pursuant to the authority expressly vested in the Board of
Directors of the Corporation by the Amended and Restated Certificate of
Incorporation of the Corporation, the Board of Directors by written consent
unanimously adopted the following resolutions providing for the issuance of a
series of the Corporation's Preferred Stock designated as the Series C
Convertible Preferred Stock:
RESOLVED, that the Board of Directors of the Corporation, in
accordance with the provisions of its Amended and Restated Certificate of
Incorporation, does hereby provide for the issue of a series of the
Corporation's Preferred Stock, and does hereby fix and herein state the
designation and amount thereof and the voting powers, preferences and
relative, participating, optional and other special rights of the shares of
such series, and the qualifications, limitations or restrictions thereof as
follows:
Section 1. DESIGNATION AND AMOUNT; OTHER SERIES OF PREFERRED.
(a) SERIES C PREFERRED.
There shall be a series of the Corporation's Preferred Stock
designated as "Series C Convertible Preferred Stock" (the "Series C
Preferred") and the number of shares of such series shall be thirteen million
three-hundred thousand (13,300,000). Each share of Series C Preferred is
referred to herein as a "Share" and, collectively, the "Shares." Immediately
after a Qualified Public Offering (as defined in Section 4(b) hereof), all
authorized and unissued shares of Series C Preferred shall be returned to the
status of authorized, unissued and undesignated shares of the Corporation's
Preferred Stock, and all such shares shall no longer be governed by this
Certificate of Designation.
SERIES C CERTIFICATE OF DESIGNATION - Page 1
<PAGE>
(b) OTHER SERIES OF PREFERRED.
The Corporation has also designated a Series A Convertible Preferred
Stock (the "Series A Preferred") and a Series B Convertible Preferred Stock
(the "Series B Preferred").
Section 2. DIVIDENDS AND DISTRIBUTIONS.
The holders of Shares of Series C Preferred shall be entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event that the Corporation declares
or pays any dividends upon the common stock, par value $0.01 per share, of the
Corporation (the "Common Stock") (whether payable in cash, securities or other
property), the Corporation shall also declare and pay to the holders of the
Series C Preferred at the same time that it declares and pays such dividends
to the holders of the Common Stock, the dividends which would have been
declared and paid with respect to the Common Stock issuable upon conversion of
the Series C Preferred pursuant to Section 4 hereof had all of the outstanding
Shares been so converted immediately prior to the record date for such
dividend, or if no record date is fixed, the date as of which the record
holders of Common Stock entitled to such dividends are to be determined. No
dividend shall be paid on or declared and set apart for the Shares for any
dividend period unless at the same time a like proportionate dividend for the
same dividend period, determined on an as-converted basis, shall be paid on or
declared and set apart for the shares of Series A Preferred and Series B
Preferred.
Section 3. LIQUIDATION RIGHTS.
In the event of any liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary (a "Liquidation"), subject to
the pari passu rights of the Series A Preferred and the Series B Preferred set
forth in Section 3(d) below, distributions shall be made to the holders of
Series C Preferred in respect of such Series C Preferred before any amount
shall be paid to the holders of any other class or series of capital stock of
the Corporation in the following manner:
(a) SERIES C PREFERRED.
The holders of the Series C Preferred shall be entitled to
receive an amount equal to (i) the Conversion Value PLUS any declared but
unpaid dividends and (ii) the holders of Series C Preferred shall be entitled
to share ratably, on an "as if converted" basis, in all remaining assets and
surplus funds along with the holders of Common Stock (and any other class of
capital stock of the Corporation which has such "as if converted" status with
respect to a Liquidation).
SERIES C CERTIFICATE OF DESIGNATION - Page 2
<PAGE>
(b) EVENTS DEEMED A LIQUIDATION.
For purposes of this Section 3, the holders of a majority of
the Shares may elect to have treated as a Liquidation the consolidation or
merger of the Corporation with or into any other corporation or the sale or
other transfer in a single transaction or a series of related transactions of
all or substantially all of the assets of the Corporation, or any other
reorganization of the Corporation, unless the stockholders of the Corporation
immediately prior to any such transaction are holders of a majority of the
voting securities of the surviving or acquiring corporation immediately
thereafter with comparable rights with respect to their respective classes of
shares (and for purposes of this calculation equity securities which any
stockholder or the Corporation owned immediately prior to such merger or
consolidation as a stockholder of another party to the transaction shall be
disregarded).
(c) VALUATION OF SECURITIES AND PROPERTY.
In the event the Corporation proposes to distribute assets
other than cash in connection with any Liquidation, the value of the assets to
be distributed to the holders of Shares of Series C Preferred shall be
determined in good faith by the Board of Directors. Any securities not subject
to contractual restrictions on free marketability shall be valued as follows:
(i) if traded on a national securities
exchange or the Nasdaq National Market System ("Nasdaq"), the value shall be
deemed to be the average of the security's closing prices on such exchange or
Nasdaq over the thirty (30) trading day period ending three (3) days prior to
the distribution;
(ii) if actively traded over-the-counter (other
than Nasdaq), the value shall be deemed to be the average of the closing bid
prices over the thirty (30) day period ending three (3) days prior to the
distribution; or
(iii) if there is no active public market, the
value shall be the fair market value thereof as determined in good faith by
the Board of Directors.
The method of valuation of securities subject to contractual restrictions on
free marketability shall be adjusted to make an appropriate discount from the
market value determined as above in clauses (i), (ii) or (iii) to reflect the
fair market value thereof as determined in good faith by the Board of
Directors. The holders of at least 50% of the outstanding Series C Preferred
shall have the right to challenge any determination by the Board of Directors
of fair market value pursuant to this Section 3(c), in which case the
determination of fair market value shall be made by an independent appraiser
selected jointly by the Board of Directors and such holders, the cost of such
appraisal to be borne equally by the Corporation and such holders. If the
Board of Directors and such holders cannot agree on an independent appraiser,
each shall select an
SERIES C CERTIFICATE OF DESIGNATION - Page 3
<PAGE>
independent appraiser and such two independent appraisers shall select one
independent appraiser to make such determination.
(d) PARI PASSU LIQUIDATION PRIORITY OF SERIES A PREFERRED,
SERIES B PREFERRED AND SERIES C PREFERRED.
Notwithstanding any other term or provision hereof, the Series A
Preferred, Series B Preferred and Series C Preferred shall rank on a pari
passu basis in the event of any Liquidation. If the proceeds from a
Liquidation are not sufficient to pay to the holders of the Series A
Preferred, Series B Preferred and Series C Preferred the full preference
amount set forth in paragraph 3(a)(i) of the respective Certificates of
Designation for such shares, then such holders shall instead be entitled to
receive the entire assets and funds of the Corporation legally available for
distribution, which assets and funds shall be distributed ratably among the
holders of the Series A Preferred, the Series B Preferred and the Series C
Preferred in proportion to the full amount to which each holder would
otherwise be entitled as set forth in paragraph 3(a)(i) of the respective
Certificates of Designation for such shares.
Section 4. CONVERSION.
The holders of Series C Preferred have conversion rights as follows
(the "Conversion Rights"):
(a) RIGHT TO CONVERT.
Each Share of Series C Preferred shall initially be
convertible, at the option of the holder thereof, at any time on or after the
date of issuance thereof, into the number of fully paid and nonassessable
shares of Common Stock which results from dividing the Conversion Price (as
hereinafter specified) per share in effect at the time of conversion into the
per share Conversion Value in effect at the time of conversion. The initial
Conversion Price of the Series C Preferred shall be $10.54 per share, and the
Conversion Value of the Series C Preferred shall be $10.54 per share. The
initial Conversion Price of the Series C Preferred shall be subject to
adjustment from time to time as provided in Section 4(d) hereof. The
Conversion Value shall not be subject to adjustment (except in connection with
a stock split, stock dividend, combination, recapitalization or other such
adjustment). Upon conversion, all declared but unpaid dividends on the Series
C Preferred so converted shall be paid in cash, to the extent permitted by
applicable law (and if not then permitted by applicable law, at such time as
the Corporation is permitted by applicable law to pay any such dividends).
(b) AUTOMATIC CONVERSION.
Each Share of Series C Preferred shall automatically be
converted into shares of Common Stock upon (i) the election of the holders of
at least two-thirds of the
SERIES C CERTIFICATE OF DESIGNATION - Page 4
<PAGE>
then outstanding Shares of Series C Preferred or (ii) the closing of a firm
commitment underwritten public offering of Common Stock pursuant to an
effective registration statement under the Securities Act of 1933 in which:
(A) the gross proceeds equal or exceed $75,000,000 and (B) the aggregate
market value of the Common Stock of the Corporation immediately prior to the
closing of the underwritten public offering, but assuming the conversion of
each then outstanding share of the Corporation's Preferred Stock (and
determined utilizing the offering price in such underwriting), equals or
exceeds $750,000,000 (a "Qualified Public Offering"). Upon conversion, all
declared but unpaid dividends on the Series C Preferred shall be paid in cash,
to the extent permitted by applicable law (and if not then permitted by
applicable law, at such time as the Corporation is permitted by applicable law
to pay any such dividends).
(c) MECHANICS OF CONVERSION.
Before any holder of Series C Preferred shall be entitled to
convert the same into shares of Common Stock and to receive certificates
therefor, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the principal office of the Corporation or of any
transfer agent for the Series C Preferred, and shall give written notice to
the Corporation at such office that such holder elects to convert the same;
provided, however, that in the event of an automatic conversion pursuant to
Section 4(b) hereof, the outstanding Shares of Series C Preferred shall be
converted automatically without any further action by the holders of such
Shares and whether or not the certificates representing such Shares are
surrendered to the Corporation or its transfer agent; and provided further
that the Corporation shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon such automatic conversion unless and
until the certificates evidencing such Shares of Series C Preferred are either
delivered to the Corporation or its transfer agent as provided above, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall as soon as
practicable after such delivery, or after such agreement and indemnification,
issue and deliver at such office to such holder of Series C Preferred, a
certificate or certificates for the number of shares of Common Stock to which
he or she shall be entitled as aforesaid and a check payable to the holder in
the amount of any declared but unpaid dividends payable pursuant to Section 2
hereof, if any. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the Shares of
Series C Preferred to be converted, or, in the case of automatic conversion,
immediately prior to the occurrence of the event leading to such automatic
conversion, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date. If the
Corporation fails to pay all such dividends within twenty (20) days of the
date of conversion, the holder entitled to such dividends may elect to have
the Corporation issue to such holder, in lieu of such cash
SERIES C CERTIFICATE OF DESIGNATION - Page 5
<PAGE>
payment, additional shares of Common Stock calculated by dividing the total
amount payable on such date by the Conversion Value.
(d) ADJUSTMENTS TO CONVERSION PRICE.
(i) SPECIAL DEFINITIONS.
For purposes of this Section 4(d), the following
definitions shall apply:
(1) "OPTIONS" shall mean rights,
options or warrants to subscribe for, purchase or otherwise acquire either
Common Stock or Convertible Securities, other than the warrants issued to
National Broadcasting Company, Inc. pursuant to the Warrant Agreements, both
entered into in April of 2000.
(2) "CONVERTIBLE SECURITIES" shall
mean any evidences of indebtedness, shares or other securities convertible
into or exchangeable for Common Stock.
(3) "ADDITIONAL SHARES OF COMMON
STOCK" shall mean all shares of Common Stock issued (or, pursuant to Section
4(d)(iii), deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable: (A) upon
conversion of Shares or any other shares of the Corporation's Preferred Stock;
(B) as a dividend or distribution on any shares of the Corporation's Preferred
Stock, including the Shares; (C) in a transaction described in Section
4(d)(vi); (D) pursuant to any stock option plan, stock purchase plan, stock
award plan or stock incentive plan of the Corporation in any amount less than
fifteen percent (15%) of the fully diluted Common Stock and the Corporation's
Preferred Stock on an as-converted basis; (E) the issuance of warrants to
National Broadcasting Company, Inc. pursuant to the Warrant Agreements, both
entered into in April of 2000, or shares of Common Stock issuable upon
exercise thereof; (F) upon the exercise or conversion of warrants or options
outstanding on the Original Issue Date; or (G) by way of dividend or other
distribution on shares of Common Stock excluded from the definition of
Additional Shares of Common Stock by the foregoing clauses (A), (B), (C), (D),
(E), (F) or this clause (G).
(4) "ORIGINAL ISSUE DATE" shall mean
the date on which the first Share of Series C Preferred was issued.
(ii) ADJUSTMENT OF CONVERSION PRICE RESULTING
FROM ISSUANCE OF ADDITIONAL SHARES.
No adjustment in the Conversion Price of the Series
C Preferred shall be made in respect of the issuance of Additional Shares of
Common Stock unless
SERIES C CERTIFICATE OF DESIGNATION - Page 6
<PAGE>
the consideration per share for an Additional Share of Common Stock issued or
deemed to be issued by the Corporation is less than the Conversion Price for
the Series C Preferred in effect on the date of, and immediately prior to,
such issue.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF
COMMON STOCK.
In the event the Corporation at any time or from
time to time after the Original Issue Date shall issue any Options (other than
Options under the Corporation's Stock Option Plan that upon exercise would not
constitute Additional Shares of Common Stock) or Convertible Securities or
shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities then
the maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the exercise of
such Options and conversion or exchange of such Convertible Securities shall
be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case such a record date shall have been fixed, as of the
close of business on such record date, provided that Additional Shares of
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 4(d)(v) hereof) of such Additional
Shares of Common Stock would be less than the Conversion Price in effect on
the date of and immediately prior to such issue, or such record date, as the
case may be, and provided further that in any such case in which Additional
Shares of Common Stock are deemed to be issued:
(1) except as provided in Section
4(d)(iii)(2), no further adjustment in the Conversion Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common Stock upon
the exercise of such Options or conversion or exchange of such Convertible
Securities;
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any change in the consideration payable to the Corporation, or change in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof (other than under or by reason of provisions designed to
protect against dilution), the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto)
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities; and
(3) no readjustment pursuant to clause
(2) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (A) the Conversion Price on the original
adjustment date or (B) the Conversion
SERIES C CERTIFICATE OF DESIGNATION - Page 7
<PAGE>
Price that would have resulted from any issuance of Additional Shares of
Common Stock between the original adjustment date and such readjustment date.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON
ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK.
In the event the Corporation shall issue Additional
Shares of Common Stock (including Additional Shares of Common Stock deemed to
be issued pursuant to Section 4(d)(iii)) without consideration or for a
consideration per share less than the Conversion Price in effect on the date
of and immediately prior to such issue, then and in each such event the
Conversion Price of the Series C Preferred shall be reduced to a price
(calculated to the nearest cent) determined by multiplying such Conversion
Price of the Series C Preferred by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issue plus the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price of
the Series C Preferred, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued.
(v) DETERMINATION OF CONSIDERATION.
For purposes of this Section 4(d), the
consideration received by the Corporation for the issue of any Additional
Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY:
(A) insofar as it consists of cash, such
consideration shall be computed at the aggregate amount of cash received by
the Corporation; (B) insofar as it consists of property other than cash, such
consideration shall be computed at the fair value thereof at the time of such
issue, as determined by the Board of Directors in the good faith exercise of
its reasonable business judgment; and (C) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, such
consideration shall be the proportion of such consideration so received,
computed as provided in clauses (A) and (B) above, as determined by the Board
of Directors in the good faith exercise of its reasonable business judgment.
(2) OPTIONS AND CONVERTIBLE SECURITIES.
The consideration per share received by
the Corporation for Additional Shares of Common Stock deemed to have been
issued pursuant to Section 4(d)(iii), relating to Options and Convertible
Securities, shall be determined by dividing
SERIES C CERTIFICATE OF DESIGNATION - Page 8
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(A) the total amount, if any, received or receivable by the Corporation as
consideration for the issue of such Options or Convertible Securities, plus
the minimum aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration) payable to the
Corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by (B) the maximum
number of shares of Common Stock (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(vi) OTHER ADJUSTMENTS.
(1) SUBDIVISIONS, COMBINATIONS, OR
CONSOLIDATIONS OF COMMON STOCK.
In the event the outstanding shares of
Common Stock shall be subdivided, combined or consolidated, by stock split,
stock dividend, combination or like event, into a greater or lesser number of
shares of Common Stock, the Conversion Price of the Series C Preferred in
effect immediately prior to such subdivision, combination, consolidation or
stock dividend shall, concurrently with the effectiveness of such subdivision,
combination or consolidation, be proportionately adjusted.
(2) RECLASSIFICATIONS.
In the case, at any time after the date
hereof, of any capital reorganization or any reclassification of the stock of
the Corporation (other than as a result of a stock dividend or subdivision,
split-up or combination of shares), or the consolidation or merger of the
Corporation with or into another person (other than a consolidation or merger
(A) in which the Corporation is the continuing entity and which does not
result in any change in the Common Stock or (B) which is treated as a
Liquidation pursuant to Section 3(b) above), the Shares of Series C Preferred
shall, after such reorganization, reclassification, consolidation or merger be
convertible into the kind and number of shares of stock or other securities or
property of the Corporation or otherwise to which such holder would have been
entitled if immediately prior to such reorganization, reclassification,
consolidation or merger such holder had converted his Shares of Series C
Preferred into Common Stock. The provisions of this clause 4(d)(vi)(2) shall
similarly apply to successive reorganizations, reclassifications,
consolidations or mergers.
(e) CERTIFICATE AS TO ADJUSTMENTS.
Upon the occurrence of each adjustment or readjustment of
the
SERIES C CERTIFICATE OF DESIGNATION - Page 9
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Conversion Price of the Series C Preferred pursuant to this Section 4, the
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series C Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the written request at any time of any
holder of Series C Preferred, furnish or cause to be furnished to such holder
a like certificate setting forth (i) such adjustments and readjustments, if
any, (ii) the Conversion Price of the Series C Preferred at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon the conversion of
the Series C Preferred.
(f) STATUS OF CONVERTED STOCK.
In case any Shares of Series C Preferred shall be converted
pursuant to Section 4 hereof, the Shares so converted shall be returned to the
status of authorized, unissued and undesignated shares of the Corporation's
Preferred Stock, and all such shares shall no longer be governed by this
Certificate of Designation.
(g) FRACTIONAL SHARES.
In lieu of any fractional shares in the aggregate to which
the holder of Series C Preferred would otherwise be entitled upon conversion,
the Corporation shall pay cash equal to such fraction multiplied by the fair
market value of one share of Common Stock as determined by the Board of
Directors in the good faith exercise of its reasonable business judgment.
(h) MISCELLANEOUS.
(i) All calculations under this Section 4
shall be made to the nearest cent or to the nearest one hundredth (1/100) of a
share, as the case may be.
(ii) The holders of at least 50% of the
outstanding Series C Preferred shall have the right to challenge any
determination by the Board of Directors of fair market value pursuant to this
Section 4, in which case such determination of fair market value shall be made
by an independent appraiser selected jointly by the Board of Directors and
such holders, the cost of such appraisal to be borne equally by the
Corporation and such holders. If the Board of Directors and such holders
cannot agree on an independent appraiser, each shall select an independent
appraiser and such two independent appraisers shall select one independent
appraiser to make such determination.
(iii) No adjustment in the Conversion Price of
the Series C Preferred will be made if such adjustment would result in a
change in such Conversion
SERIES C CERTIFICATE OF DESIGNATION - Page 10
<PAGE>
Price of less than $0.01. Any adjustment of less than $0.01 which is not made
shall be carried forward and shall be made at the time of and together with
any subsequent adjustment which, on a cumulative basis, amounts to an
adjustment of $0.01 or more in such Conversion Price.
(i) NO IMPAIRMENT.
The Corporation will not through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 4 and in the
taking of all action as may be necessary or appropriate in order to protect
the conversion rights of the holders of Series C Preferred against impairment.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion of the Shares of Series C
Preferred, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Shares of
Series C Preferred. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding Shares of Series C Preferred, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
Section 5. VOTING RIGHTS.
(a) GENERAL.
Except as otherwise required by law, by Section 5(b) hereof
or by Section 8 hereof, the holder of each Share of Series C Preferred will be
entitled to vote on all matters with the Common Stock as a single class, and
not as a separate class or series. Each Share of Series C Preferred will
entitle the holder to the number of votes per share equal to the full number
of shares of Common Stock into which each Share of Series C Preferred is
convertible on the record date for such vote. The holders of Series C
Preferred shall receive notice of and shall be entitled to attend in person or
by proxy any meeting of the holders of Common Stock.
(b) VOTING FOR DIRECTORS.
The holders of the Series C Preferred shall otherwise also
be entitled to
SERIES C CERTIFICATE OF DESIGNATION - Page 11
<PAGE>
vote in the election of directors pursuant to the terms of Section 5(a) above.
In addition, for so long as at least 3,791,900 shares of the Corporation's
Preferred Stock remain outstanding, at any time when Michael Jordan is not a
director of the Corporation, the holders of at least a majority of the shares
of the Corporation's Preferred Stock, voting as a single class, shall be
entitled to nominate and elect one (1) director. Any vacancy on the Board
occurring because of the death, resignation or removal of Michael Jordan or a
director elected by the holders of the Corporation's Preferred Stock, shall be
filled by the vote or written consent of the holders of a majority of the
shares of the Corporation's Preferred Stock. A director nominated and elected
by the holders of the Corporation's Preferred Stock may be removed from the
Board with or without cause by the vote or consent of the holders of the
outstanding class with voting power entitled to elect him or her in accordance
with the Delaware General Corporation Law.
Section 6. NOTICES OF RECORD DATE.
In the event of any taking by the Corporation of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right,
the Corporation shall mail to each holder of Series C Preferred, at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the anticipated amount and character of such
dividend, distribution or right.
Section 7. NOTICES.
Any notice required by the provisions of this Certificate to be given
to the holders of Series C Preferred shall be deemed given when deposited in
the United States mail, postage prepaid, and addressed to each holder of
record at such holder's address appearing on the books of the Corporation.
Section 8. APPROVAL OF CERTAIN TRANSACTIONS WHILE ANY SERIES C
PREFERRED IS OUTSTANDING.
So long as not less than 1,990,000 Shares of Series C Preferred are
outstanding, the Corporation shall not, without first obtaining the written
approval of the holders of at least two-thirds of the Series C Preferred then
outstanding, voting as a separate class, take any action that:
(a) amends, alters or repeals the Corporation's Bylaws or
Amended and Restated Certificate of Incorporation so as to adversely affect
the preferences, special rights or other powers of Shares of Series C
Preferred;
SERIES C CERTIFICATE OF DESIGNATION - Page 12
<PAGE>
(b) increases or decreases the authorized number of Shares
of Series C Preferred;
(c) creates any new class or series of shares that has a
preference over or is on a parity with the Series C Preferred with respect to
voting, dividends or liquidation preferences (except that the Corporation may
create and issue the Series A Preferred and the Series B Preferred and may
grant voting rights to shares of a series of preferred stock which have the
right to vote with holders of Common Stock on an as-converted basis, but in
any event not in preference to Shares of Series C Preferred);
(d) reclassifies stock into shares having a preference over
or parity with the Series C Preferred with respect to voting, dividends or
liquidation preferences (except that the Corporation may grant voting rights
to shares of a series of preferred stock which have the right to vote with
holders of Common Stock on an as-converted basis, but in any event not in
preference to Shares of Series C Preferred);
(e) authorizes any dividend or other distribution (other
than a stock dividend) with respect to the Corporation's Preferred Stock or
the Common Stock (other than cash dividends payable to the holders of Series C
Preferred);
(f) repurchases any shares of capital stock of the
Corporation other than the purchase of Common Stock from employees acquired
pursuant to any stock option plan, stock purchase plan, stock award plan or
other incentive plan of the Corporation or the purchase of Common Stock
pursuant to contractual rights to repurchase shares of Common Stock held by
employees, directors or consultants of the Corporation or its subsidiaries
upon termination of their employment or services or pursuant to the exercise
of a contractual right of first refusal, call right or other purchase option
held by the Corporation; provided that in the event the Corporation
repurchases any such shares from one or more employees pursuant to this
Section 8(f), the aggregate value of such permitted repurchases shall not
exceed $1,000,000 (exclusive of any amount of indebtedness owed to the
Corporation by an officer or employee that is canceled or rescinded as part of
a repurchase) in any twelve (12) month period;
(g) increases the number of directors of the Corporation to
greater than seven (7) persons;
(h) other than Options or shares purchasable on the exercise
of Options, offer Additional Shares of Common Stock at an issue price that is
less than the fair market value for such shares as of the date of issuance;
(i) offer or issue any equity security that has a preference
over, more favorable terms than, or is on a parity with the Series C Preferred
with respect to voting, dividends, liquidation preferences or any other
material term or condition; provided, however, the Corporation may create and
issue the Series A Preferred and the Series B
SERIES C CERTIFICATE OF DESIGNATION - Page 13
<PAGE>
Preferred; or
(j) effects the consolidation or merger of the Corporation
with or into any other corporation or business entity (other than with or into
a wholly owned domestic subsidiary of the Corporation), the sale or other
transfer in a single transaction or a series of related transactions of all or
substantially all of the assets of the Corporation, or the liquidation,
dissolution, winding-up or reorganization of the Corporation.
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SERIES C CERTIFICATE OF DESIGNATION - Page 14
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is hereby
executed by the undersigned officer of DigitalConvergence.:Com Inc., as of
this 19th day of April, 2000.
DIGITALCONVERGENCE.:COM INC.
By: /s/ Patrick V. Stark
------------------------------
Patrick V. Stark
Executive Vice President
ATTEST:
By: /s/ William S. Leftwich
-----------------------------------
Name: William S. Leftwich
Title: Secretary
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of August 16, 1999, by and between
DigitalConvergence.com Inc., a corporation incorporated under the laws of the
state of Delaware, with its principal place of business at 4264 Kellway Circle,
Addison, Texas 75001 (the "Company"), and MICHAEL GARIN, residing at the
address set forth at the end of this Agreement (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive desire to set forth the terms
and conditions of the Executive's employment by the Company;
NOW, THEREFORE, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Executive's employment under this Agreement
shall be for a term commencing on October 4, 1999 and terminating on October 3,
2002, subject to earlier termination as provided in section 5 hereof (the "Term
of Employment"). Each year of the Term of Employment is referred to herein as a
"Contract Year."
2. EMPLOYMENT
2.1 During the Term of Employment, the Company shall employ
the Executive as its President and Chief Operating Officer, and the Executive
shall serve in such position, perform such services and have such authority,
functions, duties, powers and responsibilities as ordinarily are associated
with such title. The Executive shall faithfully and diligently serve the
Company and shall, as of January 1, 2000, devote all of his business time,
attention, skill and efforts thereto; provided, that the Executive may manage
his passive investments and be involved in charitable interests so long as they
do not interfere or conflict with the performance of the Executive's duties
hereunder. Through December 31, 1999, Executive may continue to perform
services on a part-time basis at Executive's discretion for his current
employer. The Executive shall be based in New York City.
<PAGE>
3. COMPENSATION AND OTHER REMUNERATION.
3.1 BASE SALARY. The Company shall pay to the Executive
during the Term of Employment base salary at the annual rate of Two Hundred
Fifty Thousand Dollars ($250,000); provided, that Executive's base salary shall
be increased to Four Hundred Thousand Dollars ($400,000) at such time as the
Company closes a financing or financings which raise(s) an aggregate of $40
million; provided further, that Executive's base salary shall be further
increased at such time as the Company completes an initial public offering, to
a level commensurate with presidents of comparable companies at comparable
stages of development. Base salary will be paid in accordance with the
customary payroll practices of the Company and shall be subject to required
payroll deductions and withholdings. The compensation due to Executive
hereunder shall be due and payable notwithstanding any compensation which
Executive may earn from any other entity or outside source.
3.2 BONUS. The Executive shall be eligible to receive a bonus
in respect of each Contract Year in such amount, if any, as may be determined
by the Company's board of directors.
3.3 VACATION. The Executive shall be entitled to a reasonable
number of days of vacation during each Contract Year, scheduled in advance with
the Company to avoid excessive disruption of the Company's operations.
3.4 STOCK OPTIONS.
3.4.1. Pursuant to one or more stock option
agreements (hereafter referred to as the "Stock Option Agreement") dated the
date hereof, the Company shall grant to Executive stock options, under and
pursuant to the Company's 1999 Stock Option Plan, to purchase four thousand
(4,000) shares of the Company's common stock, $.01 par value ("Common Stock"),
at the price of Two Thousand Eighty-Five Dollars ($2,085) per share. Twenty
five percent (25%) of these options will vest immediately upon grant, and the
balance
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will vest in thirds on the last day of the first, second and third Contract
Year, provided Executive is employed on such dates, except as otherwise
provided in the last sentence hereof. The Stock Option Agreement will provide
that the maximum number of options which may be issued in the form of incentive
stock options pursuant to Section 422 of the Internal Revenue Code will be so
issued, with the balance of the options granted pursuant hereto to be issued as
non-qualified options. The Stock Option Agreement will further provide that if
the Executive dies during the Term of Employment or if the Company terminates
this Agreement due to his disability (as described below) or without "Cause"
(as defined below), or the Executive terminates this Agreement for "Good
Reason" (as defined below), all unvested options shall immediately become
exercisable.
3.4.2. All vested options will be exercisable for a period of
ten (10) years from the date of grant, regardless of whether this Agreement has
terminated. Any options granted in the form of incentive stock options which
are not exercised within three (3) months of the termination of employment
(other than due to death or disability) or twelve (12) month in the event of
termination due to disability automatically shall be converted into
non-qualified options.
4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES.
4.1 BENEFITS. The Executive shall participate in all benefit
plans of the Company generally available to its employees and/or to any senior
executive of the Company, whether n ow existing or hereafter established
(collectively, the "Benefit Plans"). The extent of Executive's participation in
the Benefit Plans shall be at the same level as the most senior executives of
the Company.
4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses
incurred by the Executive in accordance with the Company's policies will be
reimbursed upon the presentation of receipts. Business-related air travel shall
be such class as is determined by Executive in his reasonable discretion.
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<PAGE>
4.3 INSURANCE. During any period that the Executive is
rendering any services hereunder, the Company agrees to cause Executive to be
named as an insured under a director and officer liability insurance policy
which the Company shall obtain.
5. TERMINATION.
5.1 TERMINATION FOR CAUSE.
5.1.1 The Company may terminate this Agreement and
all of the Company's obligations hereunder, other than its obligations set
forth below in this section 5.1, for "Cause." "Cause" shall mean that the
Executive (i) is convicted of a felony, or any misdemeanor involving fraud or
theft, (ii) engages in dishonest behavior which materially adversely affects
the Company, (iii) commits a willful and intentional act having the effect of
materially injuring the reputation or business of the Company, including,
without limitation, habitual use of illegal drugs or alcohol or (iv) materially
breaches this Agreement and, after having been given written notice thereof by
the Company, fails to correct such breach within ten (10) days after receipt of
such notice.
5.1.2 In the event of termination by the Company for Cause,
the Company shall have no further obligations to the Executive other than to
pay (i) base salary accrued through the effective date of termination; and (ii)
all other benefits and amounts which may be then due the Executive under the
general provisions then in effect of any Benefit Plan ((i) and (ii)
collectively, the "Termination Entitlements").
5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate
upon the Executive's death, and in such event the Company shall have no further
obligations hereunder, other than to pay to the Executive's estate the
Termination Entitlements.
5.3 TERMINATION DUE TO DISABILITY. If, during the Term of
Employment, the Executive shall become physically or mentally disabled, whether
totally or partially, so that he is unable to perform the material functions of
his position for periods aggregating one hundred
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thirty five (135) days in any twelve (12) month period, the Company shall be
entitled to terminate this Agreement upon written notice to the Executive given
at any time thereafter during which the Executive is still so disabled. Upon
such termination, the Term of Employment shall end, and the Company shall have
no further obligations hereunder other than to pay to the Executive the
Termination Entitlements.
5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean any
of the following: (i) a material breach by the Company of this Agreement, (ii)
a material diminution of Executive's authority, duties or responsibilities with
the Company or (iii) the assignment to Executive of duties materially
inconsistent with Executive's position with the Company, unless otherwise
approved by the Executive. If there exists an event or condition that
constitutes Good Reason, and such event or condition is not cured within ten
(10) days following Executive's giving the Company notice thereof, Executive at
any time thereafter shall have the right to terminate this Agreement by giving
the Company written notice of such termination, and upon his doing so, the
provisions of sections 3.4.1 and 5.5 and all other relevant provisions hereof
shall apply.
5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the
Company terminates this Agreement without Cause (as defined in section 5.1
hereof), or if the Executive terminates this Agreement for Good Reason (as
defined in section 5.4 hereof), in addition to the Termination Entitlements,
the Executive shall be entitled to receive all base salary due for the balance
of the Term of Employment in a lump sum within thirty (30) days of the date of
termination.
5.6 STOCK OPTION VESTING. The impact of the termination of
this Agreement on the stock options referred to in section 3 hereof, shall be
as described in section 3 and in the Stock Option Agreements under which such
options shall be issued.
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6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive acknowledges
that employment by the Company will bring the Executive into close contact with
the confidential affairs of the Company and its affiliates. In recognition of
the foregoing, the Executive covenants and agrees that the Executive will keep
secret all confidential matters of the Company and its affiliates, including,
without limitation, the terms and provisions of this Agreement, and will not use
for his own benefit or intentionally disclose such matters to anyone outside of
the Company, either during or after the Term of Employment, except with the
Company's consent, provided that (i) the Executive shall have no such obligation
to the extent such matters are or become publicly known other than as a result
of the Executive's breach of his obligations hereunder; (ii) the Executive may
disclose such matters to the extent required by applicable laws or governmental
regulations or judicial or regulatory process; and (iii) the Executive may
disclose the terms of this Agreement to his attorney(s), accountant(s) and/or
financial advisor(s).
7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that in the
course of employment hereunder, he may conceive of, discover, or create
inventions or new contributions relating to the subject matter of his employment
(all of the foregoing being collectively referred to herein as "Work Product").
The Executive acknowledges that, unless the Company otherwise agrees, all of
such Work Product shall be owned by and belong exclusively to the Company. The
Executive shall further, unless the Company otherwise agrees in writing, (i)
promptly disclose any such Work Product to the Company; (ii) assign to the
Company, upon request, the entire rights to such Work Product to the extent not
otherwise owned at law by the Company; and (iii) sign all papers reasonably
necessary to carry out the foregoing.
8. REPRESENTATIONS. Both Executive and Company represent and warrant
that each is not a party to any agreements or understandings which would prevent
the fulfillment by such party of the terms of this Agreement or which would be
violated by entering into this Agreement and performing such party's obligations
hereunder.
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9. NOTICES. All notices, requests, consents and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally or three days after being
mailed first-class, postage prepaid, by registered or certified mail, to the
address of the recipient given herein (or such other address of which notice is
given or, in the case of notice to the Executive, to the most recent address set
forth on the records of the Company).
10. INDEMNIFICATION. The Company shall indemnify Executive against any
and all judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees, incurred in connection with any action or proceeding,
whether civil, criminal, judicial, legislative, administrative or investigative,
or in connection with an appeal therein, by reason of the fact that Executive is
or was a director, officer, employee, representative or agent of the Company;
provided, however, that no such indemnification shall be made to Executive if an
adverse judgment or other final adjudication establishes that the acts of
Executive were committed in bad faith or were the result of active and
deliberate dishonesty and, in either case, were material to the cause of action
so adjudicated. Without limiting the foregoing, Executive shall also be entitled
to indemnification by the Company against any liability or damage, including
attorney's fees and liabilities under federal and state securities laws, arising
from any act or omission by Executive provided such act or omission was
reasonably believed to be within the scope of Executive's authority or was taken
upon advice of the accountants or legal counsel for the Company. The
indemnification of Executive provided by this section 10 shall continue after
Executive has ceased to be a director, officer, employee, representative or
agent of the Company and shall inure to the benefit of Executive's heirs,
executors, administrators and legal representatives.
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<PAGE>
11. GENERAL.
11.1 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the state of the State of
New York applicable to agreements made and to be wholly performed therein.
11.2 CAPTIONS. The section headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties
expressly acknowledge, represent and agree that this Agreement is fully
integrated and contains and constitutes the complete and entire agreement and
understanding of the parties with respect to the subject matters hereof and
supersedes any and all agreements, understandings and discussions, whether
written or oral, between the parties with respect to the subject matters hereof,
other than the Proprietary Rights and Information Agreement being entered into
simultaneously herewith. The parties further acknowledge, represent, and agree
that neither has made any representations, promises or statements to induce the
other party to enter into this Agreement, and each party specifically disclaims
reliance, and represents that there has been no reliance, on any such
representations, promises or statements.
11.4 ASSIGNABILITY. This Agreement and the parties' rights and
obligations hereunder may not be assigned by Executive or the Company without
the other's prior written consent.
11.5 AMENDMENTS; WAIVERS. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and covenants
hereof may be waived, only by written instrument executed by both of the parties
hereto, or in the case of a waiver, by the party waiving compliance. The failure
of either party at any time or times to require performance of any provisions
hereof shall in no manner affect such party's right at a later time to enforce
the same. No waiver by either party of the breach of any term or covenant
contained
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in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such breach, or a waiver of the breach of any other term or
covenant contained in this Agreement.
11.6 CONSTRUCTION. No presumption will be made or inference
drawn because the attorneys for one of the parties drafted this Agreement or
because of its drafting history.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
DigitalConvergence.com Inc.
By: /s/ J. Jovan Philyaw
----------------------------------
Its: C.E.O.
----------------------------------
MICHAEL GARIN
Signature: /s/ Michael Garin
----------------------------
Address: 49 Moore Road
----------------------------
Bronxville, N.Y. 10708
----------------------------
9
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of August 16, 1999, by and between
DigitalConvergence.com Inc., a corporation incorporated under the laws of the
state of Delaware, with its principal place of business at 4264 Kellway Circle,
Addison, Texas 75001 (the "Company"), and GREGORY LERMAN residing at the address
set forth at the end of this Agreement (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive desire to set forth the terms
and conditions of the Executive's employment by the Company;
NOW, THEREFORE, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Executive's employment under this Agreement
shall be for a term commencing on October 18, 1999 and terminating on October
17, 2002, subject to earlier termination as provided in section 5 hereof (the
"Term of Employment"). Each year of the Term of Employment is referred to herein
as a "Contract Year."
2. EMPLOYMENT
2.1 During the Term of Employment, the Company shall employ
the Executive as its President - Interactive Group, and the Executive shall
serve in such position, perform such services and have such authority,
functions, duties, powers and responsibilities as ordinarily are associated
with such title. The Executive shall faithfully and diligently serve the
Company and shall devote all of his business time, attention, skill and efforts
thereto; provided, that the Executive may manage his passive investments and be
involved in charitable interests so long as they do not interfere or conflict
with the performance of the Executive's duties hereunder. The Executive shall
be based in Dallas, Texas.
<PAGE>
3. COMPENSATION AND OTHER REMUNERATION.
3.1 BASE SALARY. The Company shall pay to the Executive during
the Term of Employment base salary at the annual rate of Two Hundred Fifty
Thousand Dollars ($250,000); provided that Executive's base salary may be
increased at such time as the Company completes an initial public offering, to a
level to be negotiated in good faith at that time. Base salary will be paid in
accordance with the customary payroll practices of the Company and shall be
subject to required payroll deductions and withholdings. The compensation due to
Executive hereunder shall be due and payable notwithstanding any compensation
which Executive may earn from any other entity or outside source.
3.2 BONUS. The Executive shall be eligible to receive a bonus
in respect of each Contract Year in such amount, if any, as may be determined by
the Company's board of directors.
3.3 VACATION. The Executive shall be entitled to a reasonable
number of days of vacation during each Contract Year, scheduled in advance with
the Company to avoid excessive disruption of the Company's operations.
3.4 STOCK OPTIONS.
3.4.1. Pursuant to one or more stock option
agreements (hereafter referred to as the "Stock Option Agreement") dated the
date hereof, the Company shall grant to Executive stock options, under and
pursuant to the Company's 1999 Stock Option Plan, to purchase one thousand five
hundred (1,500) shares of the Company's common stock, $.01 par value ("Common
Stock"), at the price of Two Thousand Eighty-Five Dollars ($2,085) per share.
Twenty five percent (25%) of these options will vest immediately upon grant,
and the balance will vest in thirds on the last day of the first, second and
third Contract Year, provided Executive is employed on such dates, except as
otherwise provided in the last sentence hereof. The Stock Option Agreement will
provide that the maximum number of options which may be issued in the form of
incentive stock options pursuant to Section 422 of the Internal Revenue Code
will be so
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<PAGE>
issued, with the balance of the options granted pursuant hereto to be issued as
non-qualified options. The Stock Option Agreement will further provide that if
the Executive dies during the Term of Employment or if the Company terminates
this Agreement due to his disability (as described below) or without "Cause"
(as defined below), or the Executive terminates this Agreement for "Good
Reason" (as defined below), all unvested options shall immediately become
exercisable.
3.4.2 Pursuant to a second Stock Option Agreement dated the
date hereof, the Company shall grant to Executive stock options, under and
pursuant to the Company's 1999 Stock Option Plan, to purchase two hundred fifty
(250) shares of Common Stock at the price of Two Thousand Eighty-Five Dollars
($2,085) per share. The Stock Option Agreement will provide that the maximum
number of options which may be issued in the form of incentive stock options
pursuant to Section 422 of the Internal Revenue Code will be so issued, with the
balance of the options granted pursuant hereto to be issued as non-qualified
options. Such options shall become fully vested (i) upon satisfaction of the
performance criteria described in EXHIBIT A, annexed hereto, or (ii) if the
Executive dies or if the Company terminates this Agreement due to his disability
(as described below) or without "Cause" (as defined below) or the Executive
terminates this Agreement for "Good Reason" (as defined below), if such event
occurs prior to the fulfillment of such performance criteria.
3.4.3. All vested options will be exercisable for a period of
ten (10) years from the date of grant, regardless of whether this Agreement has
terminated. Any options granted in the form of incentive stock options which are
not exercised within three (3) months of the termination of employment (other
than due to death or disability) or twelve (12) month in the event of
termination due to disability automatically shall be converted into
non-qualified options.
3
<PAGE>
4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES.
4.1 BENEFITS. The Executive shall participate in all benefit
plans of the Company generally available to its employees and/or to any senior
executive of the Company, whether now existing or hereafter established
(collectively, the "Benefit Plans"). The extent of Executive's participation in
the Benefit Plans shall be at the same level as the most senior executives of
the Company.
4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses
incurred by the Executive in accordance with the Company's policies will be
reimbursed upon the presentation of receipts. Business-related air travel shall
be such class as is determined by Executive in his reasonable discretion.
4.3 MOVING EXPENSES. The Company will pay or reimburse the
Executive for the expenses of his moving from Safety Harbor, Florida, to Dallas,
Texas, up to Fifteen Thousand Dollars ($15,000).
4.4 INSURANCE. During any period that the Executive is
rendering any services hereunder, the Company agrees to cause Executive to be
named as an insured under a director and officer liability insurance policy
which the Company shall obtain.
5. TERMINATION.
5.1 TERMINATION FOR CAUSE.
5.1.1 The Company may terminate this Agreement
and all of the Company's obligations hereunder, other than its obligations set
forth below in this section 5.1, for "Cause." "Cause" shall mean that the
Executive (i) is convicted of a felony, or any misdemeanor involving fraud or
theft, (ii) engages in dishonest behavior which materially adversely affects
the Company, (iii) commits a willful and intentional act having the effect of
materially injuring the reputation or business of the Company, including,
without limitation, habitual use of illegal drugs or alcohol or (iv) materially
breaches this Agreement and, after
4
<PAGE>
having been given written notice thereof by the Company, fails to correct such
breach within ten (10) days after receipt of such notice.
5.1.2 In the event of termination by the Company for Cause,
the Company shall have no further obligations to the Executive other than to pay
(i) base salary accrued through the effective date of termination; and (ii) all
other benefits and amounts which may be then due the Executive under the general
provisions then in effect of any Benefit Plan ((i) and (ii) collectively, the
"Termination Entitlements").
5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate
upon the Executive's death, and in such event the Company shall have no further
obligations hereunder, other than to pay to the Executive's estate the
Termination Entitlements.
5.3 TERMINATION DUE TO DISABILITY. If, during the Term of
Employment, the Executive shall become physically or mentally disabled, whether
totally or partially, so that he is unable to perform the material functions of
his position for periods aggregating one hundred thirty five (135) days in any
twelve (12) month period, the Company shall be entitled to terminate this
Agreement upon written notice to the Executive given at any time thereafter
during which the Executive is still so disabled. Upon such termination, the Term
of Employment shall end, and the Company shall have no further obligations
hereunder other than to pay to the Executive the Termination Entitlements.
5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean any
of the following: (i) a material breach by the Company of this Agreement, (ii) a
material diminution of Executive's authority, duties or responsibilities with
the Company or (iii) the assignment to Executive of duties materially
inconsistent with Executive's position with the Company, unless otherwise
approved by the Executive. If there exists an event or condition that
constitutes Good Reason, and such event or condition is not cured within ten
(10) days following Executive's giving the Company notice thereof, Executive at
any time thereafter shall have the right to terminate this Agreement by giving
the Company written notice of such termination, and upon
5
<PAGE>
his doing so, the provisions of sections 3.4.1, 3.4.2, and 5.5 and all other
relevant provisions hereof shall apply.
5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the
Company terminates this Agreement without Cause (as defined in section 5.1
hereof), or if the Executive terminates this Agreement for Good Reason (as
defined in section 5.4 hereof), in addition to the Termination Entitlements,
the Executive shall be entitled to receive all base salary due for the balance
of the Term of Employment in a lump sum within thirty (30) days of the date of
termination.
5.6 STOCK OPTION VESTING. The impact of the termination of
this Agreement on the stock options referred to in section 3 hereof, shall be
as described in section 3 and in the Stock Option Agreements under which such
options shall be issued.
6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive acknowledges
that employment by the Company will bring the Executive into close contact with
the confidential affairs of the Company and its affiliates. In recognition of
the foregoing, the Executive covenants and agrees that the Executive will keep
secret all confidential matters of the Company and its affiliates, including,
without limitation, the terms and provisions of this Agreement, and will not use
for his own benefit or intentionally disclose such matters to anyone outside of
the Company, either during or after the Term of Employment, except with the
Company's consent, provided that (i) the Executive shall have no such obligation
to the extent such matters are or become publicly known other than as a result
of the Executive's breach of his obligations hereunder; (ii) the Executive may
disclose such matters to the extent required by applicable laws or governmental
regulations or judicial or regulatory process; and (iii) the Executive may
disclose the terms of this Agreement to his attorney(s), accountant(s) and/or
financial advisor(s).
7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that in the
course of employment hereunder, he may conceive of, discover, or create
inventions or new contributions relating to the subject matter of his employment
(all of the foregoing being collectively referred
6
<PAGE>
to herein as "Work Product"). The Executive acknowledges that, unless the
Company otherwise agrees, all of such Work Product shall be owned by and belong
exclusively to the Company. The Executive shall further, unless the Company
otherwise agrees in writing, (i) promptly disclose any such Work Product to the
Company; (ii) assign to the Company, upon request, the entire rights to such
Work Product to the extent not otherwise owned at law by the Company; and (iii)
sign all papers reasonably necessary to carry out the foregoing.
8. REPRESENTATIONS. Both Executive and Company represent and warrant
that each is not a party to any agreements or understandings which would prevent
the fulfillment by such party of the terms of this Agreement or which would be
violated by entering into this Agreement and performing such party's obligations
hereunder.
9. NOTICES. All notices, requests, consents and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally or three days after being
mailed first-class, postage prepaid, by registered or certified mail, to the
address of the recipient given herein (or such other address of which notice is
given or, in the case of notice to the Executive, to the most recent address set
forth on the records of the Company).
10. INDEMNIFICATION. The Company shall indemnify Executive against any
and all judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees, incurred in connection with any action or proceeding,
whether civil, criminal, judicial, legislative, administrative or investigative,
or in connection with an appeal therein, by reason of the fact that Executive is
or was a director, officer, employee, representative or agent of the Company;
provided, however, that no such indemnification shall be made to Executive if an
adverse judgment or other final adjudication establishes that the acts of
Executive were committed in bad faith or were the result of active and
deliberate dishonesty and, in either case, were material to the cause of action
so adjudicated. Without limiting the foregoing, Executive shall also be entitled
to indemnification by the Company against any liability or damage,
7
<PAGE>
including attorney's fees and liabilities under federal and state securities
laws, arising from any act or omission by Executive provided such act or
omission was reasonably believed to be within the scope of Executive's
authority or was taken upon advice of the accountants or legal counsel for the
Company. The indemnification of Executive provided by this section 10 shall
continue after Executive has ceased to be a director, officer, employee,
representative or agent of the Company and shall inure to the benefit of
Executive's heirs, executors, administrators and legal representatives.
11. GENERAL.
11.1 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the state of the State of
Texas applicable to agreements made and to be wholly performed therein.
11.2 CAPTIONS. The section headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties
expressly acknowledge, represent and agree that this Agreement is fully
integrated and contains and constitutes the complete and entire agreement and
understanding of the parties with respect to the subject matters hereof and
supersedes any and all agreements, understandings and discussions, whether
written or oral, between the parties with respect to the subject matters hereof,
other than the Proprietary Rights and Information Agreement being entered into
simultaneously herewith. The parties further acknowledge, represent, and agree
that neither has made any representations, promises or statements to induce the
other party to enter into this Agreement, and each party specifically disclaims
reliance, and represents that there has been no reliance, on any such
representations, promises or statements.
11.4 ASSIGNABILITY. This Agreement and the parties' rights and
obligations hereunder may not be assigned by Executive or the Company without
the other's prior written consent.
8
<PAGE>
11.5 AMENDMENTS; WAIVERS. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and covenants
hereof may be waived, only by written instrument executed by both of the parties
hereto, or in the case of a waiver, by the party waiving compliance. The failure
of either party at any time or times to require performance of any provisions
hereof shall in no manner affect such party's right at a later time to enforce
the same. No waiver by either party of the breach of any term or covenant
contained in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such breach, or a waiver of the breach of any other term or
covenant contained in this Agreement.
11.6 CONSTRUCTION. No presumption will be made or inference
drawn because the attorneys for one of the parties drafted this Agreement or
because of its drafting history.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
DigitalConvergence.com Inc.
By: /s/ J. Jovan Philyaw
------------------------------------
Its: C.E.O.
------------------------------------
GREGORY LERMAN
Signature: /s/ Gregory D. Lerman
------------------------------
Address: 2410 Country Trails Dr.
------------------------------
Safety Harbor, FL 34695
------------------------------
9
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of August 16, 1999, by and between
DigitalConvergence.com Inc., a corporation incorporated under the laws of the
state of Delaware, with its principal place of business at 4264 Kellway Circle,
Addison, Texas 75001 (the "Company"), and SCOTT CARLIN, residing at the address
set forth at the end of this Agreement (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive desire to set forth the terms and
conditions of the Executive's employment by the Company;
NOW, THEREFORE, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Executive's employment under this Agreement
shall be for a term commencing on October 4, 1999 and terminating on October 3,
2002, subject to earlier termination as provided in section 5 hereof (the "Term
of Employment"). Each year of the Term of Employment is referred to herein as a
"Contract Year."
2. EMPLOYMENT. During the Term of Employment, the Company shall employ
the Executive as President, Media, and the Executive shall serve in such
position, perform such services and have such authority, functions, duties,
powers and responsibilities as ordinarily are associated with such title. The
Executive shall report solely to the President, CEO and Board of Directors of
the Company. The Executive shall faithfully and diligently serve the Company and
shall devote all of his business time, attention, skill and efforts thereto;
provided, that the Executive may manage his passive investments and be involved
in charitable interests. The Executive shall be based in New York City.
3. COMPENSATION AND OTHER REMUNERATION.
3.1 BASE SALARY. The Company shall pay to the Executive during
the Term of Employment base salary at the annual rate of Two Hundred Fifty
Thousand Dollars ($250,000); provided, that Executive's base salary shall be
increased to Four Hundred Thousand Dollars ($400,000) at such time as the
Company closes a financing or financings which raise(s) an aggregate
<PAGE>
of $40 million; provided further, that Executive's base salary shall be further
increased to a level to be negotiated in good faith at such time as the Company
completes an initial public offering. Base salary will be paid in accordance
with the customary payroll practices of the Company and shall be subject to
required payroll deductions and withholdings. The compensation due to Executive
hereunder shall be due and payable notwithstanding any compensation which
Executive may earn from any other entity or outside source.
3.2 BONUS. The Executive shall be eligible to receive a bonus in
respect of each Contract Year in such amount, if any, as may be determined by
the Company's board of directors.
3.3 VACATION. The Executive shall be entitled to a reasonable
number of days of vacation during each Contract Year, scheduled in advance with
the Company to avoid excessive disruption of the Company's operations.
3.4 STOCK OPTIONS.
3.4.1. Pursuant to one or more stock option agreements
(hereafter referred to as the "Stock Option Agreement") dated the date hereof,
the Company shall grant to Executive stock options, under and pursuant to the
Company's 1999 Stock Option Plan, to purchase one thousand five hundred (1,500)
shares of its common stock, $.01 par value ("Common Stock"), at the price of
Two Thousand Eighty-Five Dollars ($2,085) per share. Twenty five percent (25%)
of these options will vest immediately upon grant, and the balance will vest in
thirds on the last day of the first, second and third Contract Year, provided
Executive is employed on such dates, except as otherwise provided in the last
sentence hereof. The Stock Option Agreement will provide that the maximum
number of options which may be issued in the form of incentive stock options
pursuant to Section 422 of the Internal Revenue Code will be so issued, with
the balance of the options granted pursuant hereto to be issued as
non-qualified options. The Stock Option Agreement will further provide that if
the Executive dies during the Term of Employment or if the Company terminates
this Agreement due to his disability (as described below) or without "Cause"
(as defined below), or the Executive terminates this Agreement for "Good
Reason" (as defined below), all unvested options shall immediately become
exercisable.
3.4.2. Pursuant to a second Stock Option Agreement dated the
date hereof, the Company shall grant to Executive stock options, under and
pursuant to the Company's 1999 Stock Option Plan, to purchase two hundred fifty
(250) shares of Common Stock at the price of Two Thousand Eighty-Five Dollars
($2,085) per share. The Stock Option Agreement will provide that the maximum
number of options which may be issued in the form of incentive stock options
pursuant to Section 422 of the Internal Revenue Code will be so issued, with
the balance of the options granted pursuant hereto to be issued as
non-qualified options. Such options shall become
<PAGE>
fully vested (i) upon satisfaction of the performance criteria described in
Exhibit A, annexed hereto, or (ii) if the Executive dies or if the Company
terminates this Agreement due to his disability (as described below) or without
"Cause" (as defined below) or the Executive terminates this Agreement for "Good
Reason" (as defined below), if such event occurs prior to the fulfillment of
such performance criteria.
3.4.3 All vested options will be exercisable for a period of
ten (10) years from the date of grant, regardless of whether this Agreement has
terminated. Any options granted in the form of incentive stock options which
are not exercised within three (3) months of the termination of employment
(other than due to death or disability) or twelve (12) month in the event of
termination due to disability automatically shall be converted into
non-qualified options.
4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES.
4.1 BENEFITS. The Executive shall participate in all benefit
plans of the Company generally available to its employees and/or to any senior
executive of the Company, whether now existing or hereafter established
(collectively, the "Benefit Plans"). The extent of Executive's participation in
the Benefit Plans shall be at the same level as the most senior executives of
the Company. Notwithstanding the foregoing, Company shall provide comprehensive
medical insurance for Executive, his wife and his minor children.
4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses
incurred by the Executive in accordance with the Company's policies will be
reimbursed upon the presentation of receipts.
4.3 MOVING AND CERTAIN OTHER EXPENSES.
4.3.1 The Company will pay or reimburse the Executive for the
expenses of his moving from California to New York, up to Twenty-Five Thousand
Dollars ($25,000).
4.3.2 The Company will reimburse the Executive for the rental
cost ($3,250 per month) of his Los Angeles apartment (including utilities of
approximately $250 per month) until the Executive is able to arrange for the
possessions in such apartment to be moved to the Executive's permanent home in
New York City; provided, however, that such reimbursement will not extend
beyond December 31, 1999.
4.4 INSURANCE. During any period that the Executive is rendering
any services hereunder, the Company agrees to cause Executive to be named as an
insured under a director and officer liability insurance policy which the
Company shall obtain.
<PAGE>
5. TERMINATION.
5.1 TERMINATION FOR CAUSE.
5.1.1 The Company may terminate this Agreement and all of the
Company's obligations hereunder, other than its obligations set forth below in
this section 5.1, for "Cause." "Cause" shall mean that the Executive (i) is
convicted of a felony, or any misdemeanor involving fraud or theft, (ii)
engages in dishonest behavior which materially adversely affects the Company,
(iii) commits a willful and intentional act having the effect of materially
injuring the reputation or business of the Company, including, without
limitation, habitual use of illegal drugs or alcohol or (iv) materially
breaches this Agreement and, after having been given written notice thereof by
the Company, fails to correct such breach within ten (10) days after receipt of
such notice.
5.1.2 In the event of termination by the Company for Cause,
the Company shall have no further obligations to the Executive other than to
pay (i) base salary accrued through the effective date of termination; and (ii)
all other benefits and amounts which may be then due the Executive under the
general provisions then in effect of any Benefit Plan ((i) and (ii)
collectively, the "Termination Entitlements").
5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate
upon the Executive's death, and in such event the Company shall have no further
obligations hereunder, other than to pay to the Executive's estate the
Termination Entitlements.
5.3 TERMINATION DUE TO DISABILITY. If, during the Term of
Employment, the Executive shall become physically or mentally disabled, whether
totally or partially, so that he is unable to perform the material functions of
his position for periods aggregating one hundred thirty five (135) days in any
twelve (12) month period, the Company shall be entitled to terminate this
Agreement upon written notice to the Executive given at any time thereafter
during which the Executive is still so disabled. Upon such termination, the
Term of Employment shall end, and the Company shall have no further obligations
hereunder other than to pay to the Executive the Termination Entitlements.
5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean any of
the following: (i) a material breach by the Company of this Agreement, (ii) a
material diminution of Executive's authority, duties or responsibilities with
the Company, (iii) the assignment to Executive of duties materially
inconsistent with Executive's position with the Company, unless otherwise
approved by the Executive, or (iv) a change in the reporting structure as
specified in section 2.1 hereof, unless otherwise approved by the Executive. If
there exists an event or condition that constitutes Good Reason, and such event
or condition is not cured within ten (10) days following
<PAGE>
Executive's giving the Company notice thereof, Executive at any time thereafter
shall have the right to terminate this Agreement by giving the Company written
notice of such termination, and upon his doing so, the provisions of sections
3.4.1, 3.4.2 and 5.5 and all other relevant provisions hereof shall apply.
5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the Company
terminates this Agreement without Cause (as defined in section 5.1 hereof), or
if the Executive terminates this Agreement for Good Reason (as defined in
section 5.4 hereof), in addition to the Termination Entitlements, the Executive
shall be entitled to receive all base salary due for the balance of the Term of
Employment in a lump sum within thirty (30) days of the date of termination.
5.6 STOCK OPTION VESTING. The impact of the termination of this
Agreement on the stock options referred to in section 3 hereof, shall be as
described in section 3 and in the Stock Option Agreements under which such
options shall be issued.
6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive acknowledges
that employment by the Company will bring the Executive into close contact with
the confidential affairs of the Company and its affiliates. In recognition of
the foregoing, the Executive covenants and agrees that the Executive will keep
secret all confidential matters of the Company and its affiliates, including,
without limitation, the terms and provisions of this Agreement, and will not
use for his own benefit or intentionally disclose such matters to anyone
outside of the Company, either during or after the Term of Employment, except
with the Company's consent, provided that (i) the Executive shall have no such
obligation to the extent such matters are or become publicly known other than
as a result of the Executive's breach of his obligations hereunder; (ii) the
Executive may disclose such matters to the extent required by applicable laws
or governmental regulations or judicial or regulatory process; and (iii) the
Executive may disclose the terms of this Agreement to his attorney(s),
accountant(s) and/or financial advisor(s).
7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that in the
course of employment hereunder, he may conceive of, discover, or create
inventions or new contributions relating to the subject matter of his employment
(all of the foregoing being collectively referred to herein as "Work Product").
The Executive acknowledges that, unless the Company otherwise agrees, all of
such Work Product shall be owned by and belong exclusively to the Company. The
Executive shall further, unless the Company otherwise agrees in writing, (i)
promptly disclose any such Work Product to the Company; (ii) assign to the
Company, upon request, the entire rights to such Work Product to the extent not
otherwise owned at law by the Company; and (iii) sign all papers reasonably
necessary to carry out the foregoing.
<PAGE>
8. REPRESENTATIONS. Both Executive and Company represent and warrant
that each is not a party to any agreements or understandings which would prevent
the fulfillment by such party of the terms of this Agreement or which would be
violated by entering into this Agreement and performing such party's obligations
hereunder.
9. NOTICES. All notices, requests, consents and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally or three days after being
mailed first-class, postage prepaid, by registered or certified mail, to the
address of the recipient given herein (or such other address of which notice is
given or, in the case of notice to the Executive, to the most recent address set
forth on the records of the Company).
10. INDEMNIFICATION. The Company shall indemnify Executive against
any and all judgments, fines, amounts paid in settlement and reasonable
expenses, including attorneys' fees, incurred in connection with any action or
proceeding, whether civil, criminal, judicial, legislative, administrative or
investigative, or in connection with an appeal therein, by reason of the fact
that Executive is or was a director, officer, employee, representative or agent
of the Company; provided, however, that no such indemnification shall be made
to Executive if an adverse judgment or other final adjudication establishes
that the acts of Executive were committed in bad faith or were the result of
active and deliberate dishonesty and, in either case, were material to the
cause of action so adjudicated. Without limiting the foregoing, Executive shall
also be entitled to indemnification by the Company against any liability or
damage, including attorney's fees and liabilities under federal and state
securities laws, arising from any act or omission by Executive provided such
act or omission was reasonably believed to be within the scope of Executive's
authority or was taken upon advice of the accountants or legal counsel for the
Company. The indemnification of Executive provided by this section 10 shall
continue after Executive has ceased to be a director, officer, employee,
representative or agent of the Company and shall inure to the benefit of
Executive's heirs, executors, administrators and legal representatives.
11. GENERAL.
11.1 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the state of the State of
New York applicable to agreements made and to be wholly performed therein.
11.2 CAPTIONS. The section headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
<PAGE>
11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties
expressly acknowledge, represent and agree that this Agreement is fully
integrated and contains and constitutes the complete and entire agreement and
understanding of the parties with respect to the subject matters hereof and
supersedes any and all agreements, understandings and discussions, whether
written or oral, between the parties with respect to the subject matters
hereof, other than the Proprietary Rights and Information Agreement being
entered into simultaneously herewith and further described in section 11.7
hereof. The parties further acknowledge, represent, and agree that neither has
made any representations, promises or statements to induce the other party to
enter into this Agreement, and each party specifically disclaims reliance, and
represents that there has been no reliance, on any such representations,
promises or statements.
11.4 ASSIGNABILITY. This Agreement and the parties' rights and
obligations hereunder may not be assigned by Executive or the Company without
the other's prior written consent.
11.5 AMENDMENTS; WAIVERS. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
covenants hereof may be waived, only by written instrument executed by both of
the parties hereto, or in the case of a waiver, by the party waiving
compliance. The failure of either party at any time or times to require
performance of any provisions hereof shall in no manner affect such party's
right at a later time to enforce the same. No waiver by either party of the
breach of any term or covenant contained in this Agreement, whether by conduct
or otherwise, in any one or more instances, shall be deemed to be, or construed
as, a further or continuing waiver of any such breach, or a waiver of the
breach of any other term or covenant contained in this Agreement. 11.6
CONSTRUCTION. No presumption will be made or inference drawn because the
attorneys for one of the parties drafted this Agreement or because of its
drafting history.
11.7 PROPRIETARY RIGHTS AND INFORMATION AGREEMENT. The parties
acknowledge that simultaneously with the execution and delivery hereof, the
Executive is executing and delivering a Proprietary Rights and Information
Agreement ("PRIA"), and that paragraph III(d) thereof contains a twelve (12)
month post-termination restriction on any activity that "competes with the
business of the Company...." The parties hereby confirm their mutual
understanding that the quoted phrase will be deemed to apply only to activities
which compete with the business of the Company by virtue of the use of
technology similar to, or functionally the equivalent of, the technology
employed by the Company.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first above written. DigitalConvergence.com Inc.
<PAGE>
DigitalConvergence.com Inc.
By: /s/ J. Jovan Philyaw
----------------------
Its: C.E.O.
----------------------
SCOTT CARLIN
Signature: /s/ Scott Carlin
-----------------
Address:________________________
________________________
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (the "First Amendment")
is dated this 16th day of August, 1999, by and between DigitalConvergence.com
Inc., a Delaware corporation (the "Company"), and Scott Carlin (the
"Executive").
WHEREAS the Company and the Executive have executed that certain
Employment Agreement dated August 16,1999 relating to the employment of
Executive as the President, Media, of the Company (the "Base Agreement"); and
WHEREAS the parties hereto desire to amend the Base Agreement in
accordance with the provisions of Section 11.5 thereof.
NOW, THEREFORE, BE IT RESOLVED that the Base Agreement is hereby
amended as follows:
1. The first full sentence of subsection 3.4.1. is hereby
amended to read in its entirety as follows:
"3.4.1. Pursuant to one or more stock option agreements (hereafter
referred to as the "Stock Option Agreement") dated the date
hereof, the Company shall grant to Executive stock options,
under and pursuant to the Company's 1999 Stock Option Plan,
to purchase one thousand seven hundred fifty (1,750) shares
of its common stock, $.01 par value ("Common Stock"), at a
price of Two Thousand Eighty-Five Dollars ($2,085) per
share."
2. Subsection 3.4.2. is hereby deleted in its entirety. All
references in the Base Agreement to Section 3.4.2. are hereby
deleted.
3. The balance of the Base Agreement shall remain in full force
and effect from and after the date hereof.
IN WITNESS WHEREOF the parties hereto have duly executed this
Agreement as the date first above written.
DIGITALCONVERGENCE.COM INC.
By: /s/ Michael Garin
-------------------
Its: President
-------------------
SCOTT CARLIN
Signature: /s/ Scott Carlin
-----------------
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of January 3, 2000, by and between
DigitalConvergence. com Inc., a corporation incorporated under the laws of the
state of Delaware, with its principal place of business at 9101 N. Central
Expressway, 6th Floor, Dallas, Texas, 75231 (the "Company"), and DONALD E.
WELSH residing at the address set forth at the end of this Agreement (the
"Employee").
W I T N E S S E T H:
--------------------
WHEREAS, the Company and the Employee desire to set forth the terms
and conditions of the Employee's employment by the Company;
NOW, THEREFORE, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Employee's employment under this
Agreement shall be for a term commencing on January 3, 2000 and terminating on
December 31, 2002, subject to earlier termination as provided in Section 5
hereof (the "Term of Employment"). Each year of the Term of Employment is
referred to herein as a "Contract Year."
2. EMPLOYMENT.
2.1 During the Term of Employment, the Company shall employ
the Employee as its Director/Magazine Sales, and the Employee shall serve in
such position, perform such services and have such authority, functions,
duties, powers and responsibilities as ordinarily are associated with such
title and as shall be designated by the President/Media Group of the Company
or others to whom the Employee reports from time to time. The Employee shall
faithfully and diligently serve the Company and, other than as set forth
hereinafter in this Section 2.1, shall devote all of his business time,
attention, skill and efforts thereto; provided, that the Employee may manage
his passive investments and be involved in charitable interests so long as
they do not interfere or conflict with the performance of the Employee's
duties hereunder. The Company and the Employee acknowledge that the Employee
has executed a one-year
<PAGE>
Employment Agreement with Newsweek Budget Travel, Inc. dated December 20, 1999
(the "Newsweek Agreement") which agreement requires by its terms that Employee
dedicate up to fifty percent (50%) of his professional time to the business
and affairs of Newsweek Budget Travel, Inc. and its affiliates during the year
2000. The Company acknowledges that the Employee may fulfill his obligations
under the Newsweek Agreement.
3. COMPENSATION AND OTHER REMUNERATION.
3.1 BASE SALARY. The Company shall pay to the Employee
during the first Contract Year of this Agreement base salary at the annual
rate of Seventy-Five Thousand Dollars ($75,000) and thereafter, during the
remainder of the Term of Employment, base salary at the annual rate of Two
Hundred Thousand Dollars ($200,000); provided that Employee's base salary may
be increased at such time as the Board of Directors of the Company deems
appropriate. Base salary will be paid in accordance with the customary payroll
practices of the Company and shall be subject to required payroll deductions
and withholdings.
3.2 BONUS. The Employee shall be eligible to receive a bonus
in respect of each Contract Year in such amount, if any, as may be determined
by the Company's Board of Directors.
3.3 VACATION. The Employee shall be entitled to a reasonable
number of days of vacation during each Contract Year (not to exceed fifteen
(15) days in the aggregate), scheduled in advance with the Company to avoid
excessive disruption of the Company's operations.
3.4 STOCK OPTIONS.
3.4.1 Pursuant to one or more stock option
agreements (hereinafter referred to as the "Stock Option Agreement") dated the
date hereof, the Company has granted to Employee stock options, under and
pursuant to the Company's 1999 Stock Option Plan, to purchase one hundred
twenty-five thousand (125,000) shares of the Company's common stock, $.01 par
value
<PAGE>
("Common Stock"), at the price of Five Dollars ($5.00) per share. The Company
and the Employee recognize and acknowledge that the Company executed a split
of its Common Stock on the effective date hereof and that the shares of Common
Stock subject to the Stock Option Agreement are on a post-split basis.
One-third (33.33%) of these options will vest on each of the last day of the
first, second and third Contract Year, provided Employee is employed with the
Company on each such date, subject to and except as otherwise provided in
Section 5.5 hereof. The Stock Option Agreement will provide the following:
(a) the maximum number of options which may be issued in the form of
incentive stock options pursuant to Section 422 of the Internal Revenue Code
will be so issued, with the balance of the options granted pursuant to Section
3.4.1. to be issued as non-qualified options;
(b) all vested options will be exercisable for a period of ten (10)
years from the date of grant, regardless of whether this Agreement has
terminated. This provision shall apply to any options granted in the form of
incentive stock options notwithstanding that they will not be treated for
Federal income tax purposes as incentive stock options unless they are
exercised within the time limits provided by the Internal Revenue Code;
(c) notwithstanding any provision of the Company's 1999 Stock Option
Plan to the contrary, Employee shall not forfeit any rights to any vested
options for any reason unless this Agreement is terminated by the Company for
"Cause", as defined in Section 5.1 of this Agreement.
4. BENEFITS: REIMBURSEMENT OF BUSINESS EXPENSES.
4.1 BENEFITS. From and after the expiration of the first
Contract Year of this Agreement, the Employee shall participate in all benefit
plans of the Company generally available to its employees of the Company,
whether now existing or hereafter established (collectively, the "Benefit
Plans").
4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses
incurred by the Employee in accordance with the Company's policies will be
reimbursed upon the presentation
<PAGE>
of receipts. Business-related air travel shall be such class as is determined
by Employee in his reasonable discretion.
5. TERMINATION.
5.1 TERMINATION FOR CAUSE.
5.1.1 The Company may terminate this Agreement
and all of the Company's obligations hereunder, other than its obligations set
forth below in this Section 5.1, for "Cause." "Cause" shall mean that the
Employee (i) is convicted of a felony, or any misdemeanor involving fraud or
theft, (ii) engages in dishonest behavior which materially adversely affects
the Company, (iii) commits a willful and intentional act having the effect of
materially injuring the reputation or business of the Company, including,
without limitation, habitual use of illegal drugs or alcohol or (iv)
materially breaches this Agreement and, after having been given written notice
thereof by the Company, fails to correct such breach within ten (10) days
after receipt of such notice.
5.1.2 In the event of termination by the Company
for Cause, the Company shall have no further obligations to the Employee other
than to pay (i) base salary accrued through the effective date of termination;
and (ii) all other benefits and amounts which may be then due the Employee
under the general provisions then in effect of any Benefit Plan ((i) and (ii)
collectively, the "Termination Entitlements").
5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate
upon the Employee's death, and in such event the Company shall have no further
obligations hereunder, other than to pay to the Employee's estate the
Termination Entitlements.
5.3 TERMINATION DUE TO DISABILITY. During the Term of
Employment, the Employee shall become physically or mentally disabled, whether
totally or partially, so that he is unable to perform the material functions
of his position for periods aggregating ninety (90) days in any twelve (12)
month period, the Company shall be entitled to terminate this Agreement upon
written notice to the Employee given at any time thereafter during which the
Employee is
<PAGE>
still so disabled. Upon such termination, the Terms of Employment shall end,
and the Company shall have no further obligations hereunder other than to pay
to the Employee the Termination Entitlements.
5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean
any of the following: (i) a material breach by the Company of this Agreement,
(ii) a material diminution of Employee's authority, duties or responsibilities
with the Company or (iii) the assignment to Employee of duties materially
inconsistent with Employee's position with the Company, unless otherwise
approved by the Employee. If there exists an event or condition that
constitutes Good Reason, and such event or condition is not cured within ten
(10) days following Employee's giving the Company notice thereof, Employee at
any time thereafter shall have the right to terminate this Agreement by giving
the Company written notice of such termination, and upon his doing so, the
provisions of Section 5.5 shall apply.
5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. The
Company may terminate this Agreement without Cause (as defined in Section 5.1
hereof) upon giving written notice thereof to the Employee. If the Company
terminates this Agreement without Cause, or if the Employee terminates this
Agreement for Good Reason (as defined in Section 5.4 hereof), in addition to
the Termination Entitlements: (i) the Employee shall be entitled to receive
six months of his monthly base salary then in effect payable on ordinary
payroll dates over the ensuing six months following termination; and (ii) for
the purposes of determining the date upon which options shall vest pursuant to
Section 3.4.1 of this Agreement, the Employee shall be deemed to have been
employed continuously by the Company until the date which is six months after
the effective date of the termination of the Agreement pursuant to this
Section 5.5.
6. PROTECTION OF CONFIDENTIAL INFORMATION. The Employee
acknowledges that employment by the Company will bring the Employee into close
contact with the confidential affairs of the Company and its affiliates. In
recognition of the foregoing, the Employee covenants and agrees that the
Employee will keep secret all confidential matters of the Company
<PAGE>
and its affiliates, including, without limitation, the terms and provisions of
this Agreement, and will not use for his own benefit or intentionally disclose
such matters to anyone outside of the Company, either during or after the Term
of Employment, except with the Company's consent, provided that (i) the
Employee shall have no such obligation to the extent such matters are or
become publicly known other than as a result of the Employee's breach of his
obligations hereunder; (ii) the Employee may disclose such matters to the
extent required by applicable laws or governmental regulations or judicial or
regulatory process; and (iii) the Employee may disclose the terms of this
Agreement to his attorney(s), accountant(s) and/or financial advisor(s).
7. OWNERSHIP OF WORK PRODUCT. The Employee acknowledges that in
the course of employment hereunder, he may conceive of, discover, or create
inventions or new contributions relating to the subject matter of his
employment (all of the foregoing being collectively referred to herein as
"Work Product"). The Employee acknowledges that, unless the Company otherwise
agrees, all of such Work Product shall be owned by and belong exclusively to
the Company. The Employee shall further, unless the Company otherwise agrees
in writing, (i) promptly disclose any such Work Product to the Company; (ii)
assign to the Company, upon request, the entire rights to such Work Product to
the extent not otherwise owned at law by the Company; and (iii) sign all
papers reasonably necessary to carry out the foregoing.
8. REPRESENTATIONS. Both Employee and Company represent and
warrant that each is not a party to any agreements or understandings which
would prevent the fulfillment by such party of the terms of this Agreement or
which would be violated by entering into this Agreement and performing such
party's obligations hereunder other than the Newsweek Agreement.
9. NOTICES. All notices, requests, consents and other
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given if delivered personally, by
overnight courier or three days after being mailed first-class, postage
prepaid, by registered or certified mail, to the address of the recipient
given herein (or such other address of which notice is given or, in the case
of notice to the Employee, to the most recent
<PAGE>
address set forth on the records of the Company).
10. INDEMNIFICATION. The Company shall indemnify Employee
against any and all judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees incurred in connection with any
action or proceeding, whether civil, criminal, judicial, legislative,
administrative or investigative, or in connection with an appeal therein, by
reason of the fact that Employee is or was a director, officer, employee,
representative or agent of the Company; provided, however, that no such
indemnification shall be made to Employee if an adverse judgment or other
final adjudication establishes that the acts of Employee were committed in bad
faith or were the result of active and deliberate dishonesty and, in either
case, were material to the cause of action so adjudicated. Without limiting
the foregoing, Employee shall also be entitled to indemnification by the
Company against any liability or damage, including attorney's fees and
liabilities under federal and state securities laws, arising from any act or
omission by Employee provided such act or omission was reasonably believed to
be within the scope of Employee's authority or was taken upon advice of the
accountants or legal counsel for the Company. The indemnification of Employee
provided by this Section 10 shall continue after Employee has ceased to be a
director, officer, employee, representative or agent of the Company and shall
inure to the benefit of Employee's heirs, executors, administrators and legal
representatives.
11. GENERAL.
11.1 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the state of the State
of Texas applicable to agreements made and to be wholly performed therein.
11.2 CAPTIONS. The section headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties
expressly
<PAGE>
acknowledge, represent and agree that this Agreement is fully integrated and
contains and constitutes the complete and entire agreement and understanding
of the parties with respect to the subject matter hereof and supersedes any
and all agreements, understandings and discussions, whether written or oral,
between the parties with respect to the subject matters hereof, other than the
Proprietary Rights and Information Agreement and the Stock Option Agreement
being entered into simultaneously herewith. The parties further acknowledge,
represent, and agree that neither has made any representations, promises or
statements to induce the other party to enter into this Agreement, and each
party specifically disclaims reliance, and represents that there has been no
reliance, on any such representations, promises or statements.
11.4 ASSIGNABILITY. This Agreement and the parties' rights
and obligations hereunder may not be assigned by Employee or the Company
without the other's prior written consent.
11.5 AMENDMENTS; WAIVERS. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
covenants hereof may be waived, only by written instrument executed by both of
the parties hereto, or in the case of a waiver, by the party waiving
compliance. The failure of either party at any time or times to require
performance of any provisions hereof shall in no manner affect such party's
right at a later time to enforce the same. No waiver by either party of the
breach of any term or covenant contained in this Agreement, whether by conduct
or otherwise, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach, or a waiver
of the breach of any other term or covenant contained in this Agreement.
11.6 CONSTRUCTION. No presumption will be made or inference
drawn because the attorneys for one of the parties drafted this Agreement or
because of its drafting history.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
DigitalConvergence.com Inc.
By: /s/ Michael Garin
---------------------
Its: President & COO
---------------------
DONALD E. WELSH
Signature: /s/ Donald E. Welsh
---------------------
Address: 501 East 79th Street
---------------------
New York, New York 10021
-------------------------
(212) 988-8921
--------------
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of December 15, 1999, by and between
DigitalConvergence.com Inc., a corporation incorporated under the laws of the
state of Delaware, with its principal place of business at 4264 Kellway
Circle, Addison, Texas 75001 (the "Company"), and DOUG DAVIS residing at the
address set forth at the end of this Agreement (the "Executive").
WITNESSETH:
WHEREAS, the Company and the Executive desire to set forth the terms
and conditions of the Executive's employment by the Company;
NOW, THEREFORE, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Executive's employment under this
Agreement shall be for a term commencing on December 15, 1999 and terminating
on December 14, 2002, subject to earlier termination as provided in section 5
hereof (the "Term of Employment"). Each year of the Term of Employment is
referred to herein as a "Contract Year."
2. EMPLOYMENT
2.1 During the Term of Employment, the Company shall
employ the Executive as its President/Technology Group, and the Executive
shall serve in such position, perform such services and have such authority,
functions, duties, powers and responsibilities as ordinarily are associated
with such title and as shall be designated by the President and/or CEO of the
Company. The Executive shall faithfully and diligently serve the Company and
shall devote all of his business time, attention, skill and efforts thereto;
provided, that the Executive may manage his passive investments and be
involved in charitable interests so long as they do not interfere or conflict
with the performance of the Executive's duties hereunder. The Executive shall
be based in Dallas, Texas.
3. COMPENSATION AND OTHER REMUNERATION.
3.1 BASE SALARY. The Company shall pay to the Executive
during the Term of Employment base salary at the annual rate of One Hundred
Seventy-Five Thousand Dollars
<PAGE>
($175,000); provided that Executive's base salary may be increased at such
time as the Board of Directors of the Company deems appropriate. Base salary
will be paid in accordance with the customary payroll practices of the Company
and shall be subject to required payroll deductions and withholdings.
3.2 BONUS. The Executive shall be eligible to receive a
bonus in respect of each Contract Year in such amount, if any, as may be
determined by the Company's board of directors.
3.3 VACATION. The Executive shall be entitled to a
reasonable number of days of vacation during each Contract Year (not to exceed
fifteen (15) days in the aggregate), scheduled in advance with the Company to
avoid excessive disruption of the Company's operations.
3.4 STOCK OPTIONS.
3.4.1. Pursuant to one or more stock option
agreements (hereafter referred to as the "Stock Option Agreement") dated the
date hereof, the Company shall grant to Executive stock options, under and
pursuant to the Company's 1999 Stock Option Plan, to purchase seven hundred
fifty (750) shares of the Company's common stock, $.01 par value ("Common
Stock"), at the price of Three Thousand One Hundred Fifty Dollars ($3,150) per
share. Twenty five percent (25%) of these options will vest on the date
hereof, and the balance will vest in thirds on the last day of the first,
second and third Contract Year, provided Executive is employed with the
Company on such dates. The Stock Option Agreement will provide that the
maximum number of options which may be issued in the form of incentive stock
options pursuant to Section 422 of the Internal Revenue Code will be so
issued, with the balance of the options granted pursuant hereto to be issued
as nonqualified options.
3.4.2. All vested options will be exercisable for a period
of ten (10) years from the date of grant, regardless of whether this Agreement
has terminated. Any options granted in the form of incentive stock options
which are not exercised within three (3) months of the
<PAGE>
termination of employment (other than due to death or disability) or twelve
(12) month in the event of termination due to disability automatically shall
be converted into non-qualified options.
4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES.
4.1 BENEFITS. The Executive shall participate in all
benefit plans of the Company generally available to its employees of the
Company, whether now existing or hereafter established (collectively, the
"Benefit Plans").
4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business
expenses incurred by the Executive in accordance with the Company's policies
will be reimbursed upon the presentation of receipts. Business-related air
travel shall be such class as is determined by Executive in his reasonable
discretion.
5. TERMINATION.
5.1 TERMINATION FOR CAUSE.
5.1.1 The Company may terminate this Agreement
and all of the Company's obligations hereunder, other than its obligations set
forth below in this section 5.1, for "Cause." "Cause" shall mean that the
Executive (i) is convicted of a felony, or any misdemeanor involving fraud or
theft, (ii) engages in dishonest behavior which materially adversely affects
the Company, (iii) commits a willful and intentional act having the effect of
materially injuring the reputation or business of the Company, including,
without limitation, habitual use of illegal drugs or alcohol or (iv)
materially breaches this Agreement and, after having been given written notice
thereof by the Company, fails to correct such breach within ten (10) days
after receipt of such notice.
5.1.2 In the event of termination by the Company
for Cause, the Company shall have no further obligations to the Executive
other than to pay (i) base salary accrued through the effective date of
termination; and (ii) all other benefits and amounts which may be then due the
Executive under the general provisions then in effect of any Benefit Plan
<PAGE>
((i) and (ii) collectively, the "Termination Entitlements").
5.2 TERMINATION DUE TO DEATH. This Agreement shall
terminate upon the Executive's death, and in such event the Company shall have
no further obligations hereunder, other than to pay to the Executive's estate
the Termination Entitlements.
5.3 TERMINATION DUE TO DISABILITY. If, during the Term
of Employment, the Executive shall become physically or mentally disabled,
whether totally or partially, so that he is unable to perform the material
functions of his position for periods aggregating ninety (90) days in any
twelve (12) month period, the Company shall be entitled to terminate this
Agreement upon written notice to the Executive given at any time thereafter
during which the Executive is still so disabled. Upon such termination, the
Term of Employment shall end, and the Company shall have no further
obligations hereunder other than to pay to the Executive the Termination
Entitlements.
5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall
mean any of the following: (i) a material breach by the Company of this
Agreement, (ii) a material diminution of Executive's authority, duties or
responsibilities with the Company or (iii) the assignment to Executive of
duties materially inconsistent with Executive's position with the Company,
unless otherwise approved by the Executive. If there exists an event or
condition that constitutes Good Reason, and such event or condition is not
cured within ten (10) days following Executive's giving the Company notice
thereof, Executive at any time thereafter shall have the right to terminate
this Agreement by giving the Company written notice of such termination, and
upon his doing so, the provisions of section 5.5 shall apply.
5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If
the Company terminates this Agreement without Cause (as defined in section 5.1
hereof), or if the Executive terminates this Agreement for Good Reason (as
defined in section 5.4 hereof), in addition to the Termination Entitlements,
the Executive shall be entitled to receive six months of monthly base salary
payable on ordinary payroll dates over the ensuing six months following
termination.
<PAGE>
6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive
acknowledges that employment by the Company will bring the Executive into
close contact with the confidential affairs of the Company and its affiliates.
In recognition of the foregoing, the Executive covenants and agrees that the
Executive will keep secret all confidential matters of the Company and its
affiliates, including, without limitation, the terms and provisions of this
Agreement, and will not use for his own benefit or intentionally disclose such
matters to anyone outside of the Company, either during or after the Term of
Employment, except with the Company's consent, provided that (i) the Executive
shall have no such obligation to the extent such matters are or become
publicly known other than as a result of the Executive's breach of his
obligations hereunder; (ii) the Executive may disclose such matters to the
extent required by applicable laws or governmental regulations or judicial or
regulatory process; and (iii) the Executive may disclose the terms of this
Agreement to his attorney(s), accountant(s) and/or financial advisor(s).
7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that
in the course of employment hereunder, he may conceive of, discover, or create
inventions or new contributions relating to the subject matter of his
employment (all of the foregoing being collectively referred to herein as
"Work Product"). The Executive acknowledges that, unless the Company otherwise
agrees, all of such Work Product shall be owned by and belong exclusively to
the Company. The Executive shall further, unless the Company otherwise agrees
in writing, (i) promptly disclose any such Work Product to the Company; (ii)
assign to the Company, upon request, the entire rights to such Work Product to
the extent not otherwise owned at law by the Company; and (iii) sign all
papers reasonably necessary to carry out the foregoing.
8. REPRESENTATIONS. Both Executive and Company represent and
warrant that each is not a party to any agreements or understandings which
would prevent the fulfillment by such party of the terms of this Agreement or
which would be violated by entering into this Agreement and performing such
party's obligations hereunder.
9. NOTICES. All notices, requests, consents and other
communications required or
<PAGE>
permitted to be given hereunder shall be in writing and shall be deemed to
have been duly given if delivered personally or three days after being mailed
first-class, postage prepaid, by registered or certified mail, to the address
of the recipient given herein (or such other address of which notice is given
or, in the case of notice to the Executive, to the most recent address set
forth on the records of the Company).
10. INDEMNIFICATION. The Company shall indemnify Executive
against any and all judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees, incurred in connection with
any action or proceeding, whether civil, criminal, judicial, legislative,
administrative or investigative, or in connection with an appeal therein, by
reason of the fact that Executive is or was a director, officer, employee,
representative or agent of the Company; provided, however, that no such
indemnification shall be made to Executive if an adverse judgment or other
final adjudication establishes that the acts of Executive were committed in
bad faith or were the result of active and deliberate dishonesty and, in
either case, were material to the cause of action so adjudicated. Without
limiting the foregoing, Executive shall also be entitled to indemnification by
the Company against any liability or damage, including attorney's fees and
liabilities under federal and state securities laws, arising from any act or
omission by Executive provided such act or omission was reasonably believed to
be within the scope of Executive's authority or was taken upon advice of the
accountants or legal counsel for the Company. The indemnification of Executive
provided by this section 10 shall continue after Executive has ceased to be a
director, officer, employee, representative or agent of the Company and shall
inure to the benefit of Executive's heirs, executors, administrators and legal
representatives.
11. GENERAL.
11.1 GOVERNING LAW. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the state of the
State of Texas applicable to agreements made and to be wholly performed
therein.
<PAGE>
11.2 CAPTIONS. The section headings contained herein are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The
parties expressly acknowledge, represent and agree that this Agreement is
fully integrated and contains and constitutes the complete and entire
agreement and understanding of the parties with respect to the subject matters
hereof and supersedes any and all agreements, understandings and discussions,
whether written or oral, between the parties with respect to the subject
matters hereof, other than the Proprietary Rights and Information Agreement
being entered into simultaneously herewith. The parties further acknowledge,
represent, and agree that neither has made any representations, promises or
statements to induce the other party to enter into this Agreement, and each
party specifically disclaims reliance, and represents that there has been no
reliance, on any such representations, promises or statements.
11.4 ASSIGNABILITY. This Agreement and the parties'
rights and obligations hereunder may not be assigned by Executive or the
Company without the other's prior written consent.
11.5 AMENDMENTS; WAIVERS. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
covenants hereof may be waived, only by written instrument executed by both of
the parties hereto, or in the case of a waiver, by the party waiving
compliance. The failure of either party at any time or times to require
performance of any provisions hereof shall in no manner affect such party's
right at a later time to enforce the same. No waiver by either party of the
breach of any term or covenant contained in this Agreement, whether by conduct
or otherwise, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach, or a waiver
of the breach of any other term or covenant contained in this Agreement.
11.6 CONSTRUCTION. No presumption will be made or
inference drawn because the attorneys for one of the parties drafted this
Agreement or because of its drafting history.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
DigitalConvergence.com Inc.
By: /s/ Michael Garin
-----------------
Its: President
---------
DOUG DAVIS
Signature:/s/ Doug Davis
--------------
Address: 1601 Branwood
---------------
Dallas, TX 75243
----------------------
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of January 1, 2000, by and between
DigitalConvergence.com Inc., a corporation incorporated under the laws of the
state of Delaware, with its principal place of business at One Dallas Center,
350 N. St. Paul, Suite 200, Dallas, Texas, 75201 (the "Company"), and Patrick
V. Stark residing at the address set forth at the end of this Agreement (the
"Executive").
WITNESSETH:
WHEREAS, the Company and the Executive desire to set forth the terms
and conditions of the Executive's employment by the Company;
NOW, THEREFORE, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Executive's employment under this
Agreement shall be for a term commencing on January 1, 2000 and terminating on
December 31, 2002, subject to earlier termination as provided in section 5
hereof (the "Term of Employment"). Each year of the Term of Employment is
referred to herein as a "Contract Year."
2. EMPLOYMENT
2.1 During the Term of Employment, the Company shall
employ the Executive as its Executive Vice-President, and the Executive shall
serve in such position, perform such services and have such authority,
functions, duties, powers and responsibilities as ordinarily are associated
with such title and as shall be designated by the President and/or CEO of the
Company. The Executive shall faithfully and diligently serve the Company and
shall devote all of his business time, attention, skill and efforts thereto;
provided, that the Executive may manage his passive investments, act as a
non-executive director of companies in which Executive has an investment and
be involved in charitable interests so long as they do not interfere or
conflict with the performance of the Executive's duties hereunder. The parties
also recognize the Executive will maintain a relationship with the firm of
Kane, Russell, Coleman &
<PAGE>
Logan, P.C. as "Of Counsel", and will continue to perform services on a
part-time basis to such firm for the purpose of finalizing matters to which
the Executive has previously devoted time and effort at such firm.
3. COMPENSATION AND OTHER REMUNERATION.
3.1 BASE SALARY. The Company shall pay to the Executive
during the Term of Employment base salary at the annual rate of Two Hundred
Fifty Thousand Dollars ($250,000); provided that Executive's base salary may
be increased at such time as the Company completes an initial public offering,
to a level to be negotiated in good faith at that time. Base salary will be
paid in accordance with the customary payroll practices of the Company and
shall be subject to required payroll deductions and withholdings. The
compensation due to Executive hereunder shall be due and payable
notwithstanding any compensation which Executive may earn from any other
entity or outside source.
3.2 BONUS. The Executive shall be eligible to receive a
bonus in respect of each Contract Year in such amount, if any, as may be
determined by the Company's board of directors.
3.3 VACATION. The Executive shall be entitled to a
reasonable number of days of vacation during each Contract Year, scheduled in
advance with the Company to avoid excessive disruption of the Company's
operations.
3.4 STOCK OPTIONS.
3.4.1. Pursuant to one or more stock option
agreements (hereafter referred to as the "Stock Option Agreement") dated the
date hereof, the Company shall grant to Executive stock options, under and
pursuant to the Company's 1999 Stock Option Plan, to purchase one thousand
(1,000) shares of the Company's common stock, $.O1 par value ("Common Stock"),
at the price of Three Thousand One Hundred Fifty Dollars ($3,150) per share.
Twenty five percent (25%) of these options will vest immediately upon grant,
and the balance will vest in thirds on the last day of the first, second and
third Contract Year, provided Executive is employed on such
<PAGE>
dates, except as otherwise provided in the last sentence hereof. The Stock
Option Agreement will provide that the maximum number of options which may be
issued in the form of incentive stock options pursuant to Section 422 of the
Internal Revenue Code will be so issued, with the balance of the options
granted pursuant hereto to be issued as non-qualified options. The Stock
Option Agreement will further provide that if the Executive dies during the
Term of Employment or if the Company terminates this Agreement due to his
disability (as described below) or without "Cause" (as defined below), or the
Executive terminates this Agreement for "Good Reason" (as defined below), all
unvested options shall immediately become exercisable.
3.4.2. All vested options will be exercisable for
a period of ten (10) years from the date of grant, regardless of whether this
Agreement has terminated. Any options granted in the form of incentive stock
options which are not exercised within three (3) months of the termination of
employment (other than due to death or disability) or twelve (12) month in the
event of termination due to disability automatically shall be converted into
non-qualified options.
4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES.
4.1 BENEFITS. The Executive shall participate in all
benefit plans of the Company generally available to its employees and/or to
any senior executive of the Company, whether now existing or hereafter
established (collectively, the "Benefit Plans"). The extent of Executive's
participation in the Benefit Plans shall be at the same level as the most
senior executives of the Company.
4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business
expenses incurred by the Executive in accordance with the Company's policies
will be reimbursed upon the presentation of receipts. Business-related air
travel shall be such class as is determined by Executive in his reasonable
discretion.
4.3 INSURANCE. During any period that the Executive is
rendering any services hereunder, the Company agrees to cause Executive to be
named as an insured under a director and officer liability insurance policy
which the Company shall obtain.
<PAGE>
5. TERMINATION.
5.1 TERMINATION FOR CAUSE.
5.1.1 The Company may terminate this Agreement
and all of the Company's obligations hereunder, other than its obligations set
forth below in this section 5.1, for "Cause." "Cause" shall mean that the
Executive (i) is convicted of a felony, or any misdemeanor involving fraud or
theft, (ii) engages in dishonest behavior which materially adversely affects
the Company, (iii) commits a willful and intentional act having the effect of
materially injuring the reputation or business of the Company, including,
without limitation, habitual use of illegal drugs or alcohol or (iv)
materially breaches this Agreement and, after having been given written notice
thereof by the Company, fails to correct such breach within ten (10) days
after receipt of such notice.
5.1.2 In the event of termination by the Company
for Cause, the Company shall have no further obligations to the Executive
other than to pay (i) base salary accrued through the effective date of
termination; and (ii) all other benefits and amounts which may be then due the
Executive under the general provisions then in effect of any Benefit Plan ((i)
and (ii) collectively, the "Termination Entitlements").
5.2 TERMINATION DUE TO DEATH. This Agreement shall
terminate upon the Executive's death, and in such event the Company shall have
no further obligations hereunder, other than to pay to the Executive's estate
the Termination Entitlements.
5.3 TERMINATION DUE TO DISABILITY. If, during the Term
of Employment, the Executive shall become physically or mentally disabled,
whether totally or partially, so that he is unable to perform the material
functions of his position for periods aggregating one hundred thirty five
(135) days in any twelve (12) month period, the Company shall be entitled to
terminate this Agreement upon written notice to the Executive given at any
time thereafter during which the Executive is still so disabled. Upon such
termination, the Term of Employment shall end, and the Company shall have no
further obligations hereunder other than to pay to the
<PAGE>
Executive the Termination Entitlements.
5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall
mean any of the following: (i) a material breach by the Company of this
Agreement, (ii) a material diminution of Executive's authority, duties or
responsibilities with the Company or (iii) the assignment to Executive of
duties materially inconsistent with Executive's position with the Company,
unless otherwise approved by the Executive. If there exists an event or
condition that constitutes Good Reason, and such event or condition is not
cured within ten (10) days following Executive's giving the Company notice
thereof, Executive at any time thereafter shall have the right to terminate,
this Agreement by giving the Company written notice of such termination, and
upon his doing so, the provisions of sections 3.4.1, 3.4.2, and 5.5 and all
other relevant provisions hereof shall apply.
5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If
the Company terminates this Agreement without Cause (as defined in section 5.1
hereof), or if the Executive terminates this Agreement for Good Reason (as
defined in section 5.4 hereof), in addition to the Termination Entitlements,
the Executive shall be entitled to receive all base salary due for the balance
of the Term of Employment in a lump sum within thirty (30) days of the date of
termination.
5.6 STOCK OPTION VESTING. The impact of the termination
of this Agreement on the stock options referred to in section 3 hereof, shall
be as described in section 3 and in the Stock Option Agreements under which
such options shall be issued.
6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive
acknowledges that employment by the Company will bring the Executive into
close contact with the confidential affairs of the Company and its affiliates.
In recognition of the foregoing, the Executive covenants and agrees that the
Executive will keep secret all confidential matters of the Company and its
affiliates, including, without limitation, the terms and provisions of this
Agreement, and will not use for his own benefit or intentionally disclose such
matters to anyone outside of the Company,
<PAGE>
either during or after the Term of Employment, except with the Company's
consent, provided that (i) the Executive shall have no such obligation to the
extent such matters are or become publicly known other than as a result of the
Executive's breach of his obligations hereunder; (ii) the Executive may
disclose such matters to the extent required by applicable laws or
governmental regulations or judicial or regulatory process; and (iii) the
Executive may disclose the terms of this Agreement to his attorney(s),
accountant(s) and/or financial advisor(s).
7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that
in the course of employment hereunder, he may conceive of, discover, or create
inventions or new contributions relating to the subject matter of his
employment (all of the foregoing being collectively referred to herein as
"Work Product"). The Executive acknowledges that, unless the Company otherwise
agrees, all of such Work Product shall be owned by and belong exclusively to
the Company. The Executive shall further, unless the Company otherwise agrees
in writing, (i) promptly disclose any such Work Product to the Company; (ii)
assign to the Company, upon request, the entire rights to such Work Product to
the extent not otherwise owned at law by the Company; and (iii) sign all
papers reasonably necessary to carry out the foregoing.
8. REPRESENTATIONS. Both Executive and Company represent and
warrant that each is not a party to any agreements or understandings which
would prevent the fulfillment by such party of the terms of this Agreement or
which would be violated by entering into this Agreement and performing such
party's obligations hereunder.
9. NOTICES. All notices, requests, consents and other
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given if delivered personally or three
days after being mailed first-class, postage prepaid, by registered or
certified mail, to the address of the recipient given herein (or such other
address of which notice is given or, in the case of notice to the Executive,
to the most recent address set forth on the records of the Company).
10. INDEMNIFICATION. The Company shall indemnify Executive
against any and all
<PAGE>
judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees, incurred in connection with any action or
proceeding, whether civil, criminal, judicial, legislative, administrative or
investigative, or in connection with an appeal therein, by reason of the fact
that Executive is or was a director, officer, employee, representative or
agent of the Company; provided, however, that no such indemnification shall be
made to Executive if an adverse judgment or other final adjudication
establishes that the acts of Executive were committed in bad faith or were the
result of active and deliberate dishonesty and, in either case, were material
to the cause of action so adjudicated. Without limiting the foregoing,
Executive shall also be entitled to indemnification by the Company against any
liability or damage, including attorney's fees and liabilities under federal
and state securities laws, arising from any act or omission by Executive
provided such act or omission was reasonably believed to be within the scope
of Executive's authority or was taken upon advice of the accountants or legal
counsel for the Company. The indemnification of Executive provided by this
section 10 shall continue after Executive has ceased to be a director,
officer, employee, representative or agent of the Company and shall inure to
the benefit of Executive's heirs, executors, administrators and legal
representatives.
11. GENERAL.
11.1 GOVERNING LAW. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the state of the
State of Texas applicable to agreements made and to be wholly performed
therein.
11.2 CAPTIONS. The section headings contained herein are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The
parties expressly acknowledge, represent and agree that this Agreement is
fully integrated and contains and constitutes the complete and entire
agreement and understanding of the parties with respect to the subject matters
hereof and supersedes any and all agreements, understandings and discussions,
<PAGE>
whether written or oral, between the parties with respect to the subject
matters hereof, other than the Proprietary Rights and Information Agreement
being entered into simultaneously herewith. The parties further acknowledge,
represent, and agree that neither has made any representations, promises or
statements to induce the other party to enter into this Agreement, and each
party specifically disclaims reliance, and represents that there has been no
reliance, on any such representations, promises or statements.
11.4 ASSIGNABILITV. This Agreement and the parties'
rights and obligations hereunder may not be assigned by Executive or the
Company without the other's prior written consent.
11.5 AMENDMENTS: WAIVERS. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
covenants hereof may be waived, only by written instrument executed by both of
the parties hereto, or in the case of a waiver, by the party waiving
compliance. The failure of either party at any time or times to require
performance of any provisions hereof shall in no manner affect such party's
right at a later time to enforce the same. No waiver by either party of the
breach of any term or covenant contained in this Agreement, whether by conduct
or otherwise, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach, or a waiver
of the breach of any other term or covenant contained in this Agreement.
11.6 CONSTRUCTION. No presumption will be made or
inference drawn because the attorneys for one of the parties drafted this
Agreement or because of its drafting history.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
DigitalConvergence.com Inc.
By: /s/ Michael Garin
-----------------
Its: President
---------
Signature:/s/ Patrick V. Stark
--------------------
Address: 6206 Lupton
Dallas, Texas 75225
<PAGE>
EXECUTION COPY
WARRANT AGREEMENT
Dated as of September 29, 1999
by and between
DIGITALCONVERGENCE.COM INC.
and
BELO ENTERPRISES, INC.
THIS WARRANT AGREEMENT (this "AGREEMENT") is made and entered into as
of September 29, 1999 by and between DIGITALCONVERGENCE.COM INC., a Delaware
corporation (the "COMPANY"), BELO ENTERPRISES, INC., a Delaware corporation
("BELO") and the Holders of the Warrants from time to time.
WHEREAS, the Company agrees to issue Common Stock warrants as
hereinafter described (the "WARRANTS") to purchase shares of Common Stock (as
defined below), in such number and at such price determined in accordance with
this Agreement. Each Warrant entitles the holder thereof to purchase one share
of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, and for the purpose of defining the respective
rights and obligations of the Company and Belo, the parties hereto agree as
follows:
Section 1. CERTAIN DEFINITIONS. As used in this Agreement, the
following terms shall have the following respective meanings:
"COMMISSION" means the Securities and Exchange Commission.
"COMMON EQUITY SECURITIES" means Common Stock and securities
convertible into, or exercisable or exchangeable for, Common Stock or rights or
options to acquire Common Stock or such other securities, excluding the
Warrants.
"COMMON STOCK" means the common stock, par value $.01 per share, of the
Company, and any other capital stock of the Company into which such common stock
may be converted or reclassified or that may be issued in respect of, in
exchange for, or in substitution for, such common stock by reason of any stock
splits, stock dividends, distributions, mergers, consolidations or other like
events.
<PAGE>
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any successor statute, and the rules and regulations promulgated thereunder.
"EXERCISE PRICE" means the purchase price per share of Common Stock to
be paid upon the exercise of each Warrant in accordance with the terms hereof,
which price shall initially be $3,150.00 per share, subject to adjustment from
time to time pursuant to SECTION 11 hereof.
"EXPIRATION DATE" means September 29, 2004, as the same may be extended
pursuant to SECTION 6 hereof.
"HOLDER" or "WARRANT HOLDER" means a Person who is the owner as shown
on the Warrant register maintained by the Company.
"ISSUE DATE" means the date of the initial issuance of the Warrants,
which shall be the date of this Agreement.
"REGISTRABLE SECURITIES" means any of (i) the Warrant Shares and (ii)
any other securities issued or issuable with respect to any Warrant Shares by
way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise, unless, in each case, such Warrant Shares and securities, if any,
have been offered and sold to the Holders pursuant to an effective Registration
Statement under the Securities Act declared effective prior to the date of
exercisability of the Warrants or the date such Warrant Shares and securities,
if any, may be sold to the public pursuant to Rule 144 without any restriction
on the amount of securities which may be sold by such Holders or the
satisfaction of any condition. As to any particular Registrable Securities held
by a Holder, such securities shall cease to be Registrable Securities when (i) a
Registration Statement with respect to the exercise or offering of such
securities by the Holder thereof shall have been declared effective under the
Securities Act and such securities shall have been exercised and/or disposed of
by such Holder pursuant to such Registration Statement, (ii) such securities may
at the time of determination be sold to the public pursuant to Rule 144 without
any restriction on the amount of securities which may be sold by such Holder (or
any similar provision then in force, but not Rule 144A) without the lapse of any
further time or the satisfaction of any condition, (iii) such securities shall
have been otherwise transferred by such Holder and new certificates for such
securities not bearing a legend restricting further transfer shall have been
delivered by the Company or its transfer agent and subsequent disposition of
such securities shall not require registration or qualification under the
Securities Act or any similar state law then in force or (iv) such securities
shall have ceased to be outstanding.
"REGISTRATION RIGHTS AGREEMENT" means the registration rights
agreement, dated as of the date hereof by and between the Company, Belo, Young &
Rubicam Inc., and certain investors and initial investors, under which
registration rights agreement the Warrant Shares constitute registrable
securities.
2
<PAGE>
"RULE 144" shall mean Rule 144 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other than Rule
144A) or regulation hereafter adopted by the Commission providing for offers and
sales of securities made in compliance therewith resulting in offers and sales
by subsequent holders that are not affiliates of an issuer of such securities
being free of the registration and prospectus delivery requirements of the
Securities Act.
"RULE 144A" shall mean Rule 144A promulgated under the Securities Act,
as such Rule may be amended from time to time, or any similar rule (other than
Rule 144) or regulation hereafter adopted by the Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor statute and the rules and regulations promulgated thereunder.
"WARRANT HOLDER" or "HOLDER" means a Person who is the owner as shown
on the Warrant register maintained by the Company.
"WARRANT SHARES" means the shares of Common Stock issued or issuable
upon the exercise of the Warrants.
Section 2. ISSUANCE OF WARRANTS; WARRANT CERTIFICATES.
(a) The Warrants will be issued in the form of definitive certificates,
substantially in the form of Exhibit A (the "WARRANT CERTIFICATES"). Each
Warrant shall provide that it shall represent the aggregate amount of
outstanding Warrants from time to time endorsed thereon and that the aggregate
amount of outstanding Warrants represented thereby may from time to time be
reduced or increased, as appropriate.
(b) The Warrants shall be initially issued on the Issue Date in the
aggregate amount of 198 shares of Common Stock, subject to adjustment as herein
provided, and shall be issued under one Warrant Certificate.
Section 3. EXECUTION OF WARRANT CERTIFICATES. Warrant Certificates
shall be signed on behalf of the Company by the Company's President or a Vice
President and by its Secretary or an Assistant Secretary under its corporate
seal. Each such signature upon the Warrant Certificates may be in the form of a
facsimile signature of the present or any future President, Vice President,
Secretary or Assistant Secretary and may be imprinted or otherwise reproduced on
the Warrant Certificates and for that purpose the Company may adopt and use the
facsimile signature of any person who shall have been President, Vice President,
Secretary or Assistant Secretary, notwithstanding the fact that at the time the
Warrant Certificates shall be countersigned and delivered or disposed of, such
person shall have ceased to hold such office. The seal of the Company may be in
the form of a facsimile thereof and may be impressed, affixed, imprinted or
otherwise reproduced on the Warrant Certificates.
3
<PAGE>
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been disposed of by the Company, such Warrant
Certificates nevertheless may be countersigned and delivered or disposed of as
though such person had not ceased to be such officer of the Company; and any
Warrant Certificate may be signed on behalf of the Company by any person who, at
the actual date of the execution of such Warrant Certificate, shall be a proper
officer of the Company to sign such Warrant Certificate, although at the date of
the execution of this Warrant Agreement any such person was not such officer.
Section 4. REGISTRATION. The Company shall number and register the
Warrant Certificates in a register as they are issued by the Company.
The Company may deem and treat the person in whose name any Warrant is
registered as the absolute owner(s) thereof, for all purposes, and the Company
shall not be affected by any notice to the contrary.
Section 5. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) TRANSFER AND EXCHANGE OF WARRANTS AND REGISTRABLE SECURITIES. When
Warrants or Registrable Securities are presented to the Company with a request
to register their transfer; or to exchange such Warrants for an equal number of
Warrants of other authorized denominations, the Company shall register the
transfer or make the exchange as requested if the following requirements are
met:
(i) the Warrants presented or surrendered for registration of
transfer or exchange shall be duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Company, duly
executed by the Holder thereof or by his attorney-in-fact, duly
authorized in writing; and
(ii) in the case of Registrable Securities, such request shall
be accompanied by the following additional information and documents
(all of which may be submitted by facsimile), as applicable:
(A) if such Registrable Security is being delivered
to the Company by a Holder for registration in the name of
such Holder, without transfer, a certification from such
Holder to that effect (in substantially the form of Exhibit B
hereto);
(B) if such Registrable Security is being transferred
(1) to a "qualified institutional buyer" (as defined in Rule
144A) in accordance with Rule 144A or (2) pursuant to an
exemption from registration in accordance with Rule 144 (and
based on an opinion of counsel if the Company so requests) or
(3) pursuant to an
4
<PAGE>
effective registration statement under the Securities Act,
a certification to that effect (in substantially the form
of Exhibit B hereto);
(C) if such Registrable Security is being transferred
pursuant to an exemption from registration in accordance with
Rule 904 under the Securities Act (and based on an opinion of
counsel if the Company so requests), a certification to that
effect (in substantially the form of Exhibit B hereto); or
(D) if such Registrable Security is being transferred
in reliance on another exemption from the registration
requirements of the Securities Act (and based on an opinion of
counsel if the Company so requests), a certification to that
effect (in substantially the form of Exhibit B hereto).
(b) LEGENDS.
(i) Except for any Registrable Security sold or transferred as
discussed in clause (ii) below, each Warrant Certificate (and all
Warrants issued in exchange therefor or substitution thereof) and each
certificate representing the Warrant Shares shall bear a legend in
substantially the following form:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THE SECURITY EVIDENCED HEREBY AND THE SECURITIES DELIVERED
UPON EXERCISE THEREOF MAY NOT BE EXERCISED, OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY
AND THE SECURITIES DELIVERED UPON THE EXERCISE THEREOF IS HEREBY
NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A.
THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF
THE ISSUER THAT (A) SUCH SECURITY AND THE SECURITIES DELIVERED UPON
EXERCISE HEREOF MAY BE EXERCISED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES
IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A PERSON THAT IS NOT A
U.S. PERSON (AS DEFINED IN RULE 902 UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES
ACT, OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION
5
<PAGE>
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (IN THE
CASE OF (b), (c) or (d), UPON AN OPINION OF COUNSEL AND WRITTEN
CERTIFICATION IF THE ISSUER, REGISTRAR OR TRANSFER AGENT FOR THE
SECURITIES SO REQUESTS), (2) TO THE ISSUER OR (3) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL,
AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM
IT OF THE SECURITY EVIDENCED HEREBY AND THE SECURITIES DELIVERED
UPON EXERCISE HEREOF OF THE RESALE RESTRICTIONS SET FORTH IN (A)
ABOVE."
(ii) Upon any sale or transfer of a Registrable Security
pursuant to an effective registration statement under the Securities
Act, pursuant to Rule 144(A) or pursuant to an opinion of counsel
reasonably satisfactory to the Company that no legend is required, the
Holder thereof shall be permitted to exchange such Registrable Security
for a Warrant that does not bear the legend set forth in clause (i)
above and rescind any restriction on the transfer of such Registrable
Security.
(c) OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES OF
WARRANTS.
(i) To permit registrations of transfers and exchanges, the
Company shall execute in accordance with the provisions of SECTION 4
and this SECTION 5, Warrants as required pursuant to the provisions of
this SECTION 5. Notwithstanding anything to the contrary contained
herein, the Company shall refuse to register any transfer of the
Warrants not made in accordance with Regulation S, pursuant to
registration under the Securities Act or pursuant to an available
exemption from the registration requirements of the Securities Act;
provided, however, that if a foreign law prevents the Company from
refusing to register securities transfers, the Company shall implement
other reasonable measures designed to prevent transfers of the Warrants
not made in accordance with Regulation S, pursuant to registration
under the Securities Act or pursuant to an available exemption from the
registration requirements of the Securities Act.
(ii) All Warrants issued upon any registration of transfer or
exchange of Warrants shall be the valid obligations of the Company,
entitled to the same benefits under this Warrant Agreement, as the
Warrants surrendered upon such registration of transfer or exchange.
(iii) Prior to due presentment for registration of transfer of
any Warrant, the Company may deem and treat the person in whose name
any Warrant is registered as the absolute owner of such Warrant and the
Company shall not be affected by notice to the contrary.
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(iv) No service charge shall be made to a Holder for any
registration of transfer or exchange.
Section 6. TERMS OF WARRANTS; EXERCISE OF WARRANTS. Subject to the
terms of this Agreement, each Warrant Holder shall have the right, which may be
exercised at any time and from time to time, in whole or in part, commencing on
the date hereof and ending at 4:00 p.m., Dallas, Texas, time, on the Expiration
Date, to receive from the Company the number of fully paid and nonassessable
Warrant Shares which the Holder may at the time be entitled to receive on
exercise of such Warrants and payment of the Exercise Price then in effect for
such Warrant Shares; provided, however, that no Warrant Holder shall be entitled
to exercise such Holder's Warrants at any time, unless, at the time of exercise,
(i) a registration statement under the Securities Act relating to the Warrant
Shares has been filed with, and declared effective by, the Commission, and no
stop order suspending the effectiveness of such registration statement has been
issued by the Commission or (ii) the issuance of the Warrant Shares is permitted
pursuant to an exemption from the registration requirements of the Securities
Act. Subject to the provisions of the following paragraph of this SECTION 6,
each Warrant not exercised prior to 4:00 p.m., Dallas, Texas, time, on the
Expiration Date shall become void and all rights thereunder and all rights in
respect thereof under this Agreement shall cease as of such time. No adjustments
as to dividends will be made upon exercise of the Warrants.
A Warrant may be exercised upon surrender to the Company of the
certificate or certificates evidencing the Warrant to be exercised with the form
of election to purchase on the reverse thereof properly completed and signed,
which signature shall be guaranteed by a bank or trust company having an office
or correspondent in the United States or a broker or dealer which is a member of
a registered securities exchange or the National Association of Securities
Dealers, Inc., and upon payment to the Company of the Exercise Price as adjusted
as herein provided, for each of the Warrant Shares in respect of which such
Warrants are then exercised. Payment of the aggregate Exercise Price shall be
made in cash or by certified or official bank check, payable to the order of the
Company. In the alternative, each Holder may exercise its right to receive
Warrant Shares (i) on a net basis, such that without the exchange of any funds,
the Holder receives that number of Warrant Shares otherwise issuable upon
exercise of its Warrants less that number of Warrant Shares having a fair market
value equal to the aggregate Exercise Price that would otherwise have been paid
by the Holder for the Warrant Shares being issued, (ii) by any Holder to whom
the Company is indebted, by tendering indebtedness having an aggregate principal
amount, plus accrued but unpaid interest, if any, thereon, to the date of
exercise equal to the aggregate Exercise Price that would otherwise have been
paid by the Holder for the Warrant Shares being issued, or (iii) by a
combination of the procedures in clauses (i) and (ii). For purposes of the
foregoing sentence, "fair market value" of the Warrant Shares shall be as
determined by the Board of Directors of the Company in good faith and evidenced
by a resolution thereof. The Company shall notify the Holders in writing of any
such determination of fair market value.
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Subject to the provisions of SECTION 7 hereof, upon surrender of
Warrants and payment of the Exercise Price as provided above, the Company
shall promptly transfer to the Holder of such Warrant a certificate or
certificates for the appropriate number of Warrant Shares or other securities
or property (including any money) to which the Holder is entitled, registered
or otherwise placed in, or payable to the order of, such name or names as may
be directed in writing by the Holder, and shall deliver such certificate or
certificates representing the Warrant Shares and any other securities or
property (including any money) to the Person or Persons entitled to receive
the same, together with an amount in cash in lieu of any fraction of a share
as provided in SECTION 13. Any such certificate or certificates representing
the Warrant Shares shall be deemed to have been issued and any Person so
designated to be named therein shall be deemed to have become a Holder of
record of such Warrant Shares as of the later of the date of the surrender of
such Warrants and payment of the Exercise Price.
The Warrants shall be exercisable commencing on the Issue Date, at the
election of the Holders thereof, either in full or from time to time in part
and, in the event that a certificate evidencing Warrants is exercised in respect
of fewer than all of the Warrant Shares issuable on such exercise at any time
prior to the date of expiration of the Warrants, a new certificate evidencing
the remaining Warrant or Warrants will be issued and delivered pursuant to the
provisions of this SECTION and of SECTION 3 hereof.
All Warrant Certificates surrendered upon exercise of Warrants shall be
canceled. Such canceled Warrant Certificates shall then be disposed of in
accordance with customary procedures.
Section 7. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes, if any, attributable to the issuance of the Warrant Certificates or the
initial issuance of Warrant Shares upon the exercise of Warrants; provided,
however, that the Company shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issue of any
certificates for Warrant Shares in a name other than that of the Holder of a
Warrant Certificate surrendered upon the exercise of a Warrant.
Section 8. MUTILATED OR MISSING WARRANT CERTIFICATES. In case any of
the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Warrant Certificate and, if
requested, indemnity reasonably satisfactory to them. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
Section 9. RESERVATION OF WARRANT SHARES. The Company will at all times
reserve and keep available, free from any preemptive rights, out of the
aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose
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of enabling it to satisfy any obligation to issue Warrant Shares upon
exercise of Warrants, the maximum number of shares of Common Stock which may
then be deliverable upon the exercise of all outstanding Warrants.
The transfer agent for the Common Stock (the "TRANSFER AGENT") and
every subsequent transfer agent for any shares of the Company's capital stock
issuable upon the exercise of any of the rights of purchase aforesaid will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares as shall be required for such purpose. The Company will keep a
copy of this Agreement on file with the Transfer Agent and with every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants. The Company will
supply such Transfer Agent with duly executed certificates for such purposes and
will provide or otherwise make available any cash which may be payable as
provided in SECTION 13. The Company will furnish such Transfer Agent a copy of
all notices of adjustments and certificates related thereto, transmitted to each
Holder of the Warrants pursuant to SECTION 14 hereof.
Before taking any action which would cause an adjustment pursuant to
SECTION 11 hereof that would reduce the Exercise Price below the then par value
(if any) of the Warrant Shares, the Company will take any corporate action which
may, in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Warrant Shares at the
Exercise Price as so adjusted.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants in accordance with the terms of this Agreement (including
the payment of the Exercise Price) will, upon issue, be duly and validly issued,
fully paid, nonassessable, and free of preemptive rights and Liens.
Section 10. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from
time to time take all action which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of Warrants, will be listed on
the principal securities exchanges and markets (including, without limitation,
the Nasdaq National or SmallCap Markets) within the United States of America, if
any, on which other shares of Common Stock are then listed. Upon the listing of
such Warrant Shares, the Company shall notify the Holders in writing. The
Company will obtain and keep all required permits and records in connection with
such listing.
Section 11. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
ISSUABLE. The number and kind of shares purchasable upon the exercise of
Warrants and the Exercise Price shall be subject to adjustment from time to time
(as set forth in the notices required by SECTION 14 hereof) as follows:
(a) STOCK SPLITS, COMBINATIONS, ETC. In case the Company shall
hereafter (A) pay a dividend or make a distribution on its Common Stock in
shares of its capital stock (whether shares of Common Stock or of capital stock
of any other class), (B) subdivide its outstanding shares of
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Common Stock, (C) combine its outstanding shares of Common Stock into a
smaller number of shares, or (D) issue by reclassification of its shares of
Common Stock any shares of capital stock of the Company, the Exercise Price
in effect and the number of Warrant Shares issuable upon exercise of each
Warrant immediately prior to such action shall be adjusted so that the Holder
of any Warrant thereafter exercised shall be entitled to receive the number
of shares of capital stock of the Company which such Holder would have owned
immediately following such action had such Warrant been exercised immediately
prior thereto. Any adjustment made pursuant to this paragraph shall become
effective immediately after the record date in the case of a dividend and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an
adjustment made pursuant to this paragraph, the Holder of any Warrant
thereafter exercised shall become entitled to receive shares of two or more
classes of capital stock of the Company, the Board of Directors of the
Company (whose determination shall be conclusive and evidenced by a Board
resolution) shall determine the allocation of the adjusted Exercise Price
between or among shares of such classes of capital stock.
(b) RECLASSIFICATION, COMBINATIONS, MERGERS, ETC. In case of any
reclassification or change of outstanding shares of Common Stock issuable upon
exercise of the Warrants (other than as set forth in PARAGRAPH (a) above and
other than a change in par value, or from par value to no par value, or from no
par value to par value or as a result of a subdivision or combination), or in
case of any consolidation or merger of the Company with or into another
corporation (other than a merger in which the Company is the continuing
corporation and which does not result in any reclassification or change of the
then outstanding shares of Common Stock or other capital stock issuable upon
exercise of the Warrants) or in case of any sale or conveyance to another
corporation of all or substantially all of the assets of the Company, then, as a
condition of such reclassification, change, consolidation, merger, sale or
conveyance, the Company or such a successor or purchasing corporation, as the
case may be, shall forthwith make lawful and adequate provision whereby the
Holder of each Warrant then outstanding shall have the right thereafter to
receive on exercise of such Warrant the kind and amount of shares of stock and
other securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a Holder of the number of shares of
Common Stock issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and enter
into a supplemental warrant agreement so providing. Such provisions shall
include provision for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this SECTION 11. If the issuer of
securities deliverable upon exercise of Warrants under the supplemental warrant
agreement is an affiliate of the formed, surviving or transferee corporation,
that issuer shall join in the supplemental warrant agreement. The above
provisions of this PARAGRAPH (b) shall similarly apply to successive
reclassifications and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances.
(c) ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the
Company shall, at any time or from time to time after the date hereof, issue,
sell, distribute or otherwise grant in any manner (including by assumption) any
additional shares of Common Stock (other than shares pursuant to the
Corporation's Stock Option Plan in any amount less than twelve percent (12%)
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of the fully diluted capital stock of the Company) without consideration or
for a price per share less than the current market price per share of Common
Stock on the date of the issuance, sale, distribution or granting of such
additional shares, then, effective upon such issuance or sale, (I) the
Exercise Price shall be reduced to the price (calculated to the nearest
1/1,000 of one cent) determined by multiplying the Exercise Price in effect
immediately prior to such issuance or sale by a fraction, the numerator of
which shall be the sum of (i) the number of shares of Common Stock
outstanding (exclusive of any treasury shares) immediately prior to such
issuance or sale multiplied by the current market price per share of Common
Stock on the date of such issuance or sale plus (ii) the consideration, if
any, received by the Company in respect of such issuance or sale, and the
denominator of which shall be the product of (A) the total number of shares
of Common Stock outstanding (exclusive of any treasury shares) immediately
after such issuance or sale multiplied by (B) the current market price per
share of Common Stock on the record date for such issuance or sale and (II)
the number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be increased to a number determined by multiplying the number
of shares of Common Stock so purchasable immediately prior to the record date
for such issuance or sale by a fraction, the numerator of which shall be the
Exercise Price in effect immediately prior to the adjustment required by
clause (I) of this sentence and the denominator of which shall be the
Exercise Price in effect immediately after such adjustment.
(d) ISSUANCE OF OPTIONS OR CONVERTIBLE SECURITIES. In the event the
Company shall, at any time or from time to time after the date hereof, issue,
sell, distribute or otherwise grant in any manner (including by assumption) any
rights to subscribe for or to purchase, or any warrants or options for the
purchase of, Common Stock (other than shares pursuant to the Corporation's Stock
Option Plan in any amount less than twelve percent (12%) of the fully diluted
capital stock of the Company) or any stock or securities convertible into or
exchangeable for Common Stock (any such rights, warrants or options being herein
called "OPTIONS" and any such convertible or exchangeable stock or securities
being herein called "CONVERTIBLE SECURITIES") or any Convertible Securities
(other than upon exercise of any Option), whether or not such Options or the
rights to convert or exchange such Convertible Securities are immediately
exercisable, and if the price per share at which Common Stock is issuable upon
the exercise of such Options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (i) the aggregate amount, if any,
received or receivable by the Company as consideration for the issuance, sale,
distribution or granting of such Options or any such Convertible Security, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Company upon the exercise of all such Options or upon conversion or exchange of
all such Convertible Securities, plus, in the case of Options to acquire
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the conversion or exchange of all such
Convertible Securities, by (ii) the total maximum number of shares of Common
Stock issuable upon the exercise of all such Options or upon the conversion or
exchange of all such Convertible Securities or upon the conversion or exchange
of all Convertible Securities issuable upon the exercise of all such Options)
shall be less than the current market price per share of Common Stock on the
date for the issuance, sale, distribution or granting of such Options or
Convertible Securities (any such event being herein called a "DISTRIBUTION"),
then, effective upon such Distribution, (I) the Exercise
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Price shall be reduced to the price (calculated to the nearest 1/1,000 of one
cent) determined by multiplying the Exercise Price in effect immediately
prior to such Distribution by a fraction, the numerator of which shall be the
sum of (i) the number of shares of Common Stock outstanding (exclusive of any
treasury shares) immediately prior to such Distribution multiplied by the
current market price per share of Common Stock on the date of such
Distribution plus (ii) the consideration, if any, received by the Company in
respect of such Distribution, and the denominator of which shall be the
product of (A) the total number of shares of Common Stock outstanding
(exclusive of any treasury shares) immediately after such Distribution
multiplied by (B) the current market price per share of Common Stock on the
record date for such Distribution and (II) the number of shares of Common
Stock purchasable upon the exercise of each Warrant shall be increased to a
number determined by multiplying the number of shares of Common Stock so
purchasable immediately prior to the record date for such Distribution by a
fraction, the numerator of which shall be the Exercise Price in effect
immediately prior to the adjustment required by clause (I) of this sentence
and the denominator of which shall be the Exercise Price in effect
immediately after such adjustment. For purposes of the foregoing, the total
maximum number of shares of Common Stock issuable upon exercise of all such
Options or upon conversion or exchange of all such Convertible Securities or
upon the conversion or exchange of the total maximum amount of the
Convertible Securities issuable upon the exercise of all such Options shall
be deemed to have been issued as of the date of such Distribution and
thereafter shall be deemed to be outstanding and the Company shall be deemed
to have received as consideration therefor such price per share, determined
as provided above. Except as provided in PARAGRAPHS (j) AND (k) below, no
additional adjustment of the Exercise Price shall be made upon the actual
exercise of such Options or upon conversion or exchange of the Convertible
Securities or upon the conversion or exchange of the Convertible Securities
issuable upon the exercise of such Options.
(e) DIVIDENDS AND DISTRIBUTIONS. In the event the Company shall, at any
time or from time to time after the date hereof, distribute to all the holders
of Common Stock any dividend or other distribution of cash, evidences of its
indebtedness, other securities or other properties or assets (in each case other
than (i) dividends payable in Common Stock, Options or Convertible Securities
and (ii) any cash dividend that, when added to all other cash dividends paid
with respect to Common Stock in the one year prior to the declaration date of
such dividend (excluding any such other dividend included in a previous
adjustment of the Exercise Price pursuant to this PARAGRAPH (e) and excluding
any cash dividends or other cash distributions from current or retained
earnings), does not exceed 5% of the current market price per share of Common
Stock on such declaration date), or any options, warrants or other rights to
subscribe for or purchase any of the foregoing, then (A) the Exercise Price
shall be decreased to a price determined by multiplying the Exercise Price then
in effect by a fraction, the numerator of which shall be the current market
price per share of Common Stock on the record date for such distribution less
the sum of (X) the cash portion, if any, of such distribution per share of
Common Stock outstanding (exclusive of any treasury shares) on the record date
for such distribution plus (Y) the then fair market value (as determined in good
faith by the Board of Directors of the Company) per share of Common Stock
outstanding (exclusive of any treasury shares) on the record date for such
distribution of that portion, if any, of such distribution consisting of
evidences of indebtedness,
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other securities, properties, assets, options, warrants or subscription or
purchase rights, and the denominator of which shall be such current market
price per share of Common Stock and (B) the number of shares of Common Stock
purchasable upon the exercise of each Warrant shall be increased to a number
determined by multiplying the number of shares of Common Stock so purchasable
immediately prior to the record date for such distribution by a fraction, the
numerator of which shall be the Exercise Price in effect immediately prior to
the adjustment required by clause (A) of this sentence and the denominator of
which shall be the Exercise Price in effect immediately after such
adjustment. The adjustments required by this PARAGRAPH (e) shall be made
whenever any such distribution occurs retroactive to the record date for the
determination of stockholders entitled to receive such distribution.
(f) CURRENT MARKET PRICE. For the purpose of any computation of current
market price under this SECTION 11 and SECTION 13, the current market price per
share of Common Stock at any date shall be (x) for purposes of SECTION 13, the
closing price on the business day immediately prior to the exercise of the
applicable Warrant pursuant to SECTION 6 and (y) in all other cases, the daily
closing price the last full trading day on the exchange or market specified in
the second succeeding sentence prior to the Time of Determination (as defined
below). The term "TIME OF DETERMINATION" as used herein shall be the time and
date of the earlier to occur of (A) the date as of which the current market
price is to be computed and (B) the last full trading day on such exchange or
market before the commencement of "ex-dividend" trading in the Common Stock
relating to the event giving rise to the adjustment required by PARAGRAPH (a),
(b), (c), (d) OR (e) above. The closing price for any day shall be the last
reported sale price regular way or, in case no such reported sale takes place on
such day, the average of the closing bid and asked prices regular way for such
day, in each case (1) on the principal national securities exchange on which the
shares of Common Stock are listed or to which such shares are admitted to
trading or (2) if the Common Stock is not listed or admitted to trading on a
national securities exchange, in the over-the-counter market as reported by
Nasdaq National or SmallCap Markets or any comparable system or (3) if the
Common Stock is not listed on Nasdaq National or SmallCap Markets or a
comparable system but a public market for the Common Stock exists, as furnished
by two members of the NASD selected from time to time in good faith by the Board
of Directors of the Company for that purpose. In the absence of all of the
foregoing, or if for any other reason the current market price per share cannot
be determined pursuant to the foregoing provisions of this PARAGRAPH (f), the
current market price per share shall be the fair market value thereof as
determined in good faith by the Board of Directors of the Company and evidenced
by a resolution of such Board, subject to the following dispute resolution right
of the Holders of the Warrants. In the event that Holders of a majority of the
Warrants dispute the determination of the Board of Directors, such Holders shall
notify the Company and the current market price shall be determined in a
reasonably prompt manner as follows:
(1) The Company and Holders of a majority of the Warrants shall each
appoint an independent, experienced appraiser who is a member of a
recognized professional association of business appraisers. The two
appraisers shall determine the value of shares of Common Stock at the
relevant date, assuming a sale between a willing buyer and a
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willing seller, both of whom have full knowledge of the financial
and other affairs of the Company, and neither of whom is under any
compulsion to sell or to buy.
(2) If the higher of the two appraisals is not more than 20% more
than the lower of the appraisals, the current market price per share
shall be the average of the two appraisals. If the higher of the two
appraisals is 20% or more than the lower of the two appraisals, then
a third appraiser shall be appointed by the two appraisers, and if
they cannot agree on a third appraiser, the American Arbitration
Association shall appoint the third appraiser. The third appraiser,
regardless of who appoints him or her, shall have the same
qualifications as the first two appraisers.
(3) The current market price per share after the appointment of the
third appraiser shall be the average of the two appraisals that are
closest in value to each other.
(4) The fees and expenses of the appraisers shall be paid one-half by
the Company and one-half by the Holders.
(g) CERTAIN DISTRIBUTIONS. If the Company shall pay a dividend or make
any other distribution payable in Options or Convertible Securities, then, for
purposes of PARAGRAPH (d) above, such Options or Convertible Securities shall be
deemed to have been initially issued or sold on such date without consideration.
(h) CONSIDERATION RECEIVED. If any shares of Common Stock, Options or
Convertible Securities shall be issued, sold or distributed for a consideration
other than cash, the amount of the consideration other than cash received by the
Company in respect thereof shall be deemed to be the then fair market value of
such consideration (as determined in good faith by the Board of Directors of the
Company and evidenced by a Board resolution). If any Options shall be issued in
connection with the issuance and sale of other securities of the Company,
together comprising one integral transaction in which no specific consideration
is allocated to such Options by the parties thereto, such Options shall be
deemed to have been issued without consideration; provided, however, that if
such Options have an exercise price equal to or greater than the current market
price of the Common Stock on the date of issuance of such Options, then such
Options shall be deemed to have been issued for consideration equal to such
exercise price.
(i) DEFERRAL OF CERTAIN ADJUSTMENTS. No adjustment to the Exercise
Price (including the related adjustment to the number of shares of Common Stock
purchasable upon the exercise of each Warrant) shall be required hereunder
unless such adjustment, together with other adjustments carried forward as
provided below, would result in an increase or decrease of at least one percent
of the Exercise Price; provided that any adjustments which by reason of this
PARAGRAPH (i) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. No adjustment need be made for a
change in the par value of the Common Stock. All calculations under this SECTION
shall be made to the nearest 1/1,000 of one cent or to the nearest 1/1000 of a
share, as the case may be.
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(j) CHANGES IN OPTIONS AND CONVERTIBLE SECURITIES. If the exercise
price provided for in any Options referred to in PARAGRAPH (d) above, the
additional consideration, if any, payable upon the conversion or exchange of
any Convertible Securities referred to in PARAGRAPH (d) OR (e) above, or the
rate at which any Convertible Securities referred to in PARAGRAPH (d) OR (e)
above are convertible into or exchangeable for Common Stock shall change at
any time (other than under or by reason of provisions designed to protect
against dilution upon an event which results in a related adjustment pursuant
to this SECTION 11), the Exercise Price then in effect and the number of
shares of Common Stock purchasable upon the exercise of each Warrant shall
forthwith be readjusted (effective only with respect to any exercise of any
Warrant after such readjustment) to the Exercise Price and number of shares
of Common Stock so purchasable that would then be in effect had the
adjustment made upon the issuance, sale, distribution or granting of such
Options or Convertible Securities been made based upon such changed purchase
price, additional consideration or conversion rate, as the case may be, but
only with respect to such Options and Convertible Securities as then remain
outstanding.
(k) EXPIRATION OF OPTIONS AND CONVERTIBLE SECURITIES. If, at any time
after any adjustment to the number of shares of Common Stock purchasable upon
the exercise of each Warrant shall have been made pursuant to PARAGRAPH (d), (e)
OR (j) above or this PARAGRAPH (k), any Options or Convertible Securities shall
have expired unexercised, the number of such shares so purchasable shall, upon
such expiration, be readjusted and shall thereafter be such as they would have
been had they been originally adjusted (or had the original adjustment not been
required, as the case may be) as if (i) the only shares of Common Stock deemed
to have been issued in connection with such Options or Convertible Securities
were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such Options or Convertible Securities and (ii) such shares of
Common Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise plus the aggregate consideration, if
any, actually received by the Company for the issuance, sale, distribution or
granting of all such Options or Convertible Securities, whether or not
exercised; provided that no such readjustment shall have the effect of
decreasing the number of such shares so purchasable by an amount (calculated by
adjusting such decrease to account for all other adjustments made pursuant to
this SECTION 11 following the date of the original adjustment referred to above)
in excess of the amount of the adjustment initially made in respect of the
issuance, sale, distribution or granting of such Options or Convertible
Securities.
(l) OTHER ADJUSTMENTS. In the event that at any time, as a result of an
adjustment made pursuant to this SECTION 11, the Holders shall become entitled
to receive any securities of the Company other than shares of Common Stock,
thereafter the number of such other securities so receivable upon exercise of
the Warrants and the Exercise Price applicable to such exercise shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the shares of Common Stock
contained in this SECTION 11.
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Section 12. STATEMENT ON WARRANTS. Irrespective of any adjustment in
the number or kind of shares issuable upon the exercise of the Warrants or the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same number and kind of shares as are stated in the Warrants
initially issuable pursuant to this Agreement.
Section 13. FRACTIONAL INTEREST. The Company shall not be required
to issue fractional shares of Common Stock on the exercise of Warrants. If
more than one Warrant shall be presented for exercise in full at the same
time by the same Holder, the number of full shares of Common Stock which
shall be issuable upon such exercise shall be computed on the basis of the
aggregate number of shares of Common Stock acquirable on exercise of the
Warrants so presented. If any fraction of a share of Common Stock would,
except for the provisions of this SECTION, be issuable on the exercise of any
Warrant (or specified portion thereof), the Company shall direct the Transfer
Agent to pay an amount in cash calculated by it equal to (i) the then current
market price per share multiplied by such fraction computed to the nearest
whole cent, less (ii) an amount equal to the Exercise Price multiplied by
such fraction computed to the nearest whole cent. The Holders, by their
acceptance of the Warrant Certificates, expressly waive any and all rights to
receive any fraction of a share of Common Stock or a stock certificate
representing a fraction of a share of Common Stock.
Section 14. NOTICES TO WARRANT HOLDERS. Upon any adjustment of the
Exercise Price pursuant to SECTION 11, the Company shall promptly thereafter
cause to be given to each of the registered Holders by first-class mail, postage
prepaid, a certificate executed by the Chief Financial Officer of the Company
setting forth the Exercise Price after such adjustment and setting forth in
reasonable detail the method of calculation and the facts upon which such
calculations are based and setting forth the number of Warrant Shares (or
portion thereof) issuable after such adjustment in the Exercise Price, upon
exercise of a Warrant and payment of the adjusted Exercise Price, which
certificate shall be conclusive evidence, absent manifest error, of the
correctness of the matters set forth therein.
In case:
(a) the Company shall authorize the issuance to all holders of
shares of Common Stock of rights, options or warrants to subscribe for
or purchase shares of Common Stock or of any other subscription rights
or warrants; or
(b) the Company shall authorize the distribution to all
holders of shares of Common Stock of evidences of its indebtedness or
assets (other than cash dividends or cash distributions payable out of
consolidated earnings or earned surplus or dividends payable in shares
of Common Stock or distributions referred to in SECTION 11 hereof); or
(c) of any consolidation or merger to which the Company is a
party for which approval of any shareholders of the Company is required
and following which the shareholders of the Company before such
consolidation or merger no longer hold at least
16
<PAGE>
50% of the outstanding capital stock of the Company following the
merger or consolidation, or of the conveyance or transfer of all or
substantially all of the properties and assets of the Company, or of
any reclassification or change of Common Stock issuable upon
exercise of the Warrants (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), or a tender offer or
exchange offer for shares of Common Stock, or other transaction that
would result in a change in control; or
(d) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(e) the Company proposes to take any other action that would
require an adjustment of the Exercise Price or the number of Warrant
Shares pursuant to SECTION 11; then the Company shall cause to be given
to each of the registered Holders of the Warrants at such Holder's
address appearing on the Warrant register, at least 20 days (or 10 days
in any case specified in clauses (a) or (b) above) prior to the
applicable record date hereinafter specified, or promptly in the case
of events for which there is no record date, by first-class mail,
postage prepaid, a written notice stating (i) the date as of which the
holders of record of shares of Common Stock to be entitled to receive
any such rights, options, warrants or distribution are to be
determined, or (ii) the initial expiration date set forth in any tender
offer or exchange offer for shares of Common Stock, or (iii) the date
on which any such consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up or change of control is expected
to become effective or consummated, and the date as of which it is
expected that holders of record of shares of Common Stock shall be
entitled to exchange such shares for securities or other property, if
any, deliverable upon such reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up or change
of control. The failure to give the notice required by this SECTION 14
or any defect therein shall not affect the legality or validity of any
distribution, right, option, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or change
of control or the vote upon any action. Nothing contained in this
Agreement or in any of the Warrant Certificates shall be construed as
conferring upon the Holders thereof the right to vote or to consent or
to receive notice as shareholders in respect of the meetings of
shareholders or the election of Directors of the Company or any other
matter, or any rights whatsoever as shareholders of the Company.
Section 15. REGISTRATION. The Company acknowledge that Holders of
Warrants shall have the registration rights set forth in the Registration Rights
Agreement.
Section 16. REPORTS. For each fiscal quarter and each fiscal year of
the Company, the Company will transmit by mail to all Warrant Holders, as their
names and addresses appear in the register, without cost to such Warrant
Holders, unaudited quarterly and audited annual financial statements of the
Company prepared in accordance with GAAP. Beginning with the
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<PAGE>
initial public offering of the Company and thereafter, whether or not the
Company is subject to Section 13(a) or 15(d) of the Exchange Act, or any
successor provision thereto, the Company shall prepare the annual and
quarterly reports and other information, and documents ("SEC REPORTS") as the
Commission shall prescribe pursuant to such Section 13(a) or 15(d) and which
the Company is or would be (if they were so subject) required to file with
the Commission pursuant to such Section 13(a) or 15(d) or any successor
provision thereto (on or prior to the respective dates (the "REQUIRED FILING
DATES") by which the Company is or would (if they were so subject) be
required so to file such SEC Reports) and shall, within 15 days of the
Required Filing Date transmit by mail to all Warrant Holders, as their names
and addresses appear in the register, without cost to such Warrant Holders,
copies of such annual and quarterly reports.
Section 17. RULE 144A. The Company hereby agrees with each Holder, for
so long as any Registrable Securities remain outstanding and the Company is not
subject to Section 13(a) or 15(d) of the Exchange Act, to make available, upon
request of any Holder of Registrable Securities, to any Holder or beneficial
owner of Registrable Securities in connection with any sale thereof and any
prospective purchaser of such Registrable Securities designated by such Holder
or beneficial owner, the information required by Rule 144A(d)(4) under the
Securities Act in order to permit resales of such Registrable Securities
pursuant to Rule 144A.
Section 18. NOTICES TO COMPANY. Any notice or demand authorized by this
Agreement to be given or made by the Holder of any Warrants to or on the Company
shall be sufficiently given or made when and if deposited in the mail,
first-class or registered, postage prepaid, addressed (until another address is
filed in writing by the Company), as follows:
Digital Convergence.Com Inc.
4264 Kellway Circle
Addison, Texas 75001
Telephone: (972) 818-4777
Telecopy: (972) 818-4805
Attn: Chief Financial Officer
Any notice pursuant to this Agreement to be given by the Company to the
Holders shall be sufficiently given when and if deposited in the mail,
first-class or registered, postage prepaid, addressed (until another address is
filed in writing with the Company) to the addresses of the Holders provided to
the Company from time to time.
Section 19. SUPPLEMENTS AND AMENDMENTS. The Company and Belo may from
time to time supplement or amend this Agreement without the approval of any
Holders of Warrants in order to cure any ambiguity or to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and Belo may deem necessary or
desirable and which shall not in any way adversely affect the interests of the
Holders of Warrants. Any amendment or supplement to this Agreement that has a
material adverse effect
18
<PAGE>
on the interests of Holders shall require the written consent of Holders
representing a majority of the then outstanding Warrants (excluding Warrants
held by the Company or any of its Affiliates); provided, however, that the
consent of each Holder of a Warrant affected shall be required for any
amendment pursuant to which the Exercise Price would be increased or the
number of Warrant Shares purchasable upon exercise of Warrants would be
decreased (other than pursuant to adjustments provided for in SECTION 11
hereof). Belo shall be entitled to receive and shall be fully protected in
relying upon an officer's certificate and opinion of counsel as conclusive
evidence that any such amendment or supplement is authorized or permitted
hereunder, that it does or does not, as the case may be, require the written
consent of Holders to be effective hereunder, that it is not inconsistent
herewith, and that it will be valid and binding upon the Company in
accordance with its terms.
Section 20. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company shall bind and inure to the
benefit of its respective successors and assigns hereunder.
Section 21. TERMINATION. This Agreement (other than any party's
obligations with respect to Warrants previously exercised and with respect to
indemnification) shall terminate at 4:00 p.m., Dallas, Texas, time on the
Expiration Date.
Section 22. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT CERTIFICATE
ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE
STATE OF TEXAS AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF SAID STATE, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS
PRINCIPLES THEREOF.
Section 23. BENEFITS OF THIS AGREEMENT.
(a) The Holders are the third-party beneficiaries of this Agreement.
Nothing in this Agreement shall be construed to give to any Person other than
the Company, Belo and the Holders of the Warrants any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, Belo and the Holders of the Warrants from
time to time.
(b) Prior to the exercise of the Warrants, no Holder of a Warrants, as
such, shall be entitled to any rights of a stockholder of a Company, including,
without limitation, the right to receive dividends or subscription rights, the
right to vote, to consent, to exercise any preemptive right, to receive any
notice of or to participate in meetings of stockholders for the election of
directors of the Company or any other matter or to receive any notice of any
proceedings of the Company, except as may be specifically and expressly provided
for herein. The Holders of the Warrants are not entitled to share in the assets
of the Company in the event of the liquidation, dissolution or winding up of the
Company's affairs.
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<PAGE>
(c) All rights of action in respect of this Agreement are vested in the
Holders of the Warrants, and any Holder of any Warrant, without the consent of
the Holder of any other Warrant, may, on such Holder's own behalf and for such
Holder's own benefit, enforce, and may institute and maintain any suit, action
or proceeding against the Company suitable to enforce, or otherwise in respect
of, such Holder's rights hereunder, including the right to exercise, exchange or
surrender for purchase such Holder's Warrants in the manner provided in this
Agreement.
Section 24. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company made in that certain Stock Purchase Agreement dated as
of September 29, 1999 among the Company, Belo, Young & Rubicam Inc. and certain
other investors (the "Stock Purchase Agreement") are hereby incorporated herein
by reference and deemed made by the Company to Belo with respect to this
Agreement; PROVIDED, that all references in such representations and warranties
to "Preferred Shares" shall be deemed references to the Warrants and the Warrant
Certificates, all references to the "Series A Preferred" shall be deemed
references to the Warrants, all references to "this Agreement" shall be deemed
references to this Agreement.
Section 25. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
DIGITALCONVERGENCE.COM INC.
By: /s/ J. Jovan Philyaw
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
BELO ENTERPRISES, INC.
By: /s/ Mark T. Ryan
-------------------------------
Name: Mark T. Ryan
-------------------------------
Title: President
-------------------------------
20
<PAGE>
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THE SECURITY EVIDENCED HEREBY AND THE SECURITIES DELIVERED
UPON EXERCISE THEREOF MAY NOT BE EXERCISED, OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY
AND THE SECURITIES DELIVERED UPON THE EXERCISE THEREOF IS HEREBY
NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A.
THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF
THE ISSUER THAT (A) SUCH SECURITY AND THE SECURITIES DELIVERED UPON
EXERCISE HEREOF MAY BE EXERCISED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES
IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A PERSON THAT IS NOT A
U.S. PERSON (AS DEFINED IN RULE 902 UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES
ACT, or (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT (IN THE CASE OF (b), (c) OR (d),
UPON AN OPINION OF COUNSEL AND WRITTEN CERTIFICATION IF THE ISSUER,
REGISTRAR OR TRANSFER AGENT FOR THE SECURITIES SO REQUESTS), (2) TO THE
ISSUER OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN
EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY
STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B)
THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY
PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY AND THE SECURITIES
DELIVERED UPON EXERCISE HEREOF OF THE RESALE RESTRICTIONS SET FORTH IN
(A) ABOVE.
198 Shares of Common Stock Warrant Certificate No. 1
WARRANT CERTIFICATE
For the Purchase of Common Stock of
DIGITALCONVERGENCE.COM INC.
1. CERTIFICATE. THIS IS TO CERTIFY THAT Belo Enterprises, Inc., or
its registered assigns ("Holder"), is entitled to exercise this Warrant
Certificate to purchase from
<PAGE>
DigitalConvergence.com Inc., a Delaware corporation (the "Company"), one hundred
ninety-eight (198) shares of common stock, par value $0.01 per share, of the
Company (the "Common Stock"), all on the terms and conditions and pursuant to
the provisions hereinafter set forth. This Warrant Certificate is executed
pursuant to the terms of that certain Warrant Agreement of even date herewith
(the "Agreement") between the Company and the Holder. Any capitalized terms not
defined herein will have the meanings set forth in the Agreement.
2. EXERCISE PRICE. The exercise price per share of Common Stock shall
be $3,150 (the "Exercise Price"). Such Exercise Price and the number of shares
of Common Stock into which this Warrant Certificate is exercisable are subject
to adjustment from time to time as provided in the Agreement.
3. EXERCISE. This Warrant Certificate may be exercised at any time or
from time to time on or after the date hereof; provided, however, that this
Warrant Certificate shall be void and all rights represented hereby shall cease
unless exercised in full before September 29, 2004 (the "Expiration Date").
In order to exercise this Warrant Certificate, in whole or in part, the
Holder hereof shall deliver to the Company at its principal office, or at such
other office as shall be designated by the Company pursuant to the Agreement:
(a) written notice of Holder's election to exercise this Warrant
Certificate, which notice shall specify the number of shares of Common Stock to
be purchased pursuant to such exercise;
(b) payment of the Exercise Price in cash or by certified check or on
a "net basis" as set forth in SECTION 6 of the Agreement; and
(c) this Warrant Certificate, properly indorsed.
Upon receipt thereof, the Company shall promptly execute or cause to be executed
and deliver to such Holder a certificate or certificates representing the
aggregate number of full shares of Common Stock issuable upon such exercise. The
stock certificate or certificates so delivered shall be registered in the name
of such Holder, or such other name as shall be designated in said notice
(subject to any restrictions on transfer set forth in the Agreement). If the
exercise is for less than all of the shares of Common Stock issuable as provided
in the Warrant Certificate, the Company will issue a new Warrant Certificate of
like tenor and date for the balance of such shares issuable hereunder to the
Holder.
4. TRANSFER. This Warrant Certificate and all options and rights
hereunder are transferable, as to all or any part of the number of shares of
Common Stock purchasable upon its exercise, in accordance with the Agreement.
2
<PAGE>
5. REGISTRATION RIGHTS. The Common Stock into which this Warrant
Certificate is exercisable is subject to registration rights as provided in the
Registration Rights Agreement.
6. SUCCESSORS AND ASSIGNS. This Warrant Certificate and the rights
evidenced hereby shall inure to the benefit of and be binding upon the
successors and assigns of the Holder hereof and, shall be enforceable by any
such Holder.
7. HEADINGS. Headings of the paragraphs in this Warrant Certificate
are for convenience and reference only and shall not, for any purpose, be deemed
a part of this Warrant Certificate.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed and issued.
DATED as of September 29, 1999.
DIGITALCONVERGENCE.COM INC.
By: /s/ J. Jovan Philyaw
-----------------------------------
Name: J. Jovan Philyaw
----------------------------------
Title:
---------------------------------
ATTEST:
By: /s/
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
CORPORATE SEAL:
3
<PAGE>
PROMISSORY NOTE
DIGITALCONVERGENCE.COM INC.
$8,000,000 Dallas, Texas
January 4, 1999
DIGITALCONVERGENCE.COM INC., a Delaware corporation (the "Company"),
the principal office of which is located at 4264 Kellway Circle, Addison, Texas
75244, for value received hereby promises to pay to Infotainment Telepictures,
Inc., or its registered assigns ("Payee"), the sum of Eight Million and
00/100ths Dollars ($8,000,000.00), or such lesser amount as shall then equal the
outstanding principal amount hereof and any unpaid accrued interest thereon, as
set forth below, on January 31, 2004. Payment of all amounts due hereunder shall
be made by registered or certified mail to the registered address of Payee, or
at such other address as Payee may, from time to time, designate in writing to
the Company.
The following is a statement of the rights of Payee of this Promissory
Note and the conditions to which this Promissory Note is subject, and to which
Payee hereof, by the acceptance of this Promissory Note, agrees:
1. DEFINITIONS. As used in this Promissory Note, the following
terms, unless the context otherwise requires, have the following meanings:
(a) "Anniversary Year" shall mean that period of time commencing
on January 4 of each year and terminating on January 3 of the following year.
(b) "Company" includes any corporation which shall succeed to or
assume the obligations of the Company under this Promissory Note.
(c) "Holder," when the context refers to a holder of this
Promissory Note, shall mean any person who shall at the time be the registered
holder of this Promissory Note.
(d) "First Level Qualified Public Offering" shall mean the
closing of an initial public offering of the common stock of the Company
pursuant to which the Company shall raise at least Twenty Million Dollars
($20,000,000) after commissions and underwriting discounts.
(e) "Second Level Qualified Public Offering" shall mean the
closing of an initial public offering of the common stock of the Company
pursuant to which the Company shall raise at least Thirty Million Dollars
($30,000,000) after commissions and underwriting discounts.
(f) "Sale of Assets" shall mean the sale of all or substantially
all of the assets of the Company.
1
<PAGE>
2. INTEREST.
(a) INTEREST RATE. The unpaid principal balance of this
Promissory Note shall bear interest at a rate equal to 6.0% per annum from the
date hereof until paid in full.
(b) PAYMENT OF PRINCIPAL AND INTEREST. Accrued interest shall not
be payable during the first two Anniversary Years hereof unless otherwise
determined by the Board of Directors of the Company. At the end of the second
Anniversary Year the accrued amount of interest not paid shall be added to the
principal amount of this Promissory Note (collectively, the "Revised Principal
Amount") and interest thereafter should be calculated on the Revised Principal
Amount or so much of the unpaid principal balance of this Promissory Note then
outstanding. During the third Anniversary Year hereof the Company shall pay
interest only on a quarterly basis such amounts to be due and payable on March
31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001,
respectively. During the fourth and fifth Anniversary Years quarterly payments
of principal and interest shall be due and payable. The amount of the principal
payment due for each such quarterly payment, unless earlier paid, shall be
12.5% of the principal amount of this Promissory Note outstanding as of the end
of the second Anniversary Year, or if higher, the Revised Principal Amount.
3. VOLUNTARY PAYMENT. Upon five (5) days' prior written notice to
Payee, the Company may PREPAY the principal sum of this Promissory Note, at any
time, in whole or in part, plus unpaid accrued interest to the date of payment.
4. MANDATORY PAYMENTS.
(a) UPON LIQUIDATION OF THE COMPANY. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company
or a Sale of Assets, prior and in preference to any distribution of any of the
assets or surplus funds of the Company to the holders of capital stock of the
Company by reason of their ownership thereof, all outstanding principal and
unpaid accrued interest on this Promissory Note shall be immediately due and
payable.
(b) UPON EVENT OF DEFAULT. Within 30 days of Payee obtaining
actual knowledge of the occurrence of an Event of Default (as hereinafter
defined), Payee may demand the prepayment of all or any portion of this
Promissory Note by submission of written notice of prepayment to the Company.
Following the receipt of such notice, the Company shall prepay the portion of
this Promissory Note requested to be prepaid as soon as reasonably practicable,
but in any event within 30 days of date of such notice. An Event of Default for
purposes of this Section 4(b) shall mean: (i) the failure to pay interest or
principal on any scheduled payment date; (ii) the filing of any petition,
whether voluntary or involuntary, seeking the reorganization or liquidation of
the Company under any provision of the Federal Bankruptcy Code or any other
federal or state reorganization, insolvency or debtor relief law; or (iii) the
appointment of any receiver, liquidator or trustee for the Company or any of
its properties by a court order and which appointment is not vacated within 30
days; or (iv) the Company is adjudicated insolvent or the Company shall make an
assignment for the benefit of any of its creditors, admit in writing an
inability to pay debts when they become due in the ordinary course of its
business, or consent to
2
<PAGE>
the appointment of a receiver, trustee or liquidator for the Company or all or
any part of the property of the Company.
(c) UPON QUALIFIED PUBLIC OFFERING. If, at any time, the Company
proposes to make a First Level Qualified Public Offering, then at the closing
of the First Level Qualified Public Offering, fifty percent (50%) of the
principal amount of this Promissory Note, plus the unpaid accrued interest
thereon, shall be prepaid. If, at any time, the Company proposes to make a
Second Level Qualified Public Offering, then at the closing of the Second Level
Qualified Public Offering, all of the principal amount of this Promissory Note,
plus the unpaid accrued interest thereon, shall be prepaid in full.
5. ASSIGNMENT. The rights of the Company and Payee shall be binding
upon and benefit the permitted successors, assigns, heirs, administrators and
transferees of the parties.
6. WAIVER AND AMENDMENT. Any provision of this Promissory Note may
be amended, WAIVED or modified upon the written consent of the Company and
Payee of this Promissory Note.
7. SUBORDINATION. Notwithstanding anything to the contrary contained
herein, the Company shall not be obligated to make payments of principal or
interest hereunder if the Company shall, at SUCH time, be in payment default on
the payment of any secured debt of the Company or any debentures issued by the
Company to investors in the Company.
8. AGREEMENT NOT TO ATTACH. The Payee, by its acceptance of this
Promissory Note, agrees that in the Event of Default as described in subsection
4(b)(i) hereof, and whether or not the Payee shall have obtained a judgment
thereon, unless the Company shall also be in default pursuant to subsections
4(b)(ii), (iii) or (iv) hereof, Payee shall not seek, or cause any third party
to seek, an attachment on or possession of any of the Company's intellectual
property, including but not limited to any of the Company's technology,
patents, trademarks, copyrights or any goodwill associated with any of the
foregoing.
9. NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or, if MAILED, by registered or certified mail,
postage prepaid, at the respective addresses of the parties as set forth
herein. Any party hereto by notice so given may change its address for future
notice hereunder. Notice shall conclusively be deemed to have been given when
personally delivered or when deposited in the mail in the manner set forth
above and shall be deemed to have been received when delivered.
10. PAYMENTS DUE ON SATURDAY, SUNDAY OR LEGAL HOLIDAYS. If an
interest payment date for this Promissory Note, or a date fixed for payment or
prepayment of all or a portion of this Promissory Note shall be a Saturday,
Sunday or, in Dallas, Texas, a legal holiday or a day on which BANKING
institutions are authorized or required by law or executive order to close or
remain closed, then any such payment need not be made on such date but may be
made on the next succeeding day which is not a Saturday, Sunday, or in such
city, a legal holiday or a day on
3
<PAGE>
which banking institutions are closed, with the same force and effect as if
made on such required payment date.
11. GOVERNING LAW. This Promissory Note shall be governed by and
construed in accordance with the laws of the State of Texas, excluding that
body of law relating to conflict of laws.
12. HEADINGS; REFERENCES. All headings used herein are used for
convenience only and shall not be USED to construe or interpret this Promissory
Note. Except where otherwise indicated, all references herein to Sections refer
to Sections hereof.
13. USURY SAVINGS CLAUSE. Regardless of any provision contained
herein, or in any document executed in connection herewith, Payee shall never
be entitled to receive, collect, or apply, as interest on the indebtedness
evidenced hereby, any amount in excess of the maximum rate permitted BY law. If
Payee ever receives, collects, or applies, as interest, any such excess, such
amount which would be excessive interest shall be deemed a partial prepayment
of principal and treated hereunder as such; and if, the principal hereof is
paid in full, any remaining excess shall be refunded to the Company. In
determining whether or not the interest paid or payable, under any specific
contingency, exceeds the maximum rate permitted by law, the Company and Payee
shall, to the maximum extent permitted under applicable law: (a) characterize
any nonprincipal payment as an expense, fee, or premium rather than as
interest, (b) exclude voluntary prepayments and the effects thereof, and (c)
prorate, allocate, and spread, the total amount of interest throughout the
entire contemplated term hereof, provided, that if the principal balance hereof
is paid and performed in full prior to the end of the full contemplated term
hereof. However, if the interest received for the actual period of existence
thereof exceeds the maximum rate permitted by law, Payee shall either apply or
refund to the Company the amount of such excess as herein provided, and in such
event, Payee shall not be subject to any penalties provided by any laws for
contracting for, charging, or receiving interest in excess of the maximum rate
permitted by law.
IN WITNESS WHEREOF, the Company has caused this Promissory Note to be
issued this 4th day of January, 1999.
DIGITALCONVERGENCE.COM INC.
By: /s/ J. Jovan Philyaw
----------------------------
Its: President - Secretary
-----------------------
Name of Holder: Infotainment Telepictures, Inc.
Address: 4264 Kellway Circle
Addison, Texas 75244
4
<PAGE>
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
LAWS AND MAY NOT BE SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT, OR AN EXEMPTION FROM REGISTRATION,
UNDER SAID ACT.
DIGITALCONVERGENCE.COM INC.
8.0% DEBENTURE
SERIES 1999A
$1,500,000 Dallas, Texas
January 28, 1999
DIGITALCONVERGENCE.COM INC., a Delaware corporation (the "Company"),
the principal office of which is located at 4264 Kellway Circle, Addison,
Texas 75244, for value received hereby promises to pay to JAT III L.L.C., or
its registered assigns, the sum of One Million Five Hundred Thousand and
00/100ths Dollars ($1,500,000), or such lesser amount as shall then equal the
outstanding principal amount hereof and any unpaid accrued interest thereon,
as set forth below, on January 27, 2004. Payment of all amounts due hereunder
shall be made by registered or certified mail to the registered address of
the Holder, or at such other address as Holder may, from time to time,
designate in writing to the Company.
This Debenture is issued in connection with the transactions
described in Section 1.1 of that certain Common Stock and Debenture Purchase
Agreement of even date herewith by and among the Company and the Purchasers
described therein, as the same may from time to time be amended, modified or
supplemented (the "Purchase Agreement"). The Holder of this Debenture is
subject to certain restrictions set forth in the Purchase Agreement and shall
be entitled to certain rights and privileges set forth in the Purchase
Agreement. This Debenture is one of the Debentures referred to as the
"Debentures" in the Purchase Agreement.
The following is a statement of the rights of the Holder of this
Debenture and the conditions to which this Debenture is subject, and to which
the Holder hereof, by the acceptance of this Debenture, agrees:
1. DEFINITIONS. As used in this Debenture, the following terms,
unless the context otherwise requires, have the following meanings:
(a) "Anniversary Year" shall mean that period of time
commencing on January 28th of each year and terminating on January 27 of the
following year.
(b) "Company" includes any corporation which shall succeed
to or assume the obligations of the Company under this Debenture.
(c) "Holder," when the context refers to a holder of this
Debenture, shall mean any person who shall at the time be the registered
holder of this Debenture.
1
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(d) "First Level Qualified Public Offering" shall mean the
closing of an initial public offering of the common stock of the Company
pursuant to which the Company shall raise at least Twenty Million Dollars
($20,000,000) after commissions and underwriting discounts.
(e) "Second Level Qualified Public Offering" shall mean the
closing of an initial public offering of the common stock of the Company
pursuant to which the Company shall raise at least Thirty Million Dollars
($30,000,000) after commissions and underwriting discounts.
(f) "Sale of Assets" shall mean the sale of all or
substantially all of the assets of the Company.
2. INTEREST.
(a) INTEREST RATE. The unpaid principal balance of this
Debenture shall bear interest at a rate equal to 8.0% per annum from the date
hereof until paid in full.
(b) PAYMENT OF PRINCIPAL AND INTEREST. Accrued interest
shall not be payable during the first two Anniversary Years hereof unless
otherwise determined by the Board of Directors of the Company. At the end of
the second Anniversary Year the accrued amount of interest not paid shall be
added to the principal amount of this Debenture (collectively, the "Revised
Principal Amount") and interest thereafter should be calculated on the
Revised Principal Amount or so much of the unpaid principal balance of this
Debenture then outstanding. During the third Anniversary Year hereof the
Company shall pay interest only on a quarterly basis such amounts to be due
and payable on March 31, 2001, June 30, 2001, September 30, 2001, and
December 31, 2001, respectively. During the fourth and fifth Anniversary
Years quarterly payments of principal and interest shall be due and payable.
The amount of the principal payment due for each such quarterly payment,
unless earlier paid, shall be 12.5% of the principal amount of this Debenture
outstanding as of the end of the second Anniversary Year, or if higher, the
Revised Principal Amount.
3. VOLUNTARY PAYMENT. Upon five (5) days' prior written notice to
the Holder, the Company may prepay the principal sum of this Debenture, at
any time, in whole or in part, plus unpaid accrued interest to the date of
payment.
4. MANDATORY PAYMENTS.
(a) UPON LIQUIDATION OF THE COMPANY. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company or a Sale of Assets, prior and in preference to any distribution of
any of the assets or surplus funds of the Company to the holders of capital
stock of the Company by reason of their ownership thereof, all outstanding
principal and unpaid accrued interest on this Debenture shall be immediately
due and payable. If the assets and funds of the Company are insufficient to
permit payment in full of all of the then
2
<PAGE>
outstanding Debentures issued pursuant to the Purchase Agreement, then the
entire assets and funds of the Company legally available for distribution
shall be distributed ratably among the holders of such Debentures in
proportion to the principal amounts thereof outstanding at the time of
payment.
(b) UPON EVENT OF DEFAULT. Within 30 days of the Holder
obtaining actual knowledge of the occurrence of an Event of Default (as
hereinafter defined), the Holder may demand the prepayment of all or any
portion of this Debenture by submission of written notice of prepayment to
the Company. Following the receipt of such notice, the Company shall prepay
the portion of this Debenture requested to be prepaid as soon as reasonably
practicable, but in any event within 30 days of date of such notice. An Event
of Default for purposes of this Section 4(b) shall mean: (i) the failure to
pay interest or principal on any scheduled payment date; (ii) the occurrence
of any material breach of any representation, warranty or covenant by the
Company under the Purchase Agreement, if such breach is not cured within 30
days of the receipt by the Company of written notice thereof; or (iii) the
filing of any petition, whether voluntary or involuntary, seeking the
reorganization or liquidation of the Company under any provision of the
Federal Bankruptcy Code or any other federal or state reorganization,
insolvency or debtor relief law; or (iv) the appointment of any receiver,
liquidator or trustee for the Company or any of its properties by a court
order and which appointment is not vacated within 30 days; or (v) the Company
is adjudicated insolvent or the Company shall make an assignment for the
benefit of any of its creditors, admit in writing an inability to pay debts
when they become due in the ordinary course of its business, or consent to
the appointment of a receiver, trustee or liquidator for the Company or all
or any part of the property of the Company.
(c) UPON QUALIFIED PUBLIC OFFERING. If, at any time, the
Company proposes to make a First Level Qualified Public Offering, then at the
closing of the First Level Qualified Public Offering, fifty percent (50%) of
the principal amount of this Debenture, plus the unpaid accured interest
thereon, shall be prepaid. If, at any time, the Company proposes to make a
Second Level Qualified Public Offering, then at the closing of the Second
Level Qualified Public Offering, all of the principal amount of this
Debenture, plus the unpaid accrued interest thereon, shall be prepaid.
(d) LIMITATION. If, the Company lacks sufficient funds to
pay lawfully all of the Debentures which the Company is, at any such time,
obligated to pay in accordance with this Section 4, then holders of all the
then outstanding Debentures issued pursuant to the Purchase Agreement shall
share ratably in any funds legally available for payment of such Debentures
according to the respective amounts which would be payable with respect to
the face amount of the Debentures owned by them if all such Debentures were
paid in full.
5. ASSIGNMENT. Subject to the restrictions on transfer described in
Section 7 below, the rights of the Company and the Holder shall be binding
upon and benefit the permitted successors, assigns, heirs, administrators and
transferees of the parties.
3
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6. WAIVER AND AMENDMENT. Any provision of this Debenture may be
amended, waived or modified upon the written consent of the Company and the
holders of all then outstanding Debentures issued pursuant to the Purchase
Agreement.
7. AGREEMENT NOT TO ATTACH. The Holder, by its acceptance of this
Debenture, agrees that in the Event of Default as described in subsection
4(b)(i) or (ii) hereof, and whether or not the Holder shall have obtained an
judgment thereon, unless the Company shall also be in default pursuant to
subsections 4(b)(iii), (iv) or (v) hereof, Holder shall not seek, or cause
any third party to seek, an attachment on or possession of any of the
Company's intellectual property, including but not limited to any of the
Company's technology, patents, trademarks, copyright or any goodwill
associated with any of the foregoing.
8. TRANSFER OF THIS DEBENTURE. This Debenture may not be transferred
or assigned without the prior written consent of holders of at least
seventy-five percent (75%) of the face amount of all the then outstanding
Debentures issued pursuant to the Purchase Agreement, except that the Holder
may transfer or assign this Debenture to an affiliate of the initial Holder
of this Debenture without requiring such consent. With respect to any
proposed offer, sale or other disposition of this Debenture, the Holder will
give prior written notice to the Company and each of the other holders of the
then outstanding Debentures issued pursuant to the Purchase Agreement,
describing briefly the manner thereof, together with a written opinion of the
Holder's counsel, addressed to the Company, to the effect that such offer,
sale or other distribution may be effected without registration or
qualification (under any federal or state law then in effect). Promptly upon
receiving such written notice and reasonably satisfactory opinion, the
Company, as promptly as practicable, shall notify the Holder that the Holder
may sell or otherwise dispose of this Debenture, in accordance with the terms
of the notice delivered to the Company and subject to the above consent
requirement from other holders of Debentures. If a determination has been
made pursuant to this Section 7 that the opinion of counsel for the Holder is
not reasonably satisfactory to the Company, the Company shall so notify the
Holder promptly after such determination has been made. The Company may issue
stop transfer instructions to its transfer agent in connection with such
restrictions.
9. NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or, if mailed, by registered or certified mail,
postage prepaid, at the respective addresses of the parties as set forth
herein. Any party hereto by notice so given may change its address for future
notice hereunder. Notice shall conclusively be deemed to have been given when
personally delivered or when deposited in the mail in the manner set forth
above and shall be deemed to have been received when delivered.
10. PAYMENTS DUE ON SATURDAY, SUNDAY OR LEGAL HOLIDAYS. If an
interest payment date for this Debenture, or a date fixed for payment or
prepayment of all or a portion of this Debenture shall be a Saturday, Sunday
or, in Dallas, Texas, a legal holiday or a day on which banking institutions
are authorized or required by law or executive order to close or remain
closed, then any such payment need not be made on such date but may be made
on the next
4
<PAGE>
succeeding day which is not a Saturday, Sunday, or in such city, a legal
holiday or a day on which banking institutions are closed, with the same
force and effect as if made on such required payment date.
11. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas, excluding that body of law
relating to conflict of laws.
12. HEADINGS; REFERENCES. All headings used herein are used for
convenience only and shall not be used to construe or interpret this
Debenture. Except where otherwise indicated, all references herein to
Sections refer to Sections hereof.
13. USURY SAVINGS CLAUSE. Regardless of any provision contained
herein, or in any document executed in connection herewith, the Holder shall
never be entitled to receive, collect, or apply, as interest on the
indebtedness evidenced hereby, any amount in excess of the maximum rate
permitted by law. If the Holder ever receives, collects, or applies, as
interest, any such excess, such amount which would be excessive interest
shall be deemed a partial prepayment of principal and treated hereunder as
such; and if, the principal hereof is paid in full, any remaining excess
shall be refunded to the Company. In determining whether or not the interest
paid or payable, under any specific contingency, exceeds the maximum rate
permitted by law, the Company and the Holder shall, to the maximum extent
permitted under applicable law: (a) characterize any nonprincipal payment as
an expense, fee, or premium rather than as interest, (b) exclude voluntary
prepayments and the effects thereof, and (c) prorate, allocate, and spread,
the total amount of interest throughout the entire contemplated term hereof,
provided, that if the principal balance hereof is paid and performed in full
prior to the end of the full contemplated term hereof. However, if the
interest received for the actual period of existence thereof exceeds the
maximum rate permitted by law, the Holder shall either apply or refund to the
Company the amount of such excess as herein provided, and in such event, the
Holder shall not be subject to any penalties provided by any laws for
contracting for, charging, or receiving interest in excess of the maximum
rate permitted by law.
IN WITNESS WHEREOF, the Company has caused this Debenture to be
issued this 28th day of January, 1999.
DIGITALCONVERGENCE.COM INC.
By: /s/ J. Jovan Philyaw
----------------------------
Its: President - Secretary
-----------------------
Name of Holder: JAT III, L.L.C.
Address: 8600 Douglas Ave.
Dallas, Texas 75225
5
<PAGE>
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
LAWS AND MAY NOT BE SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT, OR AN EXEMPTION FROM REGISTRATION,
UNDER SAID ACT.
DIGITALCONVERGENCE.COM INC.
8.0% DEBENTURE
SERIES 1999A
$500,000 Dallas, Texas
January 28, 1999
DIGITALCONVERGENCE.COM INC., a Delaware corporation (the "Company"),
the principal office of which is located at 4264 Kellway Circle, Addison,
Texas 75244, for value received hereby promises to pay to B&G PARTNERSHIP,
LTD., or its registered assigns, the sum of Five Hundred Thousand and
00/100ths Dollars ($500,000), or such lesser amount as shall then equal the
outstanding principal amount hereof and any unpaid accrued interest thereon,
as set forth below, on January 27, 2004. Payment of all amounts due hereunder
shall be made by registered or certified mail to the registered address of
the Holder, or at such other address as Holder may, from time to time,
designate in writing to the Company.
This Debenture is issued in connection with the transactions
described in Section 1.1 of that certain Common Stock and Debenture Purchase
Agreement of even date herewith by and among the Company and the Purchasers
described therein, as the same may from time to time be amended, modified or
supplemented (the "Purchase Agreement"). The Holder of this Debenture is
subject to certain restrictions set forth in the Purchase Agreement and shall
be entitled to certain rights and privileges set forth in the Purchase
Agreement. This Debenture is one of the Debentures referred to as the
"Debentures" in the Purchase Agreement.
The following is a statement of the rights of the Holder of this
Debenture and the conditions to which this Debenture is subject, and to which
the Holder hereof, by the acceptance of this Debenture, agrees:
1. DEFINITIONS. As used in this Debenture, the following terms,
unless the context otherwise requires, have the following meanings:
(a) "Anniversary Year" shall mean that period of time
commencing on January 28th of each year and terminating on January 27 of the
following year.
(b) "Company" includes any corporation which shall succeed
to or assume the obligations of the Company under this Debenture.
1
<PAGE>
(c) "Holder," when the context refers to a holder of this
Debenture, shall mean any person who shall at the time be the registered
holder of this Debenture.
(d) "First Level Qualified Public Offering" shall mean the
closing of an initial public offering of the common stock of the Company
pursuant to which the Company shall raise at least Twenty Million Dollars
($20,000,000) after commissions and underwriting discounts.
(e) "Second Level Qualified Public Offering" shall mean the
closing of an initial public offering of the common stock of the Company
pursuant to which the Company shall raise at least Thirty Million Dollars
($30,000,000) after commissions and underwriting discounts.
(f) "Sale of Assets" shall mean the sale of all or
substantially all of the assets of the Company.
2. INTEREST.
(a) INTEREST RATE. The unpaid principal balance of this
Debenture shall bear interest at a rate equal to 8.0% per annum from the date
hereof until paid in full.
(b) PAYMENT OF PRINCIPAL AND INTEREST. Accrued interest
shall not be payable during the first two Anniversary Years hereof unless
otherwise determined by the Board of Directors of the Company. At the end of
the second Anniversary Year the accrued amount of interest not paid shall be
added to the principal amount of this Debenture (collectively, the "Revised
Principal Amount") and interest thereafter should be calculated on the
Revised Principal Amount or so much of the unpaid principal balance of this
Debenture then outstanding. During the third Anniversary Year hereof the
Company shall pay interest only on a quarterly basis such amounts to be due
and payable on March 31, 2001, June 30, 2001, September 30, 2001, and
December 31, 2001, respectively. During the fourth and fifth Anniversary
Years quarterly payments of principal and interest shall be due and payable.
The amount of the principal payment due for each such quarterly payment,
unless earlier paid, shall be 12.5% of the principal amount of this Debenture
outstanding as of the end of the second Anniversary Year, or if higher, the
Revised Principal Amount.
3. VOLUNTARY PAYMENT. Upon five (5) days' prior written notice to
the Holder, the Company may prepay the principal sum of this Debenture, at
any time, in whole or in part, plus unpaid accrued interest to the date of
payment.
4. MANDATORY PAYMENTS.
(a) UPON LIQUIDATION OF THE COMPANY. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company or a Sale of Assets, prior and in preference to any distribution of
any of the assets or surplus funds of the Company to the holders of capital
stock of the Company by reason of their ownership thereof, all outstanding
2
<PAGE>
principal and unpaid accrued interest on this Debenture shall be immediately
due and payable. If the assets and funds of the Company are insufficient to
permit payment in full of all of the then outstanding Debentures issued
pursuant to the Purchase Agreement, then the entire assets and funds of the
Company legally available for distribution shall be distributed ratably among
the holders of such Debentures in proportion to the principal amounts thereof
outstanding at the time of payment.
(b) UPON EVENT OF DEFAULT. Within 30 days of the Holder
obtaining actual knowledge of the occurrence of an Event of Default (as
hereinafter defined), the Holder may demand the prepayment of all or any
portion of this Debenture by submission of written notice of prepayment to
the Company. Following the receipt of such notice, the Company shall prepay
the portion of this Debenture requested to be prepaid as soon as reasonably
practicable, but in any event within 30 days of date of such notice. An Event
of Default for purposes of this Section 4(b) shall mean: (i) the failure to
pay interest or principal on any scheduled payment date; (ii) the occurrence
of any material breach of any representation, warranty or covenant by the
Company under the Purchase Agreement, if such breach is not cured within 30
days of the receipt by the Company of written notice thereof; or (iii) the
filing of any petition, whether voluntary or involuntary, seeking the
reorganization or liquidation of the Company under any provision of the
Federal Bankruptcy Code or any other federal or state reorganization,
insolvency or debtor relief law; or (iv) the appointment of any receiver,
liquidator or trustee for the Company or any of its properties by a court
order and which appointment is not vacated within 30 days; or (v) the Company
is adjudicated insolvent or the Company shall make an assignment for the
benefit of any of its creditors, admit in writing an inability to pay debts
when they become due in the ordinary course of its business, or consent to
the appointment of a receiver, trustee or liquidator for the Company or all
or any part of the property of the Company.
(c) UPON QUALIFIED PUBLIC OFFERING. If, at any time, the
Company proposes to make a First Level Qualified Public Offering, then at the
closing of the First Level Qualified Public Offering, fifty percent (50%) of
the principal amount of this Debenture, plus the unpaid accured interest
thereon, shall be prepaid. If, at any time, the Company proposes to make a
Second Level Qualified Public Offering, then at the closing of the Second
Level Qualified Public Offering, all of the principal amount of this
Debenture, plus the unpaid accrued interest thereon, shall be prepaid.
(d) LIMITATION. If, the Company lacks sufficient funds to
pay lawfully all of the Debentures which the Company is, at any such time,
obligated to pay in accordance with this Section 4, then holders of all the
then outstanding Debentures issued pursuant to the Purchase Agreement shall
share ratably in any funds legally available for payment of such Debentures
according to the respective amounts which would be payable with respect to
the face amount of the Debentures owned by them if all such Debentures were
paid in full.
5. ASSIGNMENT. Subject to the restrictions on transfer described in
Section 7 below, the rights of the Company and the Holder shall be binding
upon and benefit the permitted successors, assigns, heirs, administrators and
transferees of the parties.
3
<PAGE>
6. WAIVER AND AMENDMENT. Any provision of this Debenture may be
amended, waived or modified upon the written consent of the Company and the
holders of all then outstanding Debentures issued pursuant to the Purchase
Agreement.
7. AGREEMENT NOT TO ATTACH. The Holder, by its acceptance of this
Debenture, agrees that in the Event of Default as described in subsection
4(b)(i) or (ii) hereof, and whether or not the Holder shall have obtained an
judgment thereon, unless the Company shall also be in default pursuant to
subsections 4(b)(iii), (iv) or (v) hereof, Holder shall not seek, or cause
any third party to seek, an attachment on or possession of any of the
Company's intellectual property, including but not limited to any of the
Company's technology, patents, trademarks, copyright or any goodwill
associated with any of the foregoing.
8. TRANSFER OF THIS DEBENTURE. This Debenture may not be transferred
or assigned without the prior written consent of holders of at least
seventy-five percent (75%) of the face amount of all the then outstanding
Debentures issued pursuant to the Purchase Agreement, except that the Holder
may transfer or assign this Debenture to an affiliate of the initial Holder
of this Debenture without requiring such consent. With respect to any
proposed offer, sale or other disposition of this Debenture, the Holder will
give prior written notice to the Company and each of the other holders of the
then outstanding Debentures issued pursuant to the Purchase Agreement,
describing briefly the manner thereof, together with a written opinion of the
Holder's counsel, addressed to the Company, to the effect that such offer,
sale or other distribution may be effected without registration or
qualification (under any federal or state law then in effect). Promptly upon
receiving such written notice and reasonably satisfactory opinion, the
Company, as promptly as practicable, shall notify the Holder that the Holder
may sell or otherwise dispose of this Debenture, in accordance with the terms
of the notice delivered to the Company and subject to the above consent
requirement from other holders of Debentures. If a determination has been
made pursuant to this Section 7 that the opinion of counsel for the Holder is
not reasonably satisfactory to the Company, the Company shall so notify the
Holder promptly after such determination has been made. The Company may issue
stop transfer instructions to its transfer agent in connection with such
restrictions.
9. NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or, if mailed, by registered or certified mail,
postage prepaid, at the respective addresses of the parties as set forth
herein. Any party hereto by notice so given may change its address for future
notice hereunder. Notice shall conclusively be deemed to have been given when
personally delivered or when deposited in the mail in the manner set forth
above and shall be deemed to have been received when delivered.
10. PAYMENTS DUE ON SATURDAY, SUNDAY OR LEGAL HOLIDAYS. If an
interest payment date for this Debenture, or a date fixed for payment or
prepayment of all or a portion of this Debenture shall be a Saturday, Sunday
or, in Dallas, Texas, a legal holiday or a day on which banking institutions
are authorized or required by law or executive order to close or remain
4
<PAGE>
closed, then any such payment need not be made on such date but may be made
on the next succeeding day which is not a Saturday, Sunday, or in such city,
a legal holiday or a day on which banking institutions are closed, with the
same force and effect as if made on such required payment date.
11. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas, excluding that body of law
relating to conflict of laws.
12. HEADINGS; REFERENCES. All headings used herein are used for
convenience only and shall not be used to construe or interpret this
Debenture. Except where otherwise indicated, all references herein to
Sections refer to Sections hereof.
13. USURY SAVINGS CLAUSE. Regardless of any provision contained
herein, or in any document executed in connection herewith, the Holder shall
never be entitled to receive, collect, or apply, as interest on the
indebtedness evidenced hereby, any amount in excess of the maximum rate
permitted by law. If the Holder ever receives, collects, or applies, as
interest, any such excess, such amount which would be excessive interest
shall be deemed a partial prepayment of principal and treated hereunder as
such; and if, the principal hereof is paid in full, any remaining excess
shall be refunded to the Company. In determining whether or not the interest
paid or payable, under any specific contingency, exceeds the maximum rate
permitted by law, the Company and the Holder shall, to the maximum extent
permitted under applicable law: (a) characterize any nonprincipal payment as
an expense, fee, or premium rather than as interest, (b) exclude voluntary
prepayments and the effects thereof, and (c) prorate, allocate, and spread,
the total amount of interest throughout the entire contemplated term hereof,
provided, that if the principal balance hereof is paid and performed in full
prior to the end of the full contemplated term hereof. However, if the
interest received for the actual period of existence thereof exceeds the
maximum rate permitted by law, the Holder shall either apply or refund to the
Company the amount of such excess as herein provided, and in such event, the
Holder shall not be subject to any penalties provided by any laws for
contracting for, charging, or receiving interest in excess of the maximum
rate permitted by law.
IN WITNESS WHEREOF, the Company has caused this Debenture to be
issued this 28th day of January, 1999.
DIGITALCONVERGENCE.COM INC.
By: /s/ J. Jovan Philyaw
-----------------------------
Its: President - Secretary
------------------------
Name of Holder: B&G Partnership, Ltd.
Address: 17604 Woods Edge Drive
Dallas, Texas 75287
5
<PAGE>
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
LAWS AND MAY NOT BE SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT, OR AN EXEMPTION FROM REGISTRATION,
UNDER SAID ACT.
DIGITALCONVERGENCE.COM INC.
8.0% DEBENTURE
SERIES 1999A
$500,000 Dallas, Texas
January 28, 1999
DIGITALCONVERGENCE.COM INC., a Delaware corporation (the "Company"),
the principal office of which is located at 4264 Kellway Circle, Addison, Texas
75244, for value received hereby promises to pay to BCG PARTNERSHIP, LTD., or
its registered assigns, the sum of Five Hundred Thousand and 00/100ths Dollars
($500,000), or such lesser amount as shall then equal the outstanding principal
amount hereof and any unpaid accrued interest thereon, as set forth below, on
January 27, 2004. Payment of all amounts due hereunder shall be made by
registered or certified mail to the registered address of the Holder, or at such
other address as Holder may, from time to time, designate in writing to the
Company.
This Debenture is issued in connection with the transactions described
in Section 1.1 of that certain Common Stock and Debenture Purchase Agreement of
even date herewith by and among the Company and the Purchasers described
therein, as the same may from time to time be amended, modified or supplemented
(the "Purchase Agreement"). The Holder of this Debenture is subject to certain
restrictions set forth in the Purchase Agreement and shall be entitled to
certain rights and privileges set forth in the Purchase Agreement. This
Debenture is one of the Debentures referred to as the "Debentures" in the
Purchase Agreement.
The following is a statement of the rights of the Holder of this
Debenture and the conditions to which this Debenture is subject, and to which
the Holder hereof, by the acceptance of this Debenture, agrees:
1. DEFINITIONS. As used in this Debenture, the following terms, unless
the context otherwise requires, have the following meanings:
(a) "Anniversary Year" shall mean that period of time
commencing on January 28th of each year and terminating on January 27 of the
following year.
(b) "Company" includes any corporation which shall succeed to
or assume the obligations of the Company under this Debenture.
1
<PAGE>
(c) "Holder," when the context refers to a holder of this
Debenture, shall mean any person who shall at the time be the registered holder
of this Debenture.
(d) "First Level Qualified Public Offering" shall mean the
closing of an initial public offering of the common stock of the Company
pursuant to which the Company shall raise at least Twenty Million Dollars
($20,000,000) after commissions and underwriting discounts.
(e) "Second Level Qualified Public Offering" shall mean the
closing of an initial public offering of the common stock of the Company
pursuant to which the Company shall raise at least Thirty Million Dollars
($30,000,000) after commissions and underwriting discounts.
(f) "Sale of Assets" shall mean the sale of all or
substantially all of the assets of the Company.
2. INTEREST.
(a) INTEREST RATE. The unpaid principal balance of this
Debenture shall bear interest at a rate equal to 8.0% per annum from the date
hereof until paid in full.
(b) PAYMENT OF PRINCIPAL AND INTEREST. Accrued interest shall
not be payable during the first two Anniversary Years hereof unless otherwise
determined by the Board of Directors of the Company. At the end of the second
Anniversary Year the accrued amount of interest not paid shall be added to the
principal amount of this Debenture (collectively, the "Revised Principal
Amount") and interest thereafter should be calculated on the Revised Principal
Amount or so much of the unpaid principal balance of this Debenture then
outstanding. During the third Anniversary Year hereof the Company shall pay
interest only on a quarterly basis such amounts to be due and payable on March
31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001,
respectively. During the fourth and fifth Anniversary Years quarterly payments
of principal and interest shall be due and payable. The amount of the principal
payment due for each such quarterly payment, unless earlier paid, shall be 12.5%
of the principal amount of this Debenture outstanding as of the end of the
second Anniversary Year, or if higher, the Revised Principal Amount.
3. VOLUNTARY PAYMENT. Upon five (5) days' prior written notice to the
Holder, the Company may prepay the principal sum of this Debenture, at any time,
in whole or in part, plus unpaid accrued interest to the date of payment.
4. MANDATORY PAYMENTS.
(a) UPON LIQUIDATION OF THE COMPANY. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company
or a Sale of Assets, prior and in preference to any distribution of any of the
assets or surplus funds of the Company to the holders of capital stock of the
Company by reason of their ownership thereof, all outstanding
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principal and unpaid accrued interest on this Debenture shall be immediately
due and payable. If the assets and funds of the Company are insufficient to
permit payment in full of all of the then outstanding Debentures issued
pursuant to the Purchase Agreement, then the entire assets and funds of the
Company legally available for distribution shall be distributed ratably among
the holders of such Debentures in proportion to the principal amounts thereof
outstanding at the time of payment.
(b) UPON EVENT OF DEFAULT. Within 30 days of the Holder
obtaining actual knowledge of the occurrence of an Event of Default (as
hereinafter defined), the Holder may demand the prepayment of all or any portion
of this Debenture by submission of written notice of prepayment to the Company.
Following the receipt of such notice, the Company shall prepay the portion of
this Debenture requested to be prepaid as soon as reasonably practicable, but in
any event within 30 days of date of such notice. An Event of Default for
purposes of this Section 4(b) shall mean: (i) the failure to pay interest or
principal on any scheduled payment date; (ii) the occurrence of any material
breach of any representation, warranty or covenant by the Company under the
Purchase Agreement, if such breach is not cured within 30 days of the receipt by
the Company of written notice thereof; or (iii) the filing of any petition,
whether voluntary or involuntary, seeking the reorganization or liquidation of
the Company under any provision of the Federal Bankruptcy Code or any other
federal or state reorganization, insolvency or debtor relief law; or (iv) the
appointment of any receiver, liquidator or trustee for the Company or any of its
properties by a court order and which appointment is not vacated within 30 days;
or (v) the Company is adjudicated insolvent or the Company shall make an
assignment for the benefit of any of its creditors, admit in writing an
inability to pay debts when they become due in the ordinary course of its
business, or consent to the appointment of a receiver, trustee or liquidator for
the Company or all or any part of the property of the Company.
(c) UPON QUALIFIED PUBLIC OFFERING. If, at any time, the
Company proposes to make a First Level Qualified Public Offering, then at the
closing of the First Level Qualified Public Offering, fifty percent (50%) of the
principal amount of this Debenture, plus the unpaid accured interest thereon,
shall be prepaid. If, at any time, the Company proposes to make a Second Level
Qualified Public Offering, then at the closing of the Second Level Qualified
Public Offering, all of the principal amount of this Debenture, plus the unpaid
accrued interest thereon, shall be prepaid.
(d) LIMITATION. If, the Company lacks sufficient funds to pay
lawfully all of the Debentures which the Company is, at any such time, obligated
to pay in accordance with this Section 4, then holders of all the then
outstanding Debentures issued pursuant to the Purchase Agreement shall share
ratably in any funds legally available for payment of such Debentures according
to the respective amounts which would be payable with respect to the face amount
of the Debentures owned by them if all such Debentures were paid in full.
5. ASSIGNMENT. Subject to the restrictions on transfer described in
Section 7 below, the rights of the Company and the Holder shall be binding upon
and benefit the permitted successors, assigns, heirs, administrators and
transferees of the parties.
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6. WAIVER AND AMENDMENT. Any provision of this Debenture may be
amended, waived or modified upon the written consent of the Company and the
holders of all then outstanding Debentures issued pursuant to the Purchase
Agreement.
7. AGREEMENT NOT TO ATTACH. The Holder, by its acceptance of this
Debenture, agrees that in the Event of Default as described in subsection
4(b)(i) or (ii) hereof, and whether or not the Holder shall have obtained an
judgment thereon, unless the Company shall also be in default pursuant to
subsections 4(b)(iii), (iv) or (v) hereof, Holder shall not seek, or cause any
third party to seek, an attachment on or possession of any of the Company's
intellectual property, including but not limited to any of the Company's
technology, patents, trademarks, copyright or any goodwill associated with any
of the foregoing.
8. TRANSFER OF THIS DEBENTURE. This Debenture may not be transferred or
assigned without the prior written consent of holders of at least seventy-five
percent (75%) of the face amount of all the then outstanding Debentures issued
pursuant to the Purchase Agreement, except that the Holder may transfer or
assign this Debenture to an affiliate of the initial Holder of this Debenture
without requiring such consent. With respect to any proposed offer, sale or
other disposition of this Debenture, the Holder will give prior written notice
to the Company and each of the other holders of the then outstanding Debentures
issued pursuant to the Purchase Agreement, describing briefly the manner
thereof, together with a written opinion of the Holder's counsel, addressed to
the Company, to the effect that such offer, sale or other distribution may be
effected without registration or qualification (under any federal or state law
then in effect). Promptly upon receiving such written notice and reasonably
satisfactory opinion, the Company, as promptly as practicable, shall notify the
Holder that the Holder may sell or otherwise dispose of this Debenture, in
accordance with the terms of the notice delivered to the Company and subject to
the above consent requirement from other holders of Debentures. If a
determination has been made pursuant to this Section 7 that the opinion of
counsel for the Holder is not reasonably satisfactory to the Company, the
Company shall so notify the Holder promptly after such determination has been
made. The Company may issue stop transfer instructions to its transfer agent in
connection with such restrictions.
9. NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or, if mailed, by registered or certified mail,
postage prepaid, at the respective addresses of the parties as set forth herein.
Any party hereto by notice so given may change its address for future notice
hereunder. Notice shall conclusively be deemed to have been given when
personally delivered or when deposited in the mail in the manner set forth above
and shall be deemed to have been received when delivered.
10. PAYMENTS DUE ON SATURDAY, SUNDAY OR LEGAL HOLIDAYS. If an interest
payment date for this Debenture, or a date fixed for payment or prepayment of
all or a portion of this Debenture shall be a Saturday, Sunday or, in Dallas,
Texas, a legal holiday or a day on which banking institutions are authorized or
required by law or executive order to close or remain
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closed, then any such payment need not be made on such date but may be made
on the next succeeding day which is not a Saturday, Sunday, or in such city,
a legal holiday or a day on which banking institutions are closed, with the
same force and effect as if made on such required payment date.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, excluding that body of law
relating to conflict of laws.
12. HEADINGS; REFERENCES. All headings used herein are used for
convenience only and shall not be used to construe or interpret this Debenture.
Except where otherwise indicated, all references herein to Sections refer to
Sections hereof.
13. USURY SAVINGS CLAUSE. Regardless of any provision contained herein,
or in any document executed in connection herewith, the Holder shall never be
entitled to receive, collect, or apply, as interest on the indebtedness
evidenced hereby, any amount in excess of the maximum rate permitted by law. If
the Holder ever receives, collects, or applies, as interest, any such excess,
such amount which would be excessive interest shall be deemed a partial
prepayment of principal and treated hereunder as such; and if, the principal
hereof is paid in full, any remaining excess shall be refunded to the Company.
In determining whether or not the interest paid or payable, under any specific
contingency, exceeds the maximum rate permitted by law, the Company and the
Holder shall, to the maximum extent permitted under applicable law: (a)
characterize any nonprincipal payment as an expense, fee, or premium rather than
as interest, (b) exclude voluntary prepayments and the effects thereof, and (c)
prorate, allocate, and spread, the total amount of interest throughout the
entire contemplated term hereof, provided, that if the principal balance hereof
is paid and performed in full prior to the end of the full contemplated term
hereof. However, if the interest received for the actual period of existence
thereof exceeds the maximum rate permitted by law, the Holder shall either apply
or refund to the Company the amount of such excess as herein provided, and in
such event, the Holder shall not be subject to any penalties provided by any
laws for contracting for, charging, or receiving interest in excess of the
maximum rate permitted by law.
IN WITNESS WHEREOF, the Company has caused this Debenture to be issued
this 28th day of January, 1999.
DIGITALCONVERGENCE.COM INC.
By: /s/ J. Jovan Philyaw
-----------------------------
Its: President - Secretary
------------------------
Name of Holder: BCG Partnership, Ltd.
Address: 17604 Woods Edge Drive
Dallas, Texas 75287
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INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT (the "Agreement") is made and entered
into effective as of this ______ day of _______________, ____, by and between
DigitalConvergence.:Com Inc., a Delaware corporation (including any successors
thereto, the "Company"), and ________________________ ("Indemnitee").
RECITALS:
A. Competent and experienced persons are reluctant to serve or to
continue to serve corporations as directors, officers, or in other capacities
unless they are provided with adequate protection through insurance or
indemnification (or both) against claims and actions against them arising out of
their service to and activities on behalf of those corporations.
B. The current uncertainties relating to the availability of adequate
insurance for directors and officers have increased the difficulty for
corporations to attract and retain competent and experienced persons.
C. The Board of Directors of the Company (the "Board") has determined
that the continuation of present trends in litigation will make it more
difficult to attract and retain competent and experienced persons, that this
situation is detrimental to the best interests of the Company's stockholders,
and that the Company should act to assure its directors and officers that there
will be increased certainty of adequate protection in the future.
D. It is reasonable, prudent, and necessary for the Company to obligate
itself contractually to indemnify its directors and officers to the fullest
extent permitted by applicable law in order to induce them to serve or continue
to serve the Company.
E. Indemnitee is willing to serve and continue to serve the Company on
the condition that he be indemnified to the fullest extent permitted by law.
F. Concurrently with the execution of this Agreement, Indemnitee is
agreeing to serve or to continue to serve as a director or officer of the
Company.
AGREEMENTS:
NOW, THEREFORE, in consideration of the foregoing premises,
Indemnitee's agreement to serve or continue to serve as a director or officer of
the Company, and the covenants contained in this Agreement, the Company and
Indemnitee hereby covenant and agree as follows:
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1. CERTAIN DEFINITIONS. For purposes of this Agreement:
a. AFFILIATE: shall mean any Person that directly, or indirectly,
through one or more intermediaries, controls, is controlled by, or is
under common control with the Person specified.
b. CHANGE OF CONTROL: shall mean the occurrence of any of the following
events:
i. The acquisition after the date of this Agreement by
any individual, entity, or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either (x) the then
outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (y) the combined voting
power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however,
that for purposes of this paragraph (i), the following
acquisitions shall not constitute a Change of Control: any
acquisition directly from the Company or any Subsidiary thereof;
any acquisition by the Company or any Subsidiary thereof; any
acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any Subsidiary of the
Company; or any acquisition by any entity or its security
holders pursuant to a transaction which complies with clauses
(A), (B), and (C) of paragraph (iii) below;
ii. Individuals who, as of the date of this Agreement,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent to
the date of this Agreement whose election or appointment by the
Board or nomination for election by the Company's stockholders,
was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board, shall in either case be
considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board;
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iii. Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the
Company or an acquisition of assets of another corporation (a
"Business Combination"), unless in each case, following such Business
Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns
the Company or all or substantially all of the Company's assets either
directly or through one or more subsidiaries) in substantially the
same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock and
Outstanding Corporation Voting Securities, as the case may be, (B) no
Person (excluding any employee benefit plan (or related trust) of the
Company or the corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership of the Company
existed prior to the Business Combination and (C) at least a majority
of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the action
of the Board, providing for such Business Combination; or
iv. Approval by the stockholders of the Company of a complete liquidation
or dissolution of the Company.
c. CLAIM: shall mean any threatened, pending, or completed action, suit, or
proceeding (including, without limitation, securities laws actions, suits,
and proceedings and also any cross claim or counterclaim in any action,
suit, or proceeding), whether civil, criminal, arbitral, administrative, or
investigative in nature, or any inquiry or investigation (including
discovery), whether conducted by the Company or any other Person, that
Indemnitee in good faith believes might lead to the institution of any
action, suit, or proceeding.
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d. EXPENSES: shall mean all costs, expenses (including attorneys' and expert
witnesses' fees), and obligations paid or incurred in connection with
investigating, defending (including affirmative defenses and
counterclaims), being a witness in, or participating in (including on
appeal), or preparing to defend, be a witness in, or participate in, any
Claim relating to any Indemnifiable Event.
e. INDEMNIFIABLE EVENT: shall mean any actual or alleged act, omission,
statement, misstatement, event, or occurrence related to the fact that
Indemnitee is or was a director, officer, agent, or fiduciary of the
Company, or is or was serving at the request of the Company as a director,
officer, trustee, agent, or fiduciary of another corporation, partnership,
joint venture, employee benefit plan, trust, or other enterprise, or by
reason of any actual or alleged thing done or not done by Indemnitee in any
such capacity. For purposes of this Agreement, the Company agrees that
Indemnitee's service on behalf of or with respect to any Subsidiary or
employee benefits plan of the Company or any Subsidiary of the Company
shall be deemed to be at the request of the Company.
f. INDEMNIFIABLE LIABILITIES: shall mean all Expenses and all other
liabilities, damages (including, without limitation, punitive, exemplary,
and the multiplied portion of any damages), judgments, payments, fines,
penalties, amounts paid in settlement, and awards paid or incurred that
arise out of, or in any way relate to, any Indemnifiable Event.
g. POTENTIAL CHANGE OF CONTROL: shall be deemed to have occurred if
(i) the Company enters into an agreement, the consummation of which
would result in the occurrence of a Change of Control, (ii) any Person
(including the Company) publicly announces an intention to take or to
consider taking actions that, if consummated, would constitute a Change
of Control, or (iii) the Board adopts a resolution to the effect that,
for purposes of this Agreement, a Potential Change of Control has
occurred.
h. REVIEWING PARTY: shall mean a member or members of the Board who
are not parties to the particular Claim for which Indemnitee is seeking
indemnification or if a Change of Control has occurred or if there is a
Potential Change of Control and Indemnitee so requests, or if the
members of the Board so elect, or if all of the members of the Board
are parties to such Claim, Special Counsel.
i. SPECIAL COUNSEL: shall mean special, independent legal counsel
selected by Indemnitee and approved by the Company (which approval
shall not be unreasonably withheld), and who has not otherwise
performed material services for the Company or for Indemnitee within
the last three years (other than as Special Counsel under this
Agreement or similar agreements).
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<PAGE>
j. SUBSIDIARY: shall mean, with respect to any Person, any
corporation or other entity of which a majority of the voting
power of the voting equity securities or equity interest is
owned, directly or indirectly, by that Person.
INDEMNIFICATION AND EXPENSE ADVANCEMENT.
k. The Company shall indemnify Indemnitee and hold Indemnitee
harmless to the fullest extent permitted by law, as soon as
practicable but in any event no later than 30 days after written
demand is presented to the Company, from and against any and all
Indemnifiable Liabilities. Notwithstanding the foregoing, the
obligations of the Company under Section 2(a) shall be subject
to the condition that the Reviewing Party shall not have
determined (in a written opinion, in any case in which Special
Counsel is involved) that Indemnitee is not permitted to be
indemnified under applicable law. Nothing contained in this
Agreement shall require any determination under this Section
2(a) to be made by the Reviewing Party prior to the disposition
or conclusion of the Claim against the Indemnitee.
l. If so requested by Indemnitee, the Company shall advance to
Indemnitee all reasonable Expenses incurred by Indemnitee to the
fullest extent permitted by law (or, if applicable, reimburse
Indemnitee for any and all reasonable Expenses incurred by
Indemnitee and previously paid by Indemnitee) within ten
business days after such request (an "Expense Advance") and
delivery by Indemnitee of an undertaking to repay Expense
Advances if and to the extent such undertaking is required by
applicable law prior to the Company's payment of Expense
Advances. The Company shall be obligated from time to time at
the request of Indemnitee to make or pay an Expense Advance in
advance of the final disposition or conclusion of any Claim. In
connection with any request for an Expense Advance, if requested
by the Company, Indemnitee or Indemnitee's counsel shall submit
an affidavit stating that the Expenses to which the Expense
Advances relate are reasonable. Any dispute as to the
reasonableness of any Expense shall not delay an Expense Advance
by the Company. If, when, and to the extent that the Reviewing
Party determines that Indemnitee would not be permitted to be
indemnified with respect to a Claim under applicable law or the
amount of the Expense Advance was not reasonable, the Company
shall be entitled to be reimbursed by Indemnitee and Indemnitee
hereby agrees to reimburse the Company without interest (which
agreement shall be an unsecured obligation of Indemnitee) for
(x) all related Expense Advances theretofore made or paid by the
Company in the event that it is determined that indemnification
would not be permitted or (y) the excessive portion of any
Expense Advances in the event that it is determined that such
Expenses Advances were unreasonable, in either case, if and to
the extent such reimbursement is required by applicable law;
provided, however, that if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee could be indemnified under
applicable law, or that the Expense Advances were reasonable,
any determination made by the Reviewing Party that Indemnitee
would not be
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permitted to be indemnified under applicable law or that the
Expense Advances were unreasonable shall not be binding, and the
Company shall be obligated to continue to make Expense Advances,
until a final judicial determination is made with respect
thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed), which determination shall be conclusive
and binding. If there has been a Potential Change of Control or
a Change of Control, the Reviewing Party shall be advised by or
shall be Special Counsel, if Indemnitee so requests. If there
has been no determination by the Reviewing Party or if the
Reviewing Party determines that Indemnitee substantively is not
permitted to be indemnified in whole or part under applicable
law or that any Expense Advances were unreasonable, Indemnitee
shall have the right to commence litigation in any court in the
states of Texas or Delaware having subject matter jurisdiction
thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination
by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such
proceeding. Any determination by the Reviewing Party otherwise
shall be conclusive and binding on the Company and Indemnitee.
m. Nothing in this Agreement, however, shall require the
Company to indemnify Indemnitee with respect to any Claim
initiated by Indemnitee, other than a Claim solely seeking
enforcement of the Company's indemnification obligations to
Indemnitee or a Claim authorized by the Board.
CHANGE OF CONTROL. The Company agrees that, if there is a Potential Change in
Control or a Change of Control and if Indemnitee requests in writing that
Special Counsel be the Reviewing Party, then Special Counsel shall be the
Reviewing Party. In such a case, the Company agrees not to request or seek
reimbursement from Indemnitee of any indemnification payment or Expense Advances
unless Special Counsel has rendered its written opinion to the Company and
Indemnitee (i) that the Company was not or is not permitted under applicable law
to pay Indemnitee and to allow Indemnitee to retain such indemnification payment
or Expense Advances or (ii) that such Expense Advances were unreasonable.
However, if Indemnitee has commenced legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee could be indemnified
under applicable law or that the Expense Advances were reasonable, any
determination made by Special Counsel that Indemnitee would not be permitted to
be indemnified under applicable law or that the Expense Advances were
unreasonable shall not be binding, and Indemnitee shall not be required to
reimburse the Company for any Expense Advance, and the Company shall be
obligated to continue to make Expense Advances, until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefore have been exhausted or lapsed), which determination shall be
conclusive and binding. The Company agrees to pay the reasonable fees of Special
Counsel and to indemnify Special Counsel against any and all expenses (including
attorneys' fees), claims, liabilities, and damages arising out of or relating to
this Agreement or Special Counsel's engagement pursuant hereto.
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ESTABLISHMENT OF TRUST. In the event of a Potential Change of Control or a
Change of Control, the Company shall, upon written request by Indemnitee, create
a trust for the benefit of Indemnitee (the "Trust") and from time to time upon
written request of Indemnitee shall fund the Trust in an amount equal to all
Indemnifiable Liabilities reasonably anticipated at the time to be incurred in
connection with any Claim. The amount to be deposited in the Trust pursuant to
the foregoing funding obligation shall be determined by the Reviewing Party. The
terms of the Trust shall provide that, upon a Change of Control, the Trust shall
not be revoked or the principal thereof invaded, without the written consent of
Indemnitee, the trustee of the Trust shall advance, within ten business days of
a request by Indemnitee, any and all reasonable Expenses to Indemnitee (and
Indemnitee hereby agrees to reimburse the Trust under the circumstances in which
Indemnitee would be required to reimburse the Company for Expense Advances under
this Agreement), any required determination concerning the reasonableness of the
Expenses to be made by the Reviewing Party, the Trust shall continue to be
funded by the Company in accordance with the funding obligation set forth above,
the trustee of the Trust shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled to indemnification pursuant to this Agreement, and
all unexpended funds in the Trust shall revert to the Company upon a final
determination by the Reviewing Party or a court of competent jurisdiction, as
the case may be, that Indemnitee has been fully indemnified under the terms of
this Agreement. The trustee of the Trust shall be chosen by Indemnitee, and
shall be an institution that is not affiliated with Indemnitee. Nothing in this
Section 4 shall relieve the Company of any of its obligations under this
Agreement.
INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify Indemnitee
against any and all costs and expenses (including attorneys' and expert
witnesses' fees) and, if requested by Indemnitee, shall (within two business
days of that request) advance those costs and expenses to Indemnitee, that are
incurred by Indemnitee if Indemnitee, whether by formal proceedings or through
demand and negotiation without formal proceedings: (a) seeks to enforce
Indemnitee's rights under this Agreement; (b) seeks to enforce Indemnitee's
rights to expense advancement or indemnification under any other agreement or
provision of the Company's Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), or Bylaws (the "Bylaws") now or hereafter in
effect relating to Claims for Indemnifiable Events; or (c) seeks recovery under
any directors' and officers' liability insurance policies maintained by the
Company, in each case regardless of whether Indemnitee ultimately prevails;
provided that a court of competent jurisdiction has not found Indemnitee's claim
for indemnification or expense advancements under the foregoing clause (a), (b)
or (c) to be frivolous, presented for an improper purpose, without evidentiary
support, or otherwise sanctionable under Federal Rule of Civil Procedure No. 11
or an analogous rule or law, and provided further, that if a court makes such a
finding, Indemnitee shall reimburse the Company for all amounts previously
advanced to Indemnitee pursuant to this Section 5. Subject to the provisos
contained in the preceding sentence, to the fullest extent permitted by law, the
Company waives any and all rights that it may have to recover its costs and
expenses from Indemnitee.
PARTIAL INDEMNITY. If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some, but not all, of
Indemnitee's Indemnifiable Liabilities, the Company shall indemnify Indemnitee
for the portion thereof to which Indemnitee is entitled.
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CONTRIBUTION.
n. CONTRIBUTION PAYMENT. To the extent the indemnification
provided for under any provision of this Agreement is determined
(in the manner hereinabove provided) not to be permitted under
applicable law, the Company, in lieu of indemnifying Indemnitee,
shall, to the extent permitted by law, contribute to the amount
of any and all Indemnifiable Liabilities incurred or paid by
Indemnitee for which such indemnification is not permitted. The
amount the Company contributes shall be in such proportion as is
appropriate to reflect the relative fault of Indemnitee, on the
one hand, and of the Company and any and all other parties
(including officers and directors of the Company other than
Indemnitee) who may be at fault (collectively, including the
Company, the "Third Parties"), on the other hand.
o. RELATIVE FAULT. The relative fault of the Third Parties and the
Indemnitee shall be determined by reference to the relative fault of
Indemnitee as determined by the court or other governmental agency or
to the extent such court or other governmental agency does not
apportion relative fault, by the Reviewing Party (which shall include
Special Counsel) after giving effect to, among other things, the
relative intent, knowledge, access to information, and opportunity to
prevent or correct the relevant events, of each party, and other
relevant equitable considerations. The Company and Indemnitee agree
that it would not be just and equitable if contribution were
determined by pro rata allocation or by any other method of allocation
that does take account of the equitable considerations referred to in
this Section 7(b).
BURDEN OF PROOF. In connection with any determination by the Reviewing Party or
otherwise as to whether Indemnitee is entitled to be indemnified under any
provision of this Agreement or to receive contribution pursuant to Section 7 of
this Agreement, to the extent permitted by law the burden of proof shall be on
the Company to establish that Indemnitee is not so entitled.
NO PRESUMPTION. For purposes of this Agreement, the termination of any Claim by
judgment, order, settlement (whether with or without court approval), or
conviction, or upon a plea of NOLO CONTENDERE, or its equivalent, or an entry of
an order of probation prior to judgment shall not create a presumption (other
than any presumption arising as a matter of law that the parties may not
contractually agree to disregard) that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not permitted by applicable law.
NON-EXCLUSIVITY. The rights of Indemnitee hereunder shall be in addition to any
other rights Indemnitee may have under the Bylaws or Certificate of
Incorporation or the Delaware General Corporation Law or otherwise. To the
extent that a change in the Delaware General Corporation Law (whether by statute
or judicial decision) permits greater indemnification by agreement than would be
afforded currently under the Bylaws or Certificate of Incorporation and this
Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by
this Agreement the greater benefits so
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afforded by that change. Indemnitee's rights under this Agreement shall not be
diminished by any amendment to the Certificate of Incorporation or Bylaws, or
of any other agreement or instrument to which Indemnitee is not a party, and
shall not diminish any other rights that Indemnitee now or in the future has
against the Company.
LIABILITY INSURANCE. Except as otherwise agreed to by the Company and Indemnitee
in a written agreement, to the extent the Company maintains an insurance policy
or policies providing directors' and officers' liability insurance, Indemnitee
shall be covered by that policy or those policies, in accordance with its or
their terms, to the maximum extent of the coverage available for any Company
director or officer.
PERIOD OF LIMITATIONS. No action, lawsuit, or proceeding may be brought against
Indemnitee or Indemnitee's spouse, heirs, executors, or personal or legal
representatives, nor may any cause of action be asserted in any such action,
lawsuit, or proceeding, by or on behalf of the Company, after the expiration of
two years after the statute of limitations commences with respect to
Indemnitee's act or omission that gave rise to the action, lawsuit, proceeding,
or cause of action; provided, however, that, if any shorter period of
limitations is otherwise applicable to any such action, lawsuit, proceeding, or
cause of action, the shorter period shall govern.
AMENDMENTS. No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any provision of this Agreement shall be effective unless in a writing signed by
the party granting the waiver. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall that waiver constitute a continuing
waiver.
OTHER SOURCES. Indemnitee shall not be required to exercise any rights that
Indemnitee may have against any other Person (for example, under an insurance
policy) before Indemnitee enforces his rights under this Agreement. However, to
the extent the Company actually indemnifies Indemnitee or advances him Expenses,
the Company shall be subrogated to the rights of Indemnitee and shall be
entitled to enforce any such rights which Indemnitee may have against third
parties. Indemnitee shall assist the Company in enforcing those rights if it
pays his costs and expenses of doing so. If Indemnitee is actually indemnified
or advanced Expenses by any third party, then, for so long as Indemnitee is not
required to disgorge the amounts so received, to that extent the Company shall
be relieved of its obligation to indemnify Indemnitee or advance Indemnitee
Expenses.
BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors,
assigns (including any direct or indirect successor by merger or consolidation),
spouses, heirs, and personal and legal representatives. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as an
officer or director of the Company or another enterprise at the Company's
request.
SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid,
or unenforceable under present or future laws effective during the term hereof,
that provision shall be fully severable; this Agreement shall be construed and
enforced as if that illegal, invalid, or unenforceable provision had
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never comprised a part hereof; and the remaining provisions shall remain in
full force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Agreement. Furthermore,
in lieu of that illegal, invalid, or unenforceable provision, there shall be
added automatically as a part of this Agreement a provision as similar in terms
to the illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
GOVERNING LAW. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in that state without giving effect to the principles of
conflicts of laws.
HEADINGS. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
NOTICES. Whenever this Agreement requires or permits notice to be given by one
party to the other, such notice must be in writing to be effective and shall be
deemed delivered and received by the party to whom it is sent upon actual
receipt (by any means) of such notice. Receipt of a notice by the Secretary of
the Company shall be deemed receipt of such notice by the Company.
COMPLETE AGREEMENT. This Agreement constitutes the complete understanding and
agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings between the parties with
respect to the subject matter hereof, other than any indemnification rights that
Indemnitee may enjoy under the Certificate of Incorporation, the Bylaws, or the
Delaware General Corporation Law.
COUNTERPARTS. This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original, but in making proof hereof it shall not be
necessary to produce or account for more than one such counterpart.
[Remainder of page intentionally left blank]
EXECUTED as of the date first written above.
DIGITALCONVERGENCE.:COM INC.
By: _____________________________________
Name: _____________________________________
Title:_____________________________________
INDEMNITEE:
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__________________________________
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DIGITALCONVERGENCE.COM INC.
1999 STOCK OPTION PLAN
1. PURPOSE.
DigitalConvergence.com inc., a Delaware corporation (herein, together
with its successors, referred to as the "COMPANY"), by means of this 1999
Stock Option Plan (the "PLAN"), desires to afford certain individuals and key
employees of the Company and any parent corporation or subsidiary corporation
thereof now existing or hereafter formed or acquired (such parent and
subsidiary corporations sometimes referred to herein as "RELATED ENTITIES")
who are responsible for the continued growth of the Company an opportunity to
acquire a proprietary interest in the Company, and thus to create in such
persons an increased interest in and a greater concern for the welfare of the
Company and any Related Entities. As used in the Plan, the terms "parent
corporation" and "subsidiary corporation" shall mean, respectively, a
corporation within the definition of such terms contained in Sections 424(e)
and 424(f), respectively, of the Internal Revenue Code of 1986, as amended
(the "CODE"). All defined terms not otherwise defined in Sections 1 through 17
of this Plan shall have the meanings set forth in Section 18 of this Plan.
The stock options described in Sections 6 and 7 (the "OPTIONS") and
the shares of Common Stock (as hereinafter defined) acquired pursuant to the
exercise of such Options are a matter of separate inducement and are not in
lieu of any salary or other compensation for services.
2. ADMINISTRATION.
(a) COMMITTEE. The Board of Directors of the Company (the "BOARD OF
DIRECTORS") shall administer the Plan with respect to all Key Employees (as
hereinafter defined) or Eligible Non-Employees (as hereinafter defined) or may
delegate all or part of its duties under this Plan to any committee or
sub-committee appointed by the Board of Directors (the "COMMITTEE") or to any
officer or committee of officers of the Company, subject in each case to such
conditions and limitations as the Board of Directors may establish and subject
to the following sentence. Unless a majority of the members of the Board of
Directors determines otherwise: (a) the Committee shall be constituted in a
manner that satisfies the requirements of Rule 16b-3, which Committee shall
administer the Plan with respect to all Key Employees or Eligible
Non-Employees who are subject to Section 16 of the Exchange Act in a manner
that satisfies the requirements of Rule 16b-3; and (b) the Committee shall be
constituted in a manner that satisfies the requirements of Section 162(m),
which Committee shall administer the Plan with respect to "performance-based
compensation" for all Key Employees or Eligible Non-Employees who are
reasonably expected to be "covered employees" as those terms are defined in
Section 162(m). The number of persons that shall constitute the Committee
shall be determined from time to time by a majority of all the members of the
Board of Directors. Except for references in Sections 2(a), 2(b), and 2(c) and
unless the context otherwise requires, references herein to the Committee
shall also refer to the Board of Directors as
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administrator of the Plan for Key Employees or Eligible Non-Employees or to
the appropriate delegate of the Committee or the Board of Directors.
(b) DURATION, REMOVAL, ETC. The members of the Committee shall serve
at the pleasure of the Board of Directors, which shall have the power, at any
time and from time to time, to remove members from or add members to the
Committee. Removal from the Committee may be with or without cause. Any
individual serving as a member of the Committee shall have the right to resign
from membership in the Committee by written notice to the Board of Directors.
The Board of Directors, and not the remaining members of the Committee, shall
have the power and authority to fill vacancies on the Committee, however
caused.
(c) MEETINGS AND ACTIONS OF COMMITTEE. The Board of Directors shall
designate which of the Committee members shall be the chairman of the
Committee. If the Board of Directors fails to designate a Committee chairman,
the members of the Committee shall elect one of the Committee members as
chairman, who shall act as chairman until he ceases to be a member of the
Committee or until the Board of Directors elects a new chairman. The Committee
shall hold its meetings at those times and places as the chairman of the
Committee may determine. At all meetings of the Committee, a quorum for the
transaction of business shall be required, and a quorum shall be deemed
present if at least a majority of the members of the Committee are present. At
any meeting of the Committee, each member shall have one vote. All decisions
and determinations of the Committee shall be made by the majority vote or
majority decision of all of its members present at a meeting at which a quorum
is present; provided, however, that any decision or determination reduced to
writing and signed by all of the members of the Committee shall be as fully
effective as if it had been made at a meeting that was duly called and held.
The Committee may make any rules and regulations as it may deem advisable for
the conduct of its business that are not inconsistent with the provisions of
the Plan, the certificate of incorporation of the Company, the by-laws of the
Company, Rule 16b-3 so long as it is applicable, and Section 162(m) so long as
it is applicable.
3. SHARES AVAILABLE.
Subject to the adjustments provided in Section 10, the maximum
aggregate number of shares of Common Stock, $.01 par value, of the Company
("COMMON STOCK") in respect of which Options may be granted for all purposes
under the Plan shall be 15,000 shares. If, for any reason, any shares as to
which Options have been granted cease to be subject to purchase thereunder,
including the expiration of such Option, the termination of such Option prior
to exercise, or the forfeiture of such Option, such shares shall thereafter be
available for grants under the Plan. Options granted under the Plan may be
fulfilled in accordance with the terms of the Plan with (i) authorized and
unissued shares of the Common Stock, (ii) issued shares of such Common Stock
held in the Company's treasury, or (iii) issued shares of Common Stock
reacquired by the Company in each situation as the Board of Directors or the
Committee may determine from time to time.
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4. ELIGIBILITY AND BASES OF PARTICIPATION.
Grants of Incentive Options (as hereinafter defined) and
Non-Qualified Options (as hereinafter defined) may be made under the Plan,
subject to and in accordance with Section 6, to Key Employees. As used herein,
the term "KEY EMPLOYEE" shall mean any employee of the Company or any Related
Entity, including officers and directors of the Company or any Related Entity
who are also employees of the Company or any Related Entity, who is regularly
employed on a salaried basis and who is so employed on the date of such grant,
whom the Committee identifies as having a direct and significant effect on the
performance of the Company or any Related Entity.
Grants of Non-Qualified Options may be made, subject to and in
accordance with Section 7, to any Eligible Non-Employee. As used herein, the
term "ELIGIBLE NON-EMPLOYEE" shall mean any director of the Company who is not
regularly employed on a salaried basis with the Company and any other person
or entity of any nature whatsoever, specifically including an individual, a
firm, a company, a corporation, a partnership, a trust, or other entity
(collectively, a "PERSON"), that the Committee designates as eligible for a
grant of Options pursuant to this Plan because such Person performs bona fide
consulting, advisory, or other services for the Company or any Related Entity
(other than services in connection with the offer or sale of securities in a
capital-raising transaction) and the Board of Directors or the Committee
determines that the Person has a direct and significant effect on the
financial development of the Company or any Related Entity.
The adoption of this Plan shall not be deemed to give any Person a
right to be granted any Options.
Notwithstanding any other provision of this Plan to the contrary,
with respect to the grant of any Options to any Key Employee or Eligible
Non-Employee, the Committee shall first determine the number of shares in
respect of which Options are to be granted to such Key Employee or Eligible
Non-Employee and shall then cause to be granted to such Key Employee or
Eligible Non-Employee an Option exercisable for such shares. The exercise
price per share of Common Stock under each Option shall be fixed by the
Committee at the time of grant of the Option and shall equal at least 100% of
the Fair Market Value of a share of Common Stock on the date of grant.
5. AUTHORITY OF COMMITTEE.
Subject to the express provisions of the Plan and any applicable law
with which the Company intends the Plan to comply, the Committee shall have
the authority, in its sole and absolute discretion, (a) to adopt, amend, and
rescind administrative and interpretive rules and regulations relating to the
Plan, including without limitation to adopt and observe such procedures
concerning the counting of Options against the Plan and individual maximums as
it may deem appropriate from time to time; (b) to determine the Key Employees
or Eligible Non-Employees to whom, and the time or times at which, Options
shall be granted; (c) to determine the number of shares of Common Stock, that
shall be the subject of each Option; (d) to determine the terms and provisions
of each award
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evidencing Options granted hereunder (which need not be identical), including
provisions defining or otherwise relating to (i) the term and the period or
periods and extent of exerciseability of the Options, (ii) the extent to which
the transferability of shares of Common Stock issued or transferred pursuant
to any Option is restricted, (iii) the effect of termination of employment on
the Option, (iv) the effect of approved leaves of absence (consistent with any
applicable regulations of the Internal Revenue Service) and (v) the
establishment of procedures for an optionee (A) to have withheld from the
total number of shares of Common Stock to be acquired upon the exercise of an
Option that number of shares having a Fair Market Value which, together with
such cash as shall be paid in respect of fractional shares, shall equal the
aggregate exercise price under such Option for the number of shares then being
acquired (including the shares to be so withheld), and (B) to exercise a
portion of an Option by delivering that number of shares of Common Stock
already owned by such optionee having an aggregate Fair Market Value which
shall equal the partial Option exercise price and to deliver the shares thus
acquired by such optionee in payment of shares to be received pursuant to the
exercise of additional portions of such Option, the effect of which shall be
that such optionee can in sequence utilize such newly acquired shares in
payment of the exercise price of the entire Option, together with such cash as
shall be paid in respect of fractional shares; provided, however, that (A) in
the case of Incentive Options, no shares shall be used to pay the exercise
price under this paragraph unless (1) such shares were not acquired through
the exercise of Incentive Options or (2) if so acquired, (x) such shares have
been held for more than two years since the grant of such Incentive Options
and for more than one year since the exercise of such Incentive Options (the
"Holding Period"), or (y) if such shares have not been held for the Holding
Period, the optionee elects in writing to use such shares to pay the exercise
price under this paragraph, and (B) no such procedure shall be available if
there is an opinion of the Company's independent accounting firm that the use
of such a procedure could negatively affect the financial statements of the
Company or a Related Entity; (e) to accelerate, pursuant to Section 8 or
otherwise, the time of exerciseability of any Option that has been granted;
(f) to construe the respective awards evidencing Options pursuant to the Plan;
(g) to make determinations of the Fair Market Value of the Common Stock
pursuant to the Plan; (h) to delegate its duties under the Plan to such agents
as it may appoint from time to time, subject to the second sentence of Section
2(a); and (i) to make all other determinations, perform all other acts, and
exercise all other powers and authority necessary or advisable for
administering the Plan, including the delegation of those ministerial acts and
responsibilities as the Committee deems appropriate. The Committee may correct
any defect, supply any omission or reconcile any inconsistency in the Plan, in
any Option, or in any awards evidencing Options granted hereunder in the
manner and to the extent it deems necessary or desirable to carry the Plan
into effect, and the Committee shall be the sole and final judge of that
necessity or desirability. The determinations of the Committee on the matters
referred to in this Section 5 shall be final and conclusive. The Committee
shall not have the power to appoint members of the Committee or to terminate,
modify, or amend the Plan. Those powers are vested in the Board of Directors.
From time to time, the Board of Directors and appropriate officers of
the Company shall be and are authorized to take whatever actions are necessary
to file required documents with
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governmental authorities, stock exchanges, and other appropriate Persons to
make shares of Common Stock available for issuance pursuant to awards
evidencing Options granted hereunder.
6. STOCK OPTIONS FOR KEY EMPLOYEES.
Subject to the express provisions of this Plan, the Committee shall
have the authority to grant incentive stock options pursuant to Section 422 of
the Code ("INCENTIVE OPTIONS"), to grant non-qualified stock options (options
which do not qualify under Section 422 of the Code) ("NON-QUALIFIED OPTIONS"),
and to grant both types of Options to Key Employees. No Incentive Option shall
be granted pursuant to this Plan after the earlier of ten years from the date
of adoption of the Plan or ten years from the date of approval of the Plan by
the stockholders of the Company. Notwithstanding anything in this Plan to the
contrary, Incentive Options may be granted only to Key Employees. The terms
and conditions of the Options granted under this Section 6 shall be determined
from time to time by the Committee; PROVIDED, HOWEVER, that the Options
granted under this Section 6 shall be subject to all terms and provisions of
the Plan (other than Section 7), including the following:
(a) OPTION EXERCISE PRICE. Subject to Section 4, the Committee shall
establish the Option exercise price at the time any Option is granted at such
amount as the Committee shall determine; PROVIDED, that such price shall not
be less than the Fair Market Value per share of Common Stock at the date the
Option is granted; and PROVIDED, FURTHER, that in the case of an Incentive
Option granted to a person who, at the time such Incentive Option is granted,
owns shares of the Company or any Related Entity which possess more than 10%
of the total combined voting power of all classes of shares of the Company or
of any Related Entity, the option exercise price shall not be less than 110%
of the Fair Market Value per share of Common Stock at the date the Option is
granted. The Option exercise price shall be subject to adjustment in
accordance with the provisions of Section 10 of the Plan.
(b) PAYMENT. The price per share of Common Stock with respect to each
Option exercise shall be payable at the time of such exercise. Such price
shall be payable in cash or by any other means acceptable to the Committee,
including delivery to the Company of shares of Common Stock owned by the
optionee or by the delivery or withholding of shares pursuant to a procedure
created pursuant to Section 5(d) of the Plan. Shares delivered to or withheld
by the Company in payment of the Option exercise price shall be valued at the
Fair Market Value of the Common Stock on the day preceding the date of the
exercise of the Option.
(c) CONTINUATION OF EMPLOYMENT. Each Incentive Option shall require
the optionee to remain in the continuous employ of the Company or any Related
Entity from the date of grant of the Incentive Option until no more than three
months prior to the date of exercise of the Incentive Option.
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(d) EXERCISEABILITY OF STOCK OPTION. Subject to Section 8, each
Option shall be exercisable in one or more installments as the Committee may
determine at the time of the grant. No Incentive Option by its terms shall be
exercisable after the expiration of ten years from the date of grant of such
Option; PROVIDED, HOWEVER, that no Incentive Option granted to a person who,
at the time such Option is granted, owns stock of the Company, or any Related
Entity, possessing more than 10% of the total combined voting power of all
classes of stock of the Company, or any Related Entity, shall be exercisable
after the expiration of five years from the date such Option is granted.
(e) DEATH. If any optionee's employment with the Company or a Related
Entity terminates due to the death of such optionee, the estate of such
optionee, or a Person who acquired the right to exercise such Option by
bequest or inheritance or by reason of the death of the optionee, shall have
the right to exercise such Option in accordance with its terms at any time and
from time to time within 180 days after the date of death unless a shorter or
longer period is expressly provided in such Option (but in no event prior to
the 90th day after the death of such optionee) or established by the Committee
pursuant to Section 8 (but in no event after the expiration date of such
Option).
(f) DISABILITY. If the employment of any optionee terminates because
of his Disability (as defined in Section 18), such optionee or his legal
representative shall have the right to exercise the Option in accordance with
its terms at any time and from time to time within 180 days after the date of
such termination unless a shorter or longer period is expressly provided in
such Option (but in no event prior to the 90th day after the date of such
termination of employment) or established by the Committee pursuant to Section
8 (but not after the expiration date of the Option); PROVIDED, HOWEVER, that
in the case of an Incentive Option, the optionee or his legal representative
shall in any event be required to exercise the Incentive Option within one
year after termination of the optionee's employment due to his Disability.
(g) TERMINATION FOR GOOD CAUSE. Unless an optionee's Option expressly
provides otherwise or the Committee determines otherwise, such optionee shall
immediately forfeit all rights under his Option, except as to the shares of
stock already purchased thereunder, if the employment of such optionee with
the Company or a Related Entity is terminated by the Company or any Related
Entity for Good Cause (as defined in Section 18 below). The determination that
there exists Good Cause for termination shall be made by the Committee (unless
otherwise agreed to in writing by the Company and the optionee) and any
decision in respect thereof by the Committee shall be final and binding on all
parties in interest.
(h) OTHER TERMINATION OF EMPLOYMENT. If the employment of an optionee
with the Company or a Related Entity terminates for any reason other than
those specified in subsections 6(e), (f) or (g) above, such optionee shall
have the right to exercise his Option in accordance with its terms, within 90
days after the date of such termination, unless a shorter or longer period is
expressly provided in such Option or established by the Committee pursuant to
Section 8 (but not after the expiration date of the Option); PROVIDED, that no
Incentive Option shall be exercisable more than three months after such
termination.
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(i) MAXIMUM EXERCISE. The aggregate Fair Market Value of stock
(determined at the time of the grant of the Option) with respect to which
Incentive Options are exercisable for the first time by an optionee during any
calendar year under all plans of the Company and any Related Entity shall not
exceed $100,000.
7. STOCK OPTION GRANTS TO ELIGIBLE NON-EMPLOYEES.
(a) Subject to the express provisions of this Plan, the Committee
shall have the authority to grant Non-Qualified Options to Eligible
Non-Employees. The terms and conditions of the Options granted under this
Section 7 shall be determined from time to time by the Committee; PROVIDED,
HOWEVER, that the Options granted under this Section 7 shall be subject to all
terms and provisions of the Plan (other than Section 6), including the
following:
(i) OPTION EXERCISE PRICE. Subject to Section 4, the
Committee shall establish the Option exercise price
at the time any Non-Qualified Option is granted at
such amount as the Committee shall determine. The
Option exercise price shall be subject to adjustment
in accordance with the provisions of Section 10 of
the Plan.
(ii) PAYMENT. The price per share of Common Stock with
respect to each Option exercise shall be payable at
the time of such exercise. Such price shall be
payable in cash or by any other means acceptable to
the Committee, including delivery to the Company of
shares of Common Stock owned by the optionee or by
the delivery or withholding of shares pursuant to a
procedure created pursuant to Section 5(d) of the
Plan. Shares delivered to or withheld by the Company
in payment of the Option exercise price shall be
valued at the Fair Market Value of the Common Stock
on the day preceding the date of the exercise of the
Option.
(iii) EXERCISEABILITY OF STOCK OPTION. Subject to Section
8, each Option shall be exercisable in one or more
installments as the Committee may determine at the
time of the grant. No Option shall be exercisable
after the expiration of ten years from the date of
grant of the Option, unless otherwise expressly
provided in such Option.
(iv) DEATH. If the retention by the Company or any
Related Entity of the services of any Eligible
Non-Employee terminates because of his death, the
estate of such optionee, or a Person who acquired
the right to exercise such Option by bequest or
inheritance or by reason of the death of the
optionee, shall have the right to exercise such
Option in accordance with its terms, at any time
and from time to time within 180 days after the
date of death unless a shorter or
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longer period is expressly provided in such Option
(but in no event prior to the 90th day after the
death of such optionee) or established by the
Committee pursuant to Section 8 (but in no event
after the expiration date of such Option).
(v) DISABILITY. If the retention by the Company or any
Related Entity of the services of any Eligible
Non-Employee terminates because of his Disability,
such optionee or his legal representative shall have
the right to exercise the Option in accordance with
its terms at any time and from time to time within
180 days after the date of the optionee's
termination unless a shorter or longer period is
expressly provided in such Option (but in no event
prior to the 90th day after the date of such
termination of employment) or established by the
Committee pursuant to Section 8 (but not after the
expiration of the Option).
(vi) TERMINATION FOR GOOD CAUSE. If the retention by the
Company or any Related Entity of the services of any
Eligible Non-Employee is terminated (i) for Good
Cause or (ii) as a result of removal of the optionee
from office as a director of the Company or of any
Related Entity for cause by action of the
stockholders of the Company or such Related Entity
in accordance with the by-laws of the Company or
such Related Entity, as applicable, and the
corporate law of the jurisdiction of incorporation
of the Company or such Related Entity, then such
optionee shall immediately forfeit his rights under
his Option except as to the shares of stock already
purchased. The determination that there exists Good
Cause for termination shall be made by the
Committee (unless otherwise agreed to in writing by
the Company and the optionee) and any decision in
respect thereof by the Committee shall be final and
binding on all parties in interest.
(vii) OTHER TERMINATION OF RELATIONSHIP. If the retention
by the Company or any Related Entity of the services
of any Eligible Non-Employee terminates for any
reason other than those specified in subsections
7(a)(iv), (a)(v) or (a)(vi) above, such optionee
shall have the right to exercise his or its Option
in accordance with its terms within 30 days after
the date of such termination, unless a shorter or
longer period is expressly provided in such Option
or established by the Committee pursuant to Section
8 (but not after the expiration date of the Option).
(b) An Eligible Non-Employee that is a non-employee director of the
Company may elect to receive Options in lieu of all or a portion of such
director's annual cash retainer fee for services as a director of the Company.
Notwithstanding subsection 7(a)(ii), the following shall apply if a
non-employee director elects to receive all or a portion of his/her annual
cash retainer in Options:
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(i) METHOD OF ELECTION. Except as otherwise specified by
the Committee, a non-employee director's election
shall be made in accordance with the following
provisions. Unless the Committee provides otherwise,
the election may be made only by written notice
delivered to the Committee prior to the first day of
the calendar year in which the cash payment would
otherwise be made. The election shall specify the
amount of the annual cash retainer that is to be
paid in the form of Options and shall be
irrevocable except for payments otherwise payable
in the next calendar year after the date of a
written notice of revocation.
(ii) TERMS OF OPTIONS. The date of grant of an Option
granted pursuant to this Section 7(b) shall be the
date on which the portion of the annual cash
retainer fee that the non-employee director has
elected not to receive would otherwise have been
paid. The number of shares subject to that Option
shall be determined by dividing the foregone amount
of the annual cash retainer fee otherwise due and
payable on the date of grant by the value of an
Option for one share of Common Stock on the date of
grant having the terms set forth herein, which
value shall be calculated pursuant to the
Black-Scholes Model. The exercise price with
respect to a share of Common Stock subject to that
Option shall be the Fair Market Value of a share of
Common Stock on the Option's date of grant.
8. CHANGE OF CONTROL.
Except as otherwise expressly provided in a particular Option, if (i)
a Change of Control shall occur or (ii) the Company shall enter into an
agreement providing for a Change of Control, then the Committee may declare
any or all Options outstanding under the Plan to be exercisable in full at
such time or times as the Committee shall determine and the Company may
purchase any or all of such Options for an amount of cash equal to the amount
that could have been attained upon the exercise of such Options or the
realization of the optionee's rights had such Option been currently
exercisable. Each Option accelerated by the Committee pursuant to the
preceding sentence shall terminate, notwithstanding any express provision
thereof or any other provision of the Plan, on such date (not later than the
stated exercise date) as the Committee shall determine.
9. PURCHASE OPTION.
(a) Except as otherwise expressly provided in any particular Option,
if (i) any optionee's employment (or, in the case of any Option granted under
Section 7, the optionee's relationship) with the Company or a Related Entity
terminates for any reason at any time or (ii) a Change of Control occurs, the
Company (and/or its designees) shall have the option (the "PURCHASE OPTION")
to purchase, and if the option is exercised, the optionee (or the optionee's
executor or the administrator
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of the optionee's estate, in the event of the optionee's death, or the
optionee's legal representative in the event of the optionee's incapacity)
(hereinafter, collectively with such optionee, the "GRANTOR") shall sell to
the Company and/or its assignee(s), all or any portion (at the Company's
option) of the shares of Common Stock acquired by exercise of an Option and/or
Options held by the Grantor (such shares of Common Stock and Options
collectively being referred to as the "PURCHASABLE SHARES").
(b) The Company shall give notice in writing to the Grantor of the
exercise of the Purchase Option within one year from the date of the
termination of the optionee's employment or engagement or such Change of
Control. Such notice shall state the number of Purchasable Shares to be
purchased and the determination of the Board of Directors of the Fair Market
Value per share of such Purchasable Shares. If no notice is given within the
time limit specified above, the Purchase Option shall terminate.
(c) The purchase price to be paid for the Purchasable Shares
purchased pursuant to the Purchase Option shall be, in the case of any Common
Stock, the Fair Market Value per share as of the date of the notice of
exercise of the Purchase Option times the number of shares being purchased,
and in the case of any Option, the Fair Market Value per share times the
number of vested shares subject to such Option which are being purchased, less
the applicable per share Option exercise price. The purchase price shall be
paid in cash. The closing of such purchase shall take place at the Company's
principal executive offices within ten days after the purchase price has been
determined. At such closing, the Grantor shall deliver to the purchasers the
certificates or instruments evidencing the Purchasable Shares being purchased,
duly endorsed (or accompanied by duly executed stock powers) and otherwise in
good form for delivery, against payment of the purchase price by check of the
purchasers. In the event that, notwithstanding the foregoing, the Grantor
shall have failed to obtain the release of any pledge or other encumbrance on
any Purchasable Shares by the scheduled closing date, at the option of the
purchasers, the closing shall nevertheless occur on such scheduled closing
date, with the cash purchase price being reduced to the extent of all unpaid
indebtedness for which such Purchasable Shares are then pledged or encumbered.
(d) To assure the enforceability of the Company's rights under this
Section 9, each certificate or instrument representing Common Stock or an
Option held by him or it shall bear a conspicuous legend in substantially the
following form:
THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE
PURSUANT TO THIS AGREEMENT] ARE SUBJECT TO AN OPTION TO
REPURCHASE PROVIDED UNDER THE PROVISIONS OF THE COMPANY'S
1999 STOCK OPTION PLAN AND A STOCK OPTION AGREEMENT ENTERED
INTO PURSUANT THERETO. A COPY OF SUCH OPTION PLAN AND OPTION
AGREEMENT ARE AVAILABLE UPON WRITTEN REQUEST TO THE COMPANY
AT ITS PRINCIPAL EXECUTIVE OFFICES.
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The Company's rights under this Section 9 shall terminate upon the
consummation of a Qualifying Public Offering.
10. ADJUSTMENT OF SHARES.
Except as otherwise contemplated in Section 8, and unless otherwise
expressly provided in a particular Option, in the event that, by reason of any
merger, consolidation, combination, liquidation, reorganization,
recapitalization, stock dividend, stock split, split-up, split-off, spin-off,
combination of shares, exchange of shares or other like change in capital
structure of the Company (collectively, a "REORGANIZATION"), the Common Stock
is substituted, combined, or changed into any cash, property, or other
securities, or the shares of Common Stock are changed into a greater or lesser
number of shares of Common Stock, the number and/or kind of shares and/or
interests subject to an Option and the per share price or value thereof shall
be appropriately adjusted by the Committee to give appropriate effect to such
Reorganization. Any fractional shares or interests resulting from such
adjustment shall be eliminated. Notwithstanding the foregoing, (i) each such
adjustment with respect to an Incentive Option shall comply with the rules of
Section 424(a) of the Code, and (ii) in no event shall any adjustment be made
which would render any Incentive Option granted hereunder other than an
"incentive stock option" for purposes of Section 422 of the Code. The maximum
aggregate number of shares of Common Stock in respect of which Options may be
granted under this Plan as provided for in Section 3 shall be subject to
adjustment as contemplated above.
Except as otherwise contemplated in Section 8, and unless otherwise
expressly provided in a particular Option, in the event that the Company is
not the surviving entity of a Reorganization and, following such
Reorganization and, in connection with such Reorganization, any optionee will
hold Options issued pursuant to this Plan which have not been exercised,
canceled, or terminated in connection therewith, the Company shall cause such
Options to be assumed (or canceled and replacement Options issued) by the
surviving entity or a Related Entity with such changes in the number and/or
kind of shares and/or interests subject to an Option and the per share price
or the value thereof as the Committee determines is necessary to give
appropriate effect to such Reorganization. In the event of any perceived
conflict between the provisions of Section 8 and this Section 10, the
Committee's determination under Section 8 shall control.
11. ASSIGNMENT OR TRANSFER.
(a) TRANSFER OF INCENTIVE OPTIONS. Incentive Options are not
transferrable by an optionee other than by will or the laws of descent and
distribution.
(b) TRANSFER OF NON-QUALIFIED OPTIONS.
(i) PERMITTED TRANSFEREES. The Committee may, in its
discretion, permit an optionee to transfer all or
any portion of a Non-Qualified Option, or authorize
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all or a portion of any Non-Qualified Option to be
granted to an optionee to be on terms which permit
transfer by such optionee, to (A) the spouse,
former spouse, children, stepchildren,
grandchildren, parents, stepparents, grandparents,
siblings, nieces, nephews, mother-in-law,
father-in-law, sons-in-law, daughters-in-law,
brothers-in-law, or sisters-in-law of the optionee,
including adoptive relationships, or any other
person sharing the optionee's household (other than
a tenant or employee) (collectively, "IMMEDIATE
FAMILY MEMBERS"), (B) a trust or trusts in which
such Immediate Family Members have more than fifty
percent of the beneficial interest, (C) a
foundation in which such Immediate Family Members
(or the optionee) control the management of assets,
or (D) any other entity in which such Immediate
Family Members (or the optionee) own more than
fifty percent of the voting interests
(collectively, "PERMITTED TRANSFEREES"); provided
that (x) there may be no consideration for any such
transfer, (y) subsequent transfers of Non-Qualified
Options transferred as provided above shall be
prohibited except subsequent transfers back to the
option grantee and transfers to other Permitted
Transferees of the option grantee.
(ii) DOMESTIC RELATIONS ORDERS. In the Committee's sole
discretion Non-Qualified Options may be transferred
pursuant to domestic relations orders entered or
approved by a court of competent jurisdiction upon
delivery to the Company of written notice of such
transfer and a certified copy of such order.
(iii) OTHER TRANSFERS AND EXERCISE RIGHTS. Except as
expressly permitted by Sections 11(b)(i) and
11(b)(ii), Non-Qualified Options requiring exercise
shall not be transferable other than by will or the
laws of descent and distribution. In the event that
a legal representative has been appointed in
connection with the Disability of an optionee, the
optionee's options may be exercised by the legal
representative.
(iv) EFFECT OF TRANSFER. Following the transfer of any
Non-Qualified Option as contemplated by Sections
11(b)(i), 11(b)(ii) and 11(b)(iii), (A) such
Non-Qualified Option shall continue to be subject to
the same terms and conditions as were applicable
immediately prior to transfer, provided that the
term "optionee" shall be deemed to refer to the
Permitted Transferee, the recipient under a
domestic relations order, or the estate or heirs of
a deceased optionee, as applicable, to the extent
appropriate to enable the optionee to exercise the
transferred Non-Qualified Option in accordance with
the terms of this Plan and applicable law, (B) the
provisions of Sections 7(e) through (h) hereof
shall continue to be applied with respect to the
original optionee and, following the occurrence of
any such events described therein the Non-Qualified
Options shall be exercisable by the Permitted
Transferee, the
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recipient under a domestic relations order, or the
estate or heirs of a deceased Holder, as
applicable, only to the extent and for the periods
specified in Sections 7(e) through (h), and (C) in
the discretion of the Committee, all voting control
in the Common Stock transferred pursuant to the
exercise of Non-Qualified Options shall be retained
in the option grantee.
(c) PROCEDURES AND RESTRICTIONS. Any optionee desiring to transfer an
Option as permitted under Section 11(a) or 11(b) shall make application
therefor in the manner and time specified by the Committee and shall comply
with such other requirements as the Committee may require to assure compliance
with all applicable securities laws. The Committee shall not give permission
for such a transfer if (i) it would give rise to short-swing liability under
Section 16(b) of the Exchange Act, or (ii) it may not be made in compliance
with all applicable federal, state and foreign securities laws.
(d) At least ninety (90) days prior to selling, pledging,
hypothecating, transferring or otherwise disposing ("TRANSFER") of any
interest in Common Stock issued upon exercise of an Option, the optionee,
provided that, for purposes of this Section 11(d), the term "optionee" shall
be deemed to refer to the Permitted Transferee, the recipient under a
qualified domestic relations order, or the estate or heirs of a deceased
optionee, as applicable proposing such Transfer shall deliver a written notice
(the "SALE NOTICE") to the Company. The Sale Notice will disclose in
reasonable detail the identity of the prospective transferee(s) and the terms
and conditions of the proposed transfer. Such optionee, shall not consummate
any such Transfer until ninety (90) days after the Sale Notice has been
delivered to the Company, unless the Company has notified such optionee in
writing that it will not exercise its rights under this Section 11(d) (the
date of the first to occur of such events is referred to herein as the
"AUTHORIZATION DATE"). The Company or its designee may elect to purchase all
(but not less than all) of the shares of Common Stock to be Transferred upon
the same terms and conditions as those set forth in the Sale Notice ("RIGHT OF
FIRST REFUSAL") by delivering a written notice of such election to such
optionee, within thirty (30) days after the receipt of the Sale Notice by the
Company (the "ELECTION NOTICE"). If the Company has not elected to purchase
all of the shares of Common Stock specified in the Sale Notice, such optionee,
may Transfer the shares of Common Stock to the prospective transferee(s) as
specified in the Sale Notice, at a price and on terms no more favorable to the
transferee(s) thereof than specified in the Sale Notice, during the 90-day
period immediately following the Authorization Date. Any shares of Common
Stock not so transferred within such 90-day period must be reoffered to the
Company in accordance with the provisions of this Section 11(d). The Right of
First Refusal will not apply with respect to Transfers of such shares of
Common Stock by will or pursuant to applicable laws of descent and
distribution or among the option grantee's family group; provided that the
restrictions contained in this Section 11(d) will continue to be applicable to
the shares of Common Stock after any such Transfer and provided further that
the transferees of such shares of Common Stock have agreed in writing to be
bound by the terms and provisions of this Plan and the applicable Option
Agreement as each may be amended from time to time. In addition, upon any
transfer to a member of the option grantee's family group, the grantee shall
be required to give notice to the Company and as a condition to such Transfer
to a member of the grantee's family group, the grantee will maintain all
voting control over
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all of the shares of Common Stock. The grantee's "family group" means the
grantee's spouse and lineal descendants (whether natural or adopted) and any
trust solely for the benefit of the grantee and/or the grantee's spouse and/or
lineal descendants. In addition, with the prior approval of the Committee,
notwithstanding the provisions of this Section 11(d), an optionee may pledge
such shares of Common Stock creating a security interest therein; provided,
that the pledgee agrees in writing to be bound, and that such shares of Common
Stock remain bound, by the terms and provisions of this Plan and the
applicable Option Agreement, as each may be amended from time to time.
To assure the enforceability of the Company's rights under this
Section 11(d), each certificate or instrument representing Common Stock or an
Option held by him or it shall bear a conspicuous legend in substantially the
following form:
THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE
PURSUANT TO THIS AGREEMENT] ARE SUBJECT TO A RIGHT OF FIRST
REFUSAL PROVIDED UNDER THE COMPANY'S 1999 STOCK OPTION PLAN
AND A STOCK OPTION AGREEMENT ENTERED INTO PURSUANT THERETO. A
COPY OF SUCH OPTION PLAN AND OPTION AGREEMENT ARE AVAILABLE
UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL
EXECUTIVE OFFICES.
(e) The rights and obligations pursuant to Section 11(d) hereof will
terminated upon the consummation of a Qualifying Public Offering.
12. COMPLIANCE WITH SECURITIES LAWS.
The Company shall not in any event be obligated to file any
registration statement under the Securities Act or any applicable state
securities law to permit exercise of any option or to issue any Common Stock
in violation of the Securities Act or any applicable state securities law.
Each optionee (or, in the event of his death or, in the event a legal
representative has been appointed in connection with his Disability, the
Person exercising the Option) shall, as a condition to his right to exercise
any Option, deliver to the Company an agreement or certificate containing such
representations, warranties and covenants as the Company may deem necessary or
appropriate to ensure that the issuance of shares of Common Stock pursuant to
such exercise is not required to be registered under the Securities Act or any
applicable state securities law.
Certificates for shares of Common Stock, when issued, may have
substantially the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY
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STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR
SALE, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF
UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO
THE ISSUER (WHICH, IN THE DISCRETION OF THE ISSUER, MAY
INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER)
THAT SUCH OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION
WILL NOT VIOLATE APPLICABLE FEDERAL OR STATE LAWS.
This legend shall not be required for shares of Common Stock issued
pursuant to an effective registration statement under the Securities Act and
in accordance with applicable state securities laws.
13. WITHHOLDING TAXES.
By acceptance of the Option, the optionee will be deemed to (i) agree
to reimburse the Company or Related Entity by which the optionee is employed
for any federal, state, or local taxes required by any government to be
withheld or otherwise deducted by such corporation in respect of the
optionee's exercise of all or a portion of the Option; (ii) authorize the
Company or any Related Entity by which the optionee is employed to withhold
from any cash compensation paid to the optionee or in the optionee's behalf,
an amount sufficient to discharge any federal, state, and local taxes imposed
on the Company, or the Related Entity by which the optionee is employed, and
which otherwise has not been reimbursed by the optionee, in respect of the
optionee's exercise of all or a portion of the Option; and (iii) agree that
the Company may, in its discretion, hold the stock certificate to which the
optionee is entitled upon exercise of the Option as security for the payment
of the aforementioned withholding tax liability, until cash sufficient to pay
that liability has been accumulated, and may, in its discretion, effect such
withholding by retaining shares issuable upon the exercise of the Option
having a Fair Market Value on the date of exercise which is equal to the
amount to be withheld.
14. COSTS AND EXPENSES.
The costs and expenses of administering the Plan shall be borne by
the Company and shall not be charged against any Option nor to any employee
receiving an Option.
15. FUNDING OF PLAN.
The Plan shall be unfunded. The Company shall not be required to make
any segregation of assets to assure the payment of any Option under the Plan.
16. OTHER INCENTIVE PLANS.
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The adoption of the Plan does not preclude the adoption by
appropriate means of any other incentive plan for employees.
17. EFFECT ON EMPLOYMENT.
Nothing contained in the Plan or any agreement related hereto or
referred to herein shall affect, or be construed as affecting, the terms of
employment of any Key Employee except to the extent specifically provided
herein or therein. Nothing contained in the Plan or any agreement related
hereto or referred to herein shall impose, or be construed as imposing, an
obligation on (i) the Company or any Related Entity to continue the employment
of any Key Employee, and (ii) any Key Employee to remain in the employ of the
Company or any Related Entity.
18. DEFINITIONS.
In addition to the terms specifically defined elsewhere in the Plan,
as used in the Plan, the following terms shall have the respective meanings
indicated unless another definition is agreed to in writing by the Company and
the optionee in an option grant agreement with respect to such term or a
similar term:
(a) "AFFILIATE" shall mean, as to any Person, a Person that directly,
or indirectly through one or more intermediaries, controls, or is controlled
by, or is under common control with, such Person.
(b) "AUTHORIZATION DATE" shall have the meaning set forth in Section
11(b) hereof.
(c) "BOARD OF DIRECTORS" shall have the meaning set forth in Section
2 hereof.
(d) "CHANGE OF CONTROL" shall mean the first to occur of the
following events: (i) any sale, lease, exchange, or other transfer (in one
transaction or series of related transactions) of all or substantially all of
the assets of the Company to any Person or group of related Persons for
purposes of Section 13(d) of the Exchange Act, (ii) a majority of the Board of
Directors of the Company shall consist of Persons who are not Continuing
Directors; or (iii) the acquisition after the date of acceptance of this Plan
by any Person or Group of the power, directly or indirectly, to vote or direct
the voting of securities having more than 50% of the ordinary voting power for
the election of directors of the Company.
(e) "CODE" shall have the meaning set forth in Section 1 hereof.
(f) "COMMITTEE" shall have the meaning set forth in Section 2 hereof.
(g) "COMMON STOCK" shall have the meaning set forth in Section 3
hereof.
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<PAGE>
(h) "COMPANY" shall have the meaning set forth in Section 1 hereof.
(i) "CONTINUING DIRECTOR" shall mean, as of the date of
determination, any Person who (i) was a member of the Board of Directors of
the Company on the date of adoption of this Plan or (ii) was nominated for
election or elected to the Board of Directors of the Company with the
affirmative vote of a majority of the Continuing Directors who were members of
such Board of Directors at the time of such nomination or election.
(j) "DISABILITY" shall mean permanent disability as defined under
Section 22(e)(3) of the Code.
(k) "ELECTION NOTICE" shall have the meaning set forth in Section
11(b) hereof.
(l) "ELIGIBLE NON-EMPLOYEE" shall have the meaning set forth in
Section 4 hereof.
(m) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE", shall, as it relates to the Common Stock,
mean, at the option of the Committee, the average of the high and low prices
or the closing price of such Common Stock as reported on the principal
national securities exchange on which the shares of Common Stock are then
listed or the NASDAQ National Market, as applicable, on the date specified
herein for such a determination, or if there were no sales on such date, on
the next succeeding day or immediately preceding day on which there were
sales, or if such Common Stock is not listed on a national securities exchange
or the NASDAQ National Market, the last reported bid price in the
over-the-counter market, or if such shares are not traded in the
over-the-counter market, the per share cash price for which all of the
outstanding Common Stock could be sold to a willing purchaser in an arms
length transaction (without regard to minority discount, absence of liquidity,
or transfer restrictions imposed by any applicable law or agreement) at the
date of the event giving rise to a need for a determination. Except as may be
otherwise expressly provided in a particular Option, Fair Market Value shall
be determined in good faith by the Committee.
(o) "GOOD CAUSE", with respect to any Key Employee, shall mean
(unless another definition is agreed to in writing by the Company and the
optionee) termination by action of the Board of Directors because of: (A) the
optionee's conviction of, or plea of nolo contendere to, a felony or a crime
involving moral turpitude; (B) the optionee's personal dishonesty,
incompetence, willful misconduct, willful violation of any law, rule, or
regulation (other than minor traffic violations or similar offenses) or breach
of fiduciary duty which involves personal profit; (C) the optionee's
commission of material mismanagement in the conduct of his duties as assigned
to him by the Board of Directors or the optionee's supervising officer or
officers of the Company or any Related Entity; (D) the optionee's willful
failure to execute or comply with the policies of the Company or any Related
Entity or his stated duties as established by the Board of Directors or the
optionee's supervising officer or officers of the Company or any Related
Entity, or the optionee's
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intentional failure to perform the optionee's stated duties; or (E) substance
abuse or addiction on the part of the optionee. "Good Cause", with respect to
any Eligible Non-Employee, shall mean (unless another definition is agreed to
in writing by the Company and the optionee) termination by action of the Board
of Directors because of: (A) the optionee's conviction of, or plea of nolo
contendere to, a felony or a crime involving moral turpitude; (B) the
optionee's personal dishonesty, incompetence, willful misconduct, willful
violation of any law, rule, or regulation (other than minor traffic violations
or similar offenses) or breach of fiduciary duty which involves personal
profit; (C) the optionee's commission of material mismanagement in providing
services to the Company or any Related Entity; (D) the optionee's willful
failure to comply with the policies of the Company in providing services to
the Company or any Related Entity, or the optionee's intentional failure to
perform the services for which the optionee has been engaged; (E) substance
abuse or addiction on the part of the optionee; or (F) the optionee's
willfully making any material misrepresentation or willfully omitting to
disclose any material fact to the board of directors of the Company or any
Related Entity with respect to the business of the Company or any Related
Entity.
(p) "GRANTOR" shall have the meaning set forth in Section 9 hereof.
(q) "HOLDING PERIOD" shall have the meaning set forth in Section 5
hereof.
(r) "INCENTIVE OPTIONS" shall have the meaning set forth in Section 6
hereof.
(s) The terms "include," "included" or "including" when used herein
shall mean "including, but not limited to".
(t) "KEY EMPLOYEE" shall have the meaning set forth in Section 4
hereof.
(u) "NON-QUALIFIED OPTIONS" shall have the meaning set forth in
Section 6 hereof.
(v) "OPTIONS" shall have the meaning set forth in Section 1 hereof.
(w) "PERSON" shall have the meaning set forth in Section 4 hereof.
(x) "PLAN" shall have the meaning set forth in Section 1 hereof.
(y) "PURCHASABLE SHARES" shall have the meaning set forth in Section
9 hereof.
(z) "PURCHASE OPTION" shall have the meaning set forth in Section 9
hereof.
(aa) "QUALIFYING PUBLIC OFFERING" shall mean a firm commitment
underwritten public offering of Common Stock for cash where the proceeds to
the Company (prior to deducting any underwriters' discounts and commissions)
exceed $10 million and the shares of Common Stock
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registered under the Securities Act are listed on a national securities
exchange or the NASDAQ National Market System.
(bb) "RELATED ENTITIES" shall have the meaning set forth in
Section 1 hereof.
(cc) "REORGANIZATION" shall have the meaning set forth in Section
10 hereof.
(dd) "RIGHT OF FIRST REFUSAL" shall have the meaning set forth in
Section 11(b) hereof.
(ee) "RULE 16b-3" shall mean Rule 16b-3, as amended, or other
applicable rules under Section 16(b) of the Exchange Act.
(ff) "SALE NOTICE" shall have the meaning set forth in Section
11(b) hereof.
(gg) "Section 162(m)" means Section 162(m) of the Code and the
rules and regulations adopted from time to time thereunder, or any successor
law or rule as it may be amended from time to time.
(hh) "SECURITIES ACT" shall mean the Securities Act of 1933.
(ii) "SUBSIDIARY" shall mean, with respect to any Person, any
other Person of which such first Person owns or has the power to vote,
directly or indirectly, securities representing a majority of the votes
ordinarily entitled to be cast for the election of directors or other
governing Persons.
(jj) "TRANSFER" shall have the meaning set forth in Section 11(b)
hereof.
19 AMENDMENT OF PLAN.
The Board of Directors shall have the right to amend, modify, suspend
or terminate the Plan at any time; provided, that no amendment shall be made
which shall increase the total number of shares of the Common Stock which may
be issued and sold pursuant to Options granted under the Plan unless such
amendment is made by or with the approval of the stockholders. The Board of
Directors shall have the right to amend the Plan and the Options outstanding
thereunder, without the consent or joinder of any optionee or other Person, in
such manner as may be determined necessary or appropriate by the Board of
Directors in order to cause the Plan and the Options outstanding thereunder
(i) to qualify as "incentive stock options" within the meaning of Section 422
of the Code, (ii) to comply with Rule 16b-3 (or any successor rule) under the
Exchange Act (or any successor law) and the regulations (including any
temporary regulations) promulgated thereunder, or (iii) to comply with Section
162(m) of the Code (or any successor section) and the regulations (including
any temporary regulations) promulgated thereunder. Except as provided above,
no amendment, modification, suspension or termination of the Plan shall alter
or impair any Options previously granted under the Plan, without the consent
of the holder thereof.
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20. EFFECTIVE DATE.
The Plan shall become effective on the date on which it is approved
by the Board of Directors and the stockholders of the Company.
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STOCK PURCHASE AGREEMENT
This Agreement is made as of the 17th day of May 1999, by and among
Digital Convergence.com Inc., a Delaware corporation (the "Corporation"), and
William S. Leftwich, a natural person residing in the State of Texas (the
"Purchaser").
ARTICLE I.
PURCHASE OF SHARES
SECTION 1.1 PURCHASE. The Purchaser hereby purchases, and the
Corporation hereby sells to the Purchaser, 750 shares of Common Stock, $.01 par
value, of the Corporation (the "Purchased Shares") at a purchase price of $.10
per share (the "Purchase Price"). The Corporation and the Purchaser agree that
the fair market value of the Purchased Shares as of the date of this Agreement
is $.10 per share of Common Stock.
SECTION 1.2 PAYMENT. Concurrently with the execution of this Agreement,
the Purchaser shall pay the Purchase Price for the Purchased Shares by check.
SECTION 1.3 DELIVERY OF CERTIFICATES. Concurrently with the execution
of this Agreement, the Corporation shall issue and deliver certificates
evidencing the Purchased Shares to the Purchaser. The Purchased Shares are
subject to the Corporation's Repurchase Right under Article IV hereof and the
certificates evidencing the Purchased Shares subject to the Repurchase Right
shall be held in escrow by the Secretary of the Corporation as provided in
Article V hereof. Purchaser shall also deliver to the Secretary of the
Corporation a duly executed blank Assignment Separate from Certificate (in the
form attached hereto as EXHIBIT "A") with respect to such Purchased Shares.
SECTION 1.4 EXECUTION OF AGREEMENT AMONG STOCKHOLDERS. Concurrently
with the execution of this Agreement, the Purchaser and his spouse will execute
and deliver that certain execution page for Shareholders' Agreement (IN THE FORM
ATTACHED HERETO AS EXHIBIT "B") pursuant to which the Purchaser will be bound by
the terms of that certain Shareholders' Agreement dated January 29, 1999 by and
among the Corporation and certain prior signatories thereto.
ARTICLE II.
TRANSFER RESTRICTIONS
SECTION 2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
and are being issued to Purchaser in reliance upon the exemption from such
registration provided by Rule 701 of the Securities and Exchange Commission for
stock issuances under compensatory benefit arrangements such as this Agreement.
Purchaser hereby acknowledges receipt of a copy of this Agreement.
<PAGE>
SECTION 2.2 RESTRICTED SECURITIES. Purchaser hereby confirms that
Purchaser has been informed that the Purchased Shares are restricted securities
under the 1933 Act and may not be sold or transferred unless the Purchased
Shares are first registered under the federal securities laws or unless an
exemption from such registration is available. Accordingly, Purchaser hereby
acknowledges that Purchaser is prepared to hold the Purchased Shares for an
indefinite period and that Purchaser is aware that Rule 144 of the Securities
and Exchange Commission issued under the 1933 Act is not presently available to
exempt the sale of the Purchased Shares from the registration requirements of
the 1933 Act. Purchaser is aware that Rule 144 permits limited public resales of
securities acquired in a nonpublic offering, subject to the satisfaction of
certain conditions. Purchaser understands that under Rule 144, the conditions
include, among other things: the availability of certain current public
information about the issuer, the resale occurring not less than one year after
the party has purchased and paid for the securities to be sold, the sale being
through a broker in an unsolicited "broker's transaction" and the amount of
securities being sold during any three-month period not exceeding specified
limitations. Purchaser acknowledges and understands that the Corporation may not
be satisfying the current public information requirement of Rule 144 at the time
Purchaser wishes to sell the Purchased Shares or other conditions under Rule 144
which are required of the Corporation. If so, Purchaser understands that
Purchaser will be precluded from selling the securities under Rule 144 even if
the one-year holding period of said Rule has been satisfied. Prior to
Purchaser's acquisition of the Purchased Shares, Purchaser acquired sufficient
information about the Corporation to reach an informed knowledgeable decision to
acquire the Purchased Shares. Purchaser has such knowledge and experience in
financial and business matters as to make Purchaser capable of utilizing said
information to evaluate the risks of the prospective investment and to make an
informed investment decision. Purchaser is able to bear the economic risk of
Purchaser's investment in the Purchased Stock.
SECTION 2.3 RESTRICTIONS ON TRANSFER.
(a) Purchaser shall not transfer, assign, encumber, or
otherwise dispose of any of the Purchased Shares that are subject to the
Corporation's Repurchase Right under Article IV.
(b) Purchaser hereby agrees that Purchaser shall make no
disposition of the Purchased Shares unless and until:
(i) Purchaser shall have complied with all
requirements of this Agreement applicable to the disposition
of the Purchased Shares;
(ii) Purchaser shall have complied with all
requirements of that certain Agreement Among Stockholders of
even date herewith by and among the Corporation and the
stockholders of the Corporation party thereto (the "Agreement
Among Stockholders") applicable to the disposition of the
Purchased Shares and shall have provided to the Corporation
evidence of such compliance which is reasonably satisfactory
to the Corporation;
<PAGE>
The Corporation shall NOT be required (i) to transfer on its
books any Purchased Shares that have been sold or transferred in violation of
the provisions of this Article II OR (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting or dividend rights to, any transferee to
whom the Purchased Shares have been transferred in contravention of this
Agreement.
SECTION 2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions
on disposition of the Purchased Shares, the stock certificates for the Purchased
Shares will be endorsed with restrictive legends, including one or both of the
following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF (i) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SHARES UNDER SUCH ACT, (ii) A `NO ACTION' LETTER OF THE SECURITIES AND
EXCHANGE COMMISSION WITH RESPECT TO SUCH SALE OR OFFER, OR (iii) AN OPINION OF
COUNSEL SATISFACTORY TO THE CORPORATION THAT REGISTRATION UNDER SUCH ACT IS NOT
REQUIRED WITH RESPECT TO SUCH SALE OR OFFER."
(b) If required by the authorities of any state in connection
with the issuance of the Shares, the legend or legends required by such state
authorities shall also be endorsed on all such certificates.
ARTICLE III.
SPECIAL PROVISIONS
SECTION 3.1 STOCKHOLDER RIGHTS. Until such time as the Corporation
actually exercises its repurchase rights under this Agreement, Purchaser (or any
successor in interest) shall have all the rights of a stockholder (including
voting and dividend rights) with respect to the Purchased Shares, including the
Purchased Shares held in escrow under Article V, subject, however, to the
transfer restrictions of Article II.
SECTION 3.2 SECTION 83(b) ELECTION. Purchaser understands that under
Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), the
difference between the Purchase Price paid for the Purchased Shares and their
fair market value on the date any forfeiture restrictions applicable to such
shares lapse will be reportable as ordinary income at that time. For this
purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to its Repurchase Right
under Article IV of this Agreement. Purchaser understands that Purchaser may
elect to be taxed at the time the Purchased Shares are acquired hereunder to the
extent the fair market value of the Purchased Shares differs from the Purchase
Price rather than when and as such Purchased Shares cease to be subject to such
forfeiture restrictions, by filing an election under Section 83(b) of the Code
with the I.R.S. within thirty (30) days after the date of purchase hereunder.
Purchaser understands that failure to make this filing within the thirty (30)
day period will result in the
<PAGE>
recognition of ordinary income by the Purchaser (in the event the fair market
value of the Purchased Shares increases after the date of purchase) as the
forfeiture restrictions lapse. PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S
SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION
UNDER SECTION 83(b), EVEN IF PURCHASER REQUESTS THE CORPORATION OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON PURCHASER'S BEHALF. PURCHASER IS
RELYING SOLELY ON PURCHASER'S ADVISORS WITH RESPECT TO THE DECISION AS TO
WHETHER OR NOT TO FILE AN 83(b) ELECTION.
ARTICLE IV.
REPURCHASE RIGHT
SECTION 4.1 GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60) day period
following the date the Purchaser ceases for any reason to be employed by the
Corporation or any of its direct or indirect subsidiaries (the "Repurchase
Event") (or such longer period of time mutually agreed to by the parties), to
repurchase at a price of $.10 per share (the "Repurchase Price") all or, at the
discretion of the Corporation, any portion of the Purchased Shares in which the
Purchaser has not acquired a vested interest in accordance with the vesting
provisions of Section 4.3 (such shares to be hereinafter called the "Unvested
Shares").
SECTION 4.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right
shall be exercisable by written notice delivered to the holder of the Unvested
Shares prior to the expiration of the applicable period specified in Section
4.1. The notice shall indicate the number of Unvested Shares to be repurchased
and the date on which the repurchase is to be effected, such date to be not more
than thirty (30) days after the date of notice. To the extent one or more
certificates representing Unvested Shares may have been previously delivered out
of escrow to the holder, then the holder shall, prior to the close of business
on the date specified for the repurchase, deliver to the Secretary of the
Corporation the certificates representing the Unvested Shares to be repurchased,
each certificate to be properly endorsed for transfer. The Corporation shall,
concurrently with the receipt of such stock certificates (either from escrow in
accordance with Section 5.3 or from the holder as herein provided), pay to the
holder in cash an amount equal to the Repurchase Price for the Unvested Shares
that are to be repurchased.
SECTION 4.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right
shall terminate with respect to any Unvested Shares for which it is not timely
exercised under Section 4.2. In addition, the Repurchase Right shall terminate,
and cease to be exercisable, with respect to any and all Purchased Shares in
which the Purchaser vests in accordance with the schedule below. Accordingly,
provided the Repurchase Event has not occurred, the Purchaser shall acquire a
vested interest in, and the Repurchase Right shall lapse with respect to, the
Purchased Shares in accordance with the following provisions:
(a) Commencing on that date following the expiration of the
initial twelve (12) month period measured from the date of this Agreement (the
"Initial Vesting Date"), the
<PAGE>
Purchaser shall acquire a vested interest in, and the Repurchase Right shall
lapse with respect to, the Purchased Shares in a series of three annual
installments each equal to thirty-three and one-third percent (33.33%) of the
Purchased Shares. Such installments shall vest upon each twelve (12) month
anniversary date, measured from the date of this Agreement, so long as the
Repurchase Event has not occurred on or prior to such anniversary date, and
there shall be no partial or pro rata vesting with respect to any portion of
a twelve (12) month period in which the Repurchase Event has occurred.
SECTION 4.4 FRACTIONAL SHARES. No fractional shares shall be
repurchased by the Corporation. Accordingly, should the Repurchase Right extend
to a fractional share (in accordance with the vesting computation provisions of
Section 4.3) at the time the Repurchase Event occurs, then such fractional share
shall be added to any fractional share in which the Purchaser is at such time
vested in order to make one whole vested share no longer subject to the
Repurchase Right.
SECTION 4.5 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event
of any stock dividend, stock split, recapitalization or other change affecting
the Corporation's outstanding Common Stock as a class effected without receipt
of consideration, then any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which is
by reason of any such transaction distributed with respect to the Purchased
Shares shall be immediately subject to the Repurchase Right, but only to the
extent of the Purchased Shares that are at the time covered by such right.
Appropriate adjustments to reflect the distribution of such securities or
property shall be made to the number of Purchased Shares hereunder and to the
price per share to be paid upon the exercise of the Repurchase Right in order to
reflect the effect of any such transaction upon the Corporation's capital
structure; provided, however, that the aggregate Repurchase Price shall remain
the same.
SECTION 4.6 CORPORATE TRANSACTION. In the event of any of the following
transactions (a "Corporate Transaction"):
(i) a merger or acquisition in which the Corporation
is not the surviving entity, except for a transaction the
principal purpose of which is to change the State in which the
Corporation is incorporated;
(ii) a change in control (as defined in the
Corporation's 1999 Stock Compensation Plan) shall have
occurred; or
(iii) any dissolution, winding up or liquidation of
the Corporation, whether voluntary or involuntary,
then the Repurchase Right shall automatically lapse in its entirety, and the
Purchaser shall acquire a vested interest in all the Purchased Shares, upon the
consummation of such Corporate Transaction.
<PAGE>
SECTION 4.7 LEGEND. In addition to the legends required by Section 2.4,
all certificates representing Purchased Shares subject to the Corporation's
Repurchase Right shall be endorsed with the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED
OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF THAT CERTAIN STOCK
PURCHASE AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED
HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE
SHARES). SUCH AGREEMENT GRANTS CERTAIN REPURCHASE RIGHTS TO
THE CORPORATION UPON TERMINATION OF SERVICE WITH THE
CORPORATION. THE SECRETARY OF THE CORPORATION WILL UPON
WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER
HEREOF WITHOUT CHARGE."
ARTICLE V.
ESCROW
SECTION 5.1 DEPOSIT. Upon issuance, certificates for the Unvested
Shares shall be deposited in escrow with the Secretary of the Corporation to be
held in accordance with the provisions of this Article V. Each deposited
certificate shall be accompanied by a duly executed Assignment Separate from
Certificate in the form of EXHIBIT A. The deposited certificates, together with
any other assets or securities from time to time deposited with the Corporation
pursuant to the requirements of this Agreement, shall remain in escrow until
such time or times as the certificates (or other assets and securities) are to
be released or otherwise surrendered for cancellation in accordance with Section
5.3. Upon delivery of the certificates (or other assets and securities) to the
Corporation, the holder shall be issued an instrument of deposit acknowledging
the number of Unvested Shares (or other assets and securities) delivered in
escrow to the Secretary of the Corporation.
SECTION 5.2 RECAPITALIZATION. All regular cash dividends on the
Unvested Shares (or other securities at the time held in escrow) shall be paid
directly to the holder and shall not be held in escrow. However, in the event of
any stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration or in the event of a Corporate Transaction, any new, substituted
or additional securities or other property which is by reason of such
transaction distributed with respect to the Unvested Shares shall be immediately
delivered to the Secretary of the Corporation to be held in escrow under this
Article V, but only to the extent the Unvested Shares are at the time subject to
the escrow requirements of Section 5.1.
<PAGE>
SECTION 5.3 RELEASE SURRENDER. The Unvested Shares, together with any
other assets or securities held in escrow hereunder, shall be subject to the
following terms and conditions relating to their release from escrow or their
surrender to the Corporation for repurchase and cancellation:
(a) Should the Corporation elect to exercise the Repurchase
Right under Article IV with respect to any Unvested Shares, then the escrowed
certificates for such Unvested Shares (together with any other assets or
securities issued with respect thereto) shall be delivered to the Corporation
for cancellation, concurrently with the payment to the holder, in cash, an
amount equal to the aggregate Repurchase Price for such Unvested Shares, and the
holder shall cease to have any further rights or claims with respect to such
Unvested Shares (or other assets or securities).
(b) As the interest of the Purchaser in the Unvested Shares
(or any other assets or securities issued with respect thereto) vests in
accordance with the provisions of Article IV, the certificates for such vested
shares (as well as all other vested assets and securities) shall be released
from escrow and delivered to the holder as follows:
(i) the initial release of vested shares (as well as
all other vested assets and securities) from escrow shall be
effected within ten (10) days following the expiration of the
initial twelve (12) month period measured from the date of
this Agreement;
(ii) subsequent releases of vested shares (as well as
all other vested assets and securities) from escrow shall be
effected at annual intervals thereafter, with the first such
annual release to occur twenty-four (24) months after the date
of this Agreement; and
(iii) upon any earlier termination of the
Corporation's Repurchase Right in accordance with the
applicable provisions of Article IV, the Unvested Shares (as
well as all other assets or securities) at the time held in
escrow hereunder shall immediately be released to the holder
as fully vested shares or other property.
ARTICLE VI.
GENERAL PROVISIONS
SECTION 6.1 ASSIGNMENT. This Agreement may not be assigned by either
party hereto.
SECTION 6.2 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this
Agreement shall confer upon the Purchaser any right to continue in the service
of the Corporation (or any parent or subsidiary corporation of the Corporation
employing or retaining Purchaser) for any period of time or interfere with or
restrict in any way the rights of the Corporation (or any parent or subsidiary
corporation of the Corporation employing or retaining Purchaser), which rights
are
<PAGE>
hereby expressly reserved by each, to terminate the Purchaser as an employee
of the Corporation or any parent or subsidiary of the Corporation at any time
for any reason whatsoever, with or without cause.
SECTION 6.3 NOTICES. Any notice required under this Agreement shall be
given in writing and shall be deemed effective upon personal delivery or upon
receipt following deposit in the United States mail, registered or certified,
postage prepaid and addressed to the party entitled to such notice at the
address indicated below such party's signature line on this Agreement or at such
other address as such party may designate by ten (10) days' advance written
notice under this Section 6.3 to all other parties to this Agreement.
SECTION 6.4 NO WAIVER. The failure of the Corporation (or its
assignees) in any instance to exercise the Repurchase Rights granted under
Article IV, shall not constitute a waiver of any other repurchase rights that
may subsequently arise under the provisions of this Agreement or any other
agreement between the Corporation and the Purchaser. No waiver of any breach or
condition of this Agreement shall be deemed to be a waiver of any other or
subsequent breach or condition, whether of like or different nature.
SECTION 6.5 CANCELLATION OF SHARES. If the Corporation shall make
available, at the time and place and in the amount and form provided in this
Agreement, the consideration for the Purchased Shares to be repurchased in
accordance with the provisions of this Agreement, then from and after such time,
the person from whom such shares are to be repurchased shall no longer have any
rights as a holder of such shares (other than the right to receive payment of
such consideration in accordance with this Agreement), and such shares shall be
deemed purchased in accordance with the applicable provisions hereof and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
ARTICLE VII.
AGREEMENT REGARDING COMMUNITY PROPERTY
The spouse of the Purchaser hereby agrees that all of the Purchased
Shares presently owned or hereafter acquired by the Purchaser are, if such
Purchased Shares are community property, community property subject to the sole
management, control and disposition of the Purchaser, and the Purchaser and the
spouse of the Purchaser agree that all Purchased Shares now owned or hereafter
acquired are subject to the sole management, control and disposition of the
Purchaser. All interest in such shares owned by the spouse of the Purchaser
shall for all purposes of this Agreement be included in, deemed part of and be
bound by the same terms hereof as the Purchased Shares of which the Purchaser is
the owner; and in any action taken, offer made or offer exercised hereunder with
reference to the Purchased Shares of the Purchaser, the terms of this Agreement
shall be applicable to any interest in such Purchased Shares owned by the spouse
of the Purchaser. The spouse of the Purchaser, or any person who becomes a
spouse of the Purchaser hereafter, shall agree in writing to be bound by this
Agreement. If joinder of a spouse of the Purchaser should be required by law in
connection with any document
<PAGE>
required to be executed by the Purchaser hereunder with respect to the
Purchaser's sole management community property, upon request, such spouse
shall execute any instruments necessary to effectuate the purposes of such
required document.
ARTICLE VIII.
MISCELLANEOUS PROVISIONS
SECTION 8.1 PURCHASER UNDERTAKING. Purchaser hereby agrees to take
whatever additional action and execute whatever additional documents the
Corporation may in its judgment deem necessary or advisable in order to carry
out or effect one or more of the obligations or restrictions imposed on either
the Purchaser or the Purchased Shares pursuant to the express provisions of this
Agreement; provided, however, that the Corporation shall pay for any of the
executor's reasonable expenses incurred with regard to such additional actions,
including reasonable attorneys fees.
SECTION 8.2 ENTIRE AGREEMENT. This Agreement constitutes the entire
contract between the parties hereto with regard to the subject matter hereof.
SECTION 8.3 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Texas.
SECTION 8.4 SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and the Purchaser and the Purchaser's legal
representatives, heirs, legatees, distributees, assigns and transferees by
operation of law, whether or not any such person shall have become a party to
this Agreement and have agreed in writing to join herein and be bound by the
terms and conditions hereof.
SECTION 8.5 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURES ON NEXT PAGE.)
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Executive Stock
Purchase Agreement on the day and year first indicated above.
DIGITAL CONVERGENCE.COM INC.
By: /s/ J. Jovan Philyaw
-----------------------------------
J. Jovan Philyaw
PURCHASER:
/s/ William S. Leftwich
--------------------------------------
William S. Leftwich
/s/
--------------------------------------
__________________, Spouse of Purchaser
<PAGE>
[LOGO]
PROPRIETARY RIGHTS AND INFORMATION AGREEMENT
(Version 1.1)
THIS AGREEMENT is made effective this _________ day of _____________________,
200__, by and between ________________________________________ (hereinafter
referred to as "you," "your," or "Employee"), and DigitalConvergence.:Com Inc.,
its affiliates and subsidiaries (hereinafter collectively referred to as the
"Company"), in consideration of the employment and the continued employment of
the Employee by the Company, and continued access to the Proprietary Information
of the Company for no less than thirty (30) days from the date hereof, the
current and future compensation, including any possible future increases in
compensation, paid in respect to employment, and the responsibilities assigned
and access granted to the Employee in connection with the Company's proprietary
and confidential information.
I. INVENTIONS. As used in this Agreement, the term "Inventions" means any and
all creative work, inventions and discoveries, including improvements, original
works of authorship, designs, formulas, processes, concepts, software
development, computer programs, databases and trade secrets and related
proprietary information and materials.
a) YOUR RIGHTS IN INVENTIONS.
The Company acknowledges that all Inventions: (a) that you
made prior to your employment with the Company; and (b) that you claim
belong to you or that you claim an interest in; and (c) in which you
wish to retain all claimed ownership rights shall be considered to be
"Employee Inventions" and not subject to claims by the Company.
b) COMPANY RIGHTS IN INVENTIONS.
1) DISCLOSURE. You agree to maintain adequate and current
written records of all Inventions you develop during and as the result
of your employment at the Company, and to make full written disclosure
in confidence to the Company of all such Inventions.
2) ASSIGNMENT OF INVENTIONS TO THE COMPANY. You agree that all
Inventions that: (a) are developed using the equipment, supplies,
facilities or trade secrets of the Company, or (b) result from work
performed by you for the Company ("Company Inventions"), will be the
sole and exclusive property of the Company, and you will and hereby do
assign all your rights in such Company Inventions to the Company. In
addition, you hereby transfer and assign any "moral" rights that you
may have in any Company Inventions under any copyright or other similar
law, whether U.S. or foreign. You agree to waive and never to assert
any such "moral" rights in Company Inventions during or after the
termination of your employment with the Company.
c) PROTECTION OF COMPANY INVENTIONS. You agree (at the
Company's expense) to assist the Company in every proper way to
obtain and to help the Company enforce patents, trademarks, service
marks, copyrights and other legal protections for Company Inventions
in any and all countries. You agree to execute any documents that the
Company may reasonable request for use in obtaining or enforcing such
patents, trademarks, service marks, copyrights and other
<PAGE>
legal protections. In addition, by execution f this Agreement, you
hereby irrevocably designate and appoint the Company and its duly
authorized officers and agents as your agent and attorney in fact to
act for and in your behalf, to execute and file any and all such
documents as the Company shall in its discretion determine necessary
or advisable in obtaining or enforcing such patents, trademarks,
service marks, copyrights and other legal protections, and to do all
other lawfully permitted acts to accomplish the same, with the same
legal force and effects as if executed by you. You acknowledge that
all original works of authorship that are made by you (solely or
jointly with others) within the scope of your employment at the
Company, and that are protectable by copyright, are "works made for
hire," as that term is defined in the United States Copyright Act
(17U.S.C. Sec. 101).
II. PROPRIETARY INFORAMTION OF THE COMPANY AND THIRD PARTIES. You
understand that your employment with the Company creates a relationship of
confidence and trust with respect to any information of a confidential or
secret nature that may be disclosed to you by the Company or learned by you in
the course of your duties at the Company, and that relates to (a) the business
of the Company or that of any of its subsidiaries, affiliates, customers,
suppliers, or (b) any confidential information of third parties disclosed to
the Company. Such confidential and secret information includes information
concerning Inventions, marketing plans, product plans, business strategies,
financial information and forecasts, personal information and customer lists
and is referred to collectively in this Agreement as "Proprietary
Information." Employee acknowledges and agrees that, while knowledge of the
Proprietary Information will continue to have value to Employee, the
Proprietary Information continues to be developed. Employee releases and
disclaims any right that he may have in the Proprietary Information to the
Company.
a) CONFIDENTIALITY OF PROPRIETARY INFORMATION. At all times, both
during your employment by the Company and after its termination, you
agree to keep all Proprietary Information in confidence and trust,
and you will not use or disclose Proprietary Information without the
written consent of the Company, except as may be necessary to perform
your duties as an employee of the Company. Upon termination of your
employment with the Company, you will promptly deliver to the Company
all documents and materials of any kind pertaining to your work with
the Company, and you will not take with you any documents and
materials of any kind pertaining to your work with the Company, and
you will not take with you any documents, materials or copies
thereof, whether on paper, magnetic or optical media or any other
medium, containing any Proprietary Information.
b) INFORMATION OF FORMER EMPLOYER. You agree that during your
employment at the Company you will not improperly use or disclose any
confidential or Proprietary Information or trade secrets of your
former employers.
III. CONFLICTING OBLIGATIONS.
2
<PAGE>
a) NO CONFLICTING EMPLOYMENT. You agree that during
the term of your employment at the Company you will not
plan or engage in other employment, occupation,
consulting or other business activity directly related to
the business in which the Company is now involved or
becomes involved during the term of your employment, nor
will you engage in any other activities that conflict
with your employment obligations to the Company.
b) NO CONFLICTING AGREEMENTS. You represent to the
Company that you have no other agreements or commitments
that would hinder or prevent the full performance of your
duties as a Company employee or your obligations under
this Agreement, and you agree not to enter into any such
conflicting agreement during the term of your employment
at the Company.
c) DISCLOSURE OF AGREEMENT. You hereby authorize the
Company to notify others, including customers of the
Company and any future employers you may have, of the
terms of this Agreement and your responsibilities under
this Agreement.
d) NON-COMPETITION AND NON-SOLICITATION. Ancillary to
the promises contained herein, and particularly with
regard to the Company's promise to provide the
Proprietary Information and your promises with regard to
the Proprietary Information, you agree that in the event
you shall at any time cease to be associated with the
Company as an employee, officer, and/or director you
shall not, for a period of twelve (12) months thereafter,
as an officer, director, employee, consultant, principal
or trustee on behalf of any other person, firm,
corporation, association or other entity, engage in any
business or activity that competes with the business of
the Company as now conducted or as conducted as of the
time you leave the Company, nor shall you solicit or
assist any person, firm, corporation, association or
other entity in soliciting any customer of the Company
for purposes competitive with the business of the
Company. You acknowledge that the scope of the activity
restricted is limited to the business of the Company and
that such restriction is reasonable to protect the
Proprietary Information of the Company. Because the
Proprietary Information may be used from many locations
and because of the potential worldwide application of the
Proprietary Information, the parties stipulate and agree
that the geographic restriction of this paragraph will
include North America, South America, Europe, and Asia
and shall include both operations based in such areas and
contact with such areas through telephonic, electronic,
Internet or other means. In exchange for such same
consideration, you further agree that for a period of
twelve (12) months following cessation of your
association with the Company you shall not employ or
solicit the employment of any person who shall then be
employed by the Company or who shall have been employed
by the Company within the prior twelve (12) month period,
on behalf of yourself or any other person, firm,
corporation, association or other entity, directly or
indirectly.
IV. NO IMPLIED EMPLOYMENT RIGHTS. You understand and agree that this
Agreement does not confer upon you any rights to continued employment
by the Company that you would not
3
<PAGE>
otherwise have, nor does this Agreement obligate the Company to
employ you for any specific period of time.
V. GENERAL PROVISIONS.
a) SEVERABILITY. Each covenant and/or provision of this
Agreement shall be enforceable independent of every other
covenant and/or provision. The assertion or existence of any
breach by the Company or claim by Employee against the Company
shall not constitute a defense to the enforcement of the
provisions of this Agreement by the Company relating to
Inventions, Proprietary Information, and Conflicting
Obligations. Furthermore, in the event any covenant and/or
provision of this Agreement is determined to be unenforceable
for any reason, the remaining covenants and/or provisions will
remain effective, binding, and enforceable. In the event a
court were to determine that any provisions herein are
unenforceable because unreasonable either in length or time or
area to which said provisions apply, it is the intent of both
parties hereto that said court shall reduce and reform the
provisions thereof so as to apply to limits considered
enforceable by said court.
b) GOVERNING LAW. This Agreement will be governed by the
laws of the State of Texas as they apply to contracts entered
into and wholly to be performed within such state. Any
litigation or dispute resolution between the parties relating
to this Agreement will take place in Dallas County, Texas, and
you and the Company each consent to the personal jurisdiction
of and venue in the state and federal courts within that
county.
c) ENTIRE AGREEMENT. This Agreement sets for the entire
agreement and understanding between you and the Company
relating to the subject matter of this Agreement. No
modification to or amendment of this Agreement, nor any waiver
of any rights under this Agreement, will be effective unless
in writing signed by both you and an authorized representative
of the Company. Any subsequent changes in your duties, salary
or compensation will not affect the validity or scope of this
Agreement.
d) SUCCESSORS AND ASSIGNS. This Agreement will be binding
upon your heirs, executors, administrators and other legal
representatives and will be for the benefit of the Company,
its successors and assigns.
__________________________________ _________________________
EMPLOYEE SIGNATURE DATE
__________________________________ _________________________
PRINTED NAME TITLE
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MANUFACTURING AND MARKETING AGREEMENT
between
DIGITALCONVERGENCE.COM INC.
and
TANDY CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS...........................................................1
2. INTELLECTUAL PROPERTY.................................................2
2.1. Ownership of Intellectual Property...........................2
2.2. License to Manufacture.......................................2
2.3. License to Market............................................2
2.4. Retention of Rights..........................................3
2.5. Exclusivity..................................................3
2.6. Indemnification..............................................3
2.7. Designs. Molds and Tools.....................................4
2.8. Warranty of Patent Application...............................4
2.9. License for Internet and Other Uses..........................4
3. MANUFACTURING.........................................................4
3.1. Manufacturing Relationship...................................4
3.2. Quality......................................................5
3.3. Cost Reduction...............................................5
3.4. Orders.......................................................5
3.5. Delivery, Inspection and Acceptance..........................7
3.6. Reports......................................................8
3.7. Warranties of Manufacture....................................8
3.8. Disclaimer...................................................8
3.9. End User Returns.............................................8
3.10. Prototypes...................................................9
3.11. Large Scale Failures.........................................9
3.12. Second Sourcing..............................................9
4. MARKETING AND DISTRIBUTION............................................9
4.1. Marketing and Distribution Manager[s]........................9
4.2. Distribution................................................10
4.3. Deployment..................................................10
4.4. Media.......................................................10
4.5. Packaging...................................................10
4.6. Marketing...................................................10
4.7. Sales Incentives............................................11
4.8. Advertising.................................................11
4.9. End User License............................................12
4.10. Import......................................................12
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5. SERVICES WARRANTY....................................................12
5.1. Services....................................................12
6. TRAINING.............................................................12
6.1. Training Program Development................................12
6.2. Training Program Dissemination..............................12
7. PAYMENT AND CONSIDERATION............................................13
7.1. Pricing.....................................................13
7.2. Export and Import Fees......................................13
7.3. Payment.....................................................13
7.4. Other Consideration.........................................13
8. AUDIT................................................................14
8.1. Records of Tandy............................................14
8.2. Records of Digital Convergence..............................14
9. TERM AND TERMINATION.................................................14
9.1. Term of Agreement...........................................14
9.2. Termination.................................................14
10. LIMITATIONS OF LIABILITY.............................................14
10.1. Limitations for Digital Convergence..........................14
10.2. Limitations for Tandy........................................15
10.3. Agreed Allocations of Risk...................................15
11. CONFIDENTIAL INFORMATION.............................................15
11.1. Disclosure and Use Limitations...............................15
11.2. Subpoena Procedure...........................................16
11.3. Remedies.....................................................16
11.4. Return or Destruction of Materials...........................16
12. MISCELLANEOUS........................................................17
12.1. Notice Generally.............................................17
12.2. Assignment...................................................17
12.3. Headings.....................................................18
12.4. Governing Law; Venue; Limitations............................18
12.5. Costs........................................................18
12.6. Delays.......................................................18
12.7. Severability.................................................18
12.8. Waiver.......................................................18
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<PAGE>
12.9. Entire Agreement.............................................19
12.10. Approvals and Consents.......................................19
12.11. Further Assurances...........................................19
12.12. Representation of Counsel; Mutual Negotiation................19
12.13. Supremacy of Contract........................................19
12.14. Media Releases...............................................19
12.15. No Partnership...............................................19
12.16. Wireless Concerto............................................19
12.17. Premium Product..............................................20
12.18. Agreement Binding on Successors..............................20
12.19. Sales, Use, Property Taxes...................................20
</TABLE>
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<PAGE>
This MANUFACTURING AND MARKETING AGREEMENT (this "Agreement"),
effective as of December 6, 1999 (the "Effective Date"), is between
DigitalConvergence.com Inc., a Delaware corporation ("Digital Convergence") and
Tandy Corporation, a Delaware corporation and its wholly-owned subsidiary A&A
International, Inc. ("A&A" and collectively, "Tandy") (hereinafter collectively
referred to as the "Parties" and individually as a "Party").
The Parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms have the respective
meanings set forth below:
"Authorized Manufacturer" shall mean a manufacturer that: (i) is
selected by Tandy; and (ii) has been approved by Digital Convergence in writing.
"Confidential Information" shall mean all information disclosed by a
Party (the "Disclosing Party") to the other Party (the "Receiving Party") (in
writing, orally, or in any other form) that is identified as confidential or
proprietary or that, due to the nature of the information or the circumstances
surrounding disclosure, ought to be treated as confidential or proprietary,
including but not limited to financial plans, strategic plans, customer lists,
technical documentation, software, and, business marketing information.
"Confidential Information" shall not include, however, information: (i)
previously known to the Receiving Party before receipt from the Disclosing
Party; (ii) independently developed by the Receiving Party without access to the
Disclosing Party's information; (iii) acquired by the Receiving Party from a
third party which is not under an obligation to the Disclosing Party not to
disclose such information; or (iv) which is or becomes publicly available
through no breach by the Receiving Party of this Agreement, expressly including
becoming available through the issuance of a patent.
"Digital Convergence Intellectual Property" shall mean all Intellectual
Property: (i) owned by Digital Convergence as of the date hereof; or (ii)
developed by or on behalf of Digital Convergence for use in connection with the
Product(s), including without limitation the Digital Convergence Technology.
"Digital Convergence Technology" shall mean the unique technology
utilized in the product known as K.A.T.-TM- or :CAT-TM- and the software
known as Concerto-TM-.
"Documentation" shall mean printed or electronic materials intended to
assist an end-user in installing or operating a Product.
"Intellectual Property" shall mean all trademarks, service marks, trade
names, Internet domain names, designs, logos, slogans and general intangibles of
like nature, together with: goodwill, regions and applications relating to the
foregoing; registered patents and unregistered patents pending; copyrights
(including registrations and applications); computer programs, including
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any and all software implementation of algorithms, applications, tools, models
and methodologies whether in source code or object code, databases and
computations, including any and all data and collections of data, all
documentation, including user manuals and training materials, relating to any of
the foregoing; and technology, know-how, inventions, processes, formulae,
algorithms, models, trade secrets and methodologies.
":CAT Product(s)" shall mean a handheld device with the capability to
read a plurality of barcode formats, the ultimate purpose of which is to direct
an end user to a specific Web Site on the Internet or to any software
application on their desktop, all as finther described in Exhibit A of this
Agreement.
"Product(s)" shall mean the "Keystroke Automation Technology" and the
"Concerto Software Media" products described in Exhibit A, as amended in writing
by the parties from time to time, including components and software.
2. INTELLECTUAL PROPERTY
2.1. OWNERSHIP OF INTELLECTUAL PROPERTY. As between Tandy and Digital
Convergence, Tandy acknowledges and agrees that all Digital Convergence
Intellectual Property shall be the sole property of Digital Convergence, and
that Tandy shall not gain any right, title, or interest in such Digital
Convergence Intellectual Property except as expressly provided under this
Agreement.
2.2. LICENSE TO MANUFACTURE. Subject to the terms of this Agreement,
Digital Convergence hereby grants to Tandy a limited, royalty-free, personal,
nonexclusive, revocable, worldwide license, pursuant to Digital Convergence's
Intellectual Property, to:
(a) make, have made, uses have used, manufacture and have
manufactured, import and have imported :CAT Products and to test,
repair, modify, and assemble the :CAT Products;
(b) sublicense the rights granted in (a) above and below, to
Authorized Manufacturers, provided however that Tandy shall impose
confidentiality restrictions and intellectual property protections
which are at least as strict as those in this Agreement; and
(c) copy, use and install the software necessary for the
manufacture of the :CAT Products.
2.3. LICENSE TO MARKET. Subject to the terms of this Agreement, Digital
Convergence hereby grants to Tandy a limited, royalty-free, personal,
non-exclusive, nationwide (including U.S. territories), revocable license,
pursuant to Digital Convergence's Intellectual Property, to:
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<PAGE>
(a) package, publish, market, sell (with the prior written
approval of Digital Convergence), ship, maintain, support, upgrade
and/or distribute the Products, in whole or in part;
(b) generate and distribute marketing materials featuring the
Products, in whole or in part; and
(c) use the :CAT and Concerto trademarks in connection with
the advertising, promotion, distribution, and sale of Products,
provided that such use is consistent with the format and rules of use
set out in Exhibit B, or as otherwise agreed by the Parties.
2.4. RETENTION OF RIGHTS. All rights to Digital Convergence
Intellectual Property which are not expressly granted to Tandy in this Section 2
are retained by Digital Convergence.
2.5. EXCLUSIVITY. Without the prior written consent of Digital
Convergence, neither Tandy nor any Authorized Manufacturer shall manufacture,
distribute or offer for sale:
(a) Any product, other than the Products, that makes use of
the Concerto-TM- software; or
(b) Any product during the team of this Agreement that is
substantially similar in design, function and results to the
Concerto-TM- software or the :CAT Product (while interacting with the
Concerto software).
This provision shall not restrict Tandy from offering for sale products
distributed by third persons that make use of Internet navigation devices.
2.6. INDEMNIFICATION. For all Products, Digital Convergence will
indemnify and hold harmless or, at its sole option, settle any action or claim
brought against Tandy to the extent that it is based upon a claim that any
Product infringes any patent rights, copyright rights, or other intellectual
property rights, or incorporates any misappropriated trade secrets (a "Claim").
Digital Convergence will pay any damages finally ageed to or awarded against
Tandy that are attributable to such Claim and that are awarded against Tandy in
a judgment or settlement approved in advance by Digital Convergence, provided
that: (i) Tandy promptly notifies Digital Convergence in writing of the Claim or
any threat thereof, (ii) Tandy grants Digital Convergence sole control of the
defense and settlement of the Claim; and (iii) Tandy provides Digital
Convergence with all assistance, information, and authority reasonably required
for the defense and settlement of the Claim at Digital Convergence's expense.
Digital Convergence shall not be responsible for damages or costs under any
settlement or compromise made without its consent. Tandy may retain their own
counsel (at their expense) to monitor and/or participate in the defense and
settlement of the Claim.
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<PAGE>
The foregoing indemnity does not apply to:
(a) any Claim based upon any use of a Product other than for
its intended purpose, whether by Tandy, any customer, end user, or
otherwise;
(b) any Claim which is not timely noticed to Digital
Convergence by Tandy;
(c) any Claim asserting infringement by a combination of a
Product with other products, which combination is not intended by the
Parties; and
(d) any settlement of a Claim made without Digital
Convergence's written consent.
2.7. DESIGNS. MOLDS AND TOOLS. Digital Convergence will notify Tandy
prior to issuing an "Order" (as defined in Section 3.4), and will state on the
Order itself, whether the pricing for the Order should include charges for
designs, molds and tools necessary for the manufacture of the :CAT Products.
Tandy will coordinate payment for, and assist in transferring ownership and
possession of, such designs, molds and tools from the Authorized Manufacturer to
Digital Convergence. As between the parties hereto, Digital Convergence will
own, and Tandy hereby assigns, and will cause the Authorized Manufacturers to
assign, all right, title and interest it may have in, all specifications,
designs, molds and tools used in manufacturing the :CAT Products, as well as all
:CAT Product improvements and :CAT Product manufacturing improvements created
during the term hereof.
2.8. WARRANTY OF PATENT APPLICATION. Digital Convergence represents and
warrants that it has filed one or more United States patent applications
claiming ownership of the Digital Convergence Technology, :CAT and Concerto
software and that such applications are currently pending in the United States
Patent and Trademark Office.
2.9. LICENSE FOR INTERNET AND OTHER USES. Digital Convergence also
hereby grants Tandy, during the term of this Agreement, a limited, royalty-free,
nonexclusive, worldwide, revocable license to use :CAT-TM-/Concerto-TM- -
readable codes in its RadioShack.com catalogs and other advertising, and to the
extent necessary to enable the RadioShack.com web site to properly recognize and
utilize such codes, to incorporate Digital Convergence Intellectual Property
into the RadioShack.com web site during the term of this Agreement. Thereafter,
for a period of one (1) year, Tandy shall be entitled to a continuation of this
license at a royalty rate no less favorable to the rates charged by Digital
Convergence to its top 10 clients.
3. MANUFACTURING
3.1. MANUFACTURING RELATIONSHIP
4
<PAGE>
(a) MANAGER. A&A will be the product sourcing manager. The
Tandy employee who shall serve as the primary contact person for Digital
Convergence on all issues related to Product production and delivery will be the
Manager of Internet Alliances (currently, Bill Berryhill). The identified
contact person shall be authorized to act for Tandy, and will interact with A&A
on all product sourcing issues as well as all issues concerning the Authorized
Manufacturer and its manufacturing process, testing and analysis, and quality.
A&A will, as product sourcing manager, oversee all manufacturing operations by
Authorized Manufacturers involving or related to the :CAT Product and, if
applicable, upon the request by Digital Convergence, the pressing of CD-ROM
discs with the Concerto-TM- software.
(b) TANDY'S RELATIONSHIP WITH AUTHORIZED MANUFACTURERS. The
parties agree that although Tandy is not the manufacturer of the :CAT Products,
Tandy will stand behind the Authorized Manufacturer[s] by using its best efforts
to monitor and, to the extent possible, control the manufacturing of :CAT
Products to meet scheduled delivery dates and desired Product quality. To that
end, Tandy will cause A&A to have persons from its foreign offices monitor the
Authorized Manufacturer's[s'] adherence to production schedules, perform
sampling inspection at the Authorized Manufacturer's[s'] facility of every lot
of :CAT Products manufactured, and perform routine audits to ensure that factory
personnel are performing ongoing testing similar to that required by Tandy on
its own products.
3.2. QUALITY. Tandy agrees that it will manage the manufacture of :CAT
Products to meet the same quality goals used to manufacture its own line of
private label products. Digital Convergence may, at its sole cost and expense,
have quality control or other appropriate personnel present at all sites of
manufacture of :CAT Products and may conduct reasonable inspections of the
manufacturing processes of the :CAT Products. Digital Convergence shall
coordinate any such visits and inspections with A&A.
3.3. COST REDUCTION. The Parties acknowledge that reduction in the cost
of manufacturing the :CAT Product(s) is a primary goal of the Parties. Tandy and
Digital Convergence each agree to use commercially reasonable efforts to reduce
the manufacturing costs for the :CAT Product(s) from present levels. If Tandy
fails to reduce the manufacturing costs within six (6) months of the effective
date of this Agreement, Digital Convergence may, upon payment of all outstanding
invoices (including work in progress) and thirty (30) days prior written notice,
terminate all of Tandy's product sourcing functions under this Agreement and
cause Tandy to terminate all manufacturing by Authorized Manufacturers. This
right of limited termination shall be the sole remedy under this section.
3.4. ORDERS.
(a) PURCHASE ORDERS. Digital Convergence shall submit
manufacturing orders ("Orders") in writing to Tandy. Such Orders shall be
subject to and governed by the terms and conditions of this Agreement. The
preprinted terms and conditions of the Order form shall not apply to, and shall
be of no force and effect with regard to, any Order placed hereunder. Orders
shall, at
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<PAGE>
a minimum, contain: (i) a description of the Product to be manufactured; (ii)
the quantity desired; (iii) the price; (iv) the delivery date; and (v) the
delivery mechanism pursuant to Section 3.5, below.
(b) ORDER ACCEPTANCE. Upon receipt of any Order conforming to
this Agreement, Tandy will forward the Order to an Authorized Manufacturer for
acceptance. Upon receipt of such acceptance, Tandy will provide Digital
Convergence with written notice of acceptance of the Order and acknowledge
tentative delivery date(s) of ordered Products, such written notice of
acceptance to be provided within fourteen (14) business days from Tandy's
receipt of the Order.
(c) ORDER REJECTION. If the Order is rejected, Tandy will
provide written notice within fourteen (14) business days from receipt of the
Order specifying that the Order is not acceptable, stating the reasons and
giving Digital Convergence an opportunity to correct it. If the Order is not
correctable, or if the reason for rejection of the Order is Tandy's inability to
fulfill an order, Digital Convergence may exercise its Second Sourcing rights
set out in, and subject to Section 3.12 below.
(d) CANCELLATION AND RESCHEDULING. Digital Convergence may,
upon giving written notice fifteen (15) days prior to the date of actual
manufacture of Products, request that any Order be rescheduled or cancelled. In
the event of such cancellation or rescheduling, Tandy shall be entitled to
reimbursement from Digital Convergence in the amount of its reasonable, actual
costs (including costs of the Authorized Manufacturer) plus ten percent (10%) of
such costs. Such additional reimbursement, if any, shall be separately invoiced
by Tandy to Digital Convergence and due and payable within thirty (30) days from
the date of the invoice.
(e) PRODUCT SPECIFICATIONS AND DESIGN. From time to time,
Digital Convergence will provide Tandy with specifications for one or more of
the Products ("Product Specifications") which Tandy will provide to the
Authorized Manufacturer. Based upon Product Specifications, Tandy will have the
Authorized Manufacturer create a design for the Product ("Product Design") which
Tandy will provide to Digital Convergence. Digital Convergence shall either
approve or reject the Product Design in writing, and shall state the reasons for
any rejection. If the Product Design is approved, subject to Section 3.10,
Digital Convergence may begin submitting Orders for the Product. If the Product
Design is rejected, Tandy will have the Authorized Manufacturer modify the
Product Design to eliminate the basis of the rejection, and will re-submit the
Product Design for approval or rejection.
(f) REQUESTED CHANGES TO PRODUCTS. After a Product Design has
been approved, either Party may submit a written request for changes in the
Product, which the other may approve in its discretion. If the change appears to
be substantial, either party may notify the other party that formal change
control procedures will be utilized as follows: Within thirty (30) days of
receipt of a written request for a substantial change in the Product, Tandy will
discuss the change with the Authorized Manufacturer and will inform Digital
Convergence of the price effect, if any, as well as the point of incorporation
and anticipated logistic considerations of such change. Both Parties agree to
negotiate in good faith regarding the incorporation of any such change, and if
incorporated, the
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<PAGE>
price and other terms concerning such change. However, neither Party is under
any obligation to agree to change requests unless otherwise expressly stated in
this Agreement.
3.5. DELIVERY, INSPECTION AND ACCEPTANCE. The Parties anticipate two
basic delivery mechanisms under this Agreement. Tandy may deliver Products to
Digital Convergence or its designate for distribution by Digital Convergence or
its designate as set forth in subsection (a) below, or Tandy may deliver
Products to Digital Convergence by delivering same to Tandy's distribution
centers for distribution by Tandy to RadioShack stores, as set forth in
subsection (b) below.
(a) DELIVERY TO DIGITAL CONVERGENCE.
(i) DELIVERY. Delivery of Products to Digital
Convergence shall be deemed completed when delivered duty paid to
Digital Convergence's carrier or forwarding agent which is intended to
deliver the Products from the U.S. port of entry to their ultimate
"ship to" location (hereinafter each is referred to as a "Delivery").
Unless specified in Digital Convergence's Orders, at least thirty (30)
days prior to the scheduled delivery date, Digital Convergence shall
give Tandy written instructions regarding the ultimate "ship to"
location, forwarding agent and/or carrier and type of conveyance by
which such purchases are to be shipped from the U.S. port of entry to
the ultimate "ship to" location. Should Digital Convergence fail to
arrange and pay for the forwarding agent and/or carrier, Tandy shall
select same, which selection shall conform to the standard commercial
practices of Tandy for shipment of its products. All costs of
transportation of Products from the U.S. port of entry to the ultimate
"ship to" location shall be the responsibility of Digital Convergence.
(ii) TITLE AND RISK OF LOSS. Title and risk of loss
and damages shall pass from Tandy to Digital Convergence upon
completion of Delivery as set forth in Section 3.5(a)(i) above.
(iii) SECURITY INTEREST. Until the purchase price and
all other charges payable by Digital Convergence hereunder are received
in full, Tandy will retain a security interest in the Products, and
proceeds therefrom, under the Uniform Commercial Code. If requested by
Tandy, Digital Convergence agrees to execute such documents as may be
necessary or required by Tandy to perfect and protect such security
interest.
(iv) INSPECTION. Digital Convergence, at its sole
cost and expense, shall have the right to obtain, and Tandy will cause
the Authorized Manufacturer to provide, randomly selected Product
samples from an Order manufacturing run for testing purposes to verify
the quality of the Products to be delivered, and Tandy will cooperate
with Digital Convergence in regard to such testing and will provide a
reasonable number of Product samples upon request.
(b) DELIVERY TO RADIOSHACK STORES.
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(i) DELIVERY. Delivery of Products to Tandy shall be
deemed completed when placed in the possession of a carrier, packed
with Tandy's standard commercial packing, F.O.B. Tandy's warehouse
facility in the United States (hereinafter each is referred to as a
"Tandy Delivery").
(ii) TIDE AND RISK OF LOSS. Title to the Products
shall pass from Tandy to Digital Convergence upon completion of Tandy
Delivery. However, risk of loss and damages shall remain with Tandy
until the Products are distributed to end users.
(iii) INSPECTION. Digital Convergence, at its sole
cost and expense, shall have the right to obtain a reasonable number of
randomly selected Product samples from Tandy's warehouse/distribution
centers and RadioShack stores for testing purposes to verify the
quality of the delivered Products, and Tandy will cooperate with
Digital Convergence in regard to such testing and will provide a
reasonable number of Product samples upon request.
3.6. REPORTS. The Parties shall cooperate with each other in
forecasting demand and inventory needs, and shall provide any information
reasonably requested to estimate current or future manufacturing needs or
distribution needs, or to assess a Product's popularity or penetration in a
given region.
3.7. WARRANTIES OF MANUFACTURE. Tandy will cause the Authorized
Manufacturer to extend to Digital Convergence the warranties of manufacture
typically extended by such manufacturers to Tandy with regard to Tandy's own
products. At a minimum, such warranties will include a warranty of clear title
free and clear of all liens and security interests, a warranty that the :CAT
Products will conform to specifications and be free of defects in material and
workmanship for a period of one hundred twenty (120) days from date of either
Delivery or Tandy Delivery (provided :CAT Products are used in accordance with
the recommendations, instructions, and/or specifications included in the :CAT
Product packaging). Tandy will assist Digital Convergence in presenting warranty
claims to any Authorized Manufacturer.
3.8. DISCLAIMER. THE EXPRESS WARRANTIES SET FORTH IN SECTION 3.7 AND
THE OBLIGATIONS AND LIABILITIES OF TANDY HEREUNDER, ARE IN LIEU OF, AND DIGITAL
CONVERGENCE HEREBY WAIVES, ALL OTHER GUARANTEES AND WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
3.9. END USER RETURNS. Tandy shall exchange any malfunctioning :CAT
Product distributed by Tandy that is brought by a customer to the store from
which it was distributed. Tandy may require the customer to return the defective
:CAT Product in order to receive a replacement. Digital Convergence shall be
entitled to receive, and Tandy shall provide, a credit on all sums due under
this Agreement for each :CAT Product returned by an end-user within one hundred
twenty (120) days from the date of Delivery due to a defect in workmanship or
materials, or a failure to
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properly operate, provided that the total number of such returned products
exceeds three (3%) of the applicable Order (as measured by the number of
returned :CAT Products during a twelve (12)-month period compared to the total
number of :CAT Products distributed by Tandy during the same period).
3.10. PROTOTYPES. Before authorizing an initial manufacturing run, or
any manufacturing run involving a change in the specifications or manufacturing
process, Tandy shall produce, or shall cause an Authorized Manufacturer to
produce, a reasonable number of prototype :CAT Products consistent with its
practices for its RadioShack division and shall provide them to Digital
Convergence for testing, analysis and other reasonable purposes. Additionally,
Tandy shall produce, or shall cause the Authorized Manufacturer to produce, and
provide a similar number of prototypes as reasonably requested by Digital
Convergence each time the manufacturing process is changed or updated.
3.11. LARGE SCALE FAILURES. If a :CAT Product fails at rates higher
than three percent (3%) of any Order, (a "Large Scale Failure") whether
discovered in factory testing, Digital Convergence testing, Tandy testing, or
through end-user complaints, the Parties shall work promptly and diligently to
determine the cause of the failures. Digital Convergence shall be entitled to
and Tandy shall pay a refund for all :CAT Products involved in a Large Scale
Failure. If the cause of the Large Scale Failure is defects in material,
workmanship or failure to conform to specifications, as between the Parties
hereto, Tandy shall be responsible for all costs associated with investigating
and correcting a Large Scale Failure. If the cause of the Large Scale Failure is
the specifications or a design approved by Digital Convergence, Digital
Convergence shall be responsible for all costs associated with investigating and
correcting a Large Scale Failure. If the Parties do not promptly determine and
correct the cause of a Large Scale Failure, Digital Convergence may exercise its
Second Sourcing rights set out in, and subject to, Section 3.12 below.
3.12. SECOND SOURCING. At any time after Delivery of the first two (2)
million units of :CAT Products, or should a need for a Second Source arise
pursuant to Section 12.6 ("Delays"), Section 3.11 ("Large Scale Failures"), or
Tandy's rejection of an Order due to the inability of an Authorized Manufacturer
to fill the Order pursuant to Section 3.4(c) ("Order Rejection"), Tandy agrees
that Digital Convergence may purchase :CAT Products from manufacturers other
than those Authorized Manufacturers utilized by Tandy to perform its services
under this Agreement (collectively "Second Sources"), provided that: (i) Digital
Convergence has paid all invoices properly and currently due (including costs
and work in progress); and (ii) Digital Convergence provides sixty (60) days
prior written notice to Tandy that Digital Convergence intends to purchase :CAT
Products from Second Sources. The decision by Digital Convergence to Second
Source :CAT Products shall be made in good faith, and Digital Convergence shall
deal fairly with Tandy in all Second Source situations. Digital Convergence
shall not deal directly with any Authorized Manufacturer without the prior
written consent of Tandy. Should Digital Convergence decide to obtain a Second
Source for reasons of cost reduction, Digital Convergence shall provide Tandy
not less than ten (10) business days within which to meet any lower quotes or
pricing obtained from any such Second Source.
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4. MARKETING AND DISTRIBUTION
4.1. MARKETING AND DISTRIBUTION MANAGER[S]. Tandy agrees to identify a
marketing and a distribution manager (which may be the same person) to be the
primary point[s] of contact for Digital Convergence for marketing and
distribution issues. The identified marketing and distribution manager[s] shall
be authorized to act for Tandy, and shall be knowledgeable in the areas of the
marketing and distribution. The identified marketing and distribution manager[s]
should oversee all marketing and distribution operations involving or related to
the Products distributed through Tandy's outlets.
4.2. DISTRIBUTION. Tandy shall use its best efforts to stock the
Products at its company owned RadioShack stores, and to encourage dealers to
stock the Products at their RadioShack stores during the term hereof and in
accordance with the deployment schedule agreed to by the parties hereto. Tandy
shall provide nationwide distribution of Products according to the promotional
criteria reasonably established by Digital Convergence. The Parties will agree
on the methods and manner of distributing the Initial Deployment of Products for
distribution to end-users by Tandy owned and associated retail outlets including
RadioShack.com. Digital Convergence may also distribute the Products through
retail and non-retail channels of distribution but may not directly distribute
the :CAT Product through the outlets listed on Exhibit C unless Tandy has
consented in writing. Nothing contained in this Agreement shall be construed so
as to limit, restrict, or prohibit Digital Convergence from offering for sale,
manufacture, or distribution the :CAT Product to other parties not identified on
Exhibit C (including manufacturers) who may, in turn, distribute products to
those outlets listed in Exhibit C. Tandy warrants and represents that Products
it distributes will be distributed only to end users free and clear of all
liens.
4.3. DEPLOYMENT. Digital Convergence shall provide Tandy with at least
1,000,000 :CAT Products on a scaled basis to be agreed upon by the parties
hereto (the "Initial Deployment") and manufactured pursuant to this Agreement.
Tandy will manage the manufacturing and distribution required to fulfill this
obligation. The parties shall mutually develop subsequent
deployment/distribution plan(s).
4.4. MEDIA. Digital Convergence shall provide Tandy with supplies of
floppy diskettes or CD-ROMs containing the Concerto software in quantities
sufficient to support the staged deployment of :CAT Products. Digital
Convergence may also seek third parties to sponsor additional floppy diskettes
or CD-ROMs for distribution by Tandy in support of the :CAT Products provided
that Tandy consents in writing to act as distributor for such Products, which
consent shall not be unreasonably withheld or delayed.
4.5. PACKAGING. The Parties shall cooperate to determine how Products
should be packaged.
4.6. MARKETING.
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(a) Digital Convergence may seek third parties to pay for all
or part of Digital Convergence's cost of manufacturing in return for their
participation in marketing campaigns. For example, a food manufacturer may pay
for the manufacture of a Product provided that Tandy will give the Product at no
charge to end users who present a proof of purchase from that manufacturer.
Tandy will participate in marketing campaigns and provide ride along ad support
to third parties that agree to pay for all or part of the cost of manufacturing
a Product provided that Tandy consents in writing to provide such ad and
marketing support to such third party, which consent shall not be unreasonably
withheld or delayed.
(b) The parties agree to cooperate to create new marketing
efforts related to the Products.
(c) Tandy will use commercially reasonable efforts to assist
Digital Convergence in meeting with and establishing business relationships with
key Tandy partners and resources.
(d) Digital Convergence will use commercially reasonable
efforts to provide Tandy with one-click online access to RadioShack.com.
(e) Digital Convergence will provide on a monthly basis a copy
of the initial customer profile to Tandy for any customer from whom Tandy
collects profile information and sends the profile information to Digital
Convergence.
4.7. SALES INCENTIVES. Tandy agrees to permit Digital Convergence to
establish and fund sales incentives for Tandy Sales Associates, subject to
Tandy's approval, which shall not be unreasonably withheld or delayed, including
without limitation financial or gift incentive programs based upon various
deployment criteria. Tandy will administer all such programs.
4.8. ADVERTISING.
(a) Tandy shall support and promote the Products through
unilateral expenditures from is established advertising budgets for its
RadioShack division, including but not limited to RadioShack catalogs, flyers,
inserts, direct mail pieces, television and radio, and RadioShack.com. Also,
during the term of the Agreement, Tandy's RadioShack division shall tag Digital
Convergence in ads using its corporate name, logo, service mark, or its Product
marks in combination with the RadioShack service mark, as deemed appropriate
solely in the discretion of Tandy on a space available basis, in all broadcast,
print or electronic media advertising which directs consumers to RadioShack
retail outlets where the Products are available for distribution. Tandy agrees
to properly attribute Digital Convergence's trademarks as registered or owned
trademarks of Digital Convergence, as appropriate, or as directed by Digital
Convergence in writing. Tandy further agrees that, except with respect to
materials substantially identical to materials that have previously been
approved, it will furnish to Digital Convergence for approval of trademark usage
of the Digital Convergence marks a sample of each use of a mark that is
different from previously approved usages on advertising, promotional materials,
packaging, and labels. If such use is not approved, Digital
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Convergence shall correct the trademark usage on the sample, and return it to
Tandy. Tandy will amend its use as instructed. Tandy will use all commercially
reasonable efforts to provide Digital Convergence adequate review and approval
time. Digital Convergence will use all commercially reasonable efforts to
review, approve and return samples in sufficient time to allow production
changes. The Parties will cooperate to develop, at Digital Convergence's cost,
posters and other in-store, point of sale promotional materials which Tandy will
cause to be displayed prominently in Tandy-owned RadioShack stores, and request
to be displayed in dealer stores.
(b) Digital Convergence will promote the Products and Tandy
through advertising as follows: (i) as Digital Convergence deems it to be
feasible, Digital Convergence will tag RadioShack stores in television marketing
efforts conducted by Digital Convergence as a place to obtain :CATS; (ii) as
Digital Convergence deems it to be feasible, Digital Convergence will mention
Tandy or RadioShack in public relations efforts, as a place to obtain :CATS;
(iii) Digital Convergence will tag Tandy and mutually agreed Tandy campaigns
within Digital Convergence's nationwide long form advertisements; and (iv)
Digital Convergence shall provide a reasonable number of posters to Tandy for
display in RadioShack locations.
(c) The Parties will cooperate to develop additional marketing
campaigns.
4.9. END USER LICENSE. Digital Convergence shall provide Tandy with an
end-user license to be included in or on the packaging for the Products. Tandy
will only distribute Products to end users.
4.10. IMPORT. Tandy will mark :CAT Products and packaging and certify
them in accordance with the laws and requirements of the country in which the
:CAT Products are manufactured and the country to which the :CAT Products are
shipped.
5. SERVICES WARRANTY
5.1. SERVICES. Tandy warrants and represents that it will
perform its services and obligations under this Agreement in a good and
workmanlike manner.
6. TRAINING
6.1. TRAINING PROGRAM DEVELOPMENT. Digital Convergence shall at its
sole cost and expense write, produce, edit and master a video program which will
familiarize end users with the installation and operation of the Product[s] and
with the features and functions of the Product[s] (a "Customer Training Video").
Tandy shall participate in, review, and approve the Customer Training Video.
Additionally, Digital Convergence shall write, produce, edit and master a video
program which will familiarize Tandy employees with the installation and
operation of the Product and with the features and functions of the Product, and
prepare them to assist end users (an "Employee Training Video"). Tandy shall
participate in, review, and approve the Employee Training Video.
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Digital Convergence shall deliver to Tandy copies of the Customer Training Video
and the Employee Training Video in quantities sufficient to support the staged
deployment of Products.
6.2. TRAINING PROGRAM DISSEMINATION. Immediately after receiving
copies of the Customer Training Video, Tandy shall provide a copy of the
Customer Training Video to each Radio Shack store in accordance with the
training program and deployment schedule developed by the parties. Tandy
shall broadcast the Employee Training Video on the Tandy Satellite Training
Network. The Parties will cooperate and work together in good faith to
develop an effective training program and schedule which utilizes both the
Customer Training Video and the Employee Training Video.
7. PAYMENT AND CONSIDERATION
7.1. PRICING. The price to be paid by Digital Convergence to Tandy for
its services hereunder will be based on pre-Order quotes supplied by Tandy and
will be Tandy's delivered cost, calculated by A&A in the same manner as for the
RadioShack division of Tandy, but which will include a ten percent (10%) mark up
for A&A's services, plus any tooling costs not included in the delivered cost.
All pre-Order quotes will be based on shipment of Product Orders by sea, unless
Digital Convergence specifies shipment by air. In that event, Digital
Convergence will bear the difference in cost.
7.2. EXPORT AND IMPORT FEES. The prices to be paid by Digital
Convergence for Products as set forth in this Agreement will include fees for
any domestic or foreign forwarding agent, consular invoices, and for any of the
documents required by the country of destination. The parties will cooperate to
obtain all required import licenses, permits or other governmental orders and
Tandy will notify Digital Convergence of the cost thereof
7.3. PAYMENT. All Orders shay be pre-paid or accompanied by a
confirmed, irrevocable, documentary letter of credit ("L/C") in the amount of
the total Order price (including estimated fees and commissions) estimated by
Tandy, issued by a U.S. banking institution acceptable to Tandy, and in form and
substance acceptable to Tandy. Upon verifiable proof the L/C has been properly
arranged for, A&A will place the Order with the Authorized Manufacturer. At a
minimum, each L/C shall: (i) be valid until the date of Delivery; (ii) specify
A&A International, Inc., 100 Throckmorton, Suite 1200, Fort Worth, Texas as the
beneficiary; (iii) provide for payment to A&A in United States dollars; and (iv)
provide for payment to A&A upon the delivery of an original letter (or telecopy
or fax thereof ) signed by the Controller of A&A or any Vice President of A&A,
which provides: [A] the L/C number; [B] the U.S. dollar amount being drawn; and
[C] a certification that the drawing is pursuant to an Order issued by Digital
Convergence and that manufacturing has been completed. No other documentation
shall be required. The Parties may modify these procedures by written agreement,
signed by authorized officers of A&A or Tandy. Any L/C shortfall will be billed
to Digital Convergence and all such invoices will be due and payable within
thirty (30) days from the date of the invoice.
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7.4. OTHER CONSIDERATION. The Parties agree that as additional
consideration, Tandy is receiving the marketing and advertising services
provided by Digital Convergence under this Agreement, and Digital Convergence is
receiving the marketing, advertising and distribution services provided by Tandy
under this Agreement. Each party shall account for the value of its respective
services and provide such valuation to the other party within a reasonable time
after the execution of this Agreement.
8. AUDIT
8.1. RECORDS OF TANDY. Tandy shall maintain all records necessary to
demonstrate its performance under this Agreement, including without limitation,
shipping records, materials invoices, store records, and defect and testing
records. Digital Convergence shall have the right to audit Tandy's records,
during normal business hours, no more than semi-annually. Should any audit
reveal that Digital Convergence was overcharged by Tandy, Tandy shall refund the
amount of any overcharge, and pay all of Digital Convergence's reasonable and
necessary costs incurred in performing the audit.
8.2. RECORDS OF DIGITAL CONVERGENCE. Digital Convergence shall maintain
all records necessary to demonstrate its performance under this Agreement. Tandy
shall have the right to audit Digital Convergence's records, during normal
business hours, no more than semi-annually.
9. TERM AND TERMINATION
9.1. TERM OF AGREEMENT. The initial term of this Agreement shall be
from the Effective Date until December 31, 2001 (the "Initial Term") and will
automatically renew for successive one (1) year terms unless written notice of
nonrenewal is given by either Party at least ninety (90) days prior to the end
of the Initial Term or any successive term. Notwithstanding the foregoing,
however, either party may terminate this Agreement at any time after the
expiration of the Initial Term by providing not less than ninety (90) days
notice thereof to the other party.
9.2. TERMINATION. Additionally, without prejudice to any other rights
or remedies at law, equity, or otherwise of the Party so terminating, a Party
(the "Terminating Party") may terminate this Agreement by giving a notice to the
other Party (the "Defaulting Party"): (i) if at any time, the Defaulting Party
commits a material breach of this Agreement and fails to remedy same to the
Terminating Party's satisfaction within thirty (30) days after delivery of
notice by Terminating Party of the occurrence or existence of such breach; or
(ii) if the Defaulting Party applies for or consents to the appointment of a
receiver, trustee, or liquidator for substantially all of its assets or such a
receiver, trustee, or liquidator is appointed; or the Defaulting Party has filed
against it an involuntary petition of bankruptcy that has not been dismissed
within thirty (30) days thereof, or files a voluntary petition of bankruptcy, or
a petition or answer seeking reorganization, or an arrangement with creditors,
or seeks to take advantage of any other law relating to relief of debtors, or
makes an assignment for the benefit of creditors.
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10. LIMITATIONS OF LIABILITY
10.1. LIMITATIONS FOR DIGITAL CONVERGENCE. WITH THE EXCEPTION OF
CLAIMS MADE UNDER SECTION 2.6 ABOVE, DIGITAL CONVERGENCE SHALL NOT BE LIABLE
OR OBLIGATED FOR ANY REASON IN ANY MANNER FOR SPECIAL, INCIDENTAL,
CONSEQUENTIAL, PUNITIVE, INDIRECT OR TORT DAMAGES, INCLUDING, WITHOUT
LIMITATION, ANY DAMAGES RESULTING FROM LOSS OF USE, LOSS OF DATA, LOSS OF
PROFITS OR LOSS OF BUSINESS ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT, THE PERFORMANCE OR NON-PERFORMANCE OR NON-AVAILABILITY OF THE
DIGITAL CONVERGENCE TECHNOLOGY, OR OF ANY OTHER OBLIGATIONS RELATING TO THIS
AGREEMENT, WHETHER OR NOT DIGITAL CONVERGENCE HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. DIGITAL CONVERGENCE SHALL NOT BE LIABLE OR
OBLIGATED IN ANY MANNER TO TANDY FOR ANY AMOUNT IN EXCESS OF THE PAYMENTS
ACTUALLY MADE TO TANDY FOR THE TWELVE (12) MONTHS PRIOR TO A CLAIM RELATED TO
THIS AGREEMENT. THIS LIMITATION OF DIGITAL CONVERGENCE'S LIABILITY IS
CUMULATIVE, AND ALL OF DIGITAL CONVERGENCE'S REASONABLE EXPENDITURES ON
ACCOUNT OF ANY LIABILITY OR OBLIGATION TO TANDY ARISING UNDER THIS AGREEMENT
SHALL BE ADDED TO DETERMINE WHEN THIS LIMITATION ON DIGITAL CONVERGENCE'S
LIABILITY IS EXHAUSTED.
10.2. LIMITATIONS FOR TANDY. WITH THE SOLE EXCEPTION OF CLAIMS BASED
UPON MISAPPROPRIATION OF INTELLECTUAL PROPERTY BY TANDY OR BY AN AUTHORIZED
MANUFACTURER (THE "EXCEPTION"), AND NOTWITHSTANDING ANY PROVISION CONTAINED
HEREIN TO THE CONTRARY, THE MAXIMUM LIABILITY OF TANDY TO DIGITAL CONVERGENCE
ARISING OUT OF OR IN CONNECTION WITH ANY SALE, USE OR OTHER EMPLOYMENT OF ANY
PRODUCTS DELIVERED HEREUNDER OR ANY OTHER OBLIGATIONS RELATING TO THIS
AGREEMENT, WHETHER SUCH LIABILITY ARISES FROM ANY CLAIM BASED UPON CONTRACT,
WARRANTY, TORT OR OTHERWISE, SHALL NOT EXCEED THE ACTUAL AMOUNT PAID TO TANDY BY
DIGITAL CONVERGENCE FOR THE SUBJECT UNITS OF PRODUCTS DELIVERED HEREUNDER.
DIGITAL CONVERGENCE AGREES THAT IN NO EVENT OTHER THAN THE EXCEPTION SHALL TANDY
BE LIABLE FOR ANY INDIRECT, SPECIAL, TORT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL
DAMAGES.
10.3. AGREED ALLOCATIONS OF RISK. The Parties agree that the foregoing
are freely bargained for allocations of risk.
11. CONFIDENTIAL INFORMATION
11.1. DISCLOSURE AND USE LIMITATIONS. Each Party shall maintain in
confidence all Confidential Information received from the other Party, shall use
such Confidential Information only as expressly contemplated by this Agreement,
and shall not disclose any such Confidential
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Information to a third party, or use or duplicate any Confidential
Information, except as expressly permitted hereunder or make any unauthorized
use thereof. Each Party will limit the disclosure of Confidential Information
to those of its employees who have a need to access such Confidential
Information for that Party's performance of this Agreement. Each Party shall
treat such Confidential Information with the same degree of care against
disclosure or unauthorized use which it affords to its own information of a
similar nature. Notwithstanding the foregoing, Tandy may disclose Digital
Convergence Confidential Information to Authorized Manufacturers as necessary
to accomplish the manufacture of the :CAT Products, provided that Tandy
imposes the same duties of confidentiality upon such Authorized Manufacturers
as Tandy has under this Agreement. Tandy shall obtain a non- disclosure
agreement (a sample of which is attached hereto as Exhibit D) from, and
executed by, each Authorized Manufacturer and shall provide a copy thereof to
Digital Convergence.
11.2. SUBPOENA PROCEDURE. In the event the Receiving Party receives a
subpoena or other validly issued administrative or judicial process requesting
any portion of the Confidential Information of the Disclosing Party, the
Receiving Party shall promptly notify the Disclosing Party and tender to it
defense of such demand. Unless the demand shall have been timely limited,
quashed or extended, the Receiving Party shall thereafter be entitled to comply
with such subpoena or other process to the extent permitted by law. If requested
by the Disclosing Party to whom the defense has been tendered, the Receiving
Party shall cooperate (at the expense of the Disclosing Party) in the defense of
a demand.
11.3. REMEDIES. The Receiving Party agrees that the unauthorized
disclosure or use of the Disclosing Party's Confidential Information may cause
irreparable harm and significant and immeasurable injury. Accordingly, the
Receiving Party agrees that the Disclosing Party shall have the right to seek an
injunction against any breach of this Section 11.
11.4. RETURN OR DESTRUCTION OF MATERIALS. Except as otherwise stated
herein, upon termination of this Agreement at the Disclosing Party's request,
the Receiving Party shall, at the Receiving Party's option, either: (i) return
to the Disclosing Party all copies of the Disclosing Party's Confidential
Information in tangible (including electronic) form; or (ii) destroy all copies
of Disclosing Party's Confidential Information in tangible (including
electronic) form which are not returned, and certify to the Disclosing Party
that all such copies of such Confidential Information have been destroyed. The
foregoing notwithstanding, Confidential Information shall remain so for a period
of one (1) year after termination or expiration of this Agreement or any renewal
thereof.
[Remainder of page intentionally left blank.]
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12. MISCELLANEOUS
12.1. NOTICE GENERALLY. Any notice, demand, request, consent, approval,
declaration, delivery or other communication hereunder to be made pursuant to
the provisions of this Agreement shall be sufficiently given or made if in
writing and either faxed, delivered in person with receipt acknowledged or sent
by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) If to Digital Convergence:
Digital Convergence.Com
4264 Kellway Circle
Addison, Texas 75244
Attn: Chief Executive Officer
Facsimile: (972) 818-4805
and and
Vinson & Elkins L.L.P. Patrick Stark, Esq.
3700 Trammell Crow Center Kane, Russell, Coleman & Logan
2001 Ross Avenue 1601 Elm Street,
Dallas, Texas 75201-2975 Suite 3700
Attention: Jeffrey Chapman Dallas, Texas 75201
Facsimile: (214) 999-7797 Facsimile: (214) 777-4299
(b) If to Tandy: and
Tandy Corporation A&A International, Inc.
100 Throckmorton Street, 100 Throckmorton Street,
Suite 1900 Suite 1200
Fort Worth, Texas 76102 Fort Worth Texas 76102
Attn.: General Counsel Attn.: Controller
Facsimile: (817) 415-3926 Facsimile: (817) 415-2774
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, or three (3) business days after the same
shall have been deposited in the United States mail.
12.2. ASSIGNMENT. The licenses granted under this Agreement are
personal to Tandy and may not be assigned without the written consent of Digital
Convergence.
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12.3. HEADINGS. The section or other headings herein are inserted only
for convenience and ease of reference and are not to be considered in the
construction or interpretation of any provision of this Agreement. Unless
otherwise stated, references to Sections herein are references to Sections
hereof.
12.4. GOVERNING LAW; VENUE; LIMITATIONS. This Agreement and the rights
and obligations of the Parties hereunder shall be governed by and construed in
accordance with the laws of the State of Texas without reference to its
provisions on conflict of laws. Texas is the exclusive venue if the action
includes a claim arising out of or relating to this Agreement or the use of the
Product. All payments to Tandy hereunder shall be made in Fort Worth, Tarrant
County, Texas and all disputes hereunder shall be resolved in the applicable
state or federal courts located in Tarrant County, Texas. Any and all claims
hereunder shall be raised within one (1) year of the event or occurrence from
which they arise.
12.5. COSTS. If either Party must bring suit to enforce or preserve its
rights under this Agreement, the Party prevailing in such suit shall be entitled
to all costs and expenses related to such enforcement, including, but not
limited to, reasonable attorneys' fees.
12.6. DELAYS. Neither Party shall be liable to the other Party for any
delay or failure to perform under this Agreement due to causes beyond the
reasonable control of the nonperforming Party. Should such delay occur, the date
or dates for performance shall be extended for a period equal to the number of
days during which performance is so delayed. Notwithstanding the foregoing, if
the Delivery of any :CAT Product is delayed for more than sixty (60) days due to
any cause beyond the control of Digital Convergence but within the control of
Tandy or the Authorized Manufacturer, Digital Convergence may cancel its Order
for the delayed :CAT Product by giving written notice to Tandy of such
cancellation at any time prior to Delivery thereof, and may exercise its Second
Sourcing rights set out in, and subject to, Section 3.12 in lieu of any and all
other remedies. Such cancellation will be without penalty if the cause of the
delay was within Tandy's or the Authorized Manufacturers' control. Otherwise,
the Parties will cooperate in good faith to reasonably apportion the costs of
cancellation among Tandy, Digital Convergence and the Authorized Manufacturer.
12.7. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. If the application of any provision of this Agreement to any
particular facts or circumstances shall be held to be invalid or unenforceable
by a court of competent jurisdiction, then: (i) the validity and enforceability
of such provision as applied to any other particular facts or circumstances and
the validity of other provisions of this Agreement shall not in any way be
affected or impaired thereby; and (ii) such provision shall be enforced to the
maximum extent possible so as to effect the intent of the Parties and shall be
reformed without further action by the Parties to the extent necessary to make
such provision valid and enforceable while preserving the original intent of the
Parties.
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12.8. WAIVER. The waiver by either Party of a breach of or a default
under any provision of this Agreement shall be in writing and shall not be
construed as a waiver of any subsequent breach of or default under the same
or any other provision of this Agreement, nor shall any delay or omission on
the part of either Party to exercise or avail itself of any right or remedy
that it has or may have hereunder or by law or at equity operate as a waiver
of any right or remedy.
12.9. ENTIRE AGREEMENT. This Agreement together with the Exhibits
hereto constitutes the entire agreement between the Parties pertaining to the
subject matter hereof and supersedes all previous communications, agreements,
and understandings between the Parties relating to the subject matter hereof.
Neither Party has entered into this Agreement in reliance upon any
representation, warranty, or undertaking of the other Party that is not set out
or referred to in this Agreement. No amendment or modification of any provision
of this Agreement shall be effective unless in writing and signed by a duly
authorized representative of each Party.
12.10. APPROVALS AND CONSENTS. Except as expressly provided otherwise
in this Agreement, where agreement, approval, acceptance, or consent by either
Party is required by any provision of this Agreement, that action will not be
unreasonably delayed or withheld.
12.11. FURTHER ASSURANCES. Each Party will, at the other's request,
enter into additional agreements or assignments, or will obtain other
documentation as is reasonably necessary to give effect to this Agreement.
12.12. REPRESENTATION OF COUNSEL; MUTUAL NEGOTIATION. Each Party
acknowledges it has had the opportunity to be represented by counsel of its
choice in negotiating this Agreement. This Agreement will therefore be deemed to
have been negotiated and prepared at the joint request, direction, and
construction of the Parties, at arms length, with the advice and participation
of counsel, and will be interpreted in accordance with its terms without favor
to any Party.
12.13. SUPREMACY OF CONTRACT. If there is any conflict between the
terms and conditions of this Agreement and any Exhibit, Schedule, addendum, or
document incorporated by reference in this Agreement, the body of this Agreement
will control.
12.14. MEDIA RELEASES. The Parties shall cooperate with each other to
prepare a mutually acceptable press release with regard to the announcement of
this Agreement.
12.15. NO PARTNERSHIP. The sole relationship between the Parties shall
be that of independent contractors. Nothing herein shall be construed to
constitute the Parties as partners, joint venturers, or agents of each other in
any way whatsoever. Neither Party shall make any warranties or representations,
or assume or create any obligations, on the other Party's behalf. Each Party
shall be solely responsible for the actions of its respective employees, agents,
and representatives.
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12.16. WIRELESS CONCERTO. The Parties agree to work together in good
faith to determine if it is feasible to market a wireless Concerto product. If
the Parties determine that it is feasible, they may enter into a separate
agreement related to the manufacturing and marketing of such a product.
12.17. PREMIUM PRODUCT. The Parties agree to work together in good
faith to determine if it is feasible to market a "premium" :CAT Product. If the
Parties determine that it is feasible, they may enter into a separate agreement
related to the manufacturing and marketing of such a product.
12.18. AGREEMENT BINDING ON SUCCESSORS. This Agreement shall be binding
on and shall inure to the benefit of the parties hereto, their successors,
administrators, heirs and assigns.
12.19. SALES, USE, PROPERTY TAXES. All liability for sales/use taxes or
property taxes due or claimed due as a result of the distribution of the
Products to end-users (if any) shall be the responsibility of Digital
Convergence.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed.
TANDY CORPORATION DIGITALCONVERGENCE.COM INC.
By: /s/ David J. Edmondson By: /s/ J. Jovan Philyaw
----------------------------------- -------------------------------
Name: David J. Edmondson, Name: J. Jovan Philyaw,
Title: Senior Vice President Title: Chief Executive Officer
A&A INTERNATIONAL, INC.
By: /s/ David Christopher
-----------------------------------
Name: David Christopher,
Title: President
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- ------------------------------------------------------------------------------
Neither party shall be bound by any agreement in whole or in part unless and
until this document is executed and delivered by both parties. This
document is otherwise intended for discussion purposes only.
- ------------------------------------------------------------------------------
:CAT-TM- ORCHESTRATION-TM-
PRINT PUBLISHING AGREEMENT
(SHORT-FORM AGREEMENT)
<TABLE>
<CAPTION>
PARTIES:
- ---------------------------------------------------------------------------------------------------------
<S> <C>
DCI: DIGITAL CONVERGENCE.:COM INC. LICENSEE (USE FORMAL COMPANY NAME):
Forbes Inc.
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
ADDRESS: 350 N. St. Paul, Ste. 200 ADDRESS: 60 5th Avenue
Dallas, Texas 75201 New York, New York 10011
- ---------------------------------------------------------------------------------------------------------
E-MAIL ADDRESS: [email protected] E-MAIL ADDRESS: [email protected]
[email protected]
[email protected]
- ---------------------------------------------------------------------------------------------------------
PHONE NUMBER: 214 861 2850 PHONE NUMBER: 212 620 2200
FAX NUMBER: 214 861 2801 FAX NUMBER: 212 620 2232
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL CONTACT: Don Welsh PRINCIPAL CONTACT: Tim Forbes,
John G. Huncke Jim Berrien, Bill Flatley
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
PRINCIPAL TERMS
This :CAT-TM- Orchestration-TM- License Agreement (the "AGREEMENT") between DCI
and Licensee (the "PARTIES") is dated as of January 13, 2000 and, upon execution
by both Parties, shall bind them in accordance with the terms and conditions of
these Principal Terms and the General Terms that are annexed below and made a
part of this Agreement. Capitalized terms not defined in the Principal Terms are
defined in the General Terms.
As used in this AGREEMENT:
(i) "TERM" means the period from September 1, 2000, through August 31, 2001
(ii) "PUBLICATION" means the print publication magazines known as FORBES, BEST
OF THE WEB, ASAP and FYI (collectively, "PUBLICATIONS").
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(iii) "ORCHESTRATION" means use of DCI's proprietary device to read a
striated graphic image ("GRAPHIC") by passing the device (":CAT") over the
image and to enable a user's personal computer programmed with DCI's
proprietary player software (the ":CAT SOFTWARE") with access to the World
Wide Web (a "PROGRAMMED COMPUTER") to link automatically with a designated
web site or data file (the "LINKED SITE"). Such Orchestration shall relate to
one of the following: (i) non-commercial creative or editorial content within
a Publication (a "CONTENT ORCHESTRATION") or (ii) advertising material within
a Publication respecting any service or product (an "ADVERTISING
ORCHESTRATION"). The Graphic will be obtained by Licensee as needed from
DCI's server in accordance with directions to be furnished by DCI to
Licensee. At the time Licensee requests from DCI the Graphic, Licensee will
provide to DCI the address of the web site to be linked with the Graphic in a
form designated by DCI. Subject to the terms hereof, DCI shall enable
Orchestrations incorporated into Publications by Licensee hereunder during
the Term to link with associated Linked Sites throughout the Term and for
sixty (60) days thereafter; and Licensee shall ensure that each Linked Site
remains relevant, accurate, current, operational, and accessible to users
(e.g., who may store the address and return there) for at least sixty (60)
days following the insertion of each associated Orchestration into a
Publication.
(iv) "PERMITTED NUMBER OF ORCHESTRATIONS" means the maximum number of
Orchestrations to be incorporated into Publications during the Term, as
follows: an unlimited number of ADVERTISING ORCHESTRATIONS per issue of each
Publication; and an unlimited number of CONTENT ORCHESTRATIONS per issue of
each Publication.
A. FEE. As a condition to performance of DCI's obligations under this
Agreement, Licensee shall pay DCI the following "FEE": For Content
Orchestrations in all Publications, a flat fee ("BLANKET FEE") regardless of
the number of Content Orchestrations used during the Term of $25,000, payable
January 10, 2001 and for Advertising Orchestrations, $100 per each such
Orchestration incorporated in each issue of each Publication between January
1, 2001 and August 31, 2001 only; provided that there will be no charge for
Advertising Orchestrations in any Publications published in the entire year
2000 of the Term.
B. MINIMUM PROMOTIONAL REQUIREMENTS BY LICENSEE. Licensee will mail to every
FORBES subscriber a box containing one (1) :CAT, one (1) CD-ROM giving
instruction on the use of the :CAT and incorporating the Concerto software
(capable of being downloaded to a user's personal computer) and one (1) set
of printed instructions on the use of the :CAT, at least one month before the
printing of the September 13, 2000, issue of FORBES ("INAUGURAL ISSUE"). DCI
will be responsible for all costs of manufacturing and shipping to Licensee
the :CATS ,the CD-ROMs and the text (e.g. in electronic form) for the printed
instructions ("INSTRUCTIONS") to consumers on how to use the :CATs and
related software. Licensee will be responsible for all other costs related to
manufacturing, printing (including without limitation, the Instructions) and
shipping the boxes and their contents (except DC's costs as provided above)
to its subscribers. In addition, after February 1, 2000, Licensee will use
reasonable commercial efforts to promote the launch of the Orchestrations in
the Publications ("LAUNCH") by print advertising and public relations
activities, which may include purchasing advertising in and engaging in
public relations with THE WALL STREET JOURNAL, THE
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NEW YORK TIMES, AD AGE, and AD WEEK and other appropriate trade advertising
publications. Licensee will use its best efforts to sell Advertising
Orchestrations in the Publications during the Term; and DCI will provide
Licensee with a Power Point presentation/demo to assist Licensee in this
regard. During the first week of September 2000, Licensee will hold customary
and reasonable press events on the Forbes yacht, "Highlander" and at the
Forbes building in Silicon Valley for the primary purpose of promoting the
Launch. On two (2) to three (3) issues immediately preceding the Inaugural
Issue, Licensee will place a "bellyband" or wrapper around each of the
Publications announcing exclusively the Launch; and in each such issue,
Licensee will run a full page, four (4) color ad announcing the Launch.
Licensee will include DCI's Concerto and :CAT technology as part the Forbes
Technology tour during the Term.
C. EXCLUSIVITY. DCI will not provide :CATS to FORTUNE, BUSINESS WEEK, BARONS,
WORTH, FAST COMPANY, RED HERRING, SMART BUSINESS, SMART MONEY, KIPLINGERS, or
INDUSTRY STANDARD before and during the Term or to TIME, NEWSWEEK, or US NEWS
before, and from the beginning of, the Term through December 31, 2000.
D. DCI'S PROVIDING :CATS. DCI will provide Licensee free of charge a number
of the :CATS equal to the number of FORBES subscribers anticipated in
September 2000 (currently approximately 750,000) reasonably in advance of the
time necessary for Licensee to include the :CATS in the boxes it is shipping
to subscribers as provided above.
BY SIGNING BELOW, THE PARTIES HERETO AGREE TO BE BOUND BY THE TERMS
AND CONDITIONS OF THIS AGREEMENT, INCLUDING THE PRINCIPAL TERMS AND THE
GENERAL TERMS, UNTIL SUCH TIME IF ANY THAT A MORE FORMAL DOCUMENT IS EXECUTED
BY BOTH PARTIES.
DIGITALCONVERGENCE.:COM INC. FORBES INC.
By: /s/ By: /s/
----------------------------------- ------------------------------------
Title: Vice President Media Group Title: President - Forbes Magazine
Date: February 10, 2000 Date: February 5, 2000
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<PAGE>
GENERAL TERMS
:CAT-TM- ORCHESTRATION-TM- LICENSE AGREEMENT
1. GRANT OF RIGHTS. DCI hereby grants to Licensee during solely the
Term the non-exclusive (except as specifically provided above),
non-transferable license to incorporate Orchestrations within
Publications, and advertising matter therein, owned or controlled by
Licensee, up to the Permitted Number of Orchestrations authorized
herein, subject to all the terms and conditions of this Agreement
2. USE OF ORCHESTRATIONS: CONTENT OF LINKED SITES. Except as provided
in paragraph 7 below respecting "make goods," Licensee shall not
exceed the Permitted Number of Orchestrations set forth in the
Principal Terms at any time. Licensee agrees that (i) for so long as
each Linked Site remains accessible, it shall be accurate, relevant
and current (for example, time-sensitive data like a weather report
at a Linked Site shall be periodically updated so that a viewer
visiting a stored address days after the transmission of the
Orchestration always will find accurate and timely information);
(ii) at least 75% of the visible area of each screen accessible at
each page of each Linked Site, and all auditory material, shag
relate explicitly and exclusively to the non-commercial content or
advertising matter (as applicable) with which the Linked Site is
associated ("RELEVANT MATERIAL"); (iii) no Linked Site shall contain
X-rated or illegal content or links thereto or advertising or
promotion thereof, (iv) no Linked Site shall redirect viewers
automatically (directly or indirectly) to any material that is not
Relevant Material by "meta-refreshing" or by any other means; (v) no
Linked Site shall contain "pop ups" or employ any other means or
device that directly or indirectly coerces or compels redirection or
otherwise that frustrates or impedes a viewer's ability to choose
his/her next destination; (vi) no Linked Site associated with any
Content Orchestration shall redirect viewers automatically (directly
or indirectly) to any commercial, advertising and/or sponsored
material; and (vii) each Linked Site associated with any Advertising
Orchestration shall relate predominantly to the advertising matter
in the Publication, and not redirect viewers automatically (directly
or indirectly) to any other commercial, advertising and/or sponsored
material. Subject to subsections (ii) - (vii) of this paragraph,
nothing in this paragraph shall be construed to forbid standard
banner advertising, signage, requests for information, or
Licensee-related announcements, which may be included (in the
discretion of Licensee) on each page of each Linked Site.
3. REPORTS AND ACCOUNTINGS. Licensee shall furnish written reports to
DCI within ten (10) days following each sixty (60) day period of the
Term, setting forth the number of Content Orchestrations and
Advertising Orchestrations it has incorporated into Publications
during the applicable period, including, without limitation, the
dates of each issue and a description of each Content Orchestration
and each Advertising Orchestration in such issue. In addition to the
foregoing reports, Licensee shall send to DCI copies of
representative Publications showing use of the Graphic as reasonably
requested by DCI. Licensee shall render to DCI accountings monthly
within thirty (30) days following the dose of each month showing the
amounts due under this Agreement to DCI and accompany each
accounting with payment of the amount due. DCI may audit Licensee's
books and records (and make copies thereof) annually on at least
twenty (20) days notice during normal business hours. The
obligations of Licensee in this paragraph 3 are of the essence.
4. OWNERSHIP/LIMITS OF USE OF DCI PROPERTY. Licensee shall not add to
or otherwise alter or edit any Graphic or other material, electronic
or physical, received from DCI. All right, title and interest in and
to the Orchestrations (including, without limitation, the Graphics),
:CAT Software, any other software furnished to Licensee or third
parties hereunder (the "DCI SOFTWARE"), any other hardware or other
materials furnished to licensee or others (including without
limitation the :CAT reading devices) hereunder (the "DCI HARDWARE")
DCI's service marks and trademarks, (the "DCI MARKS" which,
collectively with the DCI Software and DCI Hardware, shall be
referred to as the "DCI PROPERTY"), including, without limitation,
all rights under copyright, patent, trademark, trade dress, trade
secret and all other intellectual property rights, are and shall
remain the sole property of DCI. All uses by Licensee of the DCI
Marks shall inure to the benefit of DCI and shall not create any
right, title or interest in such DCI Marks for Licensee. Except as
provided for herein, Licensee shall
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<PAGE>
make no other use whatsoever of the DCI Property. Without limiting
the foregoing, Licensee shall not reverse assemble, reverse compile,
reverse engineer, or disassemble, the DCI Software or DCI Hardware;
or rent, lease, modify, merge, create derivative works from,
incorporate within any other software, copy or transfer copies of,
the DCI Property, or license or sublicense the DCI Property, in
whole or in part to any third party. In all uses of the DCI
Property, Licensee shall display any copyright, trademark or other
notices directed by DCI, and shall conform to all criteria of use
furnished by DCI.
5. PRESS RELEASES/PROMOTION/CONFIDENTIALITY. Any and all press releases
or announcements referring to Orchestrations, the business
relationship between DCI and Licensee or the subject matter of this
Agreement, shall be subject to the prior approval in writing of DCI
and DCI must obtain Licensee's written approval regarding any such
announcements or press releases that refer to or mention FORBES or
licensee. Without limiting the forgoing, any use by Licensee of the
Orchestrations or the DCI Property not specifically authorized
herein, must be approved in writing in advance by DCI. Licensee
shall keep the terms of this Agreement and all DCI technology not
known to the general public confidential and not disclose them to
any third party without the prior consent in writing of DCI.
6. REPRESENTATIONS AND WARRANTIES/INDEMNITIES. DCI and Licensee each
represent and warrant that it has the right to enter into this
Agreement and grant the rights herein granted, and that the person
executing this Agreement is duly authorized to do so. Licensee
warrants and represents that the Orchestrations and all DCI Property
will be used by Licensee solely in accordance with the terms and
conditions of the Agreement, and will not be used in a way that
reflects negatively on DCI or the DCI Marks or that violates any
third party rights or any state, local or federal laws or other laws
or regulations, including without I'unitation any FCC or FTC
regulations. Licensee further warrants and represents that the DCI
Property shall not be adapted, reproduced, distributed or disclosed
to any third party without the prior consent in writing of DCI,
except as provided herein. As between Licensee and DCI, Licensee
shall be solely responsible for (i) the Linked Site(s), including,
without limitation, the accuracy of all addresses thereof; and (ii)
the integrity and non-infringement of content at the Linked Site(s)
and any sites linked thereto and in Licensee's publications
(including, without limitation, all non-commercial, editorial and
advertising content). DCI shall be solely responsible for the
non-infringement of the :CATs, the :CAT software or any other
hardware or software provided by DCI to Licensee under this
Agreement Each party shall indemnify and hold the other harmless
from and against any claims, suits or proceedings brought by or on
behalf of any third party unaffiliated with the indemnified party,
arising out of or relating to any breach of any representation,
warranty or agreement by the indemnifying party herein including,
without limitation all damages, losses, civil and criminal penalties
and fines, costs and expenses including reasonable outside
attorneys' fees incurred as a result of any such claims, suits or
proceedings. This obligation shall survive the expiration or
termination of this Agreement.
7. LIMITED WARRANTIES. Notwithstanding anything to the contrary herein,
the DCI Software, the DCI Hardware, all Graphics, all
Orchestrations, and the services and materials being furnished by
DCI hereunder are furnished by DCI under this Agreement "AS IS"
without any warranties of any kind, whatsoever, provided that if DCI
is unable to deliver any Orchestration to which Licensee is entitled
hereunder, DCI shall authorize one substitute "make-good"
Orchestration during the Term for each such undelivered
Orchestration or, at DCI's election, provide a pro rata reduction of
the Fee, and the foregoing shall be DCI's sole obligation and
Licensee's sole and exclusive remedy for undelivered Orchestrations.
In no event shall DCI be liable for damages or the Licensee entitled
to a refund in such event. Except as explicitly provided above in
this paragraph 7: LICENSEE ASSUMES TOTAL RESPONSIBILITY AND RISK FOR
ITS USE OF THE DCI SOFTWARE AND DCI HARDWARE, AND WITH RESPECT TO
THE OBTAINING AND USE OF ORCHESTRATIONS; DCI DOES NOT MAKE, AND
EXPRESSLY DISCLAIMS, ANY AND ALL EXPRESS AND IMPLIED WARRANTIES OF
ANY KIND WHATSOEVER, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT
SHALL DCI BE LIABLE FOR (a) LOST PROFITS OR ANY INCIDENTAL,
CONSEQUENTIAL OR INDIRECT DAMAGES ARISING OUT OF THE USE OF OR
INABILITY TO USE THE DCI
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SOFTWARE, DCI HARDWARE, GRAPHICS AND/OR ORCHESTRATIONS; OR (b) ANY
CLAIM ATTRIBUTABLE TO ERRORS, OMISSIONS, OR OTHER INACCURACIES IN
THE GRAPHICS, DCI SOFTWARE OR DCI HARDWARE. UNDER NO CIRCUMSTANCES
SHALL LICENSEE BE ENTITLED TO SPECIFIC PERFORMANCE, INJUNCTIVE
RELIEF OR OTHER EQUITABLE REMEDY ARISING OUT OF, OR RELATED TO THE
SUBJECT MATTER OF, THIS AGREEMENT AND LICENSEE HEREBY WAIVES ALL
RIGHTS THERETO.
8. TERMINATION/EXPIRATION. Without limiting any rights or remedies of
DCI, DCI shall have the right to terminate this Agreement upon
written notice to Licensee: (i) in the event Licensee breaches any
of the material terms and conditions set forth herein, including,
without limitation, a failure of Licensee to submit timely reports
and/or payment to DCI; (ii) in the event there is a change of
ownership of Licensee or if Licensee should become insolvent; or
(iii) to avoid claims of infringement from third parties or other
exposure to liability as determined in good faith by DCI in its sole
discretion. Upon termination, Licensee shall within ten (10) days
remit to DCI as monies due and owing, including without limitation,
any unpaid balance of the Fee. Upon such termination (without
limitation), and upon expiration of the Term, all rights in the DCI
Property hereunder granted to Licensee shall immediately terminate
and revert to DCI and, at DCI's discretion, return or destroy (and
furnish an affidavit evidencing such destruction) all copies of the
Software and other materials or other property in Licensee's
possession furnished by DCI hereunder. DCI reserves the right to
direct the public, commencing with the earlier of termination of
this Agreement or the sixtieth (60th) day following expiration of
the Term a notice of non-availability.
9. FORCE MAJEURE. The performance of the parties shall be suspended
during any event of force majeure, as such term is commonly
understood, except that (i) DCI shall have the right to terminate
this Agreement in the event any event of force majeure lasts longer
than ninety (90) days; and (ii) there shall be no extension of the
Term hereof if such extension would conflict with any obligation or
agreement of DCI or otherwise infringe the rights of any third party.
10. MISCELLANEOUS. To the extent there is any inconsistency between
these General Terms and the Principal Terms, the Principal Terms
shall govern. Licensee shall be responsible for any and all taxes
(except for DCI's income taxes based upon payments of fees hereunder
to DCI) incurred in connection with the grant of rights hereunder,
including, without limitation, the exercise by Licensee of rights
granted hereunder. Licensee and DCI are independent contractors
under this Agreement, and nothing herein shall be construed to
create a partnership, joint venture or agency relationship between
Licensee and DCI. Licensee has no authority to enter into agreements
of any kind on behalf of DCI. Licensee may not assign this Agreement
or any of its rights or delegate any of its duties hereunder, except
to its affiliates, without the prior consent in writing of DCI and
any purported assignment or delegation without such required consent
shall be null and void. This Agreement shall be construed in
accordance with the laws of the State of New York. Any and all
disputes, differences or controversies arising out of, under or in
connection with this Agreement, or the breach or alleged breach
thereof, shall be submitted to arbitration to be held in New York,
New York under the rules and regulations of the American Arbitration
Association before a single arbitrator, and judgment upon the award
rendered may be entered in any court having jurisdiction thereof;
except any claim (including defenses thereto) which potentially
concerns the validity, enforceability or infringement of
intellectual property owned or controlled by DCI shall not be
resolved by arbitration without the prior approval in writing of
DCI, and instead shall be resolved exclusively in a court of
competent jurisdiction located in New York, New York, and both
parties waive any objections to jurisdiction or venue with respect
thereto. All notices, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given: (i)
if mailed by certified mail, postage prepaid, on the date three (3)
days following the date of mailing, (ii) if delivered by overnight
courier, when received by the addressee or (iii) if sent by
confirmed telecommunication, one business day following receipt by
the addressee at the address set forth at the beginning of this
Agreement, or such other address as either party may specify in
writing. The termination or expiration of this Agreement, howsoever
occasioned, shah not affect any of the provisions of this Agreement
that are expressly or by implication to
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<PAGE>
come into or continue in force after such termination or expiration.
This Agreement may be executed in one or more counterpart copies,
each of which shall be considered an original, and all of which when
taken together shall constitute one and the same agreement. Delivery
of an executed counterpart of a signature page by telecopier shall
be as effective as delivery of an original manually executed
counterpart. No waiver of any breach of any provision of this
Agreement shall constitute a waiver of any prior, concurrent or
subsequent breach of the same or any other provisions hereof, and no
waiver shall be effective unless made in writing and signed by an
authorized representative of the waiving party. In the event any
provision of this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, the remaining
provisions shall remain in full force and effect. In resolving any
dispute or construing any provision hereunder, there shall be no
presumptions made or inferences drawn (i) because the attorneys for
one of the parties drafted the agreement; (ii) because of the
drafting history of the agreement; or (iii) because of the inclusion
of a provision not contained in a prior draft, or the deletion of a
provision contained in a prior draft. Section headings are for
convenience only and are not a part of this Agreement. This
Agreement contains the entire understanding of the parties hereto
with respect to the transactions and matters contemplated hereby,
supersedes all previous agreements between DCI and Licensee
concerning the subject matter, and cannot be amended except by a
writing signed by both parties. No party hereto has relied on any
statement, representation or promise of any other party or with any
other officer, agent, employee or attorney for the other party in
executing this Agreement except as expressly stated herein.
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<PAGE>
Neither party shall be bound by any agreement in whole or in part unless and
until this document is executed and delivered by both parties. This document
is otherwise intended for discussion purposes only.
:CAT-TM- ORCHESTRATION-TM-
PRINT LICENSE AGREEMENT
(Short-Form Agreement)
-PRINCIPAL TERMS-
THE PARTIES TO THIS AGREEMENT ARE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
LICENSEE: DCCI:
- -------------------------------------------------------------------------------
<S> <C>
WIRED MAGAZINE C/O DIGITALCONVERGENCE.:COM INC.
THE CONDE NAST PUBLICATIONS INC. 630 5th Avenue
4 Times Square 6th Floor
19th Floor New York, NY 10111
New York, New York 10036 Attn: John G. Huncke
Phone: 212 286 5270 Executive Vice President, Media Group
Fax: 212 287 5254 Main: 212 218 5270
Attn: Drew Schutte Direct: 212 218 5282
Publisher Fax: 212 218 5277
[email protected] [email protected]
- -------------------------------------------------------------------------------
</TABLE>
This :Cat-TM- Orchestration-TM- License Agreement (THE "AGREEMENT") between
DCCI and LICENSEE (the "PARTIES") is dated as of February 16, 2000 and, upon
execution by both Parties, shall bind them in accordance with the terms and
conditions of these Principal Terms and the General Terms. Capitalized terms
not defined in the Principal Terms are defined in the General Terms.
A. As used in this AGREEMENT:
(i) "TERM" means the period from the later of August 15, 2000 or a date of
which DCCI will advise LICENSEE (by no later than July 15, 2000) coinciding
approximately with the launch of DCCI's :Cat-TM- technology at the consumer
level through December 31, 2000, subject to all provisions below (provided if
the commencement of the Term is delayed beyond August 15, 2000, the Term will
be extended a number of days equal to the number of days by which the
commencement was delayed). It is intended that Graphics (defined below) for
Orchestrations (defined below) will appear in three (3) consecutive issues of
the Publication (defined below) tentatively commencing with the October 2000
issue.
<PAGE>
(ii) "PUBLICATION" means the print publication owned or controlled by
LICENSEE, known as WIRED.
(iii) "ORCHESTRATION" means use of DCCI's proprietary device to read a
striated graphic image ("GRAPHIC") by passing the device (":CAT") over the
image and to enable a user's personal computer programmed with DCCI's
proprietary player software (the ":CAT SOFTWARE") with access to the World
Wide Web (a "PROGRAMMED COMPUTER") to link automatically with a designated web
site or data file (the "LINKED SITE"). Such Orchestration shall relate to only
the following: (i) non-commercial creative or editorial content within a
Publication (a "CONTENT ORCHESTRATION") and (ii) advertising material from
third parties or WIRED (including, without limitation, product information in
a catalog) within a Publication respecting any service or product (an
"ADVERTISING ORCHESTRATION"). The Graphic will be obtained by LICENSEE as
needed from DCCI's server (or at DCCI's election by software loaded on
LICENSEE's requests from DCCI the Graphic, LICENSEE will provide to DCCI, free
of charge, the address of the web site to be linked with the Graphic in a form
designated by DCCI consistent with industry standards. LICENSEE may authorize
advertisers and/or advertising agencies who license the right to place
Advertising Orchestrations in WIRED to obtain Graphics directly from DCCI by
LICENSEE's giving DCCI prior written notice of such authorization and by using
best efforts to cause such advertisers and agencies to execute a letter
requiring adherence ("LETTER OF ADHERENCE") to the policies prescribed in
paragraph 2(b) of the General Terms below. Subject to the terms hereof, DCCI
shall enable Orchestrations incorporated into Publication(s) by LICENSEE
hereunder during the Term to link with associated Linked Sites throughout the
Term and for sixty (60) days thereafter; and LICENSEE shall ensure that each
Linked Site owned or controlled by LICENSEE or an affiliated party remains
current, operational, and accessible to users (e.g., who may store the address
and return there) for at least sixty (60) days following the insertion of
associated Orchestration involving such owned or controlled Linked Site;
provided, however, that any breach or alleged breach of this provision shall
not give rise to a right to claim damages or injunctive relief by DCCI against
LICENSEE or any affiliated party.
(iv) "PERMITTED NUMBER OR ORCHESTRATIONS" means the maximum number of
Orchestrations to be incorporated into the Publication during the Term, as
follows: unlimited (within technically and commercially reasonable numbers)
ADVERTISING ORCHESTRATIONS per issue of the Publication and unlimited (within
technically and commercially reasonable numbers) total number of Advertising
Orchestrations among all issues; and unlimited (within technically and
commercially reasonable numbers) CONTENT ORCHESTRATIONS per issue of the
Publication and unlimited total number of Content Orchestrations among all
issues (subject to additional Orchestrations of "make goods" as provided in
paragraph 7 in the General Terms below).
B. FEE. As a condition to performance of DCCI's obligations under this
Agreement, LICENSEE shall pay DCCI the following "Fee": For CONTENT
ORCHESTRATIONS, NO CHARGE; and for ADVERTISING ORCHESTRATIONS, NO CHARGE.
<PAGE>
C. Minimum Promotion and Use Requirements of LICENSEE.
(1) LICENSEE will mail to every WIRED subscriber as of the mailing date
specified herein a box containing one (1) :CAT, one (1) CD-ROM giving
instruction on the use of the :CAT and incorporating the :Concerto software
(capable of being downloaded to a user's personal computer) and one (1) set of
printed instructions on the use of the :Cat, at least one month before the
printing of the October 2000 Issue of WIRED - or if the Term commencement date
is delayed as provided above, the first issue published after such delayed
date, to the extent reasonably practicable - ("INAUGURAL ISSUE"). DCCI will be
responsible for all cost of manufacturing and shipping to LICENSEE the :Cats,
the CD-ROMs and the text (e.g. in electronic from) for the printed
instructions ("INSTRUCTIONS"), designed and ready for printing (in
consultation with LICENSEE) to consumers on how to use the :Cats and related
software. LICENSEE will be responsible for all other costs related to
LICENSEE's fulfilling its obligations hereunder relating to manufacturing,
printing (including without limitation, the instructions) and shipping the
boxes and their contents (except DCCI's costs as provided above) to its
subscribers. In addition, LICENSEE will use reasonable commercial efforts to
promote the launch of the Orchestrations in the Publication(s) ("LAUNCH") by
print advertising and public relations activities, which may include
purchasing advertising in and engaging in public relations with THE WALL
STREET JOURNAL, THE NEW YORK TIMES, AD AGE, and AD WEEK and other appropriate
trade advertising publications. LICENSEE will use its best efforts to sell
Advertising Orchestrations in the Publication(s) during the Term; and DCCI
will provide LICENSEE with a Power Point presentation/demo to assist LICENSEE
in this regard. On the two (2) issues immediately preceding the Inaugural
Issue, LICENSEE will include a full page announcement regarding exclusively
DCCI's Orchestration and :Cat technology. LICENSEE also will enclose each
subscription copy of the Inaugural Issue in a polybag and in each polybag will
include a letter from the publisher exclusively devoted to announcing the
DCCI's Orchestration and :Cat technology. LICENSEE will incorporate a minimum
of four (4), or more at LICENSEE's discretion, Content Orchestrations in each
of the three (3) issues of WIRED referred to in paragraph A(i) above.
(2) DCCI hereby grants LICENSEE a royalty free, non-exclusive,
non-transferable license to use DCCI's name, logo, trademarks and/or service
marks; and all other such images for which DCCI grants LICENSEE express
written permission ("MARKS"), for the purpose of distributing DCCI's
Orchestration software and distributing :Cats under the terms of this
Agreement and promotion and use thereof. LICENSEE's use of the Marks will be
limited to the purposes described in this Agreement. LICENSEE agrees that
ownership of the Marks will remain solely with DCCI. LICENSEE further agrees
that LICENSEE's use of the Marks will maintain the high standard with which
DCCI has maintained the Marks.
D. EXCLUSIVITY. The rights granted to LICENSEE hereunder are non-exclusive,
except only that before and during the Term, DCCI will not provide :Cats to
BUSINESS 2.0, INDUSTRY STANDARD, FAST COMPANY, RED HERRING, UPSIDE, E-COMPANY,
SMART BUSINESS and all computer magazines
<PAGE>
currently published by Ziff Davis or its successor(s).
E. DCCI'S PROVIDING :CATS. DCCI will provide LICENSEE free of charge a number
of :Cats and CD-ROMS equal to the number of WIRED subscribers anticipated in
September 2000, currently approximately 375,000, ("FIRST GROUP") plus up to an
additional 20,000 :Cats and CD-ROMS for persons who become subscribers during
the Term as a result of LICENSEE's offer to give them a free :Cat and CD-ROM
as an incentive to becoming a new WIRED subscriber. DCCI will provide the
First Group of :Cats and CD-ROMS reasonably in advance of the time necessary
to LICENSEE to include the :Cats and CD-ROMS in the boxes it is shipping to
subscribers as provided above (in no event later than six (6) weeks before the
on-sale date of the Inaugural Issue). DCCI will provide four (4) actual
samples of the :Cats and CD-ROMS to LICENSEE by no later than July 25, 2000,
for the purpose of sizing, costing weight and the like. Commencing the earlier
of September 1, 2000 or the beginning of the Term and continuing through the
end of the Term, neither LICENSEE (i.e. WIRED MAGAZINE only) nor any party
acting on its behalf will provide to the public any technology (i.e. software
and hardware) so similar in design or function to DCCI's :Cat or Orchestration
software technology that it could confuse the public, including, without
limitation, any technology that uses a device to read any graphic or similar
image to launch a web site, web page or any data file or any software that
functions similarly to DCCI's Orchestration software; provided, however, that
LICENSEE may accept advertising and publish editorial using, and promote or
otherwise cooperate with, such third party technology.
<PAGE>
BY SIGNING BELOW, THE PARTIES HERETO AGREE TO BE BOUND BY THE TERMS AND
CONDITIONS OF THIS AGREEMENT, INCLUDING THE PRINCIPAL TERMS AND THE GENERAL
TERMS, UNTIL SUCH TIME, IF ANY, THAT A MORE FORMAL DOCUMENT IS EXECUTED BY
BOTH PARTIES.
- -------------------------------------------------------------------------------
LICENSEE WIRED MAGAZINE DCCI
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BY: /s/ BY: /s/
- -------------------------------------------------------------------------------
TITLE: Publisher TITLE:
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DATE: 3/31/2000 DATE:
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<PAGE>
GENERAL TERMS
:CAT-TM- ORCHESTRATION-TM- LICENSE AGREEMENT
1. GRANT OF RIGHTS. DCCI hereby grants to LICENSEE during solely the Term the
non-exclusive, non-transferable license to incorporate Orchestrations within
Publication(s) owned or controlled by LICENSEE and advertising matter therein,
up to the Permitted Number of Orchestrations authorized herein, subject to all
the terms and conditions of this Agreement. All rights not specifically
granted to LICENSEE are reserved to DCCI.
2. USE OF ORCHESTRATIONS; CONTENT OF LINKED SITES.
(a) Except as provided in paragraph 7 below respecting "make goods,"
LICENSEE shall not exceed the Permitted Number of Orchestrations set forth in
the Principal Terms at any time. LICENSEE represents that although the WIRED
Magazine Web site is not completely under its control, the contract between
LICENSEE and the site's host/operator provides that the site will contain only
material from Wired magazine, subscription information, and advertising, but
such advertising may not be for pornographic materials.
(b) The terms of the Letter of Adherence will provide substantially
the following: Advertisers and their agencies agree (i) for so long as each
Linked Site remains accessible, it shall be current (for example,
time-sensitive data like a weather report at a Linked Site shall be
periodically updated so that a viewer visiting a stored address days after the
transmission of the Orchestration always will find timely information); (ii)
at least 75% of the visible area of each screen accessible at each page of
each Linked Site, and all auditory material, shall relate explicitly and
exclusively to the non-commercial content or advertising matter (as
applicable) with which the Linked Site is associated ("RELEVANT MATERIAL");
(iii) no Linked Site shall contain X-rated or illegal content or links thereto
or advertising or promotion thereof; (iv) no Linked Site shall redirect
viewers automatically (directly or indirectly) to any material that is not
Relevant Material by "meta-refreshing" or by any other means; (v) no Linked
Site shall contain "pop ups" or employ any other means or device that directly
or indirectly coerces or compels redirection or otherwise that frustrates or
impedes a viewer's ability to choose his/her next destination; (vi) no Linked
Site associated with any Content Orchestration shall redirect viewers
automatically (directly or indirectly) to any commercial, advertising and/or
sponsored material; and (vii) each Linked Site associated with any Advertising
Orchestration shall relate predominantly to the advertising matter in the
Publication, and not redirect viewers automatically (directly or indirectly)
to any other commercial, advertising and/or sponsored material; (viii)
advertisers and their agencies indemnify LICENSEE and DCCI against any all
third party claims relating to Linked Sites owned or controlled by such
advertisers and advertising agencies. Subject to subsections (ii) - (vii) of
this paragraph, nothing in this paragraph shall be construed to forbid
standard banner advertising, signage, requests for information, or LICENSEE or
its advertiser-related announcements, which may be included (in the discretion
of LICENSEE or its advertisers) on each page of each Linked Site. DCCI will
prepare the initial draft of the Letter of
<PAGE>
Adherence.
3. REPORTS AND ACCOUNTING. LICENSEE shall furnish written reports to DCCI
within ten (10) days following each thirty (30) day period of the Term,
setting forth the number of Content Orchestrations and Advertising
Orchestrations it has incorporated into Publication(s) during the applicable
period, including, without limitation, the dates of each issue and a
description of each Content Orchestration and each Advertising Orchestration
in such issue. LICENSEE shall send to DCCI copies of representative
Publication(s) showing use of the Graphic as reasonably requested by DCCI.
4. OWNERSHIP/LIMITS OF USE OF DCCI PROPERTY. LICENSEE shall not add to or
otherwise alter or edit any Graphic or other material, electronic or physical,
received from DCCI. All right, title and interest in and to the Orchestrations
(including, without limitation, the Graphics), "Cat Software, any other
software furnished to LICENSEE or third parties by DCCI or its representatives
hereunder (the "DCCI SOFTWARE"), any other hardware or other materials
furnished to LICENSEE or others by DCCI or its representatives (including
without limitation the :Cat scanning devices) hereunder (the "DCCI HARDWARE")
DCCI's service marks and trademarks, (the "DCCI MARKS" which, collectively
with the DCCI Software and DCCI Hardware shall be referred to as the "DCCI
PROPERTY"), including, without limitation, all rights under copyright, patent,
trademark, trade dress, trade secret and all other intellectual property
rights, are and shall remain the sole property of DCCI. DCCI may add to or
change the DCCI Marks for its products and services, which LICENSEE will use
in lieu of or in addition to other DCCI Marks as DCCI may direct from time to
time, upon reasonable notice. All uses by LICENSEE of the DCCI Marks shall
inure to the benefit of DCCI and shall not create any right, title or interest
in such DCCI Marks for LICENSEE. Except as provided for herein and as provided
by law, LICENSEE shall make no other use whatsoever of the DCCI Property. Any
packaging or other material created by LICENSEE further to this Agreement or
otherwise relating to DCCI or its properties is subject to the written
approval of DCCI; provided that such packaging and other material will be
deemed approved by DCCI if DCCI does not give written notice of objection
thereto within three (3) business days of receiving such written packaging or
other written material from LICENSEE. Without limiting the foregoing, LICENSEE
shall not reverse assemble, reverse compile, reverse engineer, or disassemble,
the DCCI Software or DCCI Hardware; or rent, lease, modify, merge, create
derivative works from, incorporate within any other software, copy or transfer
copies of, the DCCI Property, or license or sublicense the DCCI Property, in
whole or in part to any third party. In all uses of the DCCI Property,
LICENSEE shall display any copyright, trademark or other notices directly by
DCCI, and shall conform to all criteria for use furnished by DCCI (which DCCI
will furnish to LICENSEE no later than August 1, 2000).
5. PRESS RELEASES/PROMOTION/CONFIDENTIALITY. Any and all press releases or
public announcements referring to Orchestrations, the business relationship
between DCCI and LICENSEE or the subject matter of this Agreement shall be
subject to the prior approval in writing of DCCI and Licensee. Without
limiting the foregoing, any use by LICENSEE of the
<PAGE>
Orchestrations or the DCCI Property not specifically authorized herein, must
be approved in writing in advance by DCCI. LICENSEE shall keep the terms of
this Agreement and all DCCI technology not known to the general public
confidential and not disclose them to any third party without the prior
consent in writing of DCCI.
6. REPRESENTATIONS AND WARRANTIES/INDEMNITIES. DCCI and LICENSEE each
represent and warrant that it has the right to enter into this Agreement and
grant the rights herein granted, and that the person executing this Agreement
is duly authorized to do so. DCCI represents and warrants that materials
supplied to LICENSEE by DCCI hereunder will not violate the rights of any
third party. Without limiting the foregoing, DCCI agrees to indemnify LICENSEE
against claims from any unrelated third parties relating to any damage such
third party suffers resulting from its use of any DCCI Hardware or DCCI
Software authorized hereunder, including without limitation, transmissions of
viruses, corruption of data or interference with systems or computer commands.
LICENSEE warrants and represents that the Orchestrations and all DCCI Property
will be used by LICENSEE solely in accordance with the terms and conditions of
the Agreement, and will not be used in a way that reflects negatively on DCCI
or the DCCI Marks or that violates any third party rights or any state, local
or federal laws or other laws or regulations, including without limitation any
FCC or FTC regulations. LICENSEE further warrants and represents that the DCCI
Property shall not be adapted, reproduced, distributed or disclosed to any
third party without the prior consent in writing of DCCI, except as provided
herein. As between LICENSEE and DCCI, LICENSEE shall be solely responsible for
(i) LICENSEE's owned or controlled Linked Site(s), including, without
limitation, the accuracy of all addresses thereof; and (ii) the integrity and
non-infringement of content at LICENSEE's owned or controlled Linked Site(s)
and any sites linked thereto and in Licensee's Publication(s) (including,
without limitation, all non-commercial, editorial and advertising content).
Each party shall indemnify and hold the other harmless from and against any
claims, suits or proceedings brought by or on behalf of any third party
unaffiliated with the indemnified party, arising out of or relating to any
breach of any representation, warranty or agreement by the indemnifying party
herein including, without limitation all damages, losses, civil and criminal
penalties and fines, costs and expenses including reasonable outside
attorneys' fees incurred as a result of any such claims, suits or proceedings.
Without limiting the foregoing, LICENSEE will pass through to DCCI (to extent
LICENSEE is under law, contract or otherwise entitled to do so) without
diminution each and every indemnity and similar protection LICENSEE receives
from each and every advertiser and advertising agency or other party who
LICENSEE authorizes to use DCCI's technology or who LICENSEE otherwise enters
into any agreement or relationship with LICENSEE related to this Agreement.
The obligations under this paragraph shall survive the expiration or
termination of this Agreement.
7. LIMITED WARRANTIES. Notwithstanding anything to the contrary herein and
except as specifically provided herein, the DCCI Software, the DCCI Hardware,
all Graphics, all Orchestrations, and the services and materials being
furnished by DCCI hereunder are furnished by DCCI under this Agreement "AS
IS," without any warranties of any kind, whatsoever, provided that if DCCI is
unable to deliver any Orchestration to which LICENSEE is entitled
<PAGE>
hereunder. DCCI shall authorize one substitute "make-good" Orchestration
during the Term for each such undelivered, and the foregoing shall be DCCI's
sole obligation and LICENSEE's sole and exclusive remedy for undelivered
Orchestrations. In no event shall DCCI be liable for damages or LICENSEE
entitled to a refund in such event. Except as otherwise specifically provided
herein: LICENSEE ASSUMES TOTAL RESPONSIBILITY AND RISK FOR ITS USE OF THE DCCI
SOFTWARE AND DCCI HARDWARE, AND WITH RESPECT TO THE OBTAINING AND USE OF
ORCHESTRATIONS: DCCI DOES NOT MAKE, AND EXPRESSLY DISCLAIMS, ANY AND ALL
EXPRESS AND IMPLIED WARRANTIES OF ANY KIND WHATSOEVER, INCLUDING, WITHOUT
LIMITATION, WARRANTIES REGARDING MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. IN NO EVENT SHALL DCCI BE LIABLE FOR (a) LOST PROFITS OR ANY
INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES ARISING OUT OF THE USE OF OR
INABILITY TO USE THE DCCI SOFTWARE, DCCI HARDWARE, GRAPHICS AND/OR
ORCHESTRATIONS; OR (b) ANY CLAIM ATTRIBUTABLE TO ERRORS, OMISSIONS, OR OTHER
INACCURACIES IN THE GRAPHICS, DCCI SOFTWARE OR DCCI HARDWARE. UNDER NO
CIRCUMSTANCES SHALL LICENSEE BE ENTITLED TO SPECIFIC PERFORMANCE, INJUNCTIVE
RELIEF OR OTHER EQUITABLE REMEDY ARISING OUT OF, OR RELATED TO THE SUBJECT
MATTER OF, THIS AGREEMENT (EXCEPT LICENSEE MAY SEEK INJUNCTIVE RELIEF FOR
BREACH BY DCCI OF THE EXCLUSIVITY PROVISIONS OF PARAGRAPH D ABOVE), AND
LICENSEE HEREBY WAIVES ALL RIGHTS THERETO. ANY LIABILITIES RELATING TO DCCI'S
WARRANTY IN PARAGRAPH 6 ABOVE RELATING TO THIRD PARTIES ARE NOT SUBJECT TO THE
ABOVE LIMITATIONS FOR SOLELY THE PURPOSE OF INDEMNIFYING LICENSEE AGAINST
THIRD PARTY CLAIMS BUT NOT TO PERMIT LICENSEE TO MAKE ANY CLAIM AGAINST DCCI
OR ANY AFFILIATED OR RELATED PARTY FOR BREACH OR DEFAULT OF ANY PROVISION OF
THIS AGREEMENT BY DCCI.
8. TERMINATION/EXPIRATION. Without limiting any rights or remedies of DCCI,
DCCI shall have the right to terminate this Agreement upon thirty (30) days
written notice to LICENSEE: (i) in the event LICENSEE materially breaches any
of the material terms and conditions set forth herein, including a failure of
LICENSEE to submit timely reports and/or payment to DCCI, unless LICENSEE
cures such breach, if curable, within ten (10) business days of receipt of
written notice of breach from DCCI; (ii) in the event there is a change of
ownership of LICENSEE or if LICENSEE should become insolvent; or (iii) to
avoid claims of infringement from third parties or other exposure to liability
as determined in good faith by DCCI in its sole discretion. Upon such
termination (without limitation), and upon expiration of the Term, all rights
in the DCCI Property hereunder granted to LICENSEE shall immediately terminate
and revert to DCCI and, at DCCI's discretion, return or destroy (and furnish
an affidavit evidencing such destruction) all copies of the DCCI Software and
other materials or other property in LICENSEE's possession furnished by DCCI
hereunder. DCCI reserves the right to direct the public, commencing with the
earlier of termination of this Agreement or the sixtieth (60th) day following
expiration of the Term, to a destination other than the Linked Site originally
associated
<PAGE>
with any Orchestration, including without limitation, to a notice of
non-availability. If commencement of the Term is delayed beyond December 1,
2000 either party may terminate this Agreement by written notice to the other
without liability to or on the part of either party; provided LICENSEE will
return all DCCI property to DCCI within thirty (30) days of such termination.
9. FORCE MAJEURE. The performance of the parties shall be suspended during any
event of force majeure, as such term is commonly understood, except that (i)
either party shall have the right to terminate this Agreement in the event any
event of force majeure lasts longer than ninety (90) days; and (ii) there
shall be no extension of the Term hereof if such extension would conflict with
any obligation or agreement of DCCI or LICENSEE or otherwise infringe the
rights of any third party.
10. MISCELLANEOUS. To the extent there is any inconsistency between these
General Terms and the Principal Terms, the Principal Terms shall govern.
LICENSEE shall be responsible for any and all taxes (except for DCCI's income
taxes based upon payments of fees hereunder to DCCI) incurred in connection
with the grant of rights hereunder, including, without limitation, the
exercise by LICENSEE of rights granted hereunder. LICENSEE and DCCI are
independent contractors under this Agreement, and nothing herein shall be
construed to create a partnership, joint venture or agency relationship
between LICENSEE and DCCI. Neither party has any authority to enter into
agreements of any kind on behalf of the other party. Neither party may assign
this Agreement or any of its rights or delegate any of its duties hereunder
without the prior consent in writing of the other party and any purported
assignment or delegation without such required consent shall be null and void
except to an affiliate of such assignor or to a party acquiring all or
substantially all of the stock or assets of the assignor and provided the
assignee assumes in writing all of the obligations of the assignor hereunder.
This Agreement shall be construed in accordance with the laws of the State of
New York. All notices, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given: (i) if mailed by
certified mail, postage prepaid, on the date three (3) days following the date
of mailing; (ii) if delivered by overnight courier, when received by the
addressee or (iii) if sent by confirmed telecommunication, one business day
following receipt by the addressee at the address set forth at the beginning
of this Agreement, or such other address as either party may specify in
writing. The termination or expiration of this Agreement, howsoever
occasioned, shall not affect any of the provisions of this Agreement that are
expressly or by implication to come into or continue in force after such
termination or expiration. This Agreement may be executed in one or more
counterpart copies, each of which shall be considered an original, and all of
which when taken together shall constitute one and the same agreement.
Delivery of an executed counterpart of a signature page by telecopier shall be
as effective as delivery of an original manually executed counterpart. No
waiver of any breach of any provision of this Agreement shall constitute a
waiver of any prior, concurrent or subsequent breach of the same or any other
provisions hereof, and no waiver shall be effective unless made in writing and
signed by an authorized representative of the waiving party. In the event any
provision of this Agreement shall for any reason be held to be invalid,
illegal or unenforceable in any respect, the remaining provisions shall remain
in full force and effect. In resolving any dispute or construing any
<PAGE>
provision hereunder, there shall be no presumptions made or inferences drawn
(i) because the attorneys for one of the parties drafted the agreement; (ii)
because of the drafting history of the agreement; or (iii) because of the
inclusion of a provision not contained in a prior draft, or the deletion of a
provision contained in a prior draft. Section headings are for convenience
only and are not a part of this Agreement. This Agreement contains the entire
understanding of the parties hereto with respect to the transactions and
matters contemplated hereby, supersede all previous agreements between DCCI
and LICENSEE concerning the subject matter, and cannot be amended except by a
writing signed by the party to be bound thereby. No party hereto has relied on
any statement, representation or promise of any other party or with any other
officer, agent, employee or attorney for the other party in executing this
Agreement except as expressly stated herein.
<PAGE>
EXHIBIT 21.1
Subsidiaries of DigitalConvergence.:Com
DigitalDemographics.:Com Inc., a Delaware corporation
DCCP Inc., a Delaware corporation
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated April 27, 2000 relating to the consolidated financial
statements and financial statement schedule of DigitalConvergence.:Com Inc., and
reports dated February 29, 2000, except as to Note 11 which is as of April 27,
2000 relating to the financial statements and financial statement schedules of
Infotainment Telepictures, Inc. which appear in such Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
April 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 45,540
<SECURITIES> 0
<RECEIVABLES> 32
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,662
<PP&E> 688
<DEPRECIATION> 218
<TOTAL-ASSETS> 46,518
<CURRENT-LIABILITIES> 732
<BONDS> 0
0
47,888
<COMMON> 611
<OTHER-SE> (11,246)
<TOTAL-LIABILITY-AND-EQUITY> 46,518
<SALES> 0
<TOTAL-REVENUES> 1,543
<CGS> 0
<TOTAL-COSTS> 1,012
<OTHER-EXPENSES> 4,437
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 732
<INCOME-PRETAX> (3,977)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,977)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
