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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-18690
DIGITAL ORIGIN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 68-0101300
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
460 E MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 404-6300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANTS KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. (X)
AS OF NOVEMBER 30, 1999
------------------------
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING
BID PRICE OF SUCH STOCK: $51,154,558
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING: 5,605,979
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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DIGITAL ORIGIN, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PART I Page
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ITEM 1. Business.................................................................................... 2
ITEM 2. Properties.................................................................................. 5
ITEM 3. Legal Proceedings........................................................................... 5
ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 6
ITEM 4A. Executive Officers of Registrant............................................................ 6
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters....................... 7
ITEM 6. Selected Financial Data..................................................................... 8
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 9
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk.................................. 16
ITEM 8. Financial Statements and Supplementary Data................................................. 16
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ........ 16
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......................................... 17
ITEM 11. Executive Compensation...................................................................... 20
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............................. 25
ITEM 13. Certain Relationships and Related Transactions.............................................. 26
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................. 27
SIGNATURES ............................................................................................ 31
</TABLE>
Digital Origin, the Digital Origin logo, EditDV, MotoDV, PhotoDV, IntroDV and
RotoDV, among others, are trademarks and/or service marks of Digital Origin,
Inc. Other brands and names referred to may be trademarks or service marks of
others.
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The undersigned Registrant hereby amends the Items 10, 11, 12, and 13 of
its Annual Report on Form 10-K for the period ended September 30, 1999, as
set forth in the pages attached hereto.
PART I
ITEM 1. BUSINESS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: The following discussion
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 that are subject to risks and uncertainties.
Statements indicating that we "intend", "plan", "expect," "estimate" or
"believe" are forward-looking, as are all other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors that could cause actual results or events to
differ materially from those anticipated by the forward-looking statements
contained in this discussion and other sections of this Form 10-K.
OVERVIEW
We design, develop, assemble, market and support digital video computer
products for creative professionals and consumers who use digital camcorders.
Our current product line consists of multimedia authoring and nonlinear editing
video software and related hardware that can manipulate video and audio
information in conjunction with desktop computers and digital camcorders. Our
primary target markets are video editors, video producers, and creators of
multimedia with an increasing emphasis on consumers. Prior to 1999,
substantially all of our products have been designed for and sold to users of
Macintosh computer products manufactured by Apple Computer, Inc. During 1999, we
focused on the Windows market. As a result: 25% of unit sales were made to
Macintosh only users, 29% were made to Windows only users, and 46% were made to
cross-platform users. We distribute our products directly through our web site
and through various distributors and resellers. Prior to 1999, our business
included a number of other hardware product lines, including computer monitors,
which were divested. Fiscal 1999 revenues were predominantly related to software
products. As a result, comparisons to prior period results are not meaningful,
since prior periods include these divested product lines.
Our executive offices are located at 460 E. Middlefield Road, Mountain
View, CA 94043, and our telephone number is (650) 404-6300.
PRODUCTS AND APPLICATIONS
Here is a summary of some of our principal products and their typical
applications:
<TABLE>
<CAPTION>
Software Products that include IEEE 1394 Firewire Card Suggested Retail Price
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<S> <C>
IntroDV $249
PhotoDV $299
MotoDV $399
MotoDV Studio $899
MotoDV Mobile $499
EditDV $999
Software Products without the IEEE 1394 Firewire Card
PhotoDV $199
MotoDV $299
EditDV $899
EditDV Unplugged $149
RotoDV $399
RotoWeb $ 99
</TABLE>
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These prices listed are suggested retail prices. Actual prices may vary based
on purchase volumes, competition, seasonality and promotions or other sales
incentives.
DIGITAL VIDEO SYSTEMS AND SOFTWARE
We offer a number of products for both the multimedia authoring and the
non-linear digital video editing and production market. Non-linear digital
editing enables video editors to manipulate pictures and sound in a faster,
easier and more cost effective manner than traditional analog tape-based
systems. Editors can randomly access and digitally "cut and paste" images,
videos and sound clips, avoiding the tedious process of winding and rewinding
linear tape and the subsequent physical cutting and splicing of film segments.
INTRODV, introduced in September 1999, is an entry-level video editing
solution targeted at new owners of DV camcorders. Declining prices of digital
camcorders has created increased demand for value-priced DV "FireWire" video
capture and editing solution. IntroDV includes our own video editing software, a
still photo capture and touch-up software application as well as a PCI FireWire
card. Designed for the Windows 95/98 platform, IntroDV features a simple
interface that facilitates step-by-step movie production. As an entry-level
video editing solution, IntroDV provides fewer features than our higher-end
editing products. IntroDV is currently not available for Macintosh operating
systems.
PHOTODV is a software tool used as an Adobe PhotoShop-Registered
Trademark- import plug-in. It is available with or without our FireWire card.
PhotoDV enables a DV camcorder to perform as a still image camera, in addition
to being used to record video. Pictures are acquired digitally over the FireWire
card and can be used for Web sites, picture databases, printed pages, and
QuickTime VR scenes. PhotoDV is available for both the Macintosh and Windows
operating systems.
MOTODV is an input/output software utility for moving DV camcorder
footage from the camcorder to a personal computer for the purpose of editing.
MotoDV is targeted at video designers and other creative professionals who
produce video and multimedia content for tape, CD-ROM, and Web delivery. The
MotoDV application remotely controls the DV camcorder or DV video tape recorder
over FireWire and captures DV clips, in real-time or time-lapse mode. As clips
are being captured, MotoDV converts the integrated DV data stream into QuickTime
movies with separate video and audio tracks. These clips can then be imported
into any QuickTime-compliant editing or special effects application, including
our own EditDV, Adobe Premiere, and Adobe After Effects. MotoDV is available for
both the Macintosh and Windows operating systems. MotoDV Studio builds on MotoDV
by including Adobe Premiere for Windows and a set of custom developed plug-ins
and is targeted towards the large installed base for Premiere. MotoDV Mobile is
a version of MotoDV Studio tailored for users of Apple G4-based laptops. These
laptop users can capture and edit DV footage away from their offices.
EDITDV is a digital non-linear editing software system which operates
on both the Macintosh and Windows operating systems in conjunction with digital
camcorders, Apple's QuickTime (an industry standard architecture of digital
media) and FireWire connections. Users can create digital video with multiple
video and effects tracks, rubber-band audio, and traditional wipes and fades for
fast interactive editing, color modification and keying. EditDV also provides
QuickTime-compliant digital video non-linear editing, compositing and animation
capability that facilitates the creation and editing of digital video content.
EditDV is targeted to professional users and features an intuitive user
interface, FX templates, built-in titling, multiple key frames, batch digitizing
and picture-in-picture capabilities. It also offers a variety of high-quality
special effects, including pan-zoom-rotating, chroma keying and compositing.
EditDV Unplugged is an entry level version of EditDV targeted to the beginning
non-linear editor, and is available for both the Macintosh and Windows operating
systems.
ROTODV is a painting and special effects software application for
digital video, which provides an assortment of familiar yet powerful graphics
tools for enhancing video productions. RotoDV is particularly useful for
performing touch-ups such as removing unwanted objects from scenes, which can
save the user the time and expense of re-shooting. Users can also brush animated
digital "paint" directly onto moving images, to produce creative effects like
those seen in music videos. In addition, by combining multiple layers of paint
and video, RotoDV can be used to add Hollywood-style effects to a digital video
production. RotoDV is currently available only for the Macintosh operating
system.
TECHNOLOGY AND PRODUCT DEVELOPMENT
Our current research and development focus is on developing digital video
acquisition products and editing tools for the Windows and Macintosh operating
systems for customers who create, review, approve and utilize moving video.
Current research and development efforts include: (i) performance improvements
and cost reductions of current products and (ii) development of application
software to facilitate the creation and manipulation of video and high
resolution still and full motion
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images for use on the Internet. We believe that the competitive nature of the
computer industry, along with the rapid pace of technological evolution,
require that we continue to introduce innovative products on a timely basis
to compete effectively. During fiscal 1999, 1998 and 1997, our expenditures
for research and development totaled $2.6 million, $2.8 million and $5.0
million, respectively. Of these expenditures 100.00%, 68.98% and 28.95%,
respectively, were allocated to the digital video product line. To date, all
of our research and development expenditures have been charged to operations
as incurred. Because of our smaller size and narrowing product focus, we do
not anticipate having research and development expenditures equal to earlier
levels and there can be no assurance we will be able to successfully develop
new or enhanced products, commercially successful products, or products that
will not be rendered obsolete by changing technology or new products
introduced by others. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Our
Future Results of Operations -- Technological Change; Continuing Need to
Develop New Products."
MARKETING, SALES AND DISTRIBUTION
We employ a two-tiered distribution model through which we sell
products primarily through a limited number of distributors that in turn
distribute our products to a variety of resellers including e-tailers,
superstores, independent dealers, educational resellers, systems integrators,
value added resellers and mail order resellers, both domestically and
internationally. Our distributors purchase products at discounts from suggested
retail prices. We also sell directly using our web site and toll-free call
center. Our domestic distributors include: Canon USA, Inc., Ingram Micro, Inc.,
Broadfield Distributing, Inc., Micro-Pace, and Wynit. Our European and Japanese
distributors include: Canon Europa, Computers Unlimited, Scribona, Towa and
Orbit. Our business and financial results are highly dependent on the success of
these distributors. To assist distributors and to provide marketing, training
and technical support, we provide sales representatives in a number of locations
in the United States. In Europe, we have a local sales and marketing
representative to assist European distribution. In Japan, a local firm provides
localized marketing and support. We also provide market development funds to
give distributors incentives to increase sales, improve reporting and achieve a
product mix favoring higher margin products.
For fiscal years ended September 30, 1999, 1998 and 1997, our export
sales accounted for approximately 31.6%, 23.4%, and 15.7% respectively, of our
net sales. See Note 6 of Notes to Consolidated Financial Statements. Our export
sales are subject to certain risks common to international operations, such as
currency fluctuations and governmental regulation. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Our Future Results of Operations -- International Sales."
Many of our distributors have the limited right to return products
purchased from us. While we reasonably allow for estimated product returns, if
we were to experience returns from customers significantly in excess of this
estimate, such returns could have a material adverse effect on our results of
operations.
Our marketing programs support worldwide sales and distribution of our
products. Our principal marketing activities include active use of our web site
and other web sites, frequent participation in industry trade shows and
seminars, advertising in major trade publications worldwide, public relations
activities with the trade and business press, publication of technical articles,
distribution of sales literature and product specifications and communications
with its installed base of end users. Our marketing programs are designed to
generate sales leads for both direct sales and our distributors as well as to
enhance our brand name recognition.
MANUFACTURING AND SUPPLIERS
Substantially all of our assembly, quality control testing, packaging
and other manufacturing operations are performed by our suppliers, contract
manufacturers, and other subcontractors pursuant to customary quality assurance
programs. We attempt to utilize standard parts and components available from
multiple vendors. However, certain components used are available only from sole
or limited suppliers. Although we have been able to obtain an adequate supply of
these components in the past, there can be no assurance that we will always be
able to do so.
COMPETITION
All markets in which we compete are expected to remain highly
competitive. Our principal competitors in the digital video market include
Apple, Adobe, MGI, Ulead, Pinnacle Systems and Canopus. It is difficult to
predict all future sources of competition. For example, Apple has introduced
a non-linear digital video editing products called iMovie and Final Cut for
use on Apple computers in fiscal 1999. Therefore, we will face significant
competition in the future from Apple. There may be other new competitors or
newly competitive products, including from Microsoft. Apple and Microsoft
also could add
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functionality to their computer systems that is similar to that provided by
certain of our products, or alter their systems' architecture in a manner
that could adversely affect our ability to compete. We believe that the
principal competitive factors for our product line are product performance,
breadth of distribution, brand name recognition, price and customer support.
There can be no assurance that we will be able to compete successfully with
respect to these factors. In addition, many of our current and prospective
competitors have significantly greater financial, technical and marketing
resources. As a result, there can be no assurance that we will compete
effectively with current or future competitors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain
Factors That May Affect Our Future Results of Operations -- Competition."
EMPLOYEES
As of October 31, 1999, we had approximately 49 full time employees, 25
of which are in sales and marketing functions, 11 of which are in research and
development, and the balance are in administration (finance, operations, and
senior management). Our success will depend, in large measure, on our ability to
attract, motivate and retain highly qualified technical, marketing, engineering
and management personnel, who are in great demand. Our employees are not
represented by any collective bargaining agreements, and we have never
experienced a work stoppage. We believe that our employee relations are good.
RECENT DEVELOPMENTS -AGREEMENT TO MERGE WITH MEDIA 100, INC.
We entered into a definitive agreement on December 28, 1999 to be
acquired by Media 100 Inc. of Marlboro, Massachusetts (NASDAQ:MDEA), a
pioneer of streaming media production tools. The merger is intended to be
completed as a pooling of interests for accounting purposes and as a tax-free
transaction. Under the agreement, Media 100 will issue .5347 shares of common
stock for each share of our common stock. The transaction is subject to the
approval of our shareholders and the stockholders of Media 100 and other
customary closing conditions. The merger is expected to be complete in 90-120
days. The combined company will target Internet desktops with low-cost
applications that allow personal computer users to capture, edit, and stream
video on the Internet using a single, integrated, and easy-to-use
application. We also have entered into a non-exclusive, four-year OEM
development and license agreement with Media 100 by which Media 100 will use
our consumer level video editing and effects software with Media 100's
Internet streaming media software in exchange for certain royalty payments.
ITEM 2. PROPERTIES
We are located in Mountain View, California in a leased building with
approximately 19,000 square feet of space. Our lease began on April 15, 1999 and
has a three year term with an option to extend for an additional two years. Our
current facility is sufficient for our current needs.
ITEM 3. LEGAL PROCEEDINGS
(a) On January 13, 1999 and January 28, 1999, we and one of our former
directors, Charles Berger, were named as defendants in two shareholder class
action lawsuits against Splash Technology Holdings, Inc. ("Splash"), various
directors and executives of Splash and certain selling shareholders of Splash.
The suits were filed in the United States District Court in Northern District of
California and have been consolidated and captioned IN RE SPLASH TECHNOLOGY
HOLDINGS INC. SECURITIES LITIGATION (Master File No. C99-0109 SBA). The law firm
of Milberg Weiss Bershad Hynes & Lerach LLP has been designated lead counsel for
the eight lead plaintiffs. The lawsuit alleges, among other things, that the
defendants made or were responsible for material misstatements, and failed to
disclose information concerning Splash's business, finances and future business
prospects in order to artificially inflate the price of Splash common stock. The
complaint does not identify any statements alleged to have been made by Charles
Berger or us. The complaint further alleges that we engaged in a scheme to
artificially inflate the price of Splash common stock to reap an artificially
large return on the sale of the common stock in order to pay off our debt. We
and the former director vigorously deny all allegations of wrongdoing and intend
to aggressively defend ourselves in these matters. Defendants initial motion to
dismiss the action was granted with leave to amend and an amended complaint has
been filed by plaintiffs.
(b) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates
filed a suit in the United States District Court for the District of Colorado
alleging a breach of contract and related claims in the approximate amount of
$800,000, maintaining that we failed to comply with various return, price
protection, inventory balancing and marketing development funding
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undertakings. In 1997, we filed an answer to the complaint and cross-claimed
against the plaintiffs, and in October 1997 additionally cross claimed
against Deutsche Financial, Inc., a factor in the account relationship
between us and the plaintiffs, seeking the recovery of approximately $2
million. We continue to investigate these claims as well as cross claims and
expect to vigorously defend and prosecute them as applicable. This case is
scheduled for trial in April 2000.
(c) We are involved in a number of other judicial and administrative
proceedings incidental to our business. We intend to defend these matters
vigorously and although adverse decisions (or settlements) may occur, the
final resolution of these lawsuits is not expected to have a material adverse
effect on our financial position. However, an adverse resolution and the
costs of defense, regardless of the outcome, could have a material adverse
effect on our results of operations and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT
Our executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark Housley 43 Chairman of the Board of Directors, Chief Executive
Officer (CEO) and President
Mary F. Bobel 50 Vice-President & Chief Financial Officer
</TABLE>
MARK HOUSLEY has been our President since January 1997, CEO since
August 1997 and Chairman since December 1997. From March 1995 until October
1996, Mr. Housley was founder and Vice President of Marketing of Spectrum
Wireless, Inc., a manufacturer of wireless infrastructure products. From May
1992 until March 1995, Mr. Housley held various positions of responsibility for
us and our predecessor SuperMac Technologies, Inc., including Vice President and
General Manager of our Color Publishing Division. From October 1990 until May
1992, Mr. Housley was a Vice President for Siemens AG in Santa Clara, a
multinational manufacturer of electronic equipment, directing product marketing
and planning.
MARY BOBEL has been our Vice-President & Chief Financial Officer since
May 1999. Ms. Bobel served as the Executive Vice-President and Chief Financial
Officer of Genus, Inc., a publicly traded manufacturer of semiconductor
equipment from March 1997 through August 1998. Prior to Genus, she was
Vice-President and Chief Financial Officer of Educational Publishing
Corporation, a privately held supplier of educational materials from September
1994 until September 1996. From March 1990 through September 1994 she was
Vice-President and Corporate Controller for Adobe Systems, a publicly traded
software company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Our common stock was quoted on the Nasdaq National Market from August
21, 1991 until July 1, 1996 and on the Nasdaq SmallCap Market from July 2, 1996
until February 28, 1999 under the symbol "RDUS." On March 1, 1999, we changed
our name from Radius Inc. to Digital Origin, Inc. and our common stock is now
quoted on the Nasdaq SmallCap Market under the symbol "DODV." The high and low
sales prices for the common stock are indicated below, adjusted to reflect the
one-for-ten reverse split effective March 9, 1998.
<TABLE>
<CAPTION>
Year Ended September 30, 1998 Low High
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<S> <C> <C>
First Quarter $2.81 $7.19
Second Quarter 2.25 4.37
Third Quarter 2.37 5.87
Fourth Quarter 0.94 2.94
Year Ending September 30, 1999
- ------------------------------
First Quarter $0.78 $2.56
Second Quarter 1.34 4.25
Third Quarter 2.37 4.50
Fourth Quarter 3.25 6.13
</TABLE>
On September 30, 1999, there were approximately 3,169 holders of record
of our common stock.
The price of our common stock has fluctuated widely in the past. We
believe that such fluctuations may have been caused by announcements of new
products, quarterly fluctuations in the results of operations and other factors,
including changes in conditions of the personal computer industry in general and
of Apple Computer in particular, changes in our results of operations and
financial condition, among other factors. Stock markets, and stocks of
technology companies in particular, have experienced extreme price volatility in
recent years. This volatility has had a substantial effect on the market prices
of our securities and those of other high technology companies, often for
reasons unrelated to the operating performance of the specific companies. Due to
these factors, the dynamic nature of the our industry, and general economic
conditions, our future operating results and stock prices may be subject to
significant volatility. Such stock price volatility for the common stock has in
the past provoked securities litigation, and future volatility could provoke new
litigation that could divert substantial management resources and have an
adverse effect on our results of operations.
We have never declared or paid any cash dividends on our common stock.
We anticipate that we will retain any future earnings for use in its business
and do not anticipate paying any cash dividends .
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, (1)
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1999 1998 1997 1996 1995
------ ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total net sales $ 13,353 $ 15,668 $ 31,150 $ 90,290 $ 308,133
Cost of sales 4,750 9,921 31,032 77,382 302,937
--------- ---------- ---------- ---------- ---------
Gross profit 8,603 5,747 118 12,908 5,196
Operating expenses:
Research and development 2,649 2,801 5,002 7,478 19,310
Selling, general and administrative 7,154 7,107 21,355 25,886 90,068
--------- ---------- ---------- ---------- ---------
Total operating expenses 9,803 9,908 26,357 33,364 109,378
--------- ---------- ---------- ---------- ---------
Loss from operations (1,200) (4,161) (26,239) (20,456) (104,182)
Other income (expense), net 7,104 12,353 30,600 24,032 (3,045)
Interest expense (55) (459) (2,777) (3,736) (3,023)
Litigation settlement - - - - (12,422)
--------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 5,849 7,733 1,584 (160) (122,672)
Provision (benefit) for income taxes - (1,000) 316 815 9,070
--------- ----------- ---------- ---------- ---------
Net income (loss) $ 5,849 $ 8,733 $ 1,268 $ (975) $(131,742)
========= ========== ========== =========== ==========
Preferred stock dividend - - 272 - -
--------- ---------- ------------ ---------- ---------
Net income (loss) applicable to
common shareholders $ 5,849 $ 8,733 $ 996 $ (975) $(131,742)
========= ========== ========== =========== ==========
Net income (loss) per common share:
Basic net income (loss) per share applicable
to common shareholders $ 1.06 $ 1.58 $ 0.18 $ (0.46) $ (87.54)
======== ========== ========== ============ ===========
Diluted net income (loss) per share applicable
to common shareholders $ 1.02 $ 1.57 $ 0.18 $ (0.46) $ (87.54)
======== ========== ========== ============ ===========
Shares used in per share computations:
Shares used in computing basic net income
(loss) per share 5,535 5,522 5,389 2,125 1,505
========= ========== ======== ========== ==========
Shares used in computing diluted net income
(loss) per share 5,747 5,557 5,522 2,125 1,505
========= ========== ======== ========== ==========
<CAPTION>
YEARS ENDED SEPTEMBER 30, (1)
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1999 1998 1997 1996 1995
------ ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Working capital (deficiency) $ 980 $ (5,216) $ 7,909 $ 8,476 $ (59,334)
Total assets 6,895 6,556 26,272 45,526 87,878
Long-term debt - noncurrent portion - - - 22,213 1,331
Convertible preferred stock - - - 3,000 -
Shareholders' equity (Net capital deficiency) $ 1,081 $ (5,083) $ 8,158 $ 3,960 $ (57,117)
</TABLE>
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(1) Our fiscal year ends on the Saturday closest to September 30 and includes
53 weeks in fiscal year 1998. All other fiscal years presented are 52 weeks. For
consistency of presentation, all fiscal periods in this Form 10-K are reported
as ending on a calendar month end.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: Our discussion contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 that are subject to risks and uncertainties. Statements
indicating that we "intend", "plan", "expect," "estimate" or "believe" are
forward-looking, as are all other statements concerning future financial
results, product offerings or other events that have not yet occurred. There are
several important factors that could cause actual results or events to differ
materially from those anticipated by our forward-looking statements. Such
factors include, but are not limited to: our ability to achieve and maintain
profitability; the success of our digital video software products; our ability
to compete successfully with Apple in the digital video software market; the
success of Apple's QuickTime technology for Windows; continued favorable
licensing terms for QuickTime from Apple; our ability to successfully develop,
introduce and market new software products, including products for the Windows
operating system, to keep pace with technological innovation, particularly in
light of its limited financial resources; the ability of our manufacturers and
suppliers to deliver components and manufacture the our products; our reliance
on international sales and its key distributor arrangements; and our ability to
attract and retain its key personnel.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain
operational data as a percentage of net sales (may not add due to rounding).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total net sales 100.0% 100.0% 100.0%
Cost of sales 35.6 63.3 99.6
----- ------ -----
Gross profit 64.4 36.7 0.4
Operating Expenses:
Research and development 19.8 17.9 16.1
Selling, general, and administrative 53.6 45.3 68.5
----- ------ -----
Total operating expenses 73.4 63.2 84.6
----- ------ -----
Loss from operations (9.0) (26.5) (84.2)
Other income, net 53.2 78.8 98.2
Interest expense (0.4) (2.9) (8.9)
------ ------- -------
Income before income taxes 43.8 49.4 5.1
Provision (benefit) for income taxes 0.0 (6.3) 1.0
----- ------- -----
Net income 43.8% 55.7% 4.1%
===== ====== =====
</TABLE>
FISCAL 1999 TO FISCAL 1998
NET SALES. Our net sales for fiscal 1999 decreased 15% to $13.4 million from
$15.7 million for fiscal 1998. In 1998, we entered into an agreement for the
license of significant assets of our monitor business to Korea Data Systems
America, Inc. ("KDS") and concluded this transaction in 1999. These monitor
products accounted for $8.7 million in sales for fiscal 1998. Consequently,
sales revenues for fiscal 1999 declined from the previous year as revenues for
fiscal 1999 are almost entirely attributable to video software, which accounted
for approximately $4.6 million in fiscal 1998.
The Company follows Statement of Position (SOP) 97-2, "Software
Revenue Recognition." Revenue from the sale of software, net of estimated
returns, is recognized upon either shipment of the physical product or delivery
of electronic product, at which time, collection is determined to be probable
and the Company has no remaining obligations. Sales to certain resellers are
subject to agreements allowing certain rights of return and price protection on
unsold merchandise held
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<PAGE>
by these resellers. The Company provides for estimated returns at the time of
shipment and for price protection following price declines. Revenue earned
under royalty or commission agreements is recognized in the period in which
it is earned.
During 1999, sales of previously introduced software products for
digital video camcorders including PhotoDV, MotoDV, and EditDV increased over
fiscal 1998. In addition during 1999, we introduced several new products
including EditDV-Windows, MotoDV Studio, MotoDV Mobile, RotoDV, RotoWeb and
IntroDV. Localized versions of several of the products were introduced to the
European and Japanese markets contributing to growth in international
software revenues. Related revenue grew sequentially each quarter of fiscal
1999. However, while we plan to introduce revisions of current products and
increase localized versions, there can be no assurance that sales of these
software products will continue to increase.
Two customers accounted for 20.7% and 18.4% of our net sales for fiscal
1999. For fiscal 1998 the same distributors accounted for 53.5% and 0.0% of our
net sales, respectively.
GROSS PROFIT. Our gross profit margin was 64.4% for fiscal 1999, as
compared with 36.7% for fiscal 1998 as a result of increased sales of higher
margin digital video software products and the discontinuation of lower margin
monitors and other hardware product lines.
Our digital video products have varying gross margins. In addition,
margins vary according to the method of distribution. Accordingly, in any future
period, the product and channel mix will affect the gross margin. While we
expect the gross profit margins to remain at similar levels in the future, there
can be no assurance that our gross margins will improve or remain at current
levels, particularly if the volume of our consumer oriented products grows
significantly in relation to our professional products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased from $2.8 million or 17.9% of net sales for fiscal 1998 to $2.6
million or 19.8% of net sales for fiscal 1999. The decrease in research and
development expenses is primarily due to headcount reductions resulting from our
departure from the monitor and other hardware businesses. The increase in
research and development expenses expressed as a percentage of net sales for
fiscal 1999 was primarily attributable to the decrease in net sales as we
refocused on higher margin software products, rather than high volume, lower
margin hardware products. We expect to increase our research and development
expenses in fiscal 2000 in absolute dollars.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1999 increased slightly to $7.2 million or
53.6% of net sales compared to $7.1 million or 45.3% of net sales for fiscal
1998. Increases in sales and marketing efforts in Japan and Europe offset
decreased expenses from reductions in headcount from fiscal 1998. During the
last quarter of fiscal 1999, we installed both new telephone and computer
systems and expect increased depreciation expense in fiscal 2000.
OTHER INCOME (EXPENSE), NET. Other income was $7.1 million for fiscal
1999 compared to $12.4 million for fiscal 1998. The other income for fiscal 1999
includes $4.5 million from the KDS license, $2.5 million from the sale of the
Color Server Group and other assets to Splash, and $0.1 million in miscellaneous
other income. Fiscal 1998 included $1.6 million related to the KDS license,
$10.0 million from the sale of Splash Common Stock, $0.5 million from the sale
of Umax Common Stock and $0.3 in miscellaneous other income.
INTEREST EXPENSE. Interest expense was $55,000 for fiscal 1999 as
compared to $.5 million for fiscal 1998. This decrease was due to lower average
borrowings primarily as a result of the repayment of the working capital line of
credit, which was secured by the note receivable from KDS.
PROVISION FOR INCOME TAXES. No provision for income taxes was recorded
in fiscal 1999 due to the benefit of previously unutilized net operating losses
and timing differences. For fiscal 1998 we recorded a reversal of accrual for
income taxes of $1.0 million. The reversal reflects the fact that exposure in
certain foreign jurisdictions, as a result of the passage of time, had become
remote.
FASB Statement 109, Accounting for Income Taxes, provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Our valuation allowance reduced the deferred tax asset to the amount
realizable. We have provided a full valuation allowance against our net deferred
tax assets due to uncertainties surrounding their realization. Due to the net
cumulative losses reported, predictability of earnings in future periods is
uncertain. We will evaluate the realizability of the deferred tax assets on a
quarterly basis.
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<PAGE>
As a result of our issuance of common stock and Series A Convertible
Preferred Stock in exchange for the release of certain liabilities in
September 1996, we experienced a "change in ownership" as defined under
Section 382 of the Internal Revenue Code. Accordingly, utilization of
substantial net operating losses and tax credit carryforwards will be subject
to an approximate $2.0 million annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 (and similar state
provisions), except under limited circumstances. This limitation will result
in the expiration of all of the tax credit carryforwards and a substantial
portion of the net operating loss carryforwards without full utilization. See
Note 4 of Notes to Consolidated Financial Statements.
NET INCOME (LOSS). As a result of the above factors, we had net income
of $ 5.8 million in fiscal 1999 compared to a net income of $8.7 million for
fiscal 1998.
FISCAL 1998 TO FISCAL 1997
NET SALES. Our net sales for fiscal 1998 decreased 50% to $15.7 million
from $31.2 million for fiscal 1997. The decline is due primarily to the
following factors: our efforts to refocus on the digital video software product
lines while discontinuing the development of our monitor, accelerated color
graphics products and the DOS on Mac products; and a decline in fourth quarter
sales of our monitor products due to the agreement for the license of
significant assets of our monitor business to KDS. The monitor products had $8.7
million in sales for fiscal 1998 as compared to $16.6 million for fiscal 1997.
As a result of these factors, product sales decreased 45.9% in fiscal 1998 from
fiscal 1997. Commissions and royalties decreased in fiscal 1998 by 77.3% to $1.1
million from $4.9 million in fiscal 1997 due to the termination of our exclusive
distributor relationships in Europe and Japan and due to the expiration of the
royalty agreement with Umax Computer Corporation in March 1998. Also as a result
of the distributor relationships in Japan and Europe, our export sales for
fiscal 1998 declined to $3.7 million as compared to $4.9 million for fiscal
1997. Sales growth in the Asia market has been impacted by certain factors
including weaker economic conditions and stronger dollar versus the local
currencies and the restructuring of various distributor relationships.
Revenue is recognized when products are shipped. Sales to certain
distributors are subject to agreements allowing certain rights of return and
price protection on unsold merchandise held by these distributors. We provide
for estimated returns at the time of shipment and for price protection following
price declines. Revenue earned under royalty or commission agreements is
recognized in the period in which it is earned.
The sale of the software products for digital video camcorders (PhotoDV
introduced in April 1997, MotoDV introduced in September 1997 and EditDV
introduced in November 1997) increased during 1998.
Effective January 1, 1998, we modified our relationships with
distributors in Japan and Europe for our digital video software products. Rather
than paying commissions to us for products sold, they purchase products from us
at a discount from the price list. Commissions were paid on the sales of our
other products sold through these distributors, however.
One customer accounted for 53.5% of our net sales for fiscal 1998. For
fiscal 1997 the same distributor accounted for 66.1% of our net sales.
GROSS PROFIT. Our gross profit margin was 36.7% for fiscal 1998, as
compared with 0.4% for fiscal 1997. This increase was a result of our decision
to refocus our business on higher margin digital video software products.
Included in fiscal 1997 cost of sales are one-time charges of $9.7 million
consisting principally of inventory write downs of $7.7 million and reserves for
excess purchase order commitments of $2.0 million for inventory in excess of
anticipated demand. These charges reflect decreases in demand and were
consistent with our decision to refocus our business. Excluding these one-time
charges, gross profit margin in fiscal 1997 was 31.5%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased from $5.0 million or 16.1% of net sales for fiscal 1997 to $2.8
million or 17.9% of net sales for fiscal 1998. We decreased our research and
development expenses primarily by reducing expenses related to discontinued
product lines in connection with our efforts to refocus our business. The
increase in research and development expenses expressed as a percentage of net
sales for fiscal 1998 was primarily attributable to the decrease in net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased from $21.4 million or 68.6% of net sales for
fiscal 1997 to $7.1 million or 45.4% of net sales for fiscal 1998. Included in
these expenses for fiscal 1997 is a $2.6 million charge to increase the
allowance for doubtful accounts due to accounts which we determined were
unlikely to be collected in full. Adjusting for these charges and reductions,
selling, general and administrative expenses
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<PAGE>
would have been $18.8 million or 60.3% of net sales in fiscal 1997. We
decreased fiscal 1998 selling, general and administrative expenses in
absolute and percentage terms primarily by reducing expenses related to
headcount.
OTHER INCOME (EXPENSE), NET. Other income was $12.4 million for
fiscal 1998 compared to $30.6 million for fiscal 1997. The other income for
fiscal 1998 was due to the sale of 570,139 shares of Splash common stock
compared to 996,875 shares of Splash common stock in fiscal 1997. Fiscal 1998
also includes $1.6 million related to the KDS license.
INTEREST EXPENSE. Interest expense was $0.5 million for fiscal 1998
as compared to $2.8 million for fiscal 1997. This decrease was due to lower
average borrowings primarily as a result of the repayment of the working
capital line of credit to IBM Credit.
PROVISION FOR INCOME TAXES. We recorded a reversal of accrual for
income taxes of $1.0 million for fiscal 1998 compared to a provision of $0.3
million for fiscal 1997. The reversal reflects the fact that exposure in
certain foreign jurisdictions, as a result of the passage of time, has become
remote.
As a result of our issuance of common stock and Series A Convertible
Preferred Stock in exchange for the release of certain liabilities in
September 1996, we experienced a "change in ownership" as defined under
Section 382 of the Internal Revenue Code. Accordingly, utilization of
substantial net operating losses and tax credit carryforwards will be subject
to an approximate $2.0 million annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 (and similar state
provisions), except under limited circumstances. This limitation will result
in the expiration of all of the tax credit carryforwards and a substantial
portion of the net operating loss carryforwards without full utilization. See
Note 4 of Notes to Consolidated Financial Statements.
NET INCOME (LOSS). As a result of the above factors, we had net income
of $ 8.7 million in fiscal 1998 compared to a net income of $1.0 million for
fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased from $.0.6 million at the end
of fiscal 1998 to $3.6 million at the end of fiscal 1999. Approximately $0.1
million of the $3.6 million of cash and cash equivalents available at September
30, 1999 was restricted under a letter of credit. The increase in our cash and
cash equivalents during fiscal 1999 was primarily attributable to remaining
funds received from the Splash escrow, and receipt of the licensing fees from
KDS, offset by funding of operating losses during the first half of the year.
Working capital was $980,000 at September 30, 1999.
In fiscal 1998, under the license and asset transfer agreement with
KDS, we transferred our Radius, Supermac, PressView and certain other trademarks
to KDS and licensed certain intellectual property pertaining to PressView and
PrecisionView monitors. The value of the transaction was $6.2 million payable in
installments. The asset transfer agreement was completed on May 17, 1999, and we
received the final installment payment on the note in July 1999.
We believe that our cash and cash equivalents, cash flow from
operations, and other available sources of financing, will be sufficient to fund
operations for the next fiscal year. However, there can be no assurances that
the sale of software products will continue to increase to a sufficient extent
to fund our operating plan for fiscal 2000. We may need to reduce our operating
expenses or seek additional sources of working capital.
Capital expenditures were approximately $0.7 million during fiscal
1999, primarily attributable to the upgrade of our telephone and computer
systems and leasehold improvements. As a result of these significant
expenditures in 1999, such capital expenditures for fiscal 2000 are expected to
decrease.
At September 30, 1999, our principal commitments consisted of our
obligation under a building lease. See Note 2 to the Consolidated Financial
Statements. We are also a party to various litigation proceedings, the costs of
defending or the outcome of which could adversely affect the Company's
liquidity. See "Business -- Legal Proceedings."
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<PAGE>
CERTAIN FACTORS THAT MAY AFFECT OUR FUTURE RESULTS OF OPERATIONS
Our future operating results could be affected by a number of
uncertainties, including:
OPERATING LOSSES
While we have achieved profitability on the operating level during the
last two quarters of 1999, we have experienced operating losses in each of its
prior five fiscal years. Our ability to sustain profitable operations will
depend upon a number of factors, including our ability to control costs; our
ability to generate sufficient cash from operations or obtain additional funds
to fund our operating expenses; our ability to successfully market our software
products; our ability to develop innovative and cost-competitive new products
and to bring those products to market in a timely manner; and competitive
factors such as new product introductions, product enhancements and aggressive
marketing and pricing practices; general economic conditions; and other factors.
For these and other reasons, there can be no assurance that we will be able to
maintain profitability.
FLUCTUATIONS IN OPERATING RESULTS
We have experienced substantial fluctuations in operating results. Our
customers generally order on an as-needed basis, and we have historically
operated with relatively small backlogs. Quarterly sales and operating results
depend heavily on the volume and timing of bookings received during the quarter,
which are difficult to forecast. A substantial portion of our revenues are
derived from sales made late in each quarter, which increases the difficulty in
forecasting sales accurately. We recognize sales upon shipment of product, and
allowances are recorded for estimated uncollectible amounts, returns, credits
and similar costs, including product warranties and price protection. Due to the
inherent uncertainty of such estimates, there can be no assurance that our
forecasts regarding bookings, collections, returns, credits and related matters
will be accurate. A significant portion of our operating expenses are relatively
fixed in nature, and planned expenditures are based primarily on sales forecasts
which, as indicated above, are uncertain. Any inability on the part to adjust
spending quickly enough to compensate for any failure to meet sales forecasts or
to receive anticipated collections, or any unexpected increase in product
returns or other costs, could also have an adverse impact on our operating
results. As a strategic response to a changing competitive environment, we have
elected, and, in the future, may elect from time to time, to make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on the our business. As a result, we believe that
period-to-period comparisons of our results of operations will not necessarily
be meaningful and should not be relied upon as any indication of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarter, our operating results will be below the expectations of public
market analysts and investors. In such event, the price of our common stock
would be likely to be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON AND COMPETITION WITH APPLE
Although most of our current products are cross platform and are
targeted at the Windows environment, it is expected that sales of products for
Apple computers will continue to represent a portion of our sales for fiscal
2000. While Apple has introduced new products which have been well received in
the marketplace this year, Apple had lost significant market share over recent
years. Our operating results would be adversely affected if other developments
were to adversely affect Apple's business. Furthermore, any continued difficulty
that may be experienced by Apple in the development, manufacturing, marketing or
sale of its computers, or other disruptions to, or uncertainty in the market
regarding Apple's business, resulting from these or other factors, could result
in further reduced demand for Apple computers, which in turn could materially
and adversely affect sales of our products. A number of our products compete
with products marketed by Apple, e.g. Final Cut and iMovie. As a competitor,
Apple could in the future take steps to hinder our development and to slow sales
of our products. New products anticipated from and introduced by Apple could
cause customers to defer or alter buying decisions due to uncertainty in the
marketplace, as well as presenting additional direct competition. In order to
develop products for the Macintosh on a timely basis, we depend upon access to
advance information concerning new Macintosh products. A decision by Apple to
cease sharing advance product information with us would adversely affect out
business. We also license certain technology from Apple to use on both the
Macintosh and Windows platform. Favorable licensing terms cannot be assured in
the future. If Apple ceases to support this technology for the Windows platform
this would adversely affect our business.
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<PAGE>
DEPENDENCE ON AND COMPETITION WITH MICROSOFT
As a competitor, Microsoft could in the future take steps to hinder our
development and to slow sales of our products. New products anticipated from and
introduced by Microsoft could cause customers to defer or alter buying decisions
due to uncertainty in the marketplace, as well as presenting additional direct
competition. In order to develop products for Windows on a timely basis, we
depend upon access to advance information concerning new Microsoft operating
systems and their digital video software architecture. A decision by Microsoft
to cease sharing advance product information with us would adversely affect our
business.
COMPETITION
The markets for our products are highly competitive, and we expect
competition to intensify. Many of our current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources, particularly Adobe Systems. We believe that our ability to compete
will depend on a number of factors, including the amount of financial resources
available, success and timing of new product developments and its competitors,
product performance, price and quality, breadth of distribution and customer
support. There can be no assurance that we will be able to compete successfully
with respect to these factors. In addition, the introduction of lower priced
competitive products could result in price reductions. See "Business --
Competition."
DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS
We are dependent on sole or limited source suppliers for certain key
components used in the Firewire card. We purchase these sole or limited source
components primarily pursuant to purchase orders placed from time to time in the
ordinary course of business and have no guaranteed supply arrangements with sole
or limited source suppliers. Therefore, these suppliers are not necessarily
obligated to supply products to us for any specific period, in any specific
quantity or at any specific price, except as may be provided in a particular
purchase order. Although we expect that these suppliers will continue to meet
our requirements for the components, there can be no assurance that they will do
so. Our reliance on a limited number of suppliers involves a number of risks,
including the absence of adequate capacity, the unavailability or interruption
in the supply of key components and reduced control over delivery schedules and
costs. We expect to continue to rely on a limited number of suppliers for the
foreseeable future. If these suppliers became unwilling or unable to continue to
provide these components, we would have to develop alternative sources for these
components which could result in delays or reductions in product shipments. The
introduction of new products presents additional difficulties in obtaining
timely shipments from suppliers. Additional time may be needed to identify and
qualify suppliers of the new products.
TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS
The digital video software applications industry is characterized by
rapidly changing technology, often resulting in short product life cycles and
rapid price declines. We believe that our success will be highly dependent on
our ability to develop innovative and cost-competitive new products and to bring
them to the marketplace in a timely manner. If we fail to introduce new products
on a timely basis, our operating results could be adversely affected. A
reduction in available cash resources could also result in the interruption or
cancellation of research and product development efforts which would have a
material adverse effect on the business. We anticipate that the digital video
software industry will follow the pattern of the professional publishing
industry in which desktop publishing products, including those produced by our
predecessor, replaced more expensive, proprietary products, and we also
anticipate that this evolution will lead to an increase in the purchase and use
of digital video editing products for use with digital video camcorders. As a
result, we have devoted significant resources to this product line. There can be
no assurance that this evolution will occur in the digital video editing
industry as expected, or that even if it does occur that it will not occur at a
slower pace than anticipated. There can also be no assurance that any digital
video editing products developed by us will achieve consumer acceptance or broad
commercial success. In the event that the increased use of such video editing
products does not occur or in the event that we are unable to successfully
develop and market such products, our business, operating results and financial
condition would be materially adversely affected, particularly in light of the
fact that we have licensed or sold its remaining hardware product lines over the
last four years.
DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS
Our primary means of distribution is through a limited number of
third-party distributors that are not under our direct control. Furthermore, we
continue to build a new distribution network in Europe and in Japan. We maintain
only a small direct sales force. As a result, our business and financial results
are highly dependent on the amount of products ordered by
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these distributors. Such orders are in turn dependent upon the continued
viability and financial condition of these distributors as well as on their
ability to resell such products and maintain appropriate inventory levels.
These distributors generally carry the product lines of a number of
companies, are not subject to minimum order requirements and can discontinue
marketing our products at any time. We must compete for the focus and sales
efforts of these third parties. In addition, due in part to the historical
volatility of the personal computer industry, some distributors have from
time to time experienced declining profit margins, cash flow shortages and
other financial difficulties. Our future growth and success will continue to
depend in large part upon indirect distribution channels. If our distributors
were to experience financial difficulties, our results of operations could be
adversely affected.
INTERNATIONAL SALES
We expect that international sales, primarily in Europe, will represent
a significant portion of our business activity and will be subject to the normal
risks of international sales such as currency fluctuations, longer payment
cycles, export controls and other governmental regulations and, in some
countries, a lesser degree of intellectual property protection as compared to
that provided under the laws of the United States. Sales in Japan could be
affected by the economic conditions in that region, which have been unfavorable.
Furthermore, a reduction in sales efforts or financial viability of our
international distributors could adversely affect our net sales and our ability
to provide service and support to Japanese and European customers. Additionally,
if for any reason exchange or price controls or other restrictions on foreign
currencies are imposed, our business, operating results and financial condition
could be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL
Our success depends to a significant degree upon the continued
contributions of key management, marketing, product development and operational
personnel and our ability to retain and continue to attract highly skilled
personnel. We currently have only two executive officers. We do not carry any
key person life insurance with respect to any of its personnel. Competition for
employees in the computer industry is intense, and there can be no assurance
that we will be able to attract and retain qualified employees. Because of the
very tight labor market for technical personnel, it has become increasingly
difficult for us to hire new employees and retain key management and current
employees. The failure to attract and retain key personnel would have a material
adverse effect on our business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY RIGHTS
We rely on a combination of patent, copyright, trademark and trade
secret protection, nondisclosure agreements and licensing arrangements to
establish and protect our proprietary rights. Although we intend to defend our
proprietary rights, policing unauthorized use of proprietary technology or
products and defending patents, copyrights and trademarks are difficult, and
there can be no assurance that our efforts will be successful. Moreover, the
laws of certain foreign countries may not protect our proprietary rights to the
same extent as do the laws of the United States. We have also received, and
expect to receive in the future, communications asserting that our products may
infringe the proprietary rights of third parties. As a result of such claims or
potential litigation, it may become necessary or desirable in the future for us
to obtain licenses relating to one or more of its products or relating to
current or future technologies, and there can be no assurance that we would be
able to do so on commercially reasonable terms.
IMPACT OF YEAR 2000
The year 2000 Issue ("Y2K Issue") is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of our computer programs or hardware that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on prior assessments of our information management and accounting systems,
we determined that it was necessary to replace significant portions of this
software and certain hardware, which was completed during fiscal 1999. We have
spent approximately $700,000 on our new information technology and accounting
systems and anticipate spending an additional $300,000 in fiscal 2000. We paid
for this investment from internally generated funds. The upgrade of those
systems represents over 90% of the information technology budget for the year
and was our major project. In addition to Y2K readiness, these systems provide
additional functionality in streamlining and automating many business processes
and increasing operating efficiencies. No major information technology projects
were deferred as a result. Based on a review of our product line, we have
concluded that none of our products require remediation to be Year 2000
compliant, as primarily all operate in conjunction with the MacOS or the Windows
operating system. We therefore do not believe that the
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Y2K Issue presents a material risk with respect to our current products. In
addition, we have received assurances from our key suppliers and distributors
that they are fully compliant. However, we have no means of ensuring that
such suppliers and distributors will be Year 2000 ready. The inability of
suppliers and distributors to complete their Year 2000 resolution process in
a timely fashion could materially impact us. Our contingency plans, should
our suppliers and distributors fail to be Year 2000 compliant, would
primarily involve manual processes and workarounds, which could result in
delays in obtaining components for our products, in shipping product, in
collecting receivables, and also increased administrative expense. To date,
we believe that we have adequately addressed the Y2K Issue, but there can be
no assurance that Y2K problems will not adversely affect our business.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Company's Financial Statements, Financial Schedules,
and the Report of the Independent Auditors appears in Part IV of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors as of September 30, 1999 were as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
----- --- -------------------- --------------
<S> <C> <C> <C>
Michael D. Boich (2) 45 CEO of Eazel, Inc. 1986
John Cirigliano 57 President of CLB Associates 1999
Mark Housley 43 Chairman, President and Chief Executive 1997
Officer of the Company
John C. ("Jack") Kirby (1) 55 President of W.R. Carpenter North America;
Executive Vice President of KH Consulting
Group 1997
Stephen Manousos (2) 49 Vice President Worldwide Sales and
Merchant Services of Catalog City, Inc 1999
Henry V. ("Hank") Morgan (1) 60 Chief Financial Officer and Senior Vice 1998
President of Redcreek Communications, Inc.
Carl Rosendahl 42 Chairman, Pacific Data Images, Inc. 1999
</TABLE>
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(1) Member of the Audit Committee
(2) Member of the Compensation Committee
MR. BOICH has been a director since the company's inception in May
1986 and was the Chairman of the Board of Directors from April 1991 until
March 1994. Mr. Boich founded Eazel, Inc., an open source software and web
based solutions developer, in August 1999. Mr. Boich was President and Chief
Executive Officer of Rendition, Inc., a developer of graphics chips, from
March 1994 until its sale in 1998. Mr. Boich served as our President and
Chief Executive Officer from inception until April 1991 and again assumed
these positions from September 1992 through February 1993. From July 1985 to
April 1986, Mr. Boich worked as an independent data communications
consultant. From March 1982 to July 1985, Mr. Boich was employed by Apple,
where he was part of the original Macintosh development team and was
responsible for applications software acquisitions and promoting third-party
software development for the Macintosh.
MR. CIRIGLIANO joined the Board of Directors in 1999. As president
and founder of the privately held consulting firm of CLB Associates, he has
advised or invested in dozens of emerging companies in a range of industries
including manufacturing, marketing, communications, software and hardware
since 1986. Such work has focused on operating or strategic initiatives and
implementations designed to significantly improve client company operations
and enhance equity values. In such capacity, Mr. Cirigliano advised the
company from 1995 until 1998. Prior to his association with CLB Associates,
Mr. Cirigliano was a managing director with Merrill Lynch Capital Markets for
ten years, where he headed the team that developed a highly successful zero
coupon convertible product. Mr. Cirigliano also co-founded Copaquen
Associates, a privately-held computer software development and advisory firm,
and Corporate Property Investors, a large, privately held real estate
investment trust now part of Simon DeBartolo. From 1991 to 1997, he was a
Director of Ajax Electric Corp., a leading domestic distributor of electric
motors and served as a Senior Advisor to "The Red Herring" magazine as well
as on the Advisory Board of Outward Bound U.S.A. and The Endowment Trust. Mr.
Cirigliano received his BA from Columbia University and his JD from New York
Law School.
MR. HOUSLEY has been President and Chief Operating Officer since
January 1997, CEO since August 1997 and Chairman since December 1997. From
March 1995 until October 1996, Mr. Housley was founder and Vice President of
marketing of Spectrum Wireless, Inc., a manufacturer of wireless
infrastructure products. From May 1992 until March 1995,
-17-
<PAGE>
Mr. Housley held various positions of responsibility for the company and its
predecessor SuperMac Technologies, Inc., including Vice President and General
Manager of the Color Publishing Division. From October 1990 until May 1992,
Mr. Housley was a Vice President for Siemens AG in Santa Clara, a
multinational manufacturer of electronic equipment, directing product
marketing and planning.
MR. KIRBY joined the Board of Directors in 1998 and has been a
principal and Executive Vice President of KH Consulting Group since 1986. Mr.
Kirby is responsible for this firm's reorganization and financial
restructuring practice. In this capacity, Mr. Kirby has represented various
debtors, secured parties, trade creditors and corporate buyers and frequently
assumes a management role in the client. Mr. Kirby also currently serves as
President of W.R. Carpenter North America, a diversified holding company with
interests in the the manufacturing and distribution of heavy mechanized
equipment. From early 1995, Mr. Kirby was President and CEO of Cabrillo Crane
& Rigging, Inc., a wholly owned subsidiary of Wells Fargo Bank, until its
sale in late 1997. From 1992 until 1994, Mr. Kirby was Vice President and CFO
of Everex Systems, Inc.
MR. MANOUSOS joined the Board of Directors in February 1999. He
joined Catalog City, Inc., a privately held catalog shopping portal on the
Internet, as Vice President of Sales and Merchant Services in August 1999.
Mr. Manousos co-founded and has served as Chief Executive Officer and
Director of Post Digital since May 1981. Post Digital is an electronic
prepress and digital printing company. From April 1991 until June 1996, Mr.
Manousos co-founded and served as Vice President of Sales and Marketing, and
later Vice President of Sales at Fractal Design Corporation, and was a member
of its Board of Directors until the company was acquired by MetaTools in May
1997. While at Fractal, Mr. Manousos managed the sales and marketing teams
and was responsible for the company's product packaging. Prior to Fractal,
Mr. Manousos spent 17 years in newspaper editing and writing, including a
stint as an editor on the national desk of the Los Angeles Times.
MR. MORGAN joined the company in February 1997 as Chief Financial
Officer and Senior Vice President, Finance and Administration. He resigned
from these positions in September 1998 in order to assume his current duties
at Redcreek Communications, Inc., an Internet start up company. He remained
Secretary to the company and was appointed to the Board of Directors in
October 1998. During 1995 and 1996, Mr. Morgan was Executive Vice President
and Chief Financial Officer of Connect, Inc. of Mountain View, California, an
Internet-based interactive commerce applications software company. From 1989
through 1994, Mr. Morgan was Executive Vice President and Chief Financial
Officer of Logitech International, S.A., a computer mouse manufacturer.
MR. ROSENDAHL joined the Board of Directors in 1999. Mr. Rosendahl
is Chairman of Pacific Data Images, Inc. "PDI", a privately held Palo Alto
company employing about 300 employees founded in 1980 by Mr. Rosendahl to
combine interests in filmmaking and computer graphics. PDI is an award
winning producer of high-end animation and visual effects for the feature
film, commercial and entertainment industries. PDI has a co-production pact
with DreamWorks SKG to create original, computer animated feature films,
including the movie ANTZ for which Mr. Rosendahl was Executive Producer. The
Academy of Motion Picture Arts and Sciences recognized PDI and its founders
in 1998 with a Technical Achievement Award for the concept and architecture
of PDI's proprietary animation system. Mr. Rosendahl holds a BSEE from
Stanford University (1979), has taught a graduate level course entitled
"Computer Animation and Visual Effects for Film and Television" at USC Film
School in 1993 and 1994 and is a member of ACM SIGGRAPH and the governing
board of directors of the Visual Effects Society.
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES
Standing committees of the Board include an Audit Committee and a
Compensation Committee. The Board does not have a nominating committee.
Messrs. Kirby and Morgan are currently the members of the Audit
Committee. The Audit Committee meets with our independent auditors concerning
the scope of their annual audit, the findings of the auditors with respect to
our accounting systems and controls, and other matters relating to the
preparation of our audited financial statements.
Messrs. Boich and Manousos are currently the members of the
Compensation Committee. The Compensation Committee considers all matters of
executive compensation and makes recommendations to the Board regarding the
compensation of our executive officers and the establishment of employee
benefit plans generally. The Compensation Committee also administers our
stock option plans and makes stock option awards to executive officers.
During the year ended September 30, 1999, the Board met six times, the
Audit Committee met once, and the Compensation Committee met twice. None of the
nominees for director attended fewer than 75% of the aggregate total
-18-
<PAGE>
number of meetings of the Board of Directors (held during the period for
which he was a director) and the total number of meetings held by all
committees of the Board of Directors on which he served (held during the
period that he served).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee has one former officer of the company as
a member. Mr. Boich was President and Chief Executive Officer of the Company
from May 1986 until April 1991 and from September 1992 through February 1993.
COMPENSATION OF DIRECTORS
Board members are reimbursed for expenses incurred in attending
board or committee meetings. Except as described below, they are not
otherwise compensated for attending board or committee meetings.
The 1994 Directors Stock Option Plan (the "1994 Directors Plan") was
adopted by the Board on December 14, 1994 and approved by the shareholders on
February 15, 1995. A total of 19,000 shares of the Company's Common Stock
have been reserved for issuance under the 1994 Directors Plan (consisting of
10,000 shares allocated to the 1994 Directors Plan at the time of its
adoption by the Board plus 9,000 shares that were authorized for issuance,
but not issued or subject to outstanding options, under the previous 1990
directors' stock option plan as of September 30, 1999).
The 1994 Directors Plan provides for the automatic grant of 1,000
nonqualified stock options ("NQSOs") to non-employee members of the Board
upon appointment to the Board and annual grants of 250 NQSOs on each
anniversary of a director's initial grant, provided the Director continues to
serve on the Board at such time. Options granted under the 1994 Directors
Plan vest on the anniversary date of the grant at the rate of 25% per year.
During fiscal 1999, Messrs. Boich and Kirby each received an option
to purchase 250 shares of common stock from the 1994 Directors Plan at an
exercise price equal to the common stock's fair market value at the time of
grant. During fiscal 1999, Messrs. Cirigliano, Manousos and Rosendahl each
received grants of 1000 shares from the 1994 Directors Plan at exercise
prices equal to the common stock's fair market value at the time of grant.
Moreover, each of these three also received grants of 10,000 shares from our
1995 Stock Option Plan at exercise prices equal to the common stock's fair
market value at the time of grant. All options granted have a term of ten
years.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
The provisions of Section 317 of the California Corporations Code,
Article V of our Articles of Incorporation and Article VI of our Bylaws
provide for indemnification to the fullest extent permitted by law for
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of
the fact that any person is or was a director, officer or employee. In
addition, Article IV of our Articles of Incorporation provides that the
liability of our directors shall be eliminated to the fullest extent
permissible under the California Law. We have entered into Indemnity
Agreements with each of our current directors to give such directors
additional contractual assurances regarding the scope of the indemnification
and liability limitations set forth in the Articles of Incorporation and
Bylaws. We currently carry a director and officer liability insurance
policies with a per claim and annual aggregate coverage limit of $7.5 million.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934 (as amended)
requires that the officers, directors and ten percent or greater shareholders
file reports of changes in ownership of our securities with the SEC with
copies us. To our knowledge, all such required reports were timely filed for
fiscal year 1999, except: Mr Boich inadvertently failed to timely report on
Form 5 two options for 250 shares each granted under the 1994 Directors Plan
and Mr. Kirby inadvertently failed to timely report on Form 5 an option for
10,000 shares granted on June 29, 1998 and an option for 250 shares granted
on February 25, 1998 under the 1994 Directors Plan.
-19-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the
compensation awarded to, earned by or paid for services rendered in all
capacities to the Company during each of the fiscal years ended September 30,
1997, 1998 and 1999 by our Chief Executive Officer and Chief Financial
Officer (collectively, the "Named Executive Officers"). No other executive
officer who held office at September 30, 1999, met the definition of "most
highly compensated executive officer" within the meaning of the SEC's
executive compensation disclosure rules.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------------- ------------
Securities
Name and Annual Fiscal Annual Other Annual Underlying All Other ($)
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION
- ------------------ ---- --------- -------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark Housley (1) 1999 199,038 196,010 - 100,000 1,000
President, CEO and 1998 180,000 70,625 - 100,000 1,000
Chairman 1997 179,886 50,000 - 100,000 1,000
Mary F. Bobel (2) 1999 63,692 43,121 - 60,000 1,000
Vice President 1998 - - - - -
and CFO 1997 - - - - -
</TABLE>
- ----------------------------
(1) Mr. Housley became President and CEO in August 1997.
(2) Ms. Bobel became Vice President and CFO in May 1999.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth further information regarding
individual grants of stock options during fiscal 1999 to each of the Named
Executive Officers. In accordance with the rules of the Securities and
Exchange Commission, the table sets forth the hypothetical gains or "option
spreads" that would exist for the options at the end of their respective
ten-year terms based on assumed annualized rates of compound stock
appreciation of 5% and 10% from the dates the options were granted to the end
of the respective option terms. Actual gains, if any, on option exercises are
dependent on the future performance of our Common Stock and overall market
conditions. There can be no assurance that the potential realizable values
shown in this table will be achieved.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
Potential Realizable Value
Number of at Assumed Annual Rates
Securities of Stock Price
Underlying % of Total Appreciation for Option
Options Options Granted TERMS ($)(1)
Granted to Employees in Exercise Expiration --------------------------
NAME (#) FISCAL YEAR PRICE ($/SHARE) DATE 5% 10%
- -------------- -------- ----------- --------------- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Mark Housley 45,000 (2) 8.73% $0.84 11/2/08 $ 23,878 $ 60,512
Mark Housley 55,000 (2) 10.67% $2.69 3/31/09 $ 92,958 $235,575
Mary F. Bobel 60,000 (2) 11.64% $2.69 5/4/09 $101,444 $257,100
</TABLE>
(1) The potential realizable value is calculated based on the term of the
option at its time of grant, compounded annually. It is calculated by
assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its
term for the appreciated stock price. These amounts are net of exercise
prices. The assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent our estimate
or projection of future Common Stock prices. Actual gains, if any, on
option exercises are dependent on future performance of our Common Stock
and overall market conditions. There can be no assurance that the
potential realizable values shown in this table will be achieved.
-20-
<PAGE>
(2) These stock options were granted with an exercise price equal to the
closing fair market value of our Common Stock on the date of grant. These
options became exercisable at the rate of 4% per month of the total
shares. These options lapse within 30 days after the termination of the
applicable employment, director or consulting relationships with the
Company.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table shows the number of shares of Common Stock
represented by outstanding stock options held by each Named Executive Officer
as of September 30, 1999 and the value of such options based on the last
sales price of our common stock on October 1, 1999 (the last trading day
prior to the end of fiscal 1999), which was $5.50.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-end (#) at Fiscal Year-end ($)
------------------------------ ----------------------
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Mark Housley - - 205,000/95,000 462,019/308,400
Mary F.Bobel - - 9,600/50,400 27,000/141,750
</TABLE>
BOARD OF DIRECTORS AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
THIS SECTION IS NOT "SOLICITING MATERIAL," IS NOT DEEMED FILED WITH
THE SEC AND IS NOT TO BE INCORPORATED BY REFERENCE IN ANY FILING UNDER THE
SECURITIES ACT OR THE EXCHANGE ACT WHETHER MADE BEFORE OR AFTER THE DATE
HEREOF AND IRRESPECTIVE OF ANY GENERAL INCORPORATION LANGUAGE CONTAINED IN
ANY SUCH FILING.
During the 1999 fiscal year, final decisions regarding executive
compensation were made by the Compensation Committee (the "Committee"). The
Committee currently consists of Messrs. Boich and Manousos. The Board is
currently composed of six independent non-employee directors and one employee
director. Although Mr. Housley is a member of the Board, he does not
participate in deliberations that relate to his own compensation.
GENERAL COMPENSATION POLICY
The Committee establishes the general compensation policies for the
executive officers and typically reviews base salary levels, option levels
and target bonuses for the executive officers. The Board has delegated to the
Committee the authority to grant stock options to the Company's executive
officers and has delegated to the Chief Executive Officer ("CEO") the
authority to grant stock options to employees other than executive officers.
When establishing salaries, bonus levels and stock option awards for
executive officers, the Committee considers: (1) our financial performance
during the past year and recent quarters, (2) the individual's performance
during the past year and recent quarters, and (3) the salaries of executive
officers in similar positions in companies of comparable size within the
computer industry. With respect to executive officers other than the CEO, the
Committee places considerable weight upon the recommendation of the CEO. The
method for determining compensation varies from case to case based on a
discretionary and subjective determination of what is appropriate at the
time. Also, for fiscal 1999, attaining operating profitability and a positive
net worth was given significant consideration in determining compensation in
addition to the other factors referred to above.
The Committee reviews available executive compensation sample data
for similar companies within the computer industry. The companies included in
the sample data included companies present in the NASDAQ (US) Index and the
Hambrecht & Quist Technology Index (used for purposes of the returns data
presented in the "Performance Graph" below), but the sample was not intended
to correlate with either of these indices. The Committee assessed this data
in reviewing executive officer salaries. For the 1999 fiscal year, base
salaries have been set somewhat below market, while targeted bonuses have
been set at market in order to emphasize performance.
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<PAGE>
The Committee believes that the compensation of the executive
officers also should be significantly influenced by the Company's
performance. Accordingly our practice has been to make additional
compensation in the form of bonuses and options available for each executive
contingent upon corporate performance. Specifically, corporate performance
determines bonus payments made to executive officers as bonuses are based on
achieving corporate financial objectives. Additional bonuses may also be
granted in recognition of outstanding individual performance. In each case,
targeted bonuses are established by the Committee in its discretion.
Significant stock options are granted to executive officers in order
to provide appropriate long term financial incentives and to align the
interests of the executives with the shareholders. The Committee does not set
specific target levels for options granted to Named Executive Officers or for
the CEO. Initial option grants are awarded to executives when they first
join. Initial option grants are normally larger than subsequent option grants
in order to incent the executive to join by participating in long term
success. Subsequent option grants are awarded from time to time depending on
the executive's particular circumstances such as a significant change in
responsibilities, superior performance, or the number of unvested options
then held by the executive. The number of stock option awards is based on a
discretionary and subjective determination by the Committee based on the
foregoing factors and does not necessarily take into account options granted
by comparably sized peer companies. The relative importance of these factors
varies from case to case based on a discretionary and subjective
determination by the Committee of what is appropriate at the time. In fiscal
1999, the primary factor considered in granting options to executive officers
was attaining operating profitability and a positive net worth.
FISCAL YEAR 1999 EXECUTIVE COMPENSATION
For the 1999 fiscal year, the Committee and the CEO reviewed data
collected by Radford Associates in evaluating base salaries for executive
officers. Base salaries for our executives for the 1999 fiscal year were
determined based upon these surveys, the compensation policies described
above and the CEO's recommendations.
The executive officer bonus plan for the 1999 fiscal year (the "1999
Executive Plan") provided for a target bonus of fifty percent of base salary
for vice presidents with payments to be made semi-annually based on the
attainment of operating income goals. Bonus payments were contingent on
achieving at least eighty percent of these financial goals. In the event the
financial goals were exceeded, payments would exceed target amounts. The
specific financial goals established by us in conjunction with our annual
planning process are confidential commercial and business information. Based
on these financial goals, a bonus pool was established on a semi-annual
basis. The size of the semi-annual bonus pool was dependent on whether or not
we achieved at least eighty percent of the financial goals. During fiscal
year 1999, the operating income goals were exceeded and commensurate bonuses
were paid.
In March 1999, the Company granted incremental stock options to its
Chief Executive Officer and three vice presidents Initial grants were also
made later in the year to recruit a CFO and another vice president. See
"Stock Option Grants in the Last Fiscal Year" above.
CEO COMPENSATION
Mr. Housley was hired pursuant to an Employment Agreement in
December 1996 that provides for a base salary of $200,000. In 1999, Mr.
Housley's target bonus was increased to $150,000, to be paid in semi-annual
installments. During fiscal 1999, bonus payments of $196,010 were paid to Mr.
Housley based on exceeding operating income goals. In November 1998 and March
1999, the Company also granted incremental stock options to Mr. Housley. See
"Stock Option Grants in the Last Fiscal Year" above.
COMPLIANCE WITH SECTION 162 OF THE INTERNAL REVENUE CODE OF 1986
The Omnibus Budget Reconciliation Act of 1993 added Section 162(m)
to the Internal Revenue Code. Section 162(m) limits deductions for certain
executive compensation in excess of $1 million. Certain types of compensation
are deductible only if performance criteria are specified in detail, and
payments are contingent on shareholder approval of the compensation
arrangement. The Company believes that it is in the best interests of its
shareholders to structure its compensation plans to achieve maximum
deductibility under Section 162(m) with minimal sacrifices in flexibility and
corporate objectives.
We do not expect that the cash compensation it pays in fiscal 2000
will be great enough to be affected by the requirements of Section 162(m) of
the Code. Because one member of the Compensation Committee is a former
officer, he is not an "outside director" within the meaning of Section 162(m)
and the stock options do not meet the requirements of Section 162(m). The
Committee will continue to monitor this situation and will take appropriate
action if and when it is warranted. Since corporate objectives may not always
be consistent with the requirements for full deductibility, it is conceivable
that we
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<PAGE>
may enter into compensation arrangements in the future under which payments
are not deductible under Section 162(m); deductibility will not be the sole
factor used by the Committee in ascertaining appropriate levels or modes of
compensation.
BOARD OF DIRECTORS COMPENSATION COMMITTEE
Michael D. Boich Michael D. Boich
John C. Kirby Stephen Manousos
Henry V. Morgan
Mark Housley
John Cirigliano
Stephen Manousos
Carl Rosendahl
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<PAGE>
PERFORMANCE GRAPH
The Securities and Exchange Commission requires us to provide a
comparison on an indexed basis of cumulative total shareholder return for the
company, a relevant broad equity market index and a published industry or
line-of-business index. Cumulative total shareholder return represents share
value appreciation assuming the investment of $100 in our common stock and
each of the other indexes in September 1994, and reinvestment of all
dividends. Our common stock is traded on the Nasdaq SmallCap Market. Set
forth below is a graph comparing cumulative total shareholder return on our
common stock, the NASDAQ(US) Index and the Hambrecht & Quist Technology Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG DIGITAL ORIGIN, INC., THE NASDAQ STOCK MARKET
(U.S.) INDEX
AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
<TABLE>
<CAPTION>
Cumulative Total Return
----------------------------------------------------
9/94 9/95 9/96 9/97 9/98 9/99
<S> <C> <C> <C> <C> <C> <C>
DIGITAL ORIGIN, INC. 100 83 20 8 1 6
NASDAQ STOCK MARKET (U.S.) 100 138 164 225 229 372
HAMBRECHT & QUIST TECHNOLOGY 100 175 192 287 267 514
</TABLE>
* $100 INVESTED ON 9/30/94 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING SEPTEMBER 30.
-24-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information known to us with
respect to beneficial ownership of our common stock as of September 30, 1999
(except as noted), for (i) each shareholder who is known by us to be the
beneficial owner of more than 5% of our common stock; (ii) the Named
Executive Officers (defined above), (iii) each of our directors, and (iv) all
our current directors and executive officers as a group. Shares of common
stock beneficially owned include securities that can be acquired by such
person within 60 days of September 30, 1999 upon the exercise of stock
options or warrants or upon conversion of convertible securities.
<TABLE>
<CAPTION>
Amount and Nature of Percent
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS
------------------------ ------------------------ --------
<S> <C> <C>
Ellenburg Group (2) 404,990 7.24%
Michael D. Boich (3) 15,807 *
Mark Housley (4) 213,000 3.81%
Jack Kirby (5) 7,363 *
Hank Morgan (6) 42,000 *
John Cirigliano (7) 18,774 *
Stephen Manousos (8) 16,200 *
Carl Rosendahl (9) 2,000 *
Mary Bobel (10) 14,400 *
All current executive officers and 329,544 5.89%
directors as a Group (eight persons) (11)
</TABLE>
* Less than one percent.
(1) Percentage ownership is based on 5,592,632 shares outstanding as of
September 30, 1999. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable.
(2) Includes 5,000 shares of common stock issuable upon exercise of
warrants at an exercise price of $10.00 per share until October 13,
2000. Messrs. Ellenburg, Karno, Epple and Edwards are the beneficial
owners of 182,500, 182,500, 23,994 and 15,996 respectively of our
common stock, each filing a separate Schedule 13D on December 11, 1997
with the Securities and Exchange Commission. All such persons may be
deemed to constitute a "group" within the meaning of Section 13 (d) (3)
of the Securities Exchange Act of 1934 because all of their
acquisitions of these shares were made pursuant to an option to
purchase granted by Mitsubishi Electronics America, Inc. Mr. Epple is
also the beneficial owner of 4,000 shares of stock not purchased
pursuant to such option and these shares are not included in the total
amount of the Ellenburg Group. Mr. Ellenburg's address is 217 N.
Missouri Avenue, Clearwater, FL 33755; Mr. Karno's address is 16255
Ventura Blvd. Suite 1200, Encino, CA 91436; Mr. Epple's address is 423
Cleveland Street, Clearwater, FL 33757; and Mr. Edwards' address is 217
North Missouri Avenue, Clearwater, FL 33755. Mr. Ellenburg shares
voting and investment power with Ms. Tomczak. Information with respect
to these holders is based on Schedules 13D filed December 11, 1997.
(3) Represents 15,180 shares held by Mr. Boich, and 627 shares
subject to an option exercisable within 60 days of September 30,
1999.
(4) Represents shares subject to options exercisable within 60 days of
September 30, 1999.
(5) Represents shares subject to options exercisable within 60 days of
September 30, 1999.
(6) Represents shares subject to options exercisable within 60 days of
September 30, 1999.
(7) Includes 15,574 shares owned by affiliates of Mr. Cirigliano, and
3,200 shares subject to an option exercisable within 60 days of
September 30, 1999.
(8) Includes a portion of a warrant issued to Post Digital Software, Inc.
on November 23, 1998, and 3,200 shares subject to an option
exercisable within 60 days of September 30, 1999. Mr. Manousos is
a principal in Post Digital Software, Inc.
(9) Represents shares subject to options exercisable within 60 days of
September 30, 1999.
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<PAGE>
(10) Represents shares subject to options exercisable within 60 days of
September 30, 1999.
(11) Includes the shares described in 3 - 10 footnotes above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 33
Consolidated Balance Sheets at September 30, 1999 and 1998 34
Consolidated Statements of Income for the Years Ended September 30,
1999, 1998 and 1997 35
Consolidated Statements of Convertible Preferred Stock and Shareholders'
Equity for the Years Ended September 30, 1999, 1998, and 1997 36
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998, and 1997 37
Notes to Consolidated Financial Statements 38
(a) (2) FINANCIAL STATEMENT SCHEDULES. The Company's financial statement schedule filed
herewith is as follows:
Schedule II: Valuation and Qualifying Accounts 50
</TABLE>
All other financial statement schedules are omitted because the
information called for is not present in amounts sufficient to
require submission of the schedules or because the information
required is shown either in the financial statements or the notes
thereto.
(a) (3) The following exhibits are filed herewith or incorporated by
reference herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
2.07 -- Merger Agreement (the "Merger Agreement") dated as of December 21, 1995 among Radius Inc.,
Splash Technology, Inc., Summit Subordinated Debt Fund, L.P., Summit Ventures IV, L.P., Summit
Investors II, L.P., Splash Technology Holdings, Inc. and Splash Merger Company, Inc. (2)
2.08 -- Amendment No. 1 to Merger Agreement dated as of January 30, 1996. (2)
2.09 -- Agreement and Plan of Reorganization dated December 28, 1999 with Media 100, Inc.
3.01 A Registrant's Sixth Amended and Restated Articles of Incorporation. (3)
B Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (1)
C Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (15)
-27-
<PAGE>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
4.01 -- Specimen Certificate for shares of Common Stock of the Registrant. (5)
4.03 A Warrant dated September 13, 1995 between IBM Credit Corporation and the Registrant. (8)
B Warrant dated October 13, 1996, between Mitsubishi Electronics America, Inc. and the Registrant. (9)
4.04 -- Form of Registration Rights Agreement between the Registrant and certain shareholders. (8)
A Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation.
(See exhibit 3.01)
4.05 -- The Registrant's Bylaws. (4)
10.01 A *Registrant's 401(k) Savings and Investment Plan. (6)
B *Amendment to Registrant's 401(k) Savings and Investment Plan. (1)
C *Registrant's 401(k) Savings and Investment Plan Loan Policy. (1)
10.02 -- *Registrant's 1995 Stock Option Plan. (1)
10.03 -- *Form of Stock Option Agreement and Exercise Request as currently in effect under 1995 Stock
Option Plan. (1)
10.04 -- *Registrant's 1994 Directors' Stock Option Plan. (1)
10.05 -- Form of Indemnity Agreement with Directors. (5)
10.06 -- *Employment Agreement by and between Registrant and Mark Housley dated December 20, 1996.
(10)
10.07 Asset Purchase Agreement dated as of August 7, 1998 between Korea Data Systems America, Inc. and
the Registrant. (11)
10.08 -- Amended and Restated License Agreement dated as of August 7, 1998 between Korea Data Systems
America, Inc. and the Registrant. (11)
10.09 -- Asset Purchase Agreement dated as of November 23, 1998 between Post Digital Software, Inc. and the
Registrant. (12)
10.10 -- Asset Sale Agreement dated as of December 4, 1998 between Splash Technology Holdings, Inc. and
the Registrant. (12)
10.11 -- Supplement to the License and Asset Purchase Agreement dated December 4, 1998 between Korea
Data Systems America, Inc. and the Registrant. (12)
-28-
<PAGE>
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.12 -- Lease agreement by and between Registrant and Eliane Ortuno, Trustee, Donald T. Kitts Trust dated
January 8, 1999. (460 East Middlefield Road, Mountain View, California offices). (13)
10.13 -- Registrant's 1999 Employee Stock Purchase Plan and related documents. (14)
10.14 -- OEM and license agreement between Media 100, Inc. and the registrant.
- -------------
21.01 -- List of Registrant's subsidiaries.
23.01 -- Consent of Ernst & Young LLP, Independent Auditors.
27.01 -- Financial Data Schedule (EDGAR version only)
</TABLE>
(1) Incorporated by reference to exhibits to the Company's Report on Form
10-K filed on December 15, 1995.
(2) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on February 13, 1996
(3) Incorporated by reference to exhibits to the Company's Report on Form
10-K filed on December 24, 1990.
(4) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 filed on April 29, 1992 (File No. 33-47525).
(5) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-35769) which became effective on
August 16, 1990.
(6) Incorporated by reference to exhibits to the Company's Report on Form
10-K filed on December 28, 1992.
(7) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on August 12, 1992.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-12417) filed on September 20, 1996.
(9) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-12417) filed on
November 12, 1996.
(10) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on February 11, 1997.
(11) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on August 11, 1998.
(12) Incorporated by reference to exhibits to the Company's Report on Form
10-K filed on December 23, 1998.
(13) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on February 10, 1999.
(14) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on May 12, 1999.
(15) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 filed on August 13, 1999 (File No. 333-85213).
* management contracts or compensatory plans required to be filed as an exhibit
to Form 10-K.
- ----------------
-29-
<PAGE>
(b) REPORTS ON FORM 8-K.
No report on Form 8-K was filed during the last quarter of fiscal 1999.
(c) EXHIBITS - See (a) (3) above.
(d) FINANCIAL STATEMENT SCHEDULES - See (a) (2) above.
-30-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused Form 10-K/A, Amendment No. 1
to be signed on its behalf by the undersigned, thereunto duly authorized.
DIGITAL ORIGIN, INC.
By: /s/ Mark Housley
-----------------------------------------
Mark Housley
Chairman of the Board of Directors,
Chief Executive Officer and President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Mark Housley
and Mary F. Bobel, jointly and severally, his true and attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign
amendments to this Report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATES
- ---- ----- -----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Mark Housley Chairman of the Board of Directors, January 28, 2000
- -------------------------------------------
Mark Housley Chief Executive Officer and President
PRINCIPAL FINANCIAL OFFICER
AND CHIEF ACCOUNTING OFFICER:
/s/ Mary F. Bobel Vice-President & Chief Financial Officer January 28, 2000
- -------------------------------------------
Mary F. Bobel
DIRECTORS:
/s/ Michael D. Boich Director January 28, 2000
- -------------------------------------------
Michael D. Boich
/s/ John Cirigliano Director January 28, 2000
- -------------------------------------------
John Cirigliano
/s/ John C. Kirby Director January 28, 2000
- -------------------------------------------
John C. Kirby
-31-
<PAGE>
/s/ Henry V. Morgan Director, Secretary January 28, 2000
- -------------------------------------------
Henry V. Morgan
/s/ Stephen Manousos Director January 28, 2000
- -------------------------------------------
Stephen Manousos
/s/ Carl Rosendahl Director January 28, 2000
- -------------------------------------------
Carl Rosendahl
</TABLE>
-32-
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
DIGITAL ORIGIN, INC.
We have audited the accompanying consolidated balance sheets of Digital
Origin, Inc. as of September 30, 1999 and 1998, and the related consolidated
statements of income, convertible preferred stock and shareholders' equity,
and cash flows for each of the three years in the period ended September 30,
1999. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Digital
Origin, Inc. at September 30, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
November 3, 1999
-33-
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,627 $ 600
Accounts receivable, net of allowance for doubtful accounts
of $3,758 in 1999 and $3,894 in 1998 1,995 364
Note receivable from Korea Data Systems America, Inc. - 4,500
Inventories 211 803
Prepaid expenses and other current assets 161 156
-------- ---------
Total current assets 5,994 6,423
Property and equipment, net 726 133
Other assets 175 -
-------- ---------
$ 6,895 $ 6,556
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,791 $ 1,971
Accrued payroll and related expenses 551 324
Accrued legal expenses 285 69
Other accrued liabilities 1,086 2,000
Deferred income - 4,833
Accrued income taxes 301 1,102
Short-term borrowings - 1,340
-------- ---------
Total current liabilities 5,014 11,639
Accrued income taxes 800 -
Shareholders' equity (net capital deficiency):
Preferred stock, no par value, 2,000 authorized; none
issued and outstanding in 1999 and 1998 - -
Common stock, no par value; 100,000 shares authorized;
issued and outstanding-5,593 shares in 1999 and
5,524 shares in 1998 169,417 169,102
Accumulated deficit (168,390) (174,239)
Other comprehensive income 54 54
-------- ---------
Total shareholders' equity (net capital deficiency) 1,081 (5,083)
-------- ----------
$ 6,895 $ 6,556
======== =========
</TABLE>
See accompanying notes.
-34-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 13,168 $ 14,564 $ 26,276
Commissions and royalties 185 1,104 4,874
--------- -------- ---------
Total net sales 13,353 15,668 31,150
Cost of sales 4,750 9,921 31,032
--------- -------- ---------
Gross profit 8,603 5,747 118
--------- -------- ---------
Operating expenses:
Research and development 2,649 2,801 5,002
Selling, general and administrative 7,154 7,107 21,355
--------- -------- ---------
Total operating expenses 9,803 9,908 26,357
--------- -------- ---------
Loss from operations (1,200) (4,161) (26,239)
Other income, net 7,104 12,353 30,600
Interest expense (55) (459) (2,777)
---------- --------- ----------
Income before income taxes 5,849 7,733 1,584
Provision (benefit) for income taxes - (1,000) 316
--------- --------- ---------
Net income $ 5,849 $ 8,733 $ 1,268
========= ======== =========
Preferred stock dividend - - 272
--------- ---------- ---------
Net income applicable to
common shareholders $ 5,849 $ 8,733 $ 996
========== ======== =========
Net income per common share:
Basic net income per share applicable
to common shareholders $ 1.06 $ 1.58 $ 0.18
========= ========= =========
Diluted net income per share applicable
to common shareholders $ 1.02 $ 1.57 $ 0.18
========= ========= =========
Shares used in computing net income per common share:
Shares used in computing basic net income
per common share 5,535 5,522 5,389
========== ========= =========
Shares used in computing diluted net income
per common share 5,747 5,557 5,522
========== ========= =========
</TABLE>
See accompanying notes.
-35-
<PAGE>
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Shareholder's Equity
------------------------------------------------
Convertible Other Total
Preferred Common Accumulated Comprehensive Shareholders'
Stock Stock Deficit Income Equity
--------- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $ 3,000 $ 168,746 $(183,968) $ 19,182 $ 3,960
Net income -- -- 1,268 -- 1,268
Net translation adjustment -- -- -- 13 13
Change in unrealized gain on available-for-sale securities -- -- -- 2,941 2,941
---------
Total comprehensive income -- -- -- -- 4,222
Issuance of 53 shares of common stock
under Stock Option Plans -- 200 -- -- 200
Issuance of 8 shares of common stock under
Employee Stock Purchase Plan -- 48 -- -- 48
Redemption of 75 shares of preferred stock
held by IBM (3,000) -- -- -- --
Dividends paid on convertible preferred stock -- -- (272) -- (272)
--------- -------------------------------------------------
Balance at September 30, 1997 -- 168,994 (182,972) 22,136 8,158
Net income -- -- 8,733 -- 8,733
Net translation adjustment -- -- -- 11 11
Change in unrealized gain on available-for-sale securities -- -- -- (22,093) (22,093)
---------
Total comprehensive loss -- -- -- -- (13,349)
Issuance of 22 shares of common stock
under Stock Option Plans -- 108 -- -- 108
--------- -------------------------------------------------
Balance at September 30, 1998 -- 169,102 (174,239) 54 (5,083)
Net income -- -- 5,849 -- 5,849
---------
Total comprehensive income -- -- -- -- 5,849
Issuance of 38 shares of common stock
under Stock Option Plans -- 153 -- -- 153
Issuance of 31 shares of common stock
under Employee Stock Purchase Plan -- 89 -- -- 89
Issuance of warrants for 50 shares of common stock -- 73 -- -- 73
--------- -------------------------------------------------
Balance at September 30, 1999 $ -- $ 169,417 $(168,390) $ 54 $ 1,081
--------- -------------------------------------------------
--------- -------------------------------------------------
</TABLE>
See accompanying notes.
-36-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,849 $ 8,733 $ 1,268
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 150 149 801
Gain on the sale of Splash Common Stock -- (10,011) (30,779)
Gain on the monitor license and sale of other assets to KDS (4,502) (1,615) --
Gain on the sale of the Color Server Group and other assets to Splash (2,485) -- --
Gain on the sale of Umax Common Stock -- (534) --
Non-cash restructuring and other charges -- -- 2,162
Loss on disposal of fixed assets -- 22 500
(Increase) decrease in assets:
Accounts receivable (1,631) 1,815 5,968
Note receivable 4,500 (4,500) --
Inventories 592 2 12,047
Prepaid expenses and other current assets (5) 28 182
Income tax receivable -- -- 514
Increase (decrease) in liabilities:
Accounts payable 820 (2,540) (493)
Accrued payroll and related expenses 227 (996) (1,492)
Accrued legal expenses 216 49 (67)
Other accrued liabilities (914) (1,208) 272
Deferred income (4,833) 4,833 --
Accrued income taxes (1) (1,009) (116)
Accrued restructuring and other charges -- (2,033) (420)
-------- -------- --------
Net cash used in operating activities (2,017) (8,815) (9,653)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (703) (55) (55)
Other assets (142) -- 50
Net proceeds from the sale of Splash Common Stock -- 10,011 30,779
Net proceeds from the monitor license and sale of other assets to KDS 4,502 1,615 --
Net proceeds from the sale of the Color Server Group and other assets
to Splash 2,485 -- --
Net proceeds from the sale of Umax Common Stock -- 534 --
-------- -------- --------
Net cash provided by investing activities 6,142 12,105 30,774
-------- -------- --------
Cash flows from financing activities:
Principal payment of short-term borrowings, net (1,340) (3,298) 2,716
Principal payment of long-term borrowings, net -- -- (21,940)
Redemption of preferred stock and related dividend -- -- (3,272)
Issuance of common stock 242 108 248
Principal payments under capital leases -- (273) (1,074)
-------- -------- --------
Net cash used in financing activities (1,098) (3,463) (23,322)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,027 (173) (2,201)
Cash and cash equivalents, beginning of year 600 773 2,974
-------- -------- --------
Cash and cash equivalents, end of year $ 3,627 $ 600 $ 773
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
-37-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The Company's name was changed to Digital Origin, Inc. (formerly
Radius Inc.) in fiscal 1999. The consolidated financial statements include
the accounts of Digital Origin, Inc. ("Digital Origin" or the "Company")
and its wholly-owned subsidiaries after elimination of significant
intercompany transactions and balances.
FINANCIAL STATEMENT ESTIMATES
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,
liabilities, revenues and expenses. Such estimates include levels of
allowance for potentially uncollectible receivables and sales returns;
inventory reserves for obsolete, slow-moving, or non-salable inventory; and
estimated costs for warranty and other customer support obligations. Actual
results could differ from these estimates.
MANAGEMENT'S BUSINESS RECOVERY PLANS
As shown in the accompanying consolidated financial statements,
the Company has incurred recurring operating losses. During fiscal 1997,
1998 and 1999, management implemented a number of actions to address its
cash flow and operating issues, including: refocusing its efforts on
providing solutions for digital video customers; discontinuing sales of
mass market and other low value added hardware products; divesting a number
of businesses and product lines, including the sale of its monitor business
to Korea Data Systems America, Inc.; significantly reducing expenses and
personnel headcount; and reducing its lease obligations given its reduced
occupancy requirements. All revenue in the year ended September 30, 1997
and approximately $13.0 million in the year ended September 30, 1998,
relates to businesses and product lines that have been disposed of over the
last two years. Approximately $12.9 million of revenue in the year ended
September 30, 1999 relates to digital video-related software.
For the fiscal year ended September 30, 1999 the Company had cash
and cash equivalent of $3.6 million, however, during fiscal 2000,
additional funds may be needed to finance ongoing operations and to
implement the Company's development plans and for other purposes. The
Company plans to generate cash from operations and is investigating
possible financing and strategic partnering opportunities.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to
September 30 and included 53 weeks in fiscal 1998. All other fiscal years
presented include 52 weeks. For consistency of presentation, all fiscal
periods in this Form 10-K are reported as ending on a calendar month end.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with
maturities from date of purchase of three months or less to be cash
equivalents; investments with maturities between three and twelve months
are considered to be short-term investments. Cash equivalents are carried
at cost, which approximates market. There were no short-term investments as
of September 30, 1999 and 1998. Approximately $0.1 million of the $3.6
million of cash and cash equivalents at September 30, 1999 was restricted
under various letters of credit.
-38-
<PAGE>
FOREIGN CURRENCY TRANSLATION
There was no foreign currency translation adjustment in fiscal
1999. In prior years, the Company translated the assets and liabilities of
its foreign subsidiaries into dollars at the rates of exchange in effect at
the end of the period and translated revenues and expenses using the
average rate in effect during the period. Gains and losses from these
balance sheet translations are included in other comprehensive income in
the Consolidated Balance Sheets. Foreign currency transaction gains or
losses, which are included in the results of operations, are not material.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using standard costs that approximate cost on a first-in,
first-out basis. The Company reviews the levels of its inventory in light
of current and forecasted demand to identify and provide reserves for
obsolete, slow-moving, or non-salable inventory. Inventories consist of the
following (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Raw materials $ - $ 20
Work in process 74 238
Finished goods 137 545
-------- ---------
$ 211 $ 803
======== =========
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the
following (in thousands):
<CAPTION>
September 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Computer equipment $ 7,076 $ 6,423
Machinery and equipment 111 120
Furniture and fixtures 354 354
Leasehold improvements 45 439
-------- ---------
7,586 7,336
Less accumulated depreciation
and amortization (6,860) (7,203)
--------- ----------
$ 726 $ 133
======== =========
</TABLE>
Depreciation and amortization are calculated using the
straight-line method over the shorter of the estimated useful lives (three
to four years) or lease terms of the respective assets.
OTHER ASSETS
Purchased technology and other intangible assets are stated at
cost less accumulated amortization. Amortization is recorded utilizing the
straight-line method over the useful lives of the respective assets,
generally three years. The Company periodically reviews the net realizable
value of its intangible assets and adjusts the carrying amount accordingly.
CARRYING VALUE OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company records impairment losses on long-lived assets when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than their carrying amounts.
-39-
<PAGE>
REVENUE RECOGNITION
The Company follows Statement of Position (SOP) 97-2, "Software
Revenue Recognition." Revenue from the sale of software, net of estimated
returns, is recognized upon either shipment of the physical product or
delivery of electronic product, at which time, collection is determined to
be probable and the Company has no remaining obligations. Sales to certain
resellers are subject to agreements allowing certain rights of return and
price protection on unsold merchandise held by these resellers. The Company
provides for estimated returns at the time of shipment and for price
protection following price declines. Revenue earned under royalty or
commission agreements is recognized in the period in which it is earned.
WARRANTY EXPENSE
The Company provides at the time of sale for the estimated cost to
repair or replace products under warranty. The warranty period commences on
the end user date of purchase and is normally one year for digital video
products.
ADVERTISING EXPENSES
The Company expenses the costs of advertising as incurred. Amounts
have not been material in all periods presented.
NET INCOME PER SHARE
The Company computes net income per share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128. This statement
requires the presentation of basic and diluted net income per share. Basic
net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share
is computed using the weighted average number of common and dilutive common
shares outstanding during the period. Dilutive common equivalent shares
consist of employee stock options using the treasury stock method.
SEGMENT REPORTING
The Company operates in one business segment, specifically the
development, design and marketing of software for editing digital video.
While the Company has several products at varying price points and in
various versions, all of the products from which the Company earns revenues
are similar. The Company's business practices support the criteria for
segment reporting as outlined in Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and
Related Information.
As disclosed under "Management's business recovery plans" above,
in 1998 and 1997, the Company operated primarily in one other business
segment, the manufacture and sale of monitors and accelerated graphics
products
OFF BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company sells its products to distributors in the United
States and in various foreign countries. The Company performs on-going
credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses.
FAIR VALUE DISCLOSURES
The carrying values of cash and cash equivalents approximate their
fair values as of September 30, 1999.
Estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market
-40-
<PAGE>
data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that the Company could realize in a current market exchange.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public
Accountants issued SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." SOP 98-9 amends SOP
97-2 and SOP 98-4 extending the deferral of the application of certain
provisions of SOP 97-2, amended by SOP 98-4, through fiscal years beginning
on or before March 15, 1999. All other provisions of SOP 98-9 are effective
for transactions entered into in fiscal years beginning after March 15,
1999. The adoption of SOP 98-9 is not expected to have a significant impact
on the Company's financial statements.
NOTE TWO. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has an operating lease for its headquarters in
Mountain View, California, for a period of three years beginning April 15,
1999, with an option to extend the lease for an additional two years. The
base rent is $25,000 per month the first year, $27,500 per month the second
year and $30,000 per month for years three through five, if extended.
Future annual minimum lease payments under all noncancelable
operating leases at September 30, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Leases
------
<S> <C> <C>
2000 $314
2001 343
2002 195
------
Total minimum lease payments $852
------
------
</TABLE>
Rent expense charged to operations, net of sublease income,
amounted to approximately $0.3 million, $0.5 million and $0.6 million for
the fiscal years ended September 30, 1999, 1998 and 1997, respectively.
Sublease income for fiscal 1999, 1998 and 1997 was approximately
$0.2 million, $0.8 million and $1.3 million, respectively.
CONTINGENCIES
(a) On January 13, 1999 and January 28, 1999, the Company and one of its
former directors, Charles Berger, were named as defendants in two
shareholder class action lawsuits against Splash Technology Holdings, Inc.
("Splash"), various directors and executives of Splash and certain selling
shareholders of Splash. The suits were filed in the United States District
Court in Northern District of California and have been consolidated and
captioned IN RE SPLASH TECHNOLOGY HOLDINGS INC. SECURITIES LITIGATION
(Master File No. C99-0109 SBA). The law firm of Milberg Weiss Bershad Hynes
& Lerach LLP has been designated lead counsel for the eight lead
plaintiffs. The lawsuit alleges, among other things, that the defendants
made or were responsible for material misstatements, and failed to disclose
information concerning Splash's business, finances and future business
prospects in order to artificially inflate the price of Splash common
stock. The complaint does not identify any statements alleged to have been
made by Charles Berger or the Company. The complaint further alleges that
the Company engaged in a scheme to artificially inflate the price of Splash
common stock to reap an artificially large return on the sale of the common
stock in order to pay off its debt. The Company and the former director
vigorously deny all allegations of wrongdoing and intend to aggressively
defend themselves in these matters. Defendants initial motion to dismiss
the action was granted with leave to amend, and the complaint has been
amended by plaintiffs.
(b) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates
filed a suit in the United States District Court for the District of
Colorado alleging a breach of contract and related claims in the
approximate amount of
-41-
<PAGE>
$800,000, maintaining that the Company failed to comply with various
return, price protection, inventory balancing and marketing development
funding undertakings. In 1997, the Company filed an answer to the
complaint and cross-claimed against the plaintiffs and in October 1997
additionally cross claimed against Deutsche Financial, Inc., a factor in
the account relationship between the Company and the plaintiffs, seeking
the recovery of approximately $2 million. The Company continues to
investigate these claims as well as cross claims and expect to
vigorously defend and prosecute them as applicable. This case is
scheduled for trial in April 2000.
(c) The Company is involved in a number of other judicial and
administrative proceedings incidental to its business. The Company intends
to defend these matters vigorously and although adverse decisions (or
settlements) may occur, the final resolution of these lawsuits is not
expected to have a material adverse effect on its financial position.
However, an adverse resolution and the costs of defense, regardless of the
outcome, could have a material adverse effect on the Company's results of
operations and financial condition.
NOTE THREE. SHAREHOLDERS' EQUITY
SHARES SUBJECT TO ISSUANCE
As of September 30, 1999, the Company was subject to issuing
approximately 10,000 shares of Common Stock associated with the settlement
of a securities class action lawsuit in fiscal 1995.
STOCK OPTIONS
The Company's 1995 Stock Option Plan (the "1995 Plan") authorizes
the issuance of up to 921,983 shares of common stock upon the exercise of
incentive stock options or nonqualified stock options that may be granted
to officers, employees, directors, consultants and independent contractors.
Shares available for grant under the 1995 Plan include 157,822 shares which
were not issued under a prior plan. Under the 1995 Plan, options are
exercisable, subject to vesting, for a term of up to ten years after the
grant date. Options may be granted at prices ranging from 85% to 100% of
the fair market value of the common stock on the date of grant, as
determined by the Board of Directors. Vesting of shares is also determined
by the Board of Directors at the date of grant. As of September 30, 1999,
769,831 options were outstanding under the 1995 Plan. The 1995 Plan will
expire in December 2005.
The Company has also reserved 19,000 shares of common stock for
issuance to non-employee directors pursuant to options granted under the
1994 Directors' Stock Option Plan (the "1994 Plan"), including 9,000 shares
which were not issued under the Company's prior Directors' Stock Option
Plan, which was in effect prior to the approval of the 1994 Plan. Such
options may only be nonqualified stock options, must be exercised within
ten years from the date of grant, and must be granted in accordance with a
non-discretionary formula. Under this formula, each new non-employee
director receives an option to purchase 1,000 shares when that director is
first appointed to the Board and an option to purchase 250 shares on each
anniversary of such director's appointment. As of September 30, 1999, 5,500
options were outstanding under this plan.
-42-
<PAGE>
During fiscal 1999, the Company granted, outside of the Company's
Stock Option Plans, 140,000 nonqualified stock options to three employees
at an exercise price equal to the fair market value of the Company's Common
Stock on the relevant dates. The exercise prices ranged from $2.625 to
$3.50. These options are exercisable for a term of ten years and vest over
a two year period commencing on the date of grant.
An additional 380,000 shares are outstanding under similar plans
and other option grants.
The following table summarizes the consolidated activity under all
of the Company's plans and grants:
<TABLE>
<CAPTION>
Weighted
Available for Shares Under Average
Grant Option Exercise Price Exercise Price
------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1996 267,490 116,816 $12.80 - $172.50 $ 43.40
Authorized 542,162 -- -- -- --
Granted (712,211) 712,211 $ 2.80 - $ 5.90 $ 4.00
Exercised -- (52,579) $ 3.40 - $ 4.70 $ 4.70
Canceled 92,851 (92,851) $ 2.80 - $172.50 $ 28.00
---------- ---------
Balance at September 30, 1997 190,292 683,597 $ 2.80 - $108.75 $ 4.20
Authorized 277,498 -- -- -- --
Granted (458,957) 458,957 $ 1.56 - $ 6.25 $ 2.87
Exercised -- (21,935) $ 3.44 - $ 4.69 $ 4.14
Canceled 275,759 (275,759) $ 2.81 - $ 6.25 $ 3.77
---------- ---------
Balance at September 30, 1998 284,592 844,860 $ 1.56 - $108.75 $ 3.62
Authorized 222,684 -- -- -- --
Granted (515,594) 515,594 $ 0.84 - $ 5.63 $ 2.45
Exercised -- (37,309) $ 0.84 - $ 4.69 $ 2.99
Canceled 166,320 (166,320) $ 0.84 - $ 97.50 $ 4.05
Expired (1,000) -- -- -- --
---------- ---------
Balance at September 30, 1999 157,002 1,156,825 $ 0.84 - $108.75 $ 3.05
---------- ---------
---------- ---------
</TABLE>
The following table summarizes information concerning outstanding
and exercisable options at September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Options Remaining Average Options Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices Life Price Price
------------------- ----------- ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.84 - $ 2.88 703,682 8.90 Years $ 2.38 336,633 $ 2.51
$ 2.97 - $ 4.06 378,865 8.13 Years $ 3.83 259,052 $ 4.01
$ 4.69 - $108.75 74,278 7.01 Years $ 5.48 40,198 $ 5.46
----------------- --------- -------
$ 0.84 - $108.75 1,156,825 8.53 Years $ 3.05 635,883 $ 3.31
========= =======
</TABLE>
-43-
<PAGE>
The Company accounts for stock options in accordance with FASB
Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123").
Under FAS 123, the Company may continue following existing accounting rules
or adopt a new fair value method of valuing stock-based awards. The Company
has elected to continue to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related interpretations in accounting
for its stock options plans and the Employee Stock Purchase Plan and has
not adopted the alternative fair value method of accounting provided under
FAS 123. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share
is required by FAS 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to September 30, 1995 under the fair value method of
that Statement. The weighted-average grant-date fair value of options
granted in fiscal years 1999, 1998 and 1997 were $2.25, $2.18 and $0.30,
respectively. The fair value of options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 1999, 1998 and 1997,
respectively for employee stock option plans: risk free interest rate of
approximately 5.5%, 5.5% and 6%; dividend yield of 0% for all years;
volatility factors of the expected market price of the Company's Common
Stock of 1.546, 1.148 and 1.077 and a weighted-average expected life of the
option of four years. The weighted-average fair value at date of grant for
shares purchased through the Employee Stock Purchase Plan during fiscal
year 1999 was $1.62. The following assumptions were used for the Employee
Stock Purchase plan in 1999: interest rate of 5.5%, dividend yield of 0%,
volatility of 1.546 and a weighted-average expected life of one half of one
year.
For purposes of pro forma disclosures, the estimated fair values
of the options are amortized to expense over the related vesting periods.
The Company's pro forma net income for 1997 was not materially different
from reported amounts.
The Company's pro forma information for 1999 and 1998 follows (in
thousands except for income per share information):
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Net income applicable to common
shareholders as reported $5,849 $8,733
Pro forma net income applicable ====== ======
to common shareholders for FAS 123 $4,905 $8,089
Pro forma net income per common share: ====== ======
Pro forma basic net income per share applicable
to common shareholders $0.89 $1.46
Pro forma diluted net income per share ===== =====
applicable to common shareholders $0.85 $1.46
Shares used in computing pro forma net income per common ===== =====
share:
Shares used in computing pro forma basic net
income per common share 5,535 5,522
Shares used in computing pro forma diluted ===== =====
net income per common share 5,747 5,557
===== =====
</TABLE>
Since the estimated fair value of the options are amortized to
expense over the related vesting periods, their pro forma effect will not
be fully reflected until fiscal year 2002.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan allows eligible
employee participants to purchase shares of the Company's Common Stock at a
discount through payroll deductions. Employees purchase shares at 85% of
the market value at either the beginning of the offering period or the end
of the purchase period, whichever
-44-
<PAGE>
price is lower. The plan consists of one year offering periods with two
six-month purchase periods in each offering period. The Company has
reserved 137,500 shares of its Common Stock for issuance under the plan,
in addition to 15,900 shares reserved under the previous plan. As of
September 30, 1999, 122,568 shares remained available for purchase.
WARRANTS TO PURCHASE COMMON STOCK
The Company has issued three outstanding warrants to purchase its
Common Stock. Two, in denominations of 60,000 and 5,000 were issued in 1996
in connection with the Company's debt for equity exchange with various
creditors at an exercise price of $10.00 per share and will expire in
September and October 2000, respectively. The third warrant for 50,000
shares was issued in November 1998 at a strike price of $1.50 per share in
connection with the Company's acquisition of certain technology and will
expire in November 2002. See Note 8.
NOTE FOUR. FEDERAL AND STATE INCOME TAXES
The provision (benefit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Federal:
Current $ - $ - $ 50
Foreign:
Current - (1,000) 251
State:
Current - - 15
------------- --------- --------
$ - $ (1,000) $ 316
============= ========== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 23,239 $ 25,017
Reserves and accruals not currently tax deductible 1,661 3,232
Capitalized research & development expenditures 3,130 2,769
Inventory write-downs 559 1,275
Other - 1,082
--------- ---------
Total deferred tax assets 28,589 33,375
Valuation allowance for deferred tax assets (28,589) (33,375)
---------- ----------
Deferred tax assets $ - $ -
========= =========
</TABLE>
FASB Statement 109, Accounting for Income Taxes, provides for the
recognition of deferred tax assets if realization of such assets is more
likely than not. The Company's valuation allowance reduced the deferred tax
asset to the amount realizable. The Company has provided a full valuation
allowance against its net deferred tax assets due to uncertainties
surrounding their realization. Due to the cumulative net operating losses
reported in
-45-
<PAGE>
prior years, predictability of earnings in future periods is uncertain. The
Company will evaluate the realizability of the deferred tax asset on a
quarterly basis.
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before taxes. The
sources and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Expected tax at statutory rate $ 2,047 $ 2,707 $ 554
Losses previously not benefited (2,047) (2,707) (504)
Reversal of previously accrued foreign taxes - (1,000) -
State income tax, net of federal tax benefit - - 15
Other - - 251
--------- --------- ----------
$ - $ (1,000) $ 316
======== ========= ==========
</TABLE>
As of September 30, 1999, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately
$63.0 million and $37.0 million, respectively. The federal loss
carryforwards will expire beginning in 2011, if not utilized and the state
loss carryforwards will expire beginning in 2000, if not utilized.
As a result of the issuance of Common Stock and Series A
Convertible Preferred Stock in exchange for certain liabilities of the
Company in September 1996, the Company experienced a "change in ownership"
as defined under Section 382 of the Internal Revenue Code. Accordingly,
utilization of net operating loss and tax credit carryforwards generated
prior to September 1996 will be subject to an annual limitation of
approximately $2.0 million due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions, except
under limited circumstances.
NOTE FIVE. STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest $ 55 $ 495 $ 2,988
========= ========= =========
Income taxes $ 1 $ 9 $ 8
========= ========= =========
Supplemental disclosures of non-cash
investing and financing activities:
Warrant issued for technology $ 73 $ 0 $ 0
========= ========= =========
</TABLE>
NOTE SIX. EXPORT SALES AND MAJOR CUSTOMERS
The Company's export sales were approximately $4.2 million, $3.7
million and $4.9 million in the fiscal years ended September 30, 1999, 1998
and 1997, respectively, and included export sales to Europe of
approximately $2.8 million, $1.3 million and $1.8 million, respectively.
The Pacific, Asia, and Latin America region sales were approximately $1.4
million, $2.4 million and $3.1 million for fiscal years ended September 30,
1999, 1998 and 1997, respectively. During fiscal 1996, the Company entered
into exclusive distributor arrangements in Japan and Europe and earns
royalties and commissions under such arrangements. In fiscal 1998,
-46-
<PAGE>
the Company modified its relationships with its distributors in Japan and
Europe for its digital video software products and terminated the
exclusivity provisions. These products are purchased from the Company at a
discount from the price list and no commissions are paid. For the fiscal
years ended September 30, 1999, 1998 and 1997 the Company earned
approximately $0.03 million, $0.74 million, and $2.66 million, respectively
in royalties and commissions from Europe and Japan, which are included in
the above amounts.
Ingram Micro accounted for 20.7%, 53.5% and 66.1% of the Company's
net sales during the years ended September 30, 1999, 1998 and 1997,
respectively. Sales to Canon U.S.A., Inc. accounted for 18.4% of net sales
for fiscal 1999 and $0.0% for fiscal years 1998 and 1997.
NOTE SEVEN. LICENSING OF ASSETS TO KOREA DATA SYSTEMS AMERICA, INC.
In June 1998, the Company licensed certain technology and assets
necessary to conduct its monitor and color publishing business to Korea
Data Systems America, Inc. ("KDS"), leaving the Company free to focus on
its digital video software business. The brand name and trademark RADIUS
was one of the assets so licensed because of its primary association with
monitors. In August 1998, the Company amended and restated this license and
agreed to sell the licensed assets to KDS pursuant to an asset transfer
agreement, subject to certain contingencies at the discretion of KDS. The
monitor business has accounted for substantially all of the revenues of the
color publishing product line and 55.3% of the Company's revenues during
fiscal 1998. Under the license and asset transfer agreement, the Company
transferred its Radius, Supermac, PressView and certain other trademarks to
KDS and licensed certain intellectual property pertaining to PressView and
PrecisionView monitors. The value of the transaction was $6.2 million,
which was paid in installments under a note. The Company recognized other
income under the license agreement as cash was received on the note.
On December 4, 1998, the Company and KDS supplementally agreed to
the sale of certain tangible personal property and the transfer of rights
in the Radius Emachines and Colormatch trademarks for $100,000 and other
consideration.
NOTE EIGHT. TECHNOLOGY PURCHASE FROM POST DIGITAL SOFTWARE, INC.
On November 23, 1998, the Company acquired certain software and
other intangible property from Post Digital Software, Inc. for (i) an
initial payment of $50,000, (ii) earnout payments equal to at least $50,000
but not exceeding an aggregate of $700,000, based on subsequent sales of
the Company's digital video products incorporating such software and (iii)
a warrant to purchase up to 50,000 shares of the Company's Common Stock at
an exercise price of $1.50 per share. The warrant is non-forfeitable and
exercisable over a four year period through November 23, 2002. The warrant
can be exercised for up to 12,000 shares as of May 1, 1999, plus an
additional 2,000 shares for each full month that transpires thereafter, up
to a total of 50,000 shares. The value of this agreement, as noted below,
is included as other assets in the accompanying Consolidated Balance Sheet.
The technology is being amortized over a three year period and future
royalties based on digital video products sold will be expensed as they are
incurred. As of September 30, 1999, the Company has paid approximately
$14,000 in royalties.
<TABLE>
<S> <C>
Initial purchase price $ 50,000
Guaranteed earnout 50,000
Value assigned to warrant 73,000
---------
Purchased technology 173,000
Less amortization (39,667)
---------
Net purchased technology $ 133,333
=========
</TABLE>
-47-
<PAGE>
NOTE NINE. TRANSACTIONS WITH SPLASH TECHNOLOGY HOLDINGS, INC.
ESCROW FUND RELEASE
In connection with the Company's sale of its Color Server Group to
Splash Technology Holdings, Inc. in January 1996, an escrow fund was
established to secure certain indemnification obligations. On December 31,
1998, the balance of the escrow fund of approximately $2.2 million was
released to the Company.
SALE OF CERTAIN COLOR PUBLISHING TECHNOLOGY
On December 4, 1998, the Company agreed to sell certain software and other
intangible property associated with its monitor and color publishing
business to Splash Technology Holdings, Inc. for $275,000 and other
consideration.
NOTE TEN. OTHER COMPREHENSIVE INCOME
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 requires foreign currency translation adjustments and
changes in the fair value of available-for-sale-securities to be included
in comprehensive income. However, it has no impact on the net income or
shareholders' equity as presented in the financial statements.
The following schedule shows the accumulated balances for each
item within other comprehensive income:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- -------
(in thousands)
<S> <C> <C> <C>
Unrealized gain (loss) on investments $ - $ - $22,093
Foreign currency translation 54 54 43
-------- --------- -------
Other comprehensive income $ 54 $ 54 $22,136
======== ========= =======
</TABLE>
-48-
<PAGE>
NOTE ELEVEN. COMPUTATION OF NET INCOME PER COMMON SHARE
The following table presents the calculation of basic and diluted
earnings per share as required under SFAS 128:
<TABLE>
<CAPTION>
1999 1998 1997
------- --------- ----------
(in thousands, except per-share amounts)
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted net income per share -
income available to common shareholders $5,849 $8,733 $ 996
------- --------- ----------
------- --------- ----------
DENOMINATOR:
Denominator for basic net income per share - weighted-average
shares outstanding 5,535 5,522 5,389
Effect of dilutive securities:
Dilutive potential common shares 212 35 133
------- --------- ----------
Denominator for diluted net income per share - adjusted
weighted-average shares outstanding 5,747 5,557 5,522
------- --------- ----------
------- --------- ----------
Basic net income per share $ 1.06 $ 1.58 $ 0.18
------- --------- ----------
------- --------- ----------
Diluted net income per share $ 1.02 $ 1.57 $ 0.18
------- --------- ----------
------- --------- ----------
</TABLE>
Diluted net income per share in 1999, 1998 and 1997 does not include certain
stock options in the amounts of 425,760, 750,446 and 341,252, respectively, as
those options are anti-dilutive for the periods presented.
NOTE TWELVE. EMPLOYEE BENEFIT PLAN
The Company has an employee savings plan, which qualifies under Section 401(k)
of the Internal Revenue Code (the 401(k) Plan). Under the 401(k) Plan, all
eligible employees may defer up to 15% of their pre-tax compensation, but not
more than statutory limits. The Company is allowed to make contributions as
defined in the 401(k) Plan and as approved by the Board of Directors. Company
contributions of $46,972 were made in fiscal 1999. The Company contributed
$63,850 and $112,422 in 1998 and 1997, respectively. The Company matches a
specified portion of the employee contributions up to a maximum of $1,000 per
employee per year.
NOTE THIRTEEN. SUBSEQUENT EVENTS (UNAUDITED)
AGREEMENT TO MERGE WITH MEDIA 100, INC.
The Company entered into a definitive agreement on December 28, 1999 to be
acquired by Media 100 Inc. of Marlboro, Massachusetts (NASDAQ: MDEA), a
pioneer of streaming media production tools. The merger is intended to be
completed as a pooling of interests for accounting purposes and as a tax-free
transaction. Under the agreement, Media 100 will issue .5347 shares of common
stock for each share of the Company's common stock. The transaction is
subject to the approval of both companies' shareholders and other customary
closing conditions. The merger is expected to be complete in 90-120 days. The
combined company will target Internet desktops with low-cost applications
that allow personal computer users to capture, edit, and stream video on the
Internet using a single, integrated, and easy-to-use application. The Company
also entered into a non-exclusive, four-year OEM development and license
agreement with Media 100.by which Media 100 will use the Company's consumer
level video editing and effects software with Media 100's Internet streaming
media software in exchange for certain royalty payments.
-49-
<PAGE>
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions(1) period
----------- --------- -------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended September 30, 1997 $2,132 $ 4,706 $ 0 $ 2,080 $4,758
Year ended September 30, 1998 $4,758 $ 30 $ 0 $ 894 $3,894
Year ended September 30, 1999 $3,894 $ 1 $ 0 $ 137 $3,758
</TABLE>
- -----------------------------
(1) Uncollectible accounts written off.
-50-
<PAGE>
EXHIBIT 2.09
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MEDIA 100 INC.,
DERRINGER ACQUISITION CORP.
and
DIGITAL ORIGIN, INC.
Dated as of December 28, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I
<TABLE>
<S> <C>
THE MERGER 2
SECTION 1.1 THE MERGER 2
SECTION 1.2 CONSUMMATION OF THE MERGER 2
SECTION 1.3 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION 2
SECTION 1.4 BY-LAWS OF THE SURVIVING CORPORATION 2
SECTION 1.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION 2
SECTION 1.6 CLOSING 3
ARTICLE II
CONVERSION AND EXCHANGE OF SECURITIES 3
SECTION 2.1 CONVERSION OF CAPITAL STOCK 3
SECTION 2.2 EXCHANGE OF CERTIFICATES 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY 8
SECTION 3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES 8
SECTION 3.2 ARTICLES OF INCORPORATION AND BY-LAWS 9
SECTION 3.3 CAPITALIZATION 9
SECTION 3.4 AUTHORITY RELATIVE TO THIS AGREEMENT 10
SECTION 3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS 11
SECTION 3.6 SEC FILINGS; FINANCIAL STATEMENTS 12
SECTION 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS 12
SECTION 3.8 NO UNDISCLOSED LIABILITIES 13
SECTION 3.9 ABSENCE OF LITIGATION 13
SECTION 3.10 AGREEMENTS, CONTRACTS AND COMMITMENTS 13
SECTION 3.11 COMPLIANCE; PERMITS 14
SECTION 3.12 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS 14
SECTION 3.13 LABOR MATTERS 16
SECTION 3.14 PROPERTIES; ENCUMBRANCES 17
SECTION 3.15 TAXES 17
SECTION 3.16 ENVIRONMENTAL MATTERS 19
SECTION 3.17 INTELLECTUAL PROPERTY 20
SECTION 3.18 INSURANCE 21
SECTION 3.19 RESTRICTIONS ON BUSINESS ACTIVITIES 21
SECTION 3.20 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS 22
<PAGE>
SECTION 3.21 INTERESTED PARTY TRANSACTIONS 22
SECTION 3.22 CHANGE IN CONTROL PAYMENTS 23
SECTION 3.23 YEAR 2000 COMPLIANCE 23
SECTION 3.24 POOLING; TAX MATTERS 24
SECTION 3.25 NO EXISTING DISCUSSIONS 24
SECTION 3.26 OPINION OF FINANCIAL ADVISOR 25
SECTION 3.27 BROKERS 25
SECTION 3.28 AFFILIATES 25
SECTION 3.29 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS 25
SECTION 3.30 ABSENCE OF CERTAIN PAYMENTS 25
SECTION 3.31 FULL DISCLOSURE 25
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUB 26
SECTION 4.1 ORGANIZATION AND QUALIFICATION 26
SECTION 4.2 CERTIFICATE OF INCORPORATION AND BY-LAWS 27
SECTION 4.3 CAPITALIZATION 27
SECTION 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT 28
SECTION 4.5 NO CONFLICT, REQUIRED FILINGS AND CONSENTS 29
SECTION 4.6 SEC FILINGS; FINANCIAL STATEMENTS 29
SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS 30
SECTION 4.8 NO UNDISCLOSED LIABILITIES 30
SECTION 4.9 COMPLIANCE 31
SECTION 4.10 ABSENCE OF LITIGATION 31
SECTION 4.11 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS 31
SECTION 4.12 LABOR MATTERS 33
SECTION 4.13 PROPERTIES; ENCUMBRANCES 33
SECTION 4.14 TAXES 34
SECTION 4.15 ENVIRONMENTAL MATTERS 35
SECTION 4.16 INTELLECTUAL PROPERTY 35
SECTION 4.17 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS 37
SECTION 4.18 YEAR 2000 COMPLIANCE 37
SECTION 4.19 BROKERS 38
SECTION 4.20 OWNERSHIP OF MERGER SUB; NO PRIOR ACTIVITIES 38
SECTION 4.21 POOLING; TAX MATTERS 39
SECTION 4.22 AFFILIATES. 39
ii
<PAGE>
ARTICLE V
CONDUCT OF BUSINESS 39
SECTION 5.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER 39
SECTION 5.2 CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER 41
SECTION 5.3 ADVICE OF CHANGES 42
SECTION 5.4 COOPERATION 42
ARTICLE VI
ADDITIONAL AGREEMENTS 42
SECTION 6.1 ACCESS TO INFORMATION; CONFIDENTIALITY 42
SECTION 6.2 NO SOLICITATION 43
SECTION 6.3 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT 46
SECTION 6.4 SHAREHOLDERS' AND STOCKHOLDERS' MEETINGS 46
SECTION 6.5 LEGAL CONDITIONS TO MERGER 47
SECTION 6.6 AGREEMENTS WITH RESPECT TO AFFILIATES 48
SECTION 6.7 TAX-FREE REORGANIZATION 48
SECTION 6.8 POOLING ACCOUNTING 48
SECTION 6.9 LETTERS OF ACCOUNTANTS 49
SECTION 6.10 PUBLIC ANNOUNCEMENTS 49
SECTION 6.11 LISTING OF PARENT SHARES 49
SECTION 6.12 OPTIONS 49
SECTION 6.13 CONSENTS 50
SECTION 6.14 INDEMNIFICATION AND INSURANCE 50
SECTION 6.15 ADDITIONAL AGREEMENTS; BEST EFFORTS 51
ARTICLE VII
CONDITIONS TO THE MERGER 51
SECTION 7.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER 51
SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB 53
SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY 54
iii
<PAGE>
ARTICLE VIII
TERMINATION 54
SECTION 8.1 TERMINATION 54
SECTION 8.2 EFFECT OF TERMINATION 56
SECTION 8.3 FEES AND EXPENSES 56
ARTICLE IX
GENERAL PROVISIONS 57
SECTION 9.1 NONSURVIVAL OF REPRESENTATIONS; WARRANTIES AND AGREEMENTS 57
SECTION 9.2 NOTICES 57
SECTION 9.3 CERTAIN DEFINITIONS 58
SECTION 9.4 AMENDMENT 59
SECTION 9.5 EXTENSION; WAIVER 59
SECTION 9.6 HEADINGS 60
SECTION 9.7 SEVERABILITY 60
SECTION 9.8 ENTIRE AGREEMENT, NO THIRD PARTY BENEFICIARIES 60
SECTION 9.9 ASSIGNMENT 60
SECTION 9.10 INTERPRETATION 60
SECTION 9.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE 60
SECTION 9.12 GOVERNING LAW 61
SECTION 9.13 COUNTERPARTS 61
</TABLE>
LIST OF EXHIBITS
Exhibit A Merger Agreement
Exhibit B Form of Company Affiliate Agreement
Exhibit C Form of Parent Affiliate Agreement
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 28, 1999 (this
"Agreement"), by and among Media 100 Inc., a Delaware corporation ("Parent"),
Derringer Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), and Digital Origin, Inc., a California
corporation (the "Company").
WHEREAS, the respective Boards of Directors of Parent, Merger Sub
and the Company have each determined that it is advisable and in the best
interests of their respective stockholders or shareholders that Parent
acquire the Company pursuant to the terms and conditions of this Agreement,
and, in furtherance of such acquisition, such Boards of Directors have
approved the merger of Merger Sub with and into the Company (the "Merger") in
accordance with the terms of this Agreement and the applicable provisions of
the California General Corporation Law (the "CGCL") and the Delaware General
Corporation Law (the "DGCL");
WHEREAS, for United States federal income tax purposes, it is
intended that the Merger shall qualify as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), and that this Agreement shall be, and is hereby, adopted as a plan
of reorganization for purposes of Section 368(a) of the Code; and
WHEREAS, for accounting purposes, it is intended that the Merger
shall be accounted for as a pooling of interests;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties hereto agree as follows:
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ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER . Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with sections 1100
et seq. of the CGCL, Merger Sub shall be merged with and into the Company at
the Effective Time of the Merger. Following the Merger, the separate
corporate existence of Merger Sub shall cease and the Company shall continue
as the surviving corporation (the "Surviving Corporation ") and shall succeed
to and assume all the rights, properties, liabilities and obligations of
Merger Sub in accordance with the CGCL and DGCL.
SECTION 1.2 CONSUMMATION OF THE MERGER . Upon the terms and subject
to the conditions set forth in this Agreement and the Agreement of Merger
between Merger Sub and the Company together with the related officers'
certificates required by section 1103 of the CGCL, in the form attached to
this Agreement as EXHIBIT A (the "Merger Agreement "), the parties hereto
shall file the Merger Agreement with the Secretary of State of the State of
California, whereupon Merger Sub shall be merged with and into the Company
pursuant to sections 1100 et seq. of the CGCL. The parties hereto shall make
all other filings, recordings or publications required by the CGCL and DGCL
in connection with the Merger. The Merger shall become effective at the time
specified in the Merger Agreement (the "Effective Time ").
SECTION 1.3 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION .
At and after the Effective Time, the Articles of Incorporation attached as
ANNEX I to the Merger Agreement, shall be the Articles of Incorporation of
the Surviving Corporation, until amended in accordance with the CGCL.
SECTION 1.4 BY-LAWS OF THE SURVIVING CORPORATION . At and after the
Effective Time, the By-laws of the Company, as in effect immediately prior to
the Effective Time, shall be the By-laws of the Surviving Corporation, until
amended in accordance with the CGCL.
SECTION 1.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION .
(a) The directors of Merger Sub immediately prior to the Effective
Time shall be the initial directors of the Surviving Corporation and shall
hold office from the Effective Time until their respective successors are
duly elected or appointed and qualified in the manner provided in the
Articles of Incorporation or By-laws of the Surviving Corporation or as
otherwise provided by law. In furtherance thereof, the
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Company shall secure, at the Effective Time, such resignations of its
incumbent directors as are necessary to enable the designees of Parent to be
elected or appointed to the Board of Directors of the Company.
(b) The officers of the Company immediately prior to the Effective
Time shall be the initial officers of the Surviving Corporation and shall
hold office from the Effective Time until their respective successors are
duly elected or appointed and qualified in the manner provided in the
Articles of Incorporation or By-laws of the Surviving Corporation or as
otherwise provided by law.
SECTION 1.6 CLOSING . Subject to satisfaction of the conditions set
forth in this Agreement, the closing of the Merger (the "Closing") shall take
place at 10:00 a.m., E.S.T., at the offices of Skadden, Arps, Slate, Meagher
& Flom LLP, One Beacon Street, Boston, Massachusetts on a date to be
specified by Parent and the Company which shall be no later than the second
business day after satisfaction or waiver of each of the conditions set forth
in Article VII or on such other date and at such other time and place as
Parent and the Company shall agree. The date on which the Closing shall occur
is referred to herein as the "Closing Date."
ARTICLE II
CONVERSION AND EXCHANGE OF SECURITIES
SECTION 2.1 CONVERSION OF CAPITAL STOCK . At the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of the common stock, no par value, of the Company (the "Company Common
Stock") or capital stock of Merger Sub:
(a) COMPANY COMMON STOCK. Subject to this Article II, each share of
Company Common Stock issued and outstanding immediately prior to the
Effective Time shall be converted into the right to receive 0.5347, (the
"Exchange Ratio") of a share of common stock, par value $.01 per share, of
Parent (the "Parent Common Stock"), payable upon the surrender of the
certificates which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (the "Certificates") that are to
be converted, pursuant to this Section 2.1(a), into the right to receive
shares of Parent Common Stock. All such shares of Company Common Stock, when
so converted, shall no longer be outstanding and shall automatically be
cancelled and retired and shall cease to exist and each holder of a
Certificate representing any such shares shall cease to have any rights with
respect thereto, except (i) dissenters' rights, if any, as described in
Section 2.1.(c), or (ii) the right to receive the shares of Parent Common
Stock pursuant to this Section 2.1(a), any dividends or other distributions
payable pursuant to Section 2.2(c) and any cash in lieu of fractional shares
payable pursuant to Section 2.2(d), all to be issued or paid in consideration
therefor upon the surrender of such Certificates in accordance with Section
2.2(b), without interest (collectively, the "Merger Consideration").
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Notwithstanding the foregoing, the Exchange Ratio shall be adjusted to
reflect fully the effect of any stock split, reverse split, reclassification,
stock dividend, reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Common Stock occurring after the
date hereof and prior to the Effective Time.
(b) COMPANY WARRANTS. The (i) warrant to purchase up to 60,000
shares of Company Common Stock at $10.00 per share dated September 13, 1996
issued by the Company to IBM Credit Corporation, (ii) warrant to purchase up
to 5,000 shares of Company Common Stock at $10.00 per share dated October 13,
1996 issued by the Company to Mitsubishi Electronics America, Inc., and (iii)
warrant to purchase up to 50,000 shares of Company Common Stock at $1.50 per
share dated November 23, 1998 issued by the Company to Post Digital Software,
Inc. (collectively, the "Company Warrants"), in each case to the extent
issued and outstanding immediately prior to the Effective Time, shall be
converted into the right to purchase Parent Common Stock in accordance with
their respective terms.
(c) APPRAISAL RIGHTS. Holders of all shares of the outstanding
capital stock of the Company for which dissenters' rights, if any, shall have
been perfected under section 1300 et seq. of the CGCL (the "Dissenting Shares")
shall have those rights, but only those rights, of holders of "dissenting
shares" under section 1300 et seq. of the CGCL. The Company shall give Parent
prompt notice of any demand, purported demand or other communication received
by the Company with respect to any Dissenting Shares or shares claimed to be
Dissenting Shares and Parent shall have the right to participate in all
negotiations and proceedings with respect to such shares.
(d) CAPITAL STOCK OF MERGER SUB. Each common share, par value $.01
per share, of Merger Sub ("Merger Sub Common Shares") issued and outstanding
immediately prior to the Effective Time shall be converted into and become
one fully paid and nonassessable common share, par value $.01 per share, of
the Surviving Corporation.
(e) STOCK OPTIONS. Options to purchase shares of Company Common
Stock (i) granted under (x) the Company's 1994 Directors' Stock Option Plan,
the Company's 1990 Directors' Stock Option Plan, the Company's 1995 Stock
Option Plan, the 1988 SuperMac Option Plan or the Company's 1986 Stock Option
Plan (collectively, the "Company Stock Option Plans"), or (y) the Company's
1999 Employee Stock Purchase Plan (the "Company ESPP") or (ii) granted to
James Given, Charles Berger, Mark Housley, Brady Bruce, Mary Bobel, Cary
Capece, Tom Fristoe, Henry Morgan and Michael Glass (the "Other Company
Options") shall be treated in the manner set forth in Section 6.12.
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SECTION 2.2 EXCHANGE OF CERTIFICATES .
(a) EXCHANGE AGENT. Prior to the Closing Date, Parent shall
designate a bank or trust company to act as Exchange Agent hereunder (the
"Exchange Agent"). As soon as practicable after the Effective Time, Parent
shall deposit with or for the account of the Exchange Agent stock
certificates representing the number of shares of Parent Common Stock
issuable pursuant to Section 2.1(a) in exchange for outstanding shares of
Company Common Stock, which shares of Parent Common Stock shall be deemed to
have been issued at the Effective Time.
(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective
Time, Parent will instruct the Exchange Agent to mail to each holder of
record of a Certificate or Certificates (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent and shall be in such form and have such other provisions
as Parent may specify that are not inconsistent with the terms of this
Agreement) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent together with such letter
of transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such Certificate shall
be entitled to receive in exchange therefor (i) certificates evidencing that
number of whole shares of Parent Common Stock which such holder has the right
to receive in accordance with Section 2.1(a) in respect of the shares of
Company Common Stock formerly evidenced by such Certificate, (ii) any
dividends or other distributions to which such holder is entitled pursuant to
Section 2.2(c) and (iii) any cash in lieu of any fractional shares of Parent
Common Stock to which such holder is entitled pursuant to Section 2.2(d),
after giving effect to any tax withholdings, and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of shares of Company Common Stock which is not registered in the
transfer records of the Company as of the Effective Time, a certificate
representing the proper number of shares of Parent Common Stock may be issued
to a transferee if the Certificate evidencing such Company Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer pursuant to this Section 2.2(b) and by
evidence that any applicable stock transfer taxes have been paid. Until so
surrendered, each outstanding Certificate that, prior to the Effective Time,
represented shares of Company Common Stock will be deemed from and after the
Effective Time, for all corporate purposes, to represent only (i) the right
to exercise dissenters rights, if any, as described in Section 2.1(c), or
(ii) the right to receive upon surrender the Merger Consideration.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED PARENT SHARES. No
dividends or other distributions with respect to shares of Parent Common
Stock for which the record date is after the Effective Time shall be paid to
the holder of any
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unsurrendered Certificate with respect to the shares of Parent Common Stock
they are entitled to receive until the holder of such Certificate surrenders
such Certificate. Following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Parent Common Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such
whole shares of Parent Common Stock. Promptly following the date which is six
months after the Effective Time, the Exchange Agent shall deliver to Parent
all cash, certificates and other documents in its possession relating to the
transactions described in this Agreement, and any holders of Company Common
Stock who have not theretofore complied with this Article II shall look
thereafter only to Parent for the shares of Parent Common Stock, any
dividends or distributions thereon, and any cash in lieu of fractional shares
thereof to which they are entitled pursuant to this Article II.
(d) NO FRACTIONAL SHARES.
(i) No certificates or scrip representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of
Certificates pursuant to this Article II; no dividend, stock split or
other change in the capital structure of Parent shall relate to any
fractional security; and such fractional interests shall not entitle
the owner thereof to vote or to any rights of a security holder.
(ii) As promptly as practicable following the Effective Time, the
Exchange Agent will determine the excess of (A) the number of whole
shares of Parent Common Stock delivered to the Exchange Agent by Parent
pursuant to Section 2.2(a) over (B) the aggregate number of whole
shares of Parent Common Stock to be distributed to holders of Company
Common Stock pursuant to Section 2.2(b) (such excess being herein
called the "Excess Shares"). Following the Effective Time, the Exchange
Agent will, on behalf of former shareholders of the Company, sell the
Excess Shares at then-prevailing prices on the Nasdaq National Market
(the "NASDAQ").
(iii) The Exchange Agent will use reasonable efforts to complete the
sale of the Excess Shares as promptly following the Effective Time as,
in the Exchange Agent's sole judgment, is practicable consistent with
obtaining the best execution of such sales in light of prevailing
market conditions. Until the net proceeds of such sale or sales have
been distributed to the holders of Company Common Stock, the Exchange
Agent will hold such proceeds in trust (the "Common Shares Trust").
Parent shall be entitled to any interest earned on such proceeds until
such proceeds have been distributed to the former holders of Company
Common Stock. The Surviving Corporation will
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pay all commissions, transfer taxes and other out-of-pocket
transaction costs, including the expenses and compensation of the
Exchange Agent incurred in connection with such sale of the Excess
Shares. The Exchange Agent will determine the portion of the Common
Shares Trust to which each former holder of Company Common Stock is
entitled, if any, by multiplying the amount of the aggregate net
proceeds comprising the Common Shares Trust by a fraction, the
numerator of which is the amount of the fractional share interest to
which such former holder of Company Common Stock is entitled (after
taking into account all shares of Company Common Stock held at the
Effective Time by such holder) and the denominator of which is the
aggregate amount of fractional share interests to which all holders of
Company Common Stock are entitled. For purposes of this Section
2.2(d), shares of Company Common Stock of any former holder
represented by two or more Certificates shall be aggregated and in no
event shall any holder be paid an amount of cash in respect of more
than one share of Parent Common Stock.
(iv) As soon as practicable after the determination of the amount of
cash, if any, to be paid to the former holders of Company Common Stock
with respect to any fractional share interests, the Exchange Agent will
hold such cash amounts for the benefit of, and pay such cash amounts
to, such former holders of Company Common Stock subject to and in
accordance with the terms of Section 2.2(b).
(e) NO LIABILITY. Neither Parent, Merger Sub nor the Company shall
be liable to any holder of Company Common Stock or Parent Common Stock, as
the case may be, for such shares (or dividends or distributions with respect
thereto) delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law following the passage of time specified
therein.
(f) WITHHOLDING RIGHTS. Parent or the Exchange Agent shall be
entitled to deduct and withhold from the Merger Consideration otherwise
payable pursuant to this Agreement to any holder of Company Common Stock such
amounts as Parent or the Exchange Agent is required to deduct and withhold
with respect to the making of such payment under the Code, or any provision
of state, local or foreign tax law. To the extent that amounts are so
withheld by Parent or the Exchange Agent, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holder
of the shares of Parent Common Stock in respect of which such deduction and
withholding was made by Parent or the Exchange Agent.
(g) CLOSING OF SHARE TRANSFER BOOKS. At the Effective Time, the
stock transfer books of the Company shall be closed and thereafter there
shall be no further registration of transfers on the stock transfer books of
the Company or the Surviving Corporation of the shares of Company Common
Stock which were outstanding
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immediately prior to such time. If, after such time, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Article II.
(h) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed Certificates, upon
the making of an affidavit of that fact by the holder thereof the Merger
Consideration as provided in this Article II; PROVIDED, HOWEVER, that Parent
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificates to deliver
an agreement of indemnification in form satisfactory to Parent, or a bond in
such sum as Parent may direct as indemnity against any claim that may be made
against Parent or the Exchange Agent with respect to the Certificates alleged
to have been lost, stolen or destroyed.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub that
the statements contained in this Article III are true and correct, except as
set forth in the Company Disclosure Schedule, dated as of the date hereof,
prepared by the Company and delivered to Parent in connection herewith (the
"Company Disclosure Schedule"). The Company Disclosure Schedule is arranged
in sections corresponding to the numbered and lettered sections contained in
this Article III and shall qualify only the corresponding Section in this
Article III.
SECTION 3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES . The
Company and each of its Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority necessary
to own, lease and operate the properties it purports to own, lease or operate
and to carry on its business as it is now being conducted or presently
proposed to be conducted. The Company and each of its Subsidiaries is duly
qualified or licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that could not be expected to have
a Company Material Adverse Effect. A true, complete and correct list of all
of the Company's Subsidiaries, together with the jurisdiction of
incorporation of each Subsidiary, the authorized capitalization of each
Subsidiary, and the percentage of each Subsidiary's outstanding capital stock
owned by the Company or another Subsidiary, is set forth in Section 3.1 of
the Company Disclosure Schedule. The Company does not directly
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or indirectly own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity, excluding securities in any publicly traded company
held for investment by the Company and comprising less than one percent of
the outstanding stock of such company. As used in this Agreement, the word
"Subsidiary" means, with respect to any party, any corporation or other
organization, whether incorporated or unincorporated, of which (i) such party
or any other Subsidiary of such party is a general partner (excluding
partnerships, the general partnership interests of which are held by such
party or any Subsidiary of such party that do not have a majority of the
voting interest in such partnership), (ii) such party or any Subsidiary of
such party owns in excess of a majority of the outstanding equity or voting
securities or (iii) at least a majority of the board of directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly appointed or controlled by such party
or by any one or more of its Subsidiaries. The term "Company Material Adverse
Effect" means any change, effect or circumstance that, individually or when
taken together with all other changes, effects or circumstances that have
occurred or reasonably could be expected to occur prior to the date of
determination of the occurrence of the Company Material Adverse Effect, (i)
is materially adverse to the business, prospects, assets (including
intangible assets), condition (financial or otherwise) or results of
operations of the Company and its Subsidiaries, taken as a whole or (ii)
could materially delay or prevent the consummation of the transactions
contemplated hereby. Changes in economic or market conditions affecting the
software industry generally, changes in the Company's stock price, failure to
meet the Company's revenue projections for the second quarter of fiscal year
2000 (except as set forth below) or any loss of a supplier, customer or
employee resulting from the Merger or its announcement to the extent so
resulting will be deemed not to constitute a Company Material Adverse Effect;
revenue of 25% or more below the amount set forth in Section 3.1 of the
Company Disclosure Schedule for the second quarter of fiscal year 2000 will
be deemed to constitute a Company Material Adverse Effect.
SECTION 3.2 ARTICLES OF INCORPORATION AND BY-LAWS . The Company has
heretofore furnished to Parent a true, complete and correct copy of its
Articles of Incorporation, as amended to date (the "Company Charter"), and
By-Laws, as amended to date (the "Company By-Laws"), and the charter and
by-laws (or equivalent organizational documents), as amended to date, of each
of its Subsidiaries (the "Subsidiary Documents"). Such Company Charter,
Company By-Laws and Subsidiary Documents are in full force and effect.
Neither the Company nor any of its Subsidiaries is in violation of any of the
provisions of the Company Charter, Company By-Laws or Subsidiary Documents,
as the case may be.
SECTION 3.3 CAPITALIZATION .
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(a) The authorized capital stock of the Company consists of
100,000,000 shares of Company Common Stock, and 2,000,000 shares of preferred
stock, no par value per share (the "Company Preferred Stock"). As of December
13, 1999: (i) 5,611,048 shares of Company Common Stock are issued and
outstanding, 836,250 shares of Company Common Stock are reserved for issuance
upon exercise of options granted pursuant to the Company Stock Option Plans,
122,568 (as of commencement of the current purchase period ending on February
29, 2000) shares of Company Common Stock are reserved for issuance upon
exercise of options granted under the Company ESPP, 415,785 shares of Company
Common Stock are reserved for issuance upon exercise of the Other Company
Options, 115,000 shares of Company Common Stock are reserved for issuance
upon exercise of the Company Warrants, and no shares of Company Common Stock
are issued and held in the treasury of the Company; and (ii) no shares of
Company Preferred Stock are issued and outstanding. All outstanding shares of
Company Common Stock are, and all shares of Company Common Stock subject to
issuance as specified above, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, will be,
duly authorized, validly issued, fully paid and nonassessable and not subject
to or issued in violation of any purchase option, call option, right of first
refusal, preemptive right, subscription right or any similar right under any
provision of the CGCL, the Company Charter or the Company By-Laws or any
agreement to which the Company is a party or is otherwise bound. No material
change in such capitalization has occurred since December 13, 1999. All of
the outstanding shares of capital stock of each of the Company's Subsidiaries
are duly authorized, validly issued, fully paid and nonassessable, and all
such shares are owned by the Company free and clear of all security
interests, liens, claims, pledges, agreements, limitations in voting rights,
charges or other encumbrances of any nature whatsoever (collectively,
"Liens"). There are no accrued and unpaid dividends with respect to any
outstanding shares of capital stock of the Company or any of its Subsidiaries.
(b) Except as described in Section 3.3(a) of this Agreement, there
are no equity securities of any class of the Company or any of its
Subsidiaries or any security exchangeable into or exercisable for such equity
securities, issued, reserved for issuance or outstanding. Except as described
in Section 3.3(a) of this Agreement, there are no options, warrants, calls,
rights, commitments or agreements of any character to which the Company or
any of its Subsidiaries is a party, or by which the Company or any of its
Subsidiaries is bound, obligating the Company or any of its Subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of the Company or any of its Subsidiaries or
obligating the Company or any of its Subsidiaries to grant, extend or
accelerate the vesting of or enter into any such option, warrant, call,
right, commitment or agreement. There are no voting trusts, proxies or other
similar agreements or understandings with respect to the shares of capital
stock of the Company or any of
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its Subsidiaries. There are no obligations, contingent or otherwise, of the
Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any shares of capital stock of the Company or any of its Subsidiaries or to
provide funds to or make any investment (in the form of a loan, capital
contribution or otherwise) in any such Subsidiary or any other entity.
SECTION 3.4 AUTHORITY RELATIVE TO THIS AGREEMENT . Subject only to
the approval of the Company's shareholders described below, the Company has
all necessary corporate power and authority to execute and deliver this
Agreement and each instrument required hereby to be executed and delivered by
it (the "Company Merger Documents") at the Closing and to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of the Company
Merger Documents and the consummation of the transactions contemplated by the
Company Merger Documents have been duly and validly authorized by all
necessary corporate action on the part of the Company, subject only to the
approval of this Agreement and the Merger by the Company's shareholders (the
"Company Voting Proposal") under the CGCL and the Company Charter by the
affirmative vote of the holders of a majority of the voting power of the
outstanding shares of Company Common Stock. This Agreement has been duly and
validly executed and delivered by the Company and constitutes, and when
executed and delivered by the Company each of the other Company Merger
Documents will constitute, assuming the due authorization, execution and
delivery by Parent and Merger Sub, as applicable, the legal, valid and
binding obligation of the Company, enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights and by general equitable
principles (regardless of whether enforceability is considered in a
proceeding in equity or at law). The Board of Directors of the Company has
determined that it is advisable and in the best interests of the Company's
shareholders for the Company to enter into a business combination with Parent
upon the terms and subject to the conditions of this Agreement, and has
recommended that the Company's shareholders approve the Company Voting
Proposal.
SECTION 3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS .
(a) The execution and delivery of the Company Merger Documents does
not, and the performance of the Company Merger Documents by the Company will
not, (i) conflict with or violate the Company Charter or Company By-Laws,
(ii) conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its Subsidiaries or by which its
or any of their respective properties is bound or affected, or (iii) result
in any breach of or constitute a default (or an event that with notice or
lapse of time or both would become a default), or impair the Company's or any
of its Subsidiaries' rights or alter the rights
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or obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a Lien on any of the properties or assets of the Company or any
of its Subsidiaries pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries or its or any of their
respective properties is bound or affected; other than such conflicts,
breaches, defaults, impairments or other effects under (iii) of this Section
3.5(a) that have not had and could not reasonably be expected to have a
Company Material Adverse Effect.
(b) The execution and delivery of this Agreement or any instrument
required hereby to be executed and delivered by the Company at the Closing
does not, and the performance of this Agreement by the Company or its
Subsidiaries will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any court, administrative or
regulatory agency or commission or other governmental authority or
instrumentality (whether domestic or foreign, a "Governmental Entity"),
except (i) the filing of the pre-merger notification report under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (ii) the filing of a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") in accordance with the Securities Act of 1933, as amended (the
"Securities Act"), and the filing of the Proxy Statement/Prospectus with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), (iii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and
state securities laws and the laws of any foreign country and (iv) the filing
and recordation of the Merger Agreement or other documents as required by the
CGCL.
SECTION 3.6 SEC FILINGS; FINANCIAL STATEMENTS .
(a) The Company has timely filed all forms, reports, schedules,
statements and other documents, including any exhibits thereto, required to
be filed by the Company with the SEC, since September 30, 1998 (collectively,
the "Company SEC Reports"). The Company SEC Reports (i) at the time filed,
complied in all material respects with the applicable requirements of the
Securities Act and the Exchange Act, as the case may be, and (ii) did not at
the time they were filed (or if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required
to be stated in such Company SEC Reports or necessary in order to make the
statements in such Company SEC Reports, in light of the circumstances under
which they were made, not misleading. None of the
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Company's Subsidiaries are required to file any forms, reports, schedules,
statements or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in
each case, any related notes), contained in the Company SEC Reports,
including any Company SEC Reports filed after the date of this Agreement
until the Closing, complied, as of its respective date, in all material
respects with all applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto, was prepared in accordance
with generally accepted accounting principles ("GAAP") (except as may be
indicated in the notes thereto) applied on a consistent basis throughout the
periods involved and fairly presented the consolidated financial position of
the Company and its Subsidiaries as at the respective dates and the
consolidated results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are
not expected to be material in amount. The audited balance sheet of the
Company as of September 30, 1999 is referred to herein as the "Company
Balance Sheet."
SECTION 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS . Since the date of
the Company Balance Sheet, the Company has conducted its business in the
ordinary course consistent with past practice and, since such date, there has
not occurred: (i) any change, development, event or other circumstance,
situation or state of affairs that has had or could reasonably be expected to
have a Company Material Adverse Effect; (ii) any amendments to or changes in
the Company Charter or Company By-Laws; (iii) any damage to, destruction or
loss of any asset of the Company or any of its Subsidiaries (whether or not
covered by insurance) that could reasonably be expected to have a Company
Material Adverse Effect; (iv) any change by the Company in its accounting
methods, principles or practices; (v) any revaluation by the Company of any
of its assets, including, without limitation, writing down the value of
inventory or writing off notes or accounts receivable other than in the
ordinary course of business consistent with past practice; (vi) any sale of a
material amount of assets (tangible or intangible) of the Company; or (vii)
any other action or event that would have required the consent of Parent
pursuant to Section 5.1 had such action or event occurred after the date of
this Agreement.
SECTION 3.8 NO UNDISCLOSED LIABILITIES . Except as disclosed in the
Company SEC Reports, neither the Company nor any of its Subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise), except liabilities
(a) adequately reflected in the Company Balance Sheet, (b) incurred in the
ordinary course of business consistent with past practice and not required
under GAAP to be reflected in the Company Balance Sheet, (c) incurred since
the date of the Company Balance Sheet in the ordinary course of business
consistent with past practice or (d) incurred in connection with this
Agreement.
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SECTION 3.9 ABSENCE OF LITIGATION . There are no claims, actions,
suits, proceedings or investigations (i) pending against the Company or any
of its Subsidiaries or any properties or assets of the Company or of any of
its Subsidiaries or (ii) to the knowledge of the Company, threatened against
the Company or any of its Subsidiaries, or any properties or assets of the
Company or of any of its Subsidiaries, in each case, which claims, actions,
suits, proceedings or investigations could reasonably be expected to have a
Company Material Adverse Effect.
SECTION 3.10 AGREEMENTS, CONTRACTS AND COMMITMENTS .
(a) Section 3.10(a) of the Company Disclosure Schedule sets forth a
list of (i) all agreements, contracts or other instruments containing
non-competition or similar restrictive provisions with respect to the Company
or any of its Subsidiaries and (ii) all agreements, contracts or other
instruments which, as of the date hereof, the Company is required to file as
"material contracts" with the SEC pursuant to the requirements of the
Exchange Act.
(b) (i) Neither the Company nor any of its Subsidiaries has breached
(without cure), is in default under, or has received written notice of any
breach of or default under, any agreements, contracts or other instruments
required to be disclosed in Section 3.10(a) of the Company Disclosure
Schedule (each, a "Material Contract"), (ii) to the Company's knowledge, no
other party to any Material Contract has breached or is in default of any of
its obligations thereunder, (iii) each Material Contract is in full force and
effect and (iv) each Material Contract is a legal, valid and binding
obligation of the Company or its Subsidiary and, to the knowledge of the
Company or any of its Subsidiaries, each of the other parties thereto,
enforceable in accordance with its terms, except that the enforcement thereof
may be limited by (A) bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights
generally and (B) general principles of equity.
SECTION 3.11 COMPLIANCE; PERMITS .
(a) Neither the Company nor any of its Subsidiaries is in conflict
with, or in default or violation of (and has not received any notices of
violation with respect to), any (i) law, rule or regulation, or (ii) order,
judgment or decree applicable to the Company or any of its Subsidiaries or by
which its or any of their respective properties is bound or affected, and the
Company is not aware of any such conflict, default or violation thereunder
(other than any conflicts, defaults or violations under (i) of this Section
3.11(a) that have not had and could not reasonably be expected to have a
Company Material Adverse Effect).
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(b) The Company and its Subsidiaries hold all permits, licenses,
easements, variances, exemptions, consents, certificates, authorizations,
registrations, orders and other approvals from any arbitrator, court, nation,
government, any state or other political subdivision thereof and any entity
exercising executive, legislative, judicial regulatory or administrative
functions of, or pertaining to, government that are material to the operation
of the business of the Company and its Subsidiaries taken as a whole as it is
now being conducted (collectively, the "Company Permits"). The Company
Permits are in full force and effect, have not been violated and no
suspension, revocation or cancellation thereof has been threatened and there
is no action, proceeding or investigation pending or threatened regarding
suspension, revocation or cancellation of any Company Permit.
SECTION 3.12 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT
AGREEMENTS.
(a) Section 3.12(a) of the Company Disclosure Schedule contains a
true and complete list of (i) each deferred compensation and each bonus or
other incentive compensation, stock purchase, stock option and other equity
compensation plan, program, agreement or arrangement; (ii) each severance or
termination pay, medical, surgical, hospitalization, life insurance and other
"welfare" plan, fund or program (within the meaning of Section 3(1) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")); (iii)
each profit-sharing, stock bonus or other "pension" plan, fund or program
(within the meaning of Section 3(2) of ERISA); (iv) each employment,
termination or severance agreement; and (v) each other employee benefit plan,
fund, program, agreement or arrangement, in each case, that is sponsored,
maintained or contributed to or required to be contributed to by the Company
or by any trade or business, whether or not incorporated (an "ERISA
Affiliate"), that together with the Company would be deemed a "single
employer" within the meaning of Section 4001(b) of ERISA, or to which the
Company or an ERISA Affiliate is party, whether written or oral, for the
benefit of any employee or former employee of the Company or any of its
Subsidiaries (collectively, the "Company Plans"). No Company Plan is subject
to Section 302 or Title IV of ERISA or Section 412 of the Code. Neither the
Company, any of its Subsidiaries nor any ERISA Affiliate has any commitment
or formal plan, whether legally binding or not, to create any additional
employee benefit plan or modify or change any existing Company Plan that
would affect any employee or former employee of the Company or any of its
Subsidiaries.
(b) With respect to each Company Plan, the Company has heretofore
delivered or made available to Parent true and complete copies of each of the
following documents: (i) a copy of the Company Plan and any amendments
thereto (or if the Company Plan is not a written Company Plan, a description
thereof); (ii) a copy of the two most recent annual reports and actuarial
reports, if required under ERISA, and the most recent report prepared with
respect thereto in accordance with State-
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ment of Financial Accounting Standards No. 87; (iii) a copy of the most
recent Summary Company Plan Description required under ERISA with respect
thereto; (iv) if the Company Plan is funded through a trust or any third
party funding vehicle, a copy of the trust or other funding agreement and the
latest financial statements thereof; and (v) the most recent determination
letter received from the IRS with respect to each Company Plan intended to
qualify under Section 401 of the Code.
(c) No liability under Title IV or Section 302 of ERISA has been
incurred by the Company or any ERISA Affiliate that has not been satisfied in
full, and no condition exists that presents a material risk to the Company or
any ERISA Affiliate of incurring any such liability, other than liability for
premiums due to the Pension Benefit Guaranty Corporation (which premiums have
been paid when due).
(d) All contributions required to be made with respect to any
Company Plan on or prior to the Effective Time have been timely made or are
reflected on the Company Balance Sheet.
(e) Neither the Company nor any of its Subsidiaries, any Company
Plan, any trust created thereunder, nor any trustee or administrator thereof
has engaged in a transaction in connection with which the Company or any of
its Subsidiaries, any Company Plan, any such trust, or any trustee or
administrator thereof, or any party dealing with any Company Plan or any such
trust could be subject to either a civil penalty assessed pursuant to Section
409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976 of
the Code.
(f) Each Company Plan has been operated and administered in all
material respects in accordance with its terms and applicable law, including
but not limited to ERISA and the Code. There are no pending, threatened or
anticipated claims by or on behalf of any Company Plan, by any employee or
beneficiary covered under any such Company Plan, or otherwise involving any
such Company Plan (other than routine claims for benefits).
(g) Each Company Plan intended to be "qualified" within the meaning
of Section 401(a) of the Code is so qualified and the trusts maintained
thereunder are exempt from taxation under Section 501(a) of the Code. Each
Company Plan intended to satisfy the requirements of Section 501(c)(9) has
satisfied such requirements.
(h) No Company Plan provides medical, surgical, hospitalization,
death or similar benefits (whether or not insured) for employees or former
employees of the Company or any of its Subsidiaries for periods extending
beyond their retirement or other termination of service, other than (i)
coverage mandated by applicable law, (ii) death benefits under any "pension
plan," or (iii) benefits the full cost of which is
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borne by the current or former employee (or his beneficiary). No condition
exists that would prevent the Company or any of its Subsidiaries from
amending or terminating any Company Plan providing health or medical benefits
in respect of any active or former employee of the Company or any of its
Subsidiaries.
(i) No amounts payable under the Company Plans have failed, or as a
result of the transactions contemplated hereby will fail, to be deductible
for federal income tax purposes by virtue of Sections 162(m) or 280G of the
Code.
(j) The consummation of the transactions contemplated by this
Agreement will not, either alone or in combination with another event, (i)
entitle any current or former employee or officer of the Company or any ERISA
Affiliate to severance pay, unemployment compensation or any other payment,
except as expressly provided in this Agreement, or (ii) accelerate the time
of payment or vesting, or increase the amount of compensation due any such
employee or officer.
SECTION 3.13 LABOR MATTERS . (a) There are no controversies pending
or, to the knowledge of the Company or any of its Subsidiaries, threatened,
between the Company or any of its Subsidiaries and any of their respective
employees, consultants or independent contractors; (b) neither the Company
nor any of its Subsidiaries is a party to any collective bargaining agreement
or other labor union contract applicable to persons employed by the Company
or its Subsidiaries, nor does the Company or any of its Subsidiaries know of
any activities or proceedings of any labor union to organize any such
employees; and (c) neither the Company nor any of its Subsidiaries has any
knowledge of any labor disputes, strikes, slowdowns, work stoppages,
lockouts, or threats thereof, by or with respect to any employees of, or
consultants or independent contractors to, the Company or any of its
Subsidiaries.
SECTION 3.14 PROPERTIES; ENCUMBRANCES . The Company and each of its
Subsidiaries have good, valid and marketable title to, or a valid leasehold
interest in, all the tangible properties and assets which it purports to own
or lease (real, personal and mixed), including, without limitation, all the
properties and assets reflected in the Company Balance Sheet (except for
personal property sold since the date of the Company Balance Sheet in the
ordinary course of business consistent with past practice). All properties
and assets reflected in the Company Balance Sheet are free and clear of all
Liens, except for Liens reflected on the Company Balance Sheet and Liens for
current taxes not yet due and other Liens that do not materially detract from
the value or impair the use of the property or assets subject thereto.
SECTION 3.15 TAXES .
(a) The Company and each of its Subsidiaries have timely filed with
the appropriate taxing authorities all Tax Returns required to be filed by
them (giving effect to valid extensions) and all such Tax Returns are true,
correct and complete in all material respects. Each group of corporations
with which the Company or any of
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its Subsidiaries has filed (or was required to file) consolidated, combined,
unitary or similar Tax Returns (an "Affiliated Group") has timely filed all
income and other material Tax Returns that it was required to file (giving
effect to valid extensions) with respect to any period in which the Company
or any of its Subsidiaries was a member of such Affiliated Group (each such
Tax Return, an "Affiliated Return") and all such Affiliated Returns are true,
correct and complete in all material respects. All material Taxes due and
owing by the Company and its Subsidiaries have been timely paid or adequately
reserved for. There are no Tax Liens on any assets of the Company or any
Subsidiary thereof other than liens relating to current Taxes not yet due and
payable. Neither the Company, any of its Subsidiaries nor any member of any
Affiliated Group has granted any waiver of any statute of limitations with
respect to, or any extension of a period for the assessment of, any Tax. No
power of attorney has been granted with respect to any matter relating to
Taxes of the Company or any of its Subsidiaries which is currently in force.
(b) Neither the Company nor any of its Subsidiaries is, or has been,
a United States real property holding corporation (as defined in Section
897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
(c) The Company and each of its Subsidiaries have complied in all
material respects with all applicable laws, rules and regulations relating to
Taxes required to be withheld or collected, including, without limitation,
Taxes required to be withheld pursuant to Sections 1441 and 1442 of the Code
and Taxes required to be withheld from employee wages. The Company has
delivered to Parent true, correct and complete copies of all (i) income and
other material Tax Returns filed by the Company and each of its Subsidiaries
and (ii) Affiliated Returns, in each case since the date of September 28,
1996. None of the Company, any of its Subsidiaries or any member of any
Affiliated Group has received any notice of any audit examination,
deficiency, refund litigation, proposed adjustment or matter in controversy
with respect to any Taxes or Tax Return of the Company, any of its
Subsidiaries or any Affiliated Group, and no audits or other administrative
proceedings or court proceedings with respect to any Taxes or Tax Return of
the Company, any of its Subsidiaries or any Affiliated Group are in progress.
No taxing authority has asserted that the Company, any of its Subsidiaries or
any Affiliated Group was required to file any Tax Return that was not filed.
Neither the Company nor any of its Subsidiaries is a "consenting corporation"
within the meaning of Section 341(f) of the Code or has agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f)
asset (as such term is defined in Section 341(f)(4) of the Code) owned by the
Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries is a party to or bound by any Tax indemnity, sharing,
allocation, or similar contract or arrangement. Neither the Company nor any
of its Subsidiaries is or has ever been a member of a group of corporations
with
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which it has filed (or been required to file) consolidated, combined, unitary
or similar Tax Returns, other than a group of which only the Company and its
Subsidiaries are or were members. Neither the Company nor any of its
Subsidiaries has agreed to, or is required to, make any adjustment under
Section 481(a) of the Code by reason of a change in accounting method or
otherwise.
(d) The statute of limitations for the assessment of Taxes has
expired for all Tax Returns of the Company and its Subsidiaries and any
Affiliated Group, or those Tax Returns have been audited and closed by the
appropriate taxing authorities. The Company has delivered to Parent true,
correct and complete copies of each of (i) all audit reports, letter rulings,
technical advice memoranda and similar documents issued by a taxing authority
relating to Taxes of, or with respect to, the Company or any of its
Subsidiaries and (ii) any closing agreements entered into by the Company or
any of its Subsidiaries with any taxing authority.
(e) For purposes of this Agreement, "Tax" or "Taxes" shall mean
taxes, fees, levies, duties, tariffs, imposts and governmental impositions or
charges of any kind in the nature of (or similar to) taxes, payable to any
federal, state, local or foreign taxing authority, including without
limitation (i) income, franchise, profits, gross receipts, AD VALOREM, net
worth, value added, sales, use, service, real or personal property, special
assessments, capital stock, license, payroll, withholding, employment, social
security, workers' compensation, unemployment compensation, utility,
severance, production, excise, stamp, occupation, premium, windfall profits,
transfer and gains taxes and (ii) interest, penalties, additional taxes and
additions to tax imposed with respect thereto; and "Tax Returns" shall mean
returns, reports, declarations, schedules, certificates, information
statements and other similar documents with respect to Taxes (including any
supporting information) required to be filed with the IRS or any other taxing
authority, domestic or foreign, including, without limitation, consolidated,
combined or unitary tax returns, claims for refund, amended returns, or
declarations of estimated Tax.
SECTION 3.16 ENVIRONMENTAL MATTERS .
(a) The Company and its Subsidiaries are in full compliance with all
applicable Environmental Laws; neither the Company nor any of its
Subsidiaries has received any communication whether from a Governmental
Entity, citizens group, employee or otherwise, that alleges that the Company
or any of its Subsidiaries are not in such full compliance; and, to the
Company's best knowledge, there are no circumstances that may prevent,
interfere with, such full compliance in the future.
(b) There is no Environmental Claim pending or threatened against
the Company or any of its Subsidiaries or, to the Company's knowledge,
against any person or entity whose liability for any Environmental Claim the
Company or any of its Subsidiaries have or may have retained or assumed
either contractually or by operation of law.
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(c) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including the Release, emission, discharge
or disposal of any Hazardous Materials, that could form the basis of any
Environmental Claim against the Company or any of its Subsidiaries or, to the
Company's knowledge, against any person or entity whose liability for any
Environmental Claim the Company or any of its Subsidiaries have or may have
retained or assumed either contractually or by operation of law.
(d) The Company and its Subsidiaries have delivered or otherwise
made available for inspection to Parent true, complete and correct copies and
results of any audits, reports, studies, analyses, tests or monitoring
possessed or initiated by the Company or its Subsidiaries pertaining to
Hazardous Materials in, on, beneath or adjacent to any property currently or
formerly owned, operated or leased by the Company or its Subsidiaries or
regarding the Company's or its Subsidiaries' compliance with applicable
Environmental Laws.
(e) "Environmental Claim" means any claim, action, cause of action,
investigation or notice by any person or entity alleging potential liability
arising out of, based on or resulting from (i) the presence, or release into
the environment, of any Hazardous Material at any location, whether or not
owned by the Company or any of its Subsidiaries or (ii) circumstances forming
the basis of any violation, or alleged violation, of any Environmental Law.
(f) "Environmental Laws" means all federal, state, local and foreign
laws and regulations relating to pollution or protection of human health or
the environment, including without limitation laws and regulations relating
to emissions, discharges, releases or threatened releases of Hazardous
Materials or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous
Materials and all laws and regulations with regard to record keeping,
notification, disclosure and reporting requirements respecting Hazardous
Materials.
(g) "Hazardous Materials" means chemicals, pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products, all substances
defined as Hazardous Substances, Hazardous Wastes, Oils, Pollutants or
Contaminants in the National Oil and Hazardous Substances Pollution
Contingency Plan, 40 C.F.R. Section 300.5, or defined as such by, or
otherwise regulated under, any Environmental Law.
(h) "Release" means any release, spill, emission, discharge,
leaking, pumping, injection, deposit, disposal, dispersal, leaching or
migration into the indoor or outdoor environment (including, without
limitation, ambient air, surface water,
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groundwater and surface or subsurface strata) or into or out of any property,
including the movement of Hazardous Materials through or in the air, soil,
surface water, groundwater or property.
SECTION 3.17 INTELLECTUAL PROPERTY .
(a) The Company or its Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights to use (free and clear of all
liens and encumbrances), all trademarks, service marks, trade names,
copyrights, Internet domain names, mask works, including any registrations or
applications for registration thereof, patents and patent applications, and
trade secrets, including technology, know-how, processes, schematics,
computer software programs or applications, and all other tangible or
intangible proprietary information or material, that is used in the business
of the Company and its Subsidiaries as currently conducted (the "Company
Intellectual Property Rights"). Set forth in Section 3.17(a) of the Company
Disclosure Schedule is a list of all Company-owned patents and patent
applications, registered and unregistered trademarks and service marks, and
copyright and mask work registrations.
(b) Either the Company or one of its Subsidiaries is the sole and
exclusive owner of all right, title and interest in and to (free and clear of
any Liens), or is the exclusive or non-exclusive licensee of, the Company
Intellectual Property Rights, and, in the case of Company Intellectual
Property Rights owned by the Company or any of its Subsidiaries, has sole and
exclusive rights (and is not contractually obligated to pay any compensation
to any third party in respect thereof) to the use thereof and the material
covered thereby. No claims have been asserted or, to the Company's knowledge,
are threatened by any person (i) to the effect that the manufacture, sale,
licensing or use of any of the products or services of the Company or any of
its Subsidiaries as now manufactured, sold or licensed or used or proposed
for manufacture, use, sale or licensing by the Company or any of its
Subsidiaries infringes any intellectual property rights of any third party,
(ii) against the use by the Company or any of its Subsidiaries of any
trademarks, service marks, trade names, trade secrets, copyrights, patents,
technology or know-how used in the business of the Company and its
Subsidiaries as currently conducted or as presently proposed to be conducted,
or (iii) challenging the ownership or use by the Company or any of its
Subsidiaries or the validity of any of the Company Intellectual Property
Rights. All patents and trademark, service mark, copyright and mask work
registrations held by the Company and its Subsidiaries and used in the
business of the Company or its Subsidiaries as currently conducted or as
presently proposed to be conducted are valid, subsisting, in full force and
effect, and have not lapsed, expired or been cancelled or abandoned. To the
knowledge of the Company, there is no unauthorized use, infringement or
misappropriation of any of the Company Intellectual Property Rights by any
third party, including any employee or former employee of the Company or any
of its Subsidiaries. No Company Intellectual
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Property Right or product or service of the Company or any of its
Subsidiaries is subject to any outstanding decree, order, judgment or
stipulation restricting in any manner the use, sale or licensing thereof by
the Company or any of its Subsidiaries. No current or former partner,
director, officer or employee of the Company or any of its Subsidiaries will,
after giving effect to the transactions contemplated hereby, own or retain
any rights in or to any of the Company Intellectual Property. Neither the
Company nor any of its Subsidiaries has entered into any agreement under
which the Company or its Subsidiaries is restricted from using or licensing
any Company Intellectual Property Right in any manner anywhere in the world,
or selling or otherwise distributing any of its products or services.
(c) Neither the Company nor any Subsidiary is, or as a result of the
execution or delivery of this Agreement or the performance of its obligations
hereunder will be in violation of any license, sublicense, agreement or
instrument to which the Company or such Subsidiary is a party or otherwise
bound, nor will the consummation of the transactions contemplated hereby
result in any material loss or impairment of the Company or any Subsidiary's
ownership of or right to use any of the Company Intellectual Property, nor
require the consent of any Governmental Entity or third party with respect to
any of the Company Intellectual Property.
SECTION 3.18 INSURANCE . To the Company's best knowledge, after
reasonable inquiry, all fire and casualty, general liability, business
interruption, product liability, sprinkler and water damage insurance
policies and other forms of insurance maintained by the Company or any of its
Subsidiaries are with reputable insurance carriers, provide adequate coverage
for all normal risks incident to the business of the Company and its
Subsidiaries and their respective properties and assets and are in character
and amount and with such deductibles and retained amounts as generally
carried by persons engaged in similar businesses and subject to the same or
similar perils or hazards.
SECTION 3.19 RESTRICTIONS ON BUSINESS ACTIVITIES . Except for this
Agreement, there is no agreement, judgement, injunction, order or decree
binding upon the Company or any of its Subsidiaries which has or could be
expected to have the effect of prohibiting or impairing any business practice
of the Company or any of its Subsidiaries, acquisition of property by the
Company or any of its Subsidiaries or the conduct of business by the Company
or any of its Subsidiaries as currently conducted or as proposed to be
conducted by the Company.
SECTION 3.20 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS .
The information supplied by the Company for inclusion in the Registration
Statement shall not at the time the Registration Statement is declared
effective by the SEC contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein, in
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the light of the circumstances under which they were made, not misleading.
The information supplied by the Company for inclusion or incorporation by
reference in the proxy statement/prospectus (as amended or supplemented, the
"Proxy Statement/ Prospectus") to be sent to the shareholders of the Company
in connection with the meeting of the shareholders of the Company to consider
the Company Voting Proposal (the "Company Shareholders Meeting"), and
stockholders of Parent in connection with the meeting of the stockholders of
Parent to consider the issuance of the Parent Common Stock in the Merger (the
"Parent Stockholders Meeting"), shall not, on the date the Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto) is
first mailed to shareholders of the Company and stockholders of Parent or at
the time of the Company Shareholders Meeting and the time of the Parent
Stockholders Meeting contain any statement which, at such time and in light
of the circumstances under which it shall be made, is false or misleading
with respect to any material fact, or shall omit to state any material fact
necessary in order to make the statements made therein not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Company Shareholders Meeting and the Parent Stockholders
Meeting which has become false or misleading. If at any time prior to the
later of the Company Shareholders Meeting and the Parent Stockholders Meeting
any event relating to the Company or any of its respective affiliates,
officers or directors should be discovered by the Company which should be set
forth in an amendment to the Registration Statement or a supplement to the
Proxy Statement/Prospectus, the Company shall promptly inform Parent. The
Proxy Statement/Prospectus shall comply in all material respects as to form
and substance with the requirements of the Securities Act, the Exchange Act
and the rules and regulations thereunder. Notwithstanding the foregoing, the
Company makes no representation or warranty with respect to any information
supplied by Parent or Merger Sub which is contained in the Registration
Statement or the Proxy Statement/Prospectus.
SECTION 3.21 INTERESTED PARTY TRANSACTIONS . Since the date of the
Company's proxy statement dated January 19, 1999, no event has occurred that
would be required to be reported as a Certain Relationship or Related
Transaction, pursuant to Item 404 of Regulation S-K promulgated by the SEC.
SECTION 3.22 CHANGE IN CONTROL PAYMENTS . Neither the Company nor
any of its Subsidiaries have any agreements, other than as previously
disclosed in Section 3.12 of the Company Disclosure Schedule, to which they
are parties, or to which they are subject, pursuant to which payments may be
required upon, or may become payable directly or indirectly as a result of, a
change of control of the Company.
SECTION 3.23 YEAR 2000 COMPLIANCE .
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(a) All of (i) the internal systems used in the business or
operations of the Company and its Subsidiaries, including without limitation
computer hardware systems, software, applications, firmware, equipment
containing embedded microchips and other embedded systems and (ii) the
software, hardware, firmware and other technology that constitute part of the
products and services manufactured, marketed, licensed or sold by the Company
or any of its Subsidiaries to third parties are Year 2000 Compliant.
(b) To the Company's knowledge, all third-party systems used in
connection with the business, products, services or operations of the Company
or any of its Subsidiaries, including without limitation any system belonging
to any of the Company's or its Subsidiaries' vendors, co-venturers, service
providers or customers are Year 2000 Compliant. The Company and its
Subsidiaries have received satisfactory written assurances and warranties
from all of their respective vendors, co-venturers, service providers and
customers that are material to the ongoing operation of the business of the
Company and its Subsidiaries that past and future products, software,
equipment, components or systems provided by such parties are (or in the case
of future products, will be) Year 2000 Compliant.
(c) The Company has conducted "year 2000" audits with respect to (i)
each of the internal systems used in the business, products, services and
operations of the Company and its Subsidiaries, including without limitation
computer hardware systems, software, applications, firmware, equipment
containing embedded microchips and other embedded systems and (ii) all of the
software, applications, hardware, firmware and other technology which
constitute part of the products and services manufactured, marketed,
performed or sold by the Company or any of its Subsidiaries or licensed by
the Company or any of its Subsidiaries to third parties. The Company has
obtained "year 2000" certifications with respect to all material third-party
systems used in connection with the business or operations of the Company and
its Subsidiaries, including without limitation systems belonging to the
vendors, co-venturers, service providers and customers of the Company of any
or its Subsidiaries. The Company has made available to Parent true, complete
and correct copies of all "year 2000" audits, certifications, reports and
other similar documents that have been prepared or performed by or on behalf
of the Company or any third party with respect to the systems, business,
operations, products or services of the Company or any of its Subsidiaries.
(d) Neither the Company nor any of its Subsidiaries has provided any
representation, warranty or guarantee for any product sold or licensed, or
service provided, by the Company or its Subsidiaries to the effect that such
product or service (i) complies with or accounts for the fact of the year
change from December 31, 1999 to January 1, 2000, (ii) will not be adversely
affected with respect to functionality, interoperability, connectivity,
performance, reliability or volume capacity (including without limitation the
processing storage, recall and reporting of
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data) by the passage of any date, including without limitation the year
change from December 31, 1999 to January 1, 2000 or (iii) is otherwise Year
2000 Compliant.
(e) For purposes of this Agreement, "Year 2000 Compliant" means
that the applicable system, product, service or item:
(i) will accurately receive, record, store, provide, recognize,
recall and process all date and time data from, during, into and between the
years 1999, 2000 and 2001, and all years pertinent thereafter;
(ii) will accurately perform all date-dependent calculations
and operations (including without limitation, mathematical operations,
sorting, comparing and reporting) from, during, into and between the years
1999, 2000 and 2001, and all pertinent years thereafter; and
(iii) will not malfunction, cease to function or provide
invalid or incorrect results as a result of (A) the change of years from 1999
to 2000 or from 2000 to 2001, (B) date data, including date data which
represents or references different centuries, different dates during 1999,
2000 and 2001, or more than one century or (C) the occurrence of any
particular date;
in each case without human intervention, provided, in each case, that all
software, applications, hardware and other systems used in conjunction with
such system or item that are not owned or licensed by the Company or its
Subsidiaries correctly exchange date data with or provide data to such system
or item.
SECTION 3.24 POOLING; TAX MATTERS . Neither the Company nor any of
its affiliates has taken or agreed to take any action or failed to take any
action, or has any reason to believe that any conditions exist, that would
prevent (a) Parent from accounting for the business combination to be
effected by the Merger as a pooling of interests or (b) the Merger from
constituting a reorganization within the meaning of Section 368(a) of the
Code.
SECTION 3.25 NO EXISTING DISCUSSIONS . As of the date hereof, the
Company is not engaged, directly or indirectly, in any discussions or
negotiations with any other party with respect to an Acquisition Proposal (as
defined in Section 6.2(b)) or any other substantially similar proposal.
SECTION 3.26 OPINION OF FINANCIAL ADVISOR . The financial advisor of
the Company, First Security Van Kasper, has delivered to the Company an
opinion dated the date of this Agreement to the effect that as of the date of
this Agreement, the Merger Consideration is fair, from a financial point of
view, to the shareholders of the Company. The Company has provided a complete
and correct copy of such opinion to Parent.
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SECTION 3.27 BROKERS . No broker, finder or investment banker (other
than First Security Van Kasper, whose brokerage, finder's or other fee will
be paid by the Company) is entitled to any brokerage, finder's or other fee
or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company or any
of its Subsidiaries. The Company has heretofore furnished to Parent a
complete and correct copy of all agreements between the Company and First
Security Van Kasper pursuant to which such firm would be entitled to any
payment relating to the transactions contemplated hereunder.
SECTION 3.28 AFFILIATES . Section 3.28 of the Company Disclosure
Schedule contains a true, complete and correct list of all persons who, as of
the date hereof, to the best knowledge of the Company, may be deemed to be
affiliates of the Company excluding all its Subsidiaries but including all
directors and executive officers of the Company.
SECTION 3.29 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS .
Each current and former employee and officer of the Company has executed an
Agreement Regarding Confidential Information and Inventions, or an Employee
Proprietary Information Agreement or similar such agreement, in substantially
the form previously provided or made available to Parent. The Company is not
aware that any of the current or former employees of the Company is in
violation thereof.
SECTION 3.30 ABSENCE OF CERTAIN PAYMENTS . Neither the Company, nor,
to the Company's knowledge, any of its affiliates or any of their respective
officers, directors, employees or agents or other people acting on behalf of
any of them have: (i) engaged in any activity prohibited by the United States
Foreign Corrupt Practices Act of 1977 or any other similar law, regulation,
decree, directive or order of any Governmental Entity and (ii) without
limiting the generality of the preceding clause (i), used any corporate or
other funds for unlawful contributions, payments, gifts or entertainment, or
made any unlawful expenditures relating to political activity to government
officials or others. Neither the Company, nor, to the Company's knowledge,
any of its affiliates or any of their respective directors, officers,
employees or agents of other persons acting on behalf of any of them, has
accepted or received any unlawful contributions, payments, gifts or
expenditures.
SECTION 3.31 FULL DISCLOSURE . To the Company's best knowledge,
after reasonable inquiry, no representation or warranty by the Company in
this Agreement and no statement contained in any schedule or certificate
furnished or to be furnished by the Company to Parent, or any of its
representatives pursuant to the provisions hereof taken as a whole, contains
as of the date hereof any untrue statement of material fact or omits to state
any material fact necessary in order to make the
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statements herein or therein, in light of the circumstances under which they
were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company that the
statements contained in this Article IV are true and correct, except as set
forth in the Parent Disclosure Schedule, dated as of the date hereof,
prepared by Parent and delivered to the Company in connection herewith (the
"Parent Disclosure Schedule"). The Parent Disclosure Schedule is arranged in
sections corresponding to the numbered and lettered sections contained in
this Article IV and shall qualify only the corresponding Section in this
Article IV.
SECTION 4.1 ORGANIZATION AND QUALIFICATION . Parent and each of its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its respective incorporation
and has the requisite corporate power and authority necessary to own, lease
and operate the properties it purports to own, lease or operate and to carry
on its business as it is now being conducted or presently proposed to be
conducted. Parent and each of its Subsidiaries is duly qualified or licensed
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, leased or operated
by it or the nature of its activities makes such qualification or licensing
necessary, except for such failures to be so duly qualified or licensed and
in good standing that could not reasonably be expected to have a Parent
Material Adverse Effect. A true, complete and correct list of all of Parent's
Subsidiaries, together with the jurisdiction of incorporation of each
Subsidiary, the authorized capitalization of each Subsidiary, and the
percentage of each Subsidiary's outstanding capital stock owned by Parent or
another Subsidiary, is set forth in Section 4.1 of the Parent Disclosure
Schedule. Parent does not directly or indirectly own any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable
for, any equity or similar interest in, any corporation, partnership, joint
venture or other business association or entity, excluding securities in any
publicly traded company held for investment by Parent and comprising less
than one percent of the outstanding stock of such company. The term "Parent
Material Adverse Effect" means any change, effect or circumstance that,
individually or when taken together with all other such similar or related
changes, effects or circumstances that have occurred or could reasonably be
expected to occur prior to the date of determination of the occurrence of the
Parent Material Adverse Effect, (i) is materially adverse to the business,
prospects, assets (including intangible assets), condition (financial or
otherwise) or results of operations of Parent and its Subsidiaries taken as a
whole or (ii) could materially delay or prevent the consummation of the
transactions
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contemplated hereby. Changes in economic or market conditions affecting the
computer peripherals or computer software industries generally, changes in
Parent's stock price, failure to meet Parent's revenue projections for the
first quarter of fiscal year 2000 (except as set forth below) or any loss of
a supplier, customer or employee resulting from the Merger or its
announcement to the extent so resulting will be deemed not to constitute a
Parent Material Adverse Effect; revenue for the first quarter of fiscal year
2000 of 25% or more below the amount set forth in Section 4.1 of the Parent
Disclosure Schedule will be deemed to constitute a Parent Material Adverse
Effect.
SECTION 4.2 CERTIFICATE OF INCORPORATION AND BY-LAWS . Parent has
heretofore furnished to the Company a true, complete and correct copy of its
Certificate of Incorporation, as amended to date (the "Parent Charter"), and
By-Laws, as amended to date (the "Parent By-Laws"). Such Parent Charter and
Parent By-Laws are in full force and effect. Parent is not in violation of
any of the provisions of the Parent Charter or Parent By-Laws.
SECTION 4.3 CAPITALIZATION .
(a) The authorized capital stock of Parent consists of 25,000,000
shares of Parent Common Stock, and 1,000,000 shares of preferred stock, par
value $.01 per share (the "Parent Preferred Stock"). As of November 30, 1999:
(i) 8,485,714 shares of Parent Common Stock are issued and outstanding,
1,826,309 shares of Parent Common Stock are reserved for issuance upon
exercise of options granted pursuant to Parent's 1982 Key Employee Incentive
Plan, 1986 Employee Stock Purchase Plan and 1992 Key Employee Incentive Plan;
and no shares of Parent Common Stock are issued and held in the treasury of
Parent; and (ii) no shares of Parent Preferred Stock are issued and
outstanding. All outstanding shares of Parent Common Stock are, and all
shares of Parent Common Stock subject to issuance as specified above, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, will be, duly authorized, validly issued, fully paid
and nonassessable and not subject to or issued in violation of any purchase
option, call option, right of first refusal, preemptive right, subscription
right or any similar right under any provision of the DGCL, Parent Charter or
Parent By-Laws or any agreement to which Parent is a party or is otherwise
bound. No material change in such capitalization has occurred since November
30, 1999. All of the outstanding shares of capital stock of each of Parent's
Subsidiaries are duly authorized, validly issued, fully paid and
nonassessable, and all such shares are owned by Parent free and clear of all
Liens. There are no accrued and unpaid dividends with respect to any
outstanding shares of capital stock of Parent or any of its Subsidiaries.
(b) Except as described in Section 4.3(a) of this Agreement, there
are no equity securities of any class of Parent or any of its Subsidiaries or
any security
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exchangeable into or exercisable for such equity securities, issued, reserved
for issuance or outstanding. Except as described in Section 4.3(a) of this
Agreement, there are no options, warrants, calls, rights, commitments or
agreements of any character to which Parent or any of its Subsidiaries is a
party, or by which Parent or any of its Subsidiaries is bound, obligating
Parent or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock of Parent or
any of its Subsidiaries or obligating Parent or any of its Subsidiaries to
grant, extend or accelerate the vesting of or enter into any such option,
warrant, call, right, commitment or agreement. To Parent's knowledge, there
are no voting trusts, proxies or other similar agreements or understandings
with respect to the shares of capital stock of Parent or any of its
Subsidiaries There are no obligations, contingent or otherwise, of Parent or
any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares
of capital stock of Parent or any of its Subsidiaries or to provide funds to
or make any investment (in the form of a loan, capital contribution or
otherwise) in any such Subsidiary or any other entity.
(c) All of the shares of Parent Common Stock to be issued in the
Merger will be, when issued in accordance with this Agreement, duly
authorized, validly issued, fully paid and nonassessable.
(d) The authorized capital stock of Merger Sub consists of 100
Merger Sub Common Shares, all of which are issued and outstanding and fully
paid and nonassessable.
SECTION 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT . Subject only to
the approval of Parent's stockholders described below, each of Parent and
Merger Sub has all necessary corporate power and authority to execute and
deliver this Agreement and each instrument required hereby to be executed and
delivered by it (the "Parent Merger Documents") at the Closing and to perform
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of the Parent
Merger Documents and the consummation of the transactions contemplated by the
Parent Merger Documents have been duly and validly authorized by all
necessary corporate action on the part of Parent and Merger Sub, subject only
to the approval of the holders of Parent Common Stock of the issuance of the
Parent Common Stock in the Merger at a meeting where a quorum is present by a
majority of the votes properly cast (the "Parent Voting Proposal"). This
Agreement has been duly and validly executed and delivered by Parent and
Merger Sub and constitutes, and when executed and delivered by Parent and
Merger Sub, as applicable, each of the other Parent Merger Documents will
constitute, assuming the due authorization, execution and delivery by the
Company, the legal and binding obligation of each of Parent and Merger Sub,
as applicable, except as such enforceability may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights and by
general equitable
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principles (regardless of whether enforceability is considered in a
proceeding in equity or at law). The Board of Directors of Parent has
determined that it is advisable and in the best interests of Parent's
stockholders for Parent to issue the shares to the Company's shareholders on
the terms and subject to the conditions of this Agreement, and has
recommended that Parent's stockholders approve the Parent Stockholder
Proposal.
SECTION 4.5 NO CONFLICT, REQUIRED FILINGS AND CONSENTS .
(a) The execution and delivery of the Parent Merger Documents by
Parent and Merger Sub do not, and the performance of this Agreement by Parent
and Merger Sub will not, (i) conflict with or violate the Parent Charter, the
Parent By-Laws, the Certificate of Incorporation of Merger Sub or the By-Laws
of Merger Sub, (ii) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Parent or Merger Sub by which its or
their respective properties are bound or affected, or (iii) result in any
breach of or constitute a default (or an event that with notice or lapse of
time or both would become a default), or impair Parent's or any of its
Subsidiaries' rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration
or cancellation of, or result in the creation of a Lien on any of the
properties or assets of Parent or any of its Subsidiaries pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Parent or any of its
Subsidiaries is a party or by which Parent or any of its Subsidiaries or its
or any of their respective properties is bound or affected; other than such
conflicts, breaches, defaults, impairments or other effects under (iii) of
this Section 4.5(a) that have not had and could not reasonably be expected to
have a Parent Material Adverse Effect.
(b) The execution and delivery of this Agreement or any instrument
required hereby to be executed and delivered by Parent and Merger Sub does
not, and the performance of this Agreement by Parent and Merger Sub will not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity, except (i) the filing of the
pre-merger notification report under the HSR Act, (ii) the filing of the
Registration Statement with the SEC in accordance with the Securities Act,
and the filing of the Proxy Statement/Prospectus with the SEC under the
Exchange Act, (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the laws of any foreign country and
(iv) the filing and recordation of the Merger Agreement or other documents as
required by the CGCL and the DGCL.
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SECTION 4.6 SEC FILINGS; FINANCIAL STATEMENTS .
(a) Parent has timely filed all forms, reports, schedules,
statements and other documents required to be filed by Parent with the SEC
since November 30, 1998 (collectively, the "Parent SEC Reports"). The Parent
SEC Reports (i) at the time filed, complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the
case may be, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date
of such filing) contain any untrue statement of a material fact or omit to
state a material fact required to be stated in such Parent SEC Reports or
necessary in order to make the statements in such Parent SEC Reports, in
light of the circumstances under which they were made, not misleading. None
of Parent's Subsidiaries are required to file any forms, reports, schedules,
statements or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in
each case, any related notes), contained in the Parent SEC Reports, including
any Parent SEC Reports filed after the date of this Agreement until the
Closing, complied, as of its respective date, in all material respects with
all applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved and fairly
presented the consolidated financial position of Parent and its Subsidiaries
as at the respective dates and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount.
SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS . Since the date of
the unaudited balance sheet of Parent as of November 30, 1999 (the "Parent
Balance Sheet"), a copy of which has been previously supplied to the Company
by Parent, and except as disclosed in the Parent SEC Reports, Parent has
conducted its business in the ordinary course consistent with past practice
and, since such date, there has not occurred: (i) any change, development,
event or other circumstance, situation or state of affairs that has had or
could reasonably be expected to have a Parent Material Adverse Effect; (ii)
any amendments to or changes in the Parent Charter or Parent By-Laws; (iii)
any damage to, destruction or loss of any asset of Parent or any of its
Subsidiaries (whether or not covered by insurance) that could reasonably be
expected to have a Parent Material Adverse Effect; (iv) any change by Parent
in its accounting methods, principles or practices; (v) any revaluation by
Parent of any of its assets, including, without limitation, writing down the
value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business consistent with past practice; or (vi) any
sale of a material amount of assets (tangible or
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intangible) of Parent other than in the ordinary course of business and
consistent with past practice.
SECTION 4.8 NO UNDISCLOSED LIABILITIES . Except as disclosed in the
Parent SEC Reports or in the Parent Balance Sheet, to Parent's knowledge,
neither Parent nor any of its Subsidiaries has any liabilities (absolute,
accrued, contingent or otherwise), except liabilities (a) adequately
reflected in the Parent Balance Sheet, (b) incurred in the ordinary course of
business consistent with past practice and not required under GAAP to be
reflected in the Parent Balance Sheet, (c) incurred since the date of the
Parent Balance Sheet in the ordinary course of business consistent with past
practice or (d) incurred in connection with this Agreement.
SECTION 4.9 COMPLIANCE . To Parent's knowledge, neither Parent nor
any of its Subsidiaries is in conflict with, or in default or violation of
(and has not received any notices of violation with respect to), any (i) law,
rule or regulation, or (ii) order, judgment or decree applicable to Parent or
any of its Subsidiaries or by which its or any of their respective properties
is bound or affected, and Parent is not aware of any such conflict, default
or violation thereunder (other than any conflicts, defaults or violations
under (i) of this Section 4.9 that have not had and could not reasonably be
expected to have a Parent Material Adverse Effect).
SECTION 4.10 ABSENCE OF LITIGATION . Except as disclosed in the
Parent SEC Reports, there are no claims, actions, suits, proceedings or
investigations (i) pending against Parent or any of its Subsidiaries or any
properties or assets of Parent or of any of its Subsidiaries or (ii) to the
knowledge of Parent, threatened against Parent or any of its Subsidiaries, or
any properties or assets of Parent or of any of its Subsidiaries, in each
case, which claims, actions, suits, proceedings or investigations could
reasonably be expected to have a Parent Material Adverse Effect.
SECTION 4.11 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT
AGREEMENTS.
(a) Section 4.11(a) of the Parent Disclosure Schedule contains a
true and complete list of (i) each deferred compensation and each bonus or
other incentive compensation, stock purchase, stock option and other equity
compensation plan, program, agreement or arrangement; (ii) each severance or
termination pay, medical, surgical, hospitalization, life insurance and other
"welfare" plan, fund or program (within the meaning of Section 3(1) of
ERISA); (iii) each profit-sharing, stock bonus or other "pension" plan, fund
or program (within the meaning of Section 3(2) of ERISA); (iv) each
employment, termination or severance agreement; and (v) each other employee
benefit plan, fund, program, agreement or arrangement, in each case, that is
sponsored, maintained or contributed to or required to be contributed to by
Parent or by any trade or business, whether or not incorporated (a "Parent
ERISA
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Affiliate"), that together with Parent would be deemed a "single employer"
within the meaning of Section 4001(b) of ERISA, or to which Parent or a
Parent ERISA Affiliate is party, whether written or oral, for the benefit of
any employee or former employee of Parent or any of its Subsidiaries
(collectively, the "Parent Plans"). No Parent Plan is subject to Section 302
or Title IV of ERISA or Section 412 of the Code. Neither Parent, any of its
Subsidiaries nor any Parent ERISA Affiliate has any commitment or formal
plan, whether legally binding or not, to create any additional employee
benefit plan or modify or change any existing Parent Plan that would affect
any employee or former employee of Parent or any of its Subsidiaries.
(b) With respect to each Parent Plan, Parent has heretofore delivered
or made available to the Company true and complete copies of each of the
following documents: (i) a copy of the Parent Plan and any amendments thereto
(or if the Parent Plan is not a written Parent Plan, a description thereof);
(ii) a copy of the two most recent annual reports and actuarial reports, if
required under ERISA, and the most recent report prepared with respect thereto
in accordance with Statement of Financial Accounting Standards No. 87; (iii) a
copy of the most recent Summary Parent Plan Description required under ERISA
with respect thereto; (iv) if the Parent Plan is funded through a trust or
any third party funding vehicle, a copy of the trust or other funding
agreement and the latest financial statements thereof; and (v) the most
recent determination letter received from the IRS with respect to each Parent
Plan intended to qualify under Section 401 of the Code.
(c) No liability under Title IV or Section 302 of ERISA has been
incurred by Parent or any Parent ERISA Affiliate that has not been satisfied
in full, and no condition exists that presents a material risk to Parent or
any Parent ERISA Affiliate of Parent incurring any such liability, other than
liability for premiums due to the Pension Benefit Guaranty Corporation (which
premiums have been paid when due).
(d) All contributions required to be made with respect to any Parent
Plan on or prior to the Effective Time have been timely made or are reflected
on the Parent Balance Sheet.
(e) Neither Parent nor any of its Subsidiaries, any Parent Plan, any
trust created thereunder, nor any trustee or administrator thereof has
engaged in a transaction in connection with which Parent or any of its
Subsidiaries, any Parent Plan, any such trust, or any trustee or
administrator thereof, or any party dealing with any Parent Plan or any such
trust could be subject to either a civil penalty assessed pursuant to Section
409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976 of
the Code.
(f) Each Parent Plan has been operated and administered in all
material respects in accordance with its terms and applicable law, including
but not limited to ERISA and the Code. There are no pending, threatened or
anticipated claims by or on behalf of any Parent Plan, by any employee or
beneficiary covered under any
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such Parent Plan, or otherwise involving any such Parent Plan (other than
routine claims for benefits).
(g) Each Parent Plan intended to be "qualified" within the meaning
of Section 401(a) of the Code is so qualified and the trusts maintained
thereunder are exempt from taxation under Section 501(a) of the Code. Each
Parent Plan intended to satisfy the requirements of Section 501(c)(9) has
satisfied such requirements.
(h) No Parent Plan provides medical, surgical, hospitalization,
death or similar benefits (whether or not insured) for employees or former
employees of Parent or any of its Subsidiaries for periods extending beyond
their retirement or other termination of service, other than (i) coverage
mandated by applicable law, (ii) death benefits under any "pension plan," or
(iii) benefits the full cost of which is borne by the current or former
employee (or his beneficiary). No condition exists that would prevent Parent
or any of its Subsidiaries from amending or terminating any Parent Plan
providing health or medical benefits in respect of any active or former
employee of Parent or any of its Subsidiaries.
(i) No amounts payable under the Parent Plans have failed, or as a
result of the transactions contemplated hereby will fail, to be deductible
for federal income tax purposes by virtue of Sections 162(m) or 280G of the
Code.
(j) The consummation of the transactions contemplated by this
Agreement will not, either alone or in combination with another event, (i)
entitle any current or former employee or officer of Parent or any Parent
ERISA Affiliate to severance pay, unemployment compensation or any other
payment, except as expressly provided in this Agreement, or (ii) accelerate
the time of payment or vesting, or increase the amount of compensation due
any such employee or officer.
SECTION 4.12 LABOR MATTERS . (a) There are no controversies pending
or, to the knowledge of Parent or any of its Subsidiaries, threatened,
between Parent or any of its Subsidiaries and any of their respective
employees, consultants or independent contractors; (b) neither Parent nor any
of its Subsidiaries is a party to any collective bargaining agreement or
other labor union contract applicable to persons employed by Parent or its
Subsidiaries, nor does Parent or any of its Subsidiaries know of any
activities or proceedings of any labor union to organize any such employees;
and (c) neither Parent nor any of its Subsidiaries has any knowledge of any
labor disputes, strikes, slowdowns, work stoppages, lockouts, or threats
thereof, by or with respect to any employees of, or consultants or
independent contractors to, Parent or any of its Subsidiaries.
SECTION 4.13 PROPERTIES; ENCUMBRANCES . Parent and each of its
Subsidiaries have good, valid and marketable title to, or a valid leasehold
interest in, all the tangible properties and assets which it purports to own
or lease (real, personal
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and mixed), including, without limitation, all the properties and assets
reflected in the Parent Balance Sheet (except for personal property sold
since the date of the Parent Balance Sheet in the ordinary course of business
consistent with past practice). All properties and assets reflected in the
Parent Balance Sheet are free and clear of all Liens, except for Liens
reflected on the Parent Balance Sheet and Liens for current taxes not yet due
and other Liens that do not materially detract from the value or impair the
use of the property or assets subject thereto.
SECTION 4.14 TAXES .
(a) Parent and each of its Subsidiaries have timely filed with the
appropriate taxing authorities all Tax Returns required to be filed by them
(giving effect to valid extensions) and all such Tax Returns are true,
correct and complete in all material respects. Each group of corporations
with which Parent or any of its Subsidiaries has filed (or was required to
file) consolidated, combined, unitary or similar Tax Returns (an "Parent
Affiliated Group") has timely filed all income and other material Tax Returns
that it was required to file (giving effect to valid extensions) with respect
to any period in which Parent or any of its Subsidiaries was a member of such
Parent Affiliated Group (each such Tax Return, a "Parent Affiliated Return")
and all such Parent Affiliated Returns are true, correct and complete in all
material respects. All material Taxes due and owing by Parent and its
Subsidiaries have been timely paid or adequately reserved for. There are no
Tax Liens on any assets of Parent or any Subsidiary thereof other than liens
relating to current Taxes not yet due and payable. Neither Parent, any of its
Subsidiaries nor any member of any Affiliated Group has granted any waiver of
any statute of limitations with respect to, or any extension of a period for
the assessment of, any Tax. No power of attorney has been granted with
respect to any matter relating to Taxes of Parent or any of its Subsidiaries
which is currently in force.
(b) Neither Parent nor any of its Subsidiaries is, or has been, a
United States real property holding corporation (as defined in Section
897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
(c) Parent and each of its Subsidiaries have complied in all
material respects with all applicable laws, rules and regulations relating to
Taxes required to be withheld or collected, including, without limitation,
Taxes required to be withheld pursuant to Sections 1441 and 1442 of the Code
and Taxes required to be withheld from employee wages. None of Parent, any of
its Subsidiaries or any member of any Parent Affiliated Group has received
any notice of any audit examination, deficiency, refund litigation, proposed
adjustment or matter in controversy with respect to any Taxes or Tax Return
of Parent, any of its Subsidiaries or any Parent Affiliated Group, and no
audits or other administrative proceedings or court proceedings with respect
to any Taxes or Tax Return of Parent, any of its Subsidiaries or any Parent
Affiliated Group are in progress. No taxing authority has asserted that
Parent, any of its
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Subsidiaries or any Parent Affiliated Group was required to file any Tax
Return that was not filed. Neither Parent nor any of its Subsidiaries is a
"consenting corporation" within the meaning of Section 341(f) of the Code or
has agreed to have Section 341(f)(2) of the Code apply to any disposition of
a subsection (f) asset (as such term is defined in Section 341(f)(4) of the
Code) owned by Parent or any of its Subsidiaries. Neither Parent nor any of
its Subsidiaries is a party to or bound by any Tax indemnity, sharing,
allocation, or similar contract or arrangement. Neither Parent nor any of its
Subsidiaries is or has ever been a member of a group of corporations with
which it has filed (or been required to file) consolidated, combined, unitary
or similar Tax Returns, other than a group of which only Parent and its
Subsidiaries are or were members. Neither Parent nor any of its Subsidiaries
has agreed to, or is required to, make any adjustment under Section 481(a) of
the Code by reason of a change in accounting method or otherwise.
(d) The statute of limitations for the assessment of Taxes has
expired for all Tax Returns of Parent and its Subsidiaries and any Parent
Affiliated Group, or those Tax Returns have been audited and closed by the
appropriate taxing authorities.
SECTION 4.15 ENVIRONMENTAL MATTERS .
(a) Parent and its Subsidiaries are in full compliance with all
applicable Environmental Laws; neither Parent nor any of its Subsidiaries has
received any communication whether from a Governmental Entity, citizens
group, employee or otherwise, that alleges that Parent or any of its
Subsidiaries are not in such full compliance; and, to Parent's best
knowledge, there are no circumstances that may prevent, interfere with, such
full compliance in the future.
(b) There is no Environmental Claim pending or threatened against
Parent or any of its Subsidiaries or, to Parent's knowledge, against any
person or entity whose liability for any Environmental Claim Parent or any of
its Subsidiaries have or may have retained or assumed either contractually or
by operation of law.
(c) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including the Release, emission, discharge
or disposal of any Hazardous Materials, that could form the basis of any
Environmental Claim against Parent or any of its Subsidiaries or, to Parent's
knowledge, against any person or entity whose liability for any Environmental
Claim Parent or any of its Subsidiaries have or may have retained or assumed
either contractually or by operation of law.
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(d) Parent and its Subsidiaries have delivered or otherwise made
available for inspection to Parent true, complete and correct copies and
results of any audits, reports, studies, analyses, tests or monitoring
possessed or initiated by Parent or its Subsidiaries pertaining to Hazardous
Materials in, on, beneath or adjacent to any property currently or formerly
owned, operated or leased by Parent or its Subsidiaries or regarding Parent's
or its Subsidiaries' compliance with applicable Environmental Laws.
SECTION 4.16 INTELLECTUAL PROPERTY .
(a) To Parent's knowledge, Parent or its Subsidiaries owns, or is
licensed or otherwise possesses legally enforceable rights to use (free and
clear of all liens and encumbrances), all trademarks, service marks, trade
names, copyrights, Internet domain names, mask works, including any
registrations or applications for registration thereof, patents and patent
applications, and trade secrets, including technology, know-how, processes,
schematics, computer software programs or applications, and all other
tangible or intangible proprietary information or material, that is used in
the business of Parent and its Subsidiaries as currently conducted (the
"Parent Intellectual Property Rights").
(b) To Parent's knowledge, either Parent or one of its Subsidiaries
is the sole and exclusive owner of all right, title and interest in and to
(free and clear of any Liens), or is the exclusive or non-exclusive licensee
of, the Parent Intellectual Property Rights, and, in the case of Parent
Intellectual Property Rights owned by Parent or any of its Subsidiaries, has
sole and exclusive rights (and is not contractually obligated to pay any
compensation to any third party in respect thereof) to the use thereof and
the material covered thereby. No claims have been asserted or, to Parent's
knowledge, are threatened by any person (i) to the effect that the
manufacture, sale, licensing or use of any of the products or services of
Parent or any of its Subsidiaries as now manufactured, sold or licensed or
used or proposed for manufacture, use, sale or licensing by Parent or any of
its Subsidiaries infringes any intellectual property rights of any third
party, (ii) against the use by Parent or any of its Subsidiaries of any
trademarks, service marks, trade names, trade secrets, copyrights, patents,
technology or know-how used in the business of Parent and its Subsidiaries as
currently conducted or as presently proposed to be conducted, or (iii)
challenging the ownership or use by Parent or any of its Subsidiaries or the
validity of any of the Parent Intellectual Property Rights. To Parent's
knowledge, all patents and trademark, service mark, copyright and mask work
registrations held by Parent and its Subsidiaries and used in the business of
Parent or its Subsidiaries as currently conducted or as presently proposed to
be conducted are valid, subsisting, in full force and effect, and have not
lapsed, expired or been canceled or abandoned. To Parent's knowledge, there
is no unauthorized use, infringement or misappropriation of any of the Parent
Intellectual Property Rights by any third party, including any employee or
former employee of Parent or any of its Subsidiaries. To
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Parent's knowledge, no Parent Intellectual Property Right or product or
service of Parent or any of its Subsidiaries is subject to any outstanding
decree, order, judgment or stipulation restricting in any manner the use,
sale or licensing thereof by Parent or any of its Subsidiaries. To Parent's
knowledge, no current or former partner, director, officer or employee of
Parent or any of its Subsidiaries will, after giving effect to the
transactions contemplated hereby, own or retain any rights in or to any of
the Parent Intellectual Property. To Parent's knowledge, neither Parent nor
any of its Subsidiaries has entered into any agreement under which Parent or
its Subsidiaries is restricted from using or licensing any Parent
Intellectual Property Right in any manner anywhere in the world, or selling
or otherwise distributing any of its products or services.
(c) To Parent's knowledge, neither Parent nor any Subsidiary is, or
as a result of the execution or delivery of this Agreement or the performance
of its obligations hereunder will be in violation of any license, sublicense,
agreement or instrument to which Parent or such Subsidiary is a party or
otherwise bound, nor will the consummation of the transactions contemplated
hereby result in any material loss or impairment of Parent or any
Subsidiary's ownership of or right to use any of the Parent Intellectual
Property, nor require the consent of any Governmental Entity or third party
with respect to any of the Parent Intellectual Property.
SECTION 4.17 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS .
The information supplied by Parent for inclusion in the Registration
Statement shall not at the time the Registration Statement is declared
effective by the SEC contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The information supplied by Parent for
inclusion or incorporation by reference in the Proxy Statement/Prospectus to
be sent to the stockholders of Parent and the shareholders of the Company in
connection with the Parent Stockholders Meeting and the Company Shareholders
Meeting, shall not, on the date the Proxy Statement/Prospectus (or any
amendment thereof or supplement thereto) is first mailed to stockholders of
Parent or shareholders of the Company or at the time of the Parent
Stockholders Meeting or the Company Shareholders Meeting, contain any
statement which, at such time and in light of the circumstances under which
it shall be made, is false or misleading with respect to any material fact,
or shall omit to state any material fact necessary in order to make the
statements made therein not false or misleading; or omit to state any
material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of proxies for the Parent Stockholders
Meeting or the Company Shareholders Meeting which has become false or
misleading. If at any time prior to the Parent Stockholders Meeting or the
Company Shareholders Meeting any event relating to Parent or any of its
respective affiliates, officers or directors should be discovered by Parent
which should be set forth in an amendment to the
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Registration Statement or a supplement to the Proxy Statement/Prospectus,
Parent shall promptly inform the Company. The Registration Statement shall
comply in all material respects as to form and substance with the
requirements of the Securities Act, the Exchange Act and the rules and
regulations thereunder. Notwithstanding the foregoing, Parent makes no
representation or warranty with respect to any information supplied by the
Company which is contained in any of the foregoing documents.
SECTION 4.18 YEAR 2000 COMPLIANCE .
(a) All of (i) the internal systems used in the business or
operations of Parent and its Subsidiaries, including without limitation
computer hardware systems, software, applications, firmware, equipment
containing embedded microchips and other embedded systems and (ii) the
software, hardware, firmware and other technology that constitute part of the
products and services manufactured, marketed, licensed or sold by Parent or
any of its Subsidiaries to third parties are Year 2000 Compliant.
(b) To Parent's knowledge, all third-party systems used in
connection with the business, products, services or operations of Parent or
any of its Subsidiaries, including without limitation any system belonging to
any of Parent's or its Subsidiaries' vendors, co-venturers, service providers
or customers are Year 2000 Compliant. Parent and its Subsidiaries have
received satisfactory written assurances and warranties from all of their
respective vendors, co-venturers, service providers and customers that are
material to the ongoing operation of the business of Parent and its
Subsidiaries that past and future products, software, equipment, components
or systems provided by such parties are (or in the case of future products,
will be) Year 2000 Compliant.
(c) Parent has conducted "year 2000" audits with respect to (i) each
of the internal systems used in the business, products, services and
operations of Parent and its Subsidiaries, including without limitation
computer hardware systems, software, applications, firmware, equipment
containing embedded microchips and other embedded systems and (ii) all of the
software, applications, hardware, firmware and other technology which
constitute part of the products and services manufactured, marketed,
performed or sold by Parent or any of its Subsidiaries or licensed by Parent
or any of its Subsidiaries to third parties. Parent has obtained "year 2000"
certifications with respect to all material third-party systems used in
connection with the business or operations of Parent and its Subsidiaries,
including without limitation systems belonging to the vendors, co-venturers,
service providers and customers of Parent of any or its Subsidiaries. Parent
has made available to the Company true, complete and correct copies of all
"year 2000" audits, certifications, reports and other similar documents that
have been prepared or performed by or on
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behalf of Parent or any third party with respect to the systems, business,
operations, products or services of Parent or any of its Subsidiaries.
(d) Neither Parent nor any of its Subsidiaries has provided any
representation, warranty or guarantee for any product sold or licensed, or
service provided, by Parent or its Subsidiaries to the effect that such
product or service (i) complies with or accounts for the fact of the year
change from December 31, 1999 to January 1, 2000, (ii) will not be adversely
affected with respect to functionality, interoperability, connectivity,
performance, reliability or volume capacity (including without limitation the
processing storage, recall and reporting of data) by the passage of any date,
including without limitation the year change from December 31, 1999 to
January 1, 2000 or (iii) is otherwise Year 2000 Compliant.
SECTION 4.19 BROKERS . No broker, finder or investment banker (other
than U.S. Bancorp Piper Jaffray Inc. whose brokerage, finder's or other fee
will be paid by Parent) is entitled to any brokerage, finder's or other fee
or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Parent.
SECTION 4.20 OWNERSHIP OF MERGER SUB; NO PRIOR ACTIVITIES . As of
the date hereof and as of the Effective Time, except for obligations or
liabilities incurred in connection with its incorporation or organization and
the transactions contemplated by this Agreement and except for this Agreement
and any other agreements or arrangements contemplated by this Agreement,
Merger Sub has not and will not have incurred, directly or indirectly, any
obligations or liabilities or engaged in any business activities of any type
or kind whatsoever or entered into any agreements or arrangements with any
person.
SECTION 4.21 POOLING; TAX MATTERS . Neither Parent nor any of its
affiliates has taken or agreed to take any action or failed to take any
action, or has any reason to believe that any conditions exist, that would
prevent (a) Parent from accounting for the business combination to be
effected by the Merger as a pooling of interests or (b) the Merger from
constituting a reorganization within the meaning of Section 368(a) of the
Code.
SECTION 4.22 AFFILIATES. Section 4.22 of the Parent Disclosure
Schedule contains a true, complete and correct list of all persons who, as of
the date hereof, to the best knowledge of Parent, may be deemed to be
affiliates of Parent excluding all its Subsidiaries but including all
directors and executive officers of Parent.
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ARTICLE V
CONDUCT OF BUSINESS
SECTION 5.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER .
The Company covenants and agrees that, during the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, unless Parent shall otherwise agree in
writing or in accordance with Section 6.2(b), the Company shall conduct its
business and shall cause the businesses of its Subsidiaries to be conducted
only in, and the Company and its Subsidiaries shall not take any action
except in, the ordinary course of business and in a manner consistent with
past practice and in compliance in all material respects with all applicable
laws and regulations; and the Company shall use commercially reasonable best
efforts to preserve substantially intact the business organization of the
Company and its Subsidiaries, to keep available the services of the current
officers, employees and consultants of the Company and its Subsidiaries and
to preserve the present relationships of the Company and its Subsidiaries
with customers, suppliers and other persons with which the Company or any of
its Subsidiaries has significant business relations. By way of amplification
and not limitation, except (x) as set forth in Section 5.1 of the Company
Disclosure Schedule, (y) as contemplated by this Agreement or (z) in
accordance with Section 6.2(b), the Company shall not and shall not permit
its Subsidiaries to, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, directly or indirectly do, or propose to do, any of the
following without the prior written consent of Parent:
(a) amend or otherwise change the Company Charter, Company By-Laws
or any Subsidiary Document;
(b) issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares of capital
stock of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest (including, without limitation, any phantom interest) in
the Company or any of its Subsidiaries, other than Company Common Stock
pursuant to the exercise of (x) options currently outstanding, under the
Company Stock Option Plans or the Company ESPP, in each case, in accordance
with their current terms, (y) the Other Company Options in accordance with
their current terms or (z) the warrants in accordance with their current
terms;
(c) sell, pledge, dispose of or encumber any assets of the Company
or any of its Subsidiaries (except for sales of assets in the ordinary course
of business and in a manner consistent with past practice);
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(d) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof)
in respect of any of its capital stock, except that a wholly owned Subsidiary
of the Company may declare and pay a dividend to its parent, (ii) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock, or (iii) amend the terms or
change the period of exercisability of, purchase, repurchase, redeem or
otherwise acquire, or permit any Subsidiary to purchase, repurchase, redeem
or otherwise acquire, any of its securities or any securities of its
Subsidiaries, or any option, warrant or right, directly or indirectly, to
acquire any such securities, or propose to do any of the foregoing, other
than Company Common Stock pursuant to the exercise of options currently
outstanding, under the Company Stock Option Plans or the Company ESPP, in
each case, in accordance with their current terms, (y) the Other Company
Options in accordance with their current terms or (z) the warrants in
accordance with their current terms;
(e) (i) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof; (ii) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse or otherwise as an
accommodation become responsible for, the obligations of any person, or make
any loans or advances or capital contributions to or investments in any other
person, except in the ordinary course of business and consistent with past
practice; (iii) enter into or amend any material contract or agreement, or
enter into, renew, amend or terminate any lease relating to real property; or
(iv) authorize any capital expenditures or purchase of fixed assets which
are, in the aggregate, in excess of $100,000 for the Company and its
Subsidiaries taken as a whole;
(f) except as disclosed in Section 5.1(f) of the Company Disclosure
Schedule, increase the compensation payable or to become payable to its
directors, officers or employees (except such increases payable to
non-officer employees made in the ordinary course of business consistent with
past practice), grant any severance or termination pay to, or enter into or
amend any employment or severance agreement with, any director, officer or
other employee of the Company or any of its Subsidiaries, establish, adopt,
enter into or amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any current or former
directors, officers or employees, pay any bonuses to any officer of the
Company, materially change any actuarial assumption or other assumption used
to calculate funding obligations with respect to any pension or retirement
plan, or change the manner in which contributions to any such plan are made
or the basis on which such contributions are determined;
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(g) take any action to change accounting policies or procedures
(including, without limitation, procedures with respect to revenue
recognition, payments of accounts payable and collection of accounts
receivable), except as required by GAAP;
(h) make any Tax election or settle or compromise any Tax liability
or agree to an extension of a statute of limitations or file any amended Tax
Returns or claims for refund;
(i) except for the settlement of existing lawsuits disclosed in
Section 5.1(i) of the Company Disclosure Schedule solely in exchange for the
payment of not more than $50,000 per lawsuit (and $100,000 in the aggregate
for all such lawsuits) in cash, pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction
in the ordinary course of business and consistent with past practice of
liabilities reflected or reserved against in the financial statements
contained in the Company SEC Reports filed prior to the date of this
Agreement or incurred in the ordinary course of business and consistent with
past practice; or
(j) take, or agree in writing or otherwise to take, any of the
actions described in Sections 5.1(a) through (i) above, or any action which
would make any of the representations or warranties of the Company contained
in this Agreement untrue or incorrect or prevent the Company from performing
or cause the Company not to perform its covenants hereunder, in each case,
such that the conditions set forth in Sections 7.2(a) or 7.2(b), as the case
may be, would not be satisfied.
SECTION 5.2 CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER .
Parent covenants and agrees that, during the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, unless the Company shall otherwise agree in
writing, Parent shall conduct its business and shall cause the businesses of
its Subsidiaries to be conducted only in the ordinary course of business and
in compliance in all material respects with all applicable laws and
regulations; and Parent shall use commercially reasonable best efforts to
preserve substantially intact the business organization of Parent and its
Subsidiaries, to keep available the services of the current officers,
employees and consultants of Parent and its Subsidiaries and to preserve the
present relationships of Parent and its Subsidiaries with customers,
suppliers and other persons with which Parent or any of its Subsidiaries has
significant business relations.
SECTION 5.3 ADVICE OF CHANGES . Parent and the Company shall
promptly advise the other party orally and in writing to the extent it has
knowledge of (i) any representation or warranty made by it (and, in the case
of Parent, made by
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Merger Sub) contained in this Agreement becoming untrue or inaccurate in any
material respect, (ii) the failure by it (and, in the case of Parent, by
Merger Sub) to comply in any material respect with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied
by it under this Agreement and (iii) any change or event having, or which
could reasonably be expected to have, a Company Material Adverse Effect or a
Parent Material Adverse Effect, as the case may be, on such party or the
ability for the conditions set forth in Article VII to be satisfied;
PROVIDED, HOWEVER, that no such notification shall affect in any manner the
representations, warranties, covenants or agreements of the parties (or
remedies with respect thereto) or any matter set forth in the Company
Disclosure Schedule, the Parent Disclosure Schedule or the conditions to the
obligations of the parties under this Agreement.
SECTION 5.4 COOPERATION . Subject to compliance with applicable law,
from the date hereof until the Effective Time, (a) representatives of the
Company shall confer on a regular and frequent basis with one or more
representatives of Parent to discuss operational matters that are material
and the general status of ongoing operations and (b) each of Parent and the
Company shall promptly provide the other party or its counsel with copies of
all filings made by such party with any Governmental Entity in connection
with this Agreement, the Merger and the transactions contemplated hereby and
thereby.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 ACCESS TO INFORMATION; CONFIDENTIALITY .
(a) The Company shall (and shall cause its Subsidiaries and its and
their respective officers, directors, employees, auditors and agents to)
afford to Parent and to Parent's officers, employees, financial advisors,
legal counsel, accountants, consultants and other representatives access
during normal business hours throughout the period prior to the Effective
Time to all of its books and records and its properties, plants and personnel
and, during such period, the Company shall furnish promptly to Parent a copy
of each report, schedule and other document filed or received by it pursuant
to the requirements of federal securities laws, provided that no
investigation pursuant to this Section 6.1(a) shall affect any
representations or warranties made herein or the conditions to the
obligations of the respective parties to consummate the Merger.
(b) Parent shall (and shall cause its Subsidiaries and its and their
respective officers, directors, employees, auditors and agents to) afford to
the Company and to the Company's officers, employees, financial advisors,
legal
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counsel, accountants, consultants and other representatives access during
normal business hours throughout the period prior to the Effective Time to
all of its books and records and its properties, plants and personnel and,
during such period, Parent shall furnish promptly to the Company a copy of
each report, schedule and other document filed or received by it pursuant to
the requirements of federal securities laws, provided that no investigation
pursuant to this Section 6.1(b) shall affect any representations or
warranties made herein or the conditions to the obligations of the respective
parties to consummate the Merger.
(c) Unless otherwise required by law, each party agrees that it (and
its Subsidiaries and its and their respective representatives) shall hold in
confidence all non-public information acquired in accordance with the terms
of the Mutual Agreement of Confidentiality dated November 11, 1999 between
Parent and the Company (the "Confidentiality Agreement"); provided, however,
that the termination date of the Confidentiality Agreement is hereby extended
to June 30, 2000.
SECTION 6.2 NO SOLICITATION .
(a) From and after the date of this Agreement until the earlier of
the termination of this Agreement in accordance with its terms or the
Effective Time, the Company and its Subsidiaries and affiliates shall not,
directly or indirectly, through any officer, director, employee, advisor,
financial advisor, representative or agent (and it shall cause such officers,
directors, employees, advisors, financial advisors, representatives and
agents not to, directly or indirectly), (i) solicit, initiate, facilitate or
encourage any inquiries or proposals that constitute, or could be expected to
lead to, an Acquisition Proposal or (ii) engage in negotiations or
discussions concerning, or provide any non-public information with respect to
the Company and its Subsidiaries to any person making or proposing to make,
any Acquisition Proposal; PROVIDED, HOWEVER, that if, at any time prior to
the date of the Company Shareholders Meeting, the Board of Directors of the
Company determines in good faith, after consultation with outside counsel,
that it is necessary to do so in order to comply with its fiduciary duties to
the Company's shareholders under applicable law, the Company may, in response
to an unsolicited Acquisition Proposal, and subject to the Company's
compliance with Section 6.2(c), (x) furnish information with respect to the
Company and its Subsidiaries to any person making such Acquisition Proposal
pursuant to a confidentiality agreement containing terms no less favorable to
the Company than the Confidentiality Agreement and (y) participate in
discussions or negotiations regarding such Acquisition Proposal.
(b) From and after the date of this Agreement until the earlier of
the termination of this Agreement in accordance with its terms or the
Effective Time, neither the Board of Directors of the Company nor any
committee thereof shall (i) withdraw or modify, or propose publicly to
withdraw or modify, in a manner adverse
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to Parent, the approval or recommendation by such Board of Directors or such
committee of the Company Voting Proposal, (ii) approve or recommend, or
propose publicly to approve or recommend, any Acquisition Proposal, or (iii)
cause the Company to enter into any letter of intent, agreement in principle,
acquisition agreement or similar agreement related to any Acquisition
Proposal; PROVIDED, HOWEVER, that if, at any time prior to the date of the
Company Shareholders Meeting, the Board of Directors of the Company
determines in good faith, after consultation with outside counsel, that it is
necessary to do so in order to comply with its fiduciary duties to the
Company's shareholders under applicable law, the Board of Directors of the
Company may, in response to an unsolicited Superior Proposal, and subject to
the Company's compliance with Section 6.2(c), (x) take any action prohibited
by clause (i) of this sentence or (y) if prior to taking any action
prohibited by clauses (ii) or (iii) of this sentence the Company terminates
this Agreement pursuant to Section 8.1(g) and pays to Parent all amounts due
Parent in connection with such termination pursuant to Sections 8.3(b) and
(c) in accordance therewith, take any action prohibited by clauses (ii) or
(iii) of this sentence. For purposes of this Agreement, "Acquisition
Proposal" means any inquiry, proposal or offer from any person relating to
any direct or indirect acquisition or purchase of a business that constitutes
15% or more of the net revenues, net income or the assets of the Company and
its Subsidiaries, taken as a whole, or 15% or more of any class of equity
securities of the Company or any of its Subsidiaries, any tender offer or
exchange offer that if consummated would result in any person beneficially
owning 15% or more of any class of equity securities of the Company or any of
its Subsidiaries, or any merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
the Company or any of its Subsidiaries, other than the transactions
contemplated by this Agreement. For purposes of this Agreement, a "Superior
Proposal" means any proposal made by a third party to acquire, directly or
indirectly, including pursuant to a tender offer, exchange offer, merger,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction, for consideration consisting of cash or
securities, more than 50% of the combined voting power of the shares of
Company Common Stock then outstanding or all or substantially all the assets
of the Company and otherwise on terms which the Board of Directors of the
Company determines in its good faith judgment (based on the advice of a
financial advisor of nationally recognized reputation, including First
Security Van Kasper) to be more favorable to the Company's shareholders than
the Merger and for which financing, to the extent required, is then committed.
(c) The Company, its Subsidiaries and affiliates (and their
respective officers, directors, employees, advisors, financial advisors,
representatives and agents) shall immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
person (other than Parent or its representatives) conducted heretofore with
respect to any Acquisition Proposal. The Company shall
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notify Parent immediately after receipt by the Company (or its counsel,
advisors or agents) of any Acquisition Proposal or any request for nonpublic
information in connection with an Acquisition Proposal or for access to the
properties, books or records of the Company or any of its Subsidiaries by any
person or entity that informs the Company that it is considering making, or
has made, an Acquisition Proposal. Such notice to Parent shall be made orally
and in writing and shall indicate in detail the identity of the offeror and
the terms and conditions of such proposal, inquiry or contact. The Company
shall keep Parent informed of all developments and the status of any
Acquisition Proposal, any negotiations or discussions with respect to any
Acquisition Proposal or any request for nonpublic information in connection
with any Acquisition Proposal or for access to the properties, books or
records of the Company or any of its Subsidiaries by any person or entity
that is considering making, or has made, an Acquisition Proposal. The Company
shall give Parent five business days advance notice of its intention to
exercise its rights under the proviso to (i) Section 6.2(a) specifying the
material terms and conditions of the Acquisition Proposal with respect to
which it intends to exercise such rights and identifying the person making
such Acquisition Proposal, or (ii) Section 6.2(b) specifying the material
terms and conditions of the Superior Proposal with respect to which it
intends to exercise such rights and identifying the person making such
Superior Proposal. The Company shall provide Parent with (i) copies of all
documents received from any person or entity that is considering making or
has made an Acquisition Proposal and (ii) copies of all documents to be
delivered or sent to any person or entity that is considering making or has
made an Acquisition Proposal.
(d) Nothing contained in this Section 6.2 shall prohibit the Company
from taking and disclosing to its shareholders a position with respect to a
tender or exchange offer by a third party contemplated by Rule 14d-9 or
14e-2(a) promulgated under the Exchange Act or from making any disclosure to
the Company's shareholders if, in the good faith judgment of the Board of
Directors of the Company, after consultation with outside counsel, failure so
to disclose would be inconsistent with its obligations under applicable law;
PROVIDED, HOWEVER, that, except as expressly provided in Sections 6.2(b) and
6.4, neither the Company nor its Board of Directors nor any committee thereof
shall withdraw or modify, in a manner adverse to Parent, or propose publicly
to withdraw or modify, in a manner adverse to Parent, its position with
respect to the Company Voting Proposal or approve or recommend, or propose
publicly to approve or recommend, an Acquisition Proposal.
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SECTION 6.3 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT .
(a) As promptly as practicable after execution of this Agreement,
Parent and the Company shall in consultation with each other prepare, and
shall file with the SEC, preliminary joint proxy materials which shall
constitute the Proxy Statement/Prospectus. As promptly as practicable after
comments are received from the SEC thereon and after the furnishing by the
Company and Parent of all information required to be contained therein, (i)
Parent and the Company shall file with the SEC the Proxy Statement/Prospectus
and (ii) Parent shall file with the SEC the Registration Statement. The
Company and Parent shall use all reasonable efforts to cause the Registration
Statement to become effective as soon thereafter as practicable.
(b) The Company shall use all reasonable efforts to mail the Proxy
Statement/Prospectus to the shareholders of the Company and Parent shall use
all reasonable efforts to mail the Proxy Statement/Prospectus to the
stockholders of Parent as soon as practicable after the Registration
Statement is declared effective by the SEC.
(c) The Company shall furnish Parent with all information concerning
the Company and the holders of its capital stock and shall take such other
action as Parent may request pursuant to this Agreement in connection with
the Registration Statement and the issuance of the shares of Parent Common
Stock.
(d) The Company and Parent shall make any necessary filing with
respect to the Merger under the Securities Act and the Exchange Act and the
rules and regulations thereunder.
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SECTION 6.4 SHAREHOLDERS' AND STOCKHOLDERS' MEETINGS .
(a) The Company shall, subject to and in accordance with applicable
law and the Company Charter and Company By-Laws, promptly and duly call, give
notice of, convene and hold the Company Shareholders Meeting to be held as
promptly as practicable following the date upon which the Registration
Statement becomes effective for the purpose of voting on the Company Voting
Proposal. The Company will, through its Board of Directors, recommend to its
shareholders the approval of the Company Voting Proposal and the other
transactions contemplated, which recommendation shall be included in the
Proxy Statement/Prospectus, and will use its best efforts to solicit from its
shareholders proxies in favor of the Company Voting Proposal; PROVIDED,
HOWEVER, that the Board of Directors of the Company may withdraw or modify,
in a manner adverse to Parent, such recommendation (i) if a Superior Proposal
has been made and remains in effect, then if the Board of Directors of the
Company is permitted to do so under Section 6.2(b) or (ii) if no Acquisition
Proposal or Superior Proposal has been made, then if, at any time prior to
the date of the Company Shareholders Meeting, the Board of Directors of the
Company determines in good faith, after consultation with outside counsel,
that it is necessary to do so in order to comply with its fiduciary duties to
the Company's stockholders under applicable law.
(b) At or prior to the Closing, the Company shall deliver to Parent
a certificate of its Corporate Secretary setting forth the voting results
from the Company Shareholders Meeting.
(c) Parent shall, subject to and in accordance with applicable law
and the Parent Charter and Parent By-Laws, promptly and duly call, give
notice of, convene and hold the Parent Stockholders Meeting to be held as
promptly as practicable following the date upon which the Registration
Statement becomes effective for the purpose of voting on the Parent
Stockholder Proposal. Parent will, through its Board of Directors, recommend
to its stockholders the approval of the Parent Voting Proposal and will use
its best efforts to solicit from its stockholders proxies in favor of the
Parent Voting Proposal. In addition to a proposal that four of its five
existing directors be reelected to it's Board of Directors, Parent will
include in the Proxy Statement/Prospectus, a proposal that Mark Housley and
Carl Rosendahl be elected to it's Board of Directors, effective as of the
Effective Time. Management of Parent shall recommend to the Board of
Directors of Parent that Parent include in the Proxy Statement/Prospectus a
proposal to increase the number of shares reserved for issuance under the
Parent's Stock Option Plan by an amount to be determined by the management of
Parent to be prudent under the circumstances.
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(d) At or prior to the Closing, Parent shall deliver to the Company
a certificate of its Corporate Secretary setting forth the voting results
from the Parent Stockholders Meeting.
SECTION 6.5 LEGAL CONDITIONS TO MERGER . Each of Parent and, subject
to Section 6.2, the Company will use its commercially reasonable best efforts
to comply promptly with all legal requirements which may be imposed with
respect to the Merger (which actions shall include, without limitation,
furnishing all information required under the HSR Act and in connection with
approvals of or filings with any other Governmental Entity) and will promptly
cooperate with and furnish information to each other in connection with any
such requirements imposed upon any of them or any of their Subsidiaries in
connection with the Merger. Each of Parent and the Company will, and will
cause its Subsidiaries to, take all actions necessary to obtain (and will
cooperate with each other in obtaining) any consent, authorization, order or
approval of, or any exemption by, any Governmental Entity required to be
obtained or made by Parent, the Company or any of their Subsidiaries in
connection with the Merger or taking of any action contemplated thereby or by
this Agreement.
SECTION 6.6 AGREEMENTS WITH RESPECT TO AFFILIATES .
(a) The Company will use its commercially reasonable best efforts to
cause each person who is identified in Section 3.28 of the Company Disclosure
Schedule and any other person who may be or become an "affiliate" of the
Company as of the time of the Company Shareholders Meeting for purposes of
(i) Rule 145 under the Securities Act ("Rule 145") or (ii) qualifying the
merger for pooling of interests accounting treatment under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations to
deliver to Parent, as soon as practicable but not later than thirty days
preceding the Effective Time, a written agreement (a "Company Affiliate
Agreement") in connection with restrictions on affiliates under Rule 145 and
pooling of interests accounting treatment, substantially in the form of
EXHIBIT B hereto. The Company shall provide prompt notice to Parent of any
such other person who may be or become an "affiliate" of the Company as of
the time of the Company Shareholders Meeting who is not identified in Section
3.28 of the Company Disclosure Schedule.
(b) Parent will use its commercially reasonable best efforts to
cause each person who is identified in Section 4.22 of the Parent Disclosure
Schedule and any other person who may be or become an "affiliate" of Parent
as of the time of the Parent Stockholders Meeting for purposes of qualifying
the merger for pooling of interests accounting treatment under Opinion 16 of
the Accounting Principles Board
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and applicable SEC rules and regulations to deliver to the Company, as soon
as practicable but not later than thirty days preceding the Effective Time, a
written agreement (a "Parent Affiliate Agreement") in connection with
restrictions on affiliates under pooling of interests accounting treatment,
substantially in the form of EXHIBIT C hereto. Parent shall provide prompt
notice to the Company of any such other person who may be or become an
"affiliate" of Parent as of the time of the Parent Stockholders Meeting who
is not identified in Section 4.22 of the Parent Disclosure Schedule.
SECTION 6.7 TAX-FREE REORGANIZATION . Parent and the Company intend
that the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code. Parent and the Company shall each use its
commercially reasonable best efforts to cause the Merger to so qualify.
Neither Parent nor the Company shall knowingly take any action, or knowingly
fail to take any action, that could jeopardize the qualification of the
Merger as a reorganization within the meaning of Section 368(a) of the Code.
SECTION 6.8 POOLING ACCOUNTING . Parent and the Company shall each
use its commercially reasonable best efforts to cause the business
combination to be effected by the Merger to be accounted for as a pooling of
interests for accounting purposes. Neither Parent nor the Company shall
knowingly take any action, or knowingly fail to take any action, that could
jeopardize the treatment of the Merger as a pooling of interests for
accounting purposes. Each of Parent and the Company agrees to take such
commercially reasonable action as may be required to negate the impact of any
past actions which to its knowledge could jeopardize the treatment of the
Merger as a pooling of interests for accounting purposes.
SECTION 6.9 LETTERS OF ACCOUNTANTS .
(a) Parent shall use its commercially reasonable best efforts to
cause to be delivered to the Company (i) a copy of a letter of Arthur
Andersen LLP, Parent's independent auditors, dated a date within two business
days before the date on which the Registration Statement shall become
effective, in form and substance satisfactory to Parent and customary in
scope and substance for letters delivered by independent public accountants
in connection with registration statements similar to the Registration
Statement, which letter shall be brought down to the Effective Time and (ii)
the letter of Arthur Andersen LLP referred to in Section 7.1(h).
(b) The Company shall use its commercially reasonable best efforts
to cause to be delivered to Parent (i) a copy of a letter of Ernst & Young
LLP, the Company's independent auditors, dated a date within two business
days before the date on which the Registration Statement shall become
effective, in form and substance satisfactory to Parent and customary in
scope and substance for letters delivered by independent public accountants
in connection with registration
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statements similar to the Registration Statement, which letter shall be
brought down to the Effective Time and (ii) the letter of Ernst & Young LLP
referred to in Section 7.1(h).
SECTION 6.10 PUBLIC ANNOUNCEMENTS . Parent and the Company shall
consult with each other before issuing any press release or making any public
statement with respect to the Merger or this Agreement and shall not issue
any such press release or make any such public statement without the prior
written consent of the other party, which shall not be unreasonably withheld
or delayed; PROVIDED, HOWEVER, that a party may, without the prior consent of
the other party, issue such press release or make such public statement as
may upon the advice of counsel be required by law or the rules and
regulations of the NASDAQ if it has used all reasonable efforts to consult
with the other party prior thereto.
SECTION 6.11 LISTING OF PARENT SHARES . Parent shall use its
commercially reasonable best efforts to have authorized for listing on the
NASDAQ, upon official notice of issuance, the shares of Parent Common Stock
to be issued in the Merger.
SECTION 6.12 OPTIONS . As of the Effective Time, each option to
acquire shares of Company Common Stock (each, a "Company Option") other than
options issued pursuant to the Radius, Inc. Directors' Stock Option Plan (all
of which ACCELERATE AND WILL BE EXERCISED OR WILL expire pursuant to their
existing terms as of the Effective Time) shall become and represent an option
to purchase (i) the number of shares of Parent Common Stock (a "Parent
Option") determined by multiplying (x) the number of shares of Company Common
Stock which would have been purchasable pursuant to such Company Option by
(y) the Exchange Ratio (with the result rounded up to the nearest whole
share) (ii) at an exercise price per share of Parent Common Stock equal to
the exercise price per share of Company Common Stock subject to the Company
Option divided by the Exchange Ratio (with the result rounded to the nearest
whole cent); provided, however, that in the case of any Company Option to
which Section 421 of the Code applies by reason of its qualification as an
incentive stock option under Section 422 of the Code, the conversion formula
shall be adjusted if necessary to comply with Section 424(a) of the Code.
After the Effective Time, (i) each Parent Option shall be exercisable upon
the same terms and conditions as were applicable to the related Company
Option immediately prior to the Effective Time and (ii) Parent shall promptly
file a Registration Statement on Form S-8 with respect to the shares of
Parent Common Stock issuable with respect thereto and shall use its
commercially reasonable best efforts to list such shares with the NASDAQ.
Prior to the Effective Time, the Company shall take all necessary and
appropriate action to effectuate the provisions of this Section 6.12.
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SECTION 6.13 CONSENTS . The Company shall use its commercially
reasonable best efforts to obtain all necessary consents, waivers and
approvals under any of the Company's material agreements, contracts, licenses
or leases in connection with the Merger, including without limitation each of
the consents listed in Section 3.5 of the Company Disclosure Schedule.
SECTION 6.14 INDEMNIFICATION AND INSURANCE .
(a) All rights to indemnification, advancement of litigation
expenses and limitation of personal liability existing in favor of the
directors, officers and employees of the Company and its Subsidiaries under
the provisions existing on the date hereof in the Company Charter or Company
By-Laws or in the indemnification agreements previously provided by the
Company to Parent (collectively "Existing Indemnification Obligations")
shall, with respect to any matter existing or occurring at or prior to the
Effective Time (including the transactions contemplated by this Agreement),
survive the Effective Time. Parent shall cause the Existing Indemnification
Obligations to be assumed (by operation of law or otherwise) by any successor
to the Surviving Corporation by merger or sale of all or substantially all
assets and shall guarantee the performance of the Existing Indemnification
Obligation by the Surviving Corporation (or any such successor) with respect
to claims thereunder related to the transactions contemplated by this
Agreement.
(b) For a period of five years after the Effective Time, Parent
shall cause the Surviving Corporation (or any successor of the Surviving
Corporation by merger or sale of all or substantially all assets) to maintain
in effect the current policies of directors' and officers' and fiduciary
liability insurance maintained by the Company (provided that the Surviving
Corporation may substitute therefor policies of at least the same coverage
and amounts containing terms and conditions which are no less advantageous to
former officers and directors of the Company) only with respect to claims
arising from facts or events which occurred at or before the Effective Time;
PROVIDED, HOWEVER, that in no event shall the Surviving Corporation (or any
such successor) be required to expend pursuant to this Section 6.14(b) more
than an aggregate amount equal to 125% the current aggregate annual premiums
paid by the Company for such insurance (the "Maximum Amount") (which premiums
the Company represents and warrants to be $117,000 in the aggregate). If the
amount of the aggregate annual premiums necessary to maintain or procure such
insurance coverage exceeds the Maximum Amount, the Surviving Corporation (or
any such successor) during such five-year period shall maintain or procure as
much coverage as possible for aggregate annual premiums not to exceed the
Maximum Amount and shall promptly send a letter to the persons listed in
Section 6.14(b) of the Company Disclosure Schedule notifying them of such
occurrence.
SECTION 6.15 ADDITIONAL AGREEMENTS; BEST EFFORTS . Subject to the
terms and conditions of this Agreement, each of the parties agrees to use its
commercially
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reasonable best efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE
MERGER . The respective obligations of each party to effect the Merger shall
be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration
Statement shall have been declared effective by the SEC under the Securities
Act. No stop order suspending the effectiveness of the Registration Statement
shall have been issued by the SEC and no proceedings for that purpose and no
similar proceeding in respect of the Proxy Statement/Prospectus shall have
been initiated or threatened by the SEC;
(b) SHAREHOLDER APPROVAL. The Company Voting Proposal shall have
been approved and adopted by the requisite vote of the shareholders of the
Company;
(c) HSR ACT AND OTHER APPROVALS. The waiting period applicable to
the consummation of the Merger under the HSR Act and under any other legal
requirement (including without limitation any authorization, consent, order
or approval, or dedication, filing or expiration of any waiting period) of
any Governmental Entity shall have expired or been terminated, as the case
may be, and any requirements of other jurisdictions applicable to the
consummation of the Merger shall have been satisfied;
(d) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary
restraining order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger shall be in effect, nor
shall any proceeding brought by any administrative agency or commission or
other Governmental Entity seeking any of the foregoing be pending; and there
shall not be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger which makes the
consummation of the Merger illegal;
(e) TAX OPINIONS. (i) Parent shall have received an opinion of its
counsel, Skadden, Arps, Slate, Meagher & Flom LLP, in form and substance
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reasonably satisfactory to Parent, dated as of the Effective Time,
substantially to the effect that for U.S. federal income tax purposes the
Merger will qualify as a reorganization within the meaning of Section 368(a)
of the Code, (ii) the Company shall have received an opinion of its counsel,
Fenwick & West LLP, in form and substance reasonably satisfactory to the
Company, dated as of the Effective Time, substantially to the effect that for
U.S. federal income tax purposes the Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Code, and (iii) the issuance of
the opinions described in clauses (i) and (ii) of this paragraph shall be
conditioned upon the receipt by counsel for Parent and the Company of
representation letters from each of Parent, Merger Sub and Company, in each
case, in form and substance reasonably satisfactory to both of such counsel;
(f) GOVERNMENTAL ACTIONS. There shall not be pending or threatened
any action or proceeding (or any investigation or other inquiry that might
result in such an action or proceeding) by any Governmental Entity or
administrative agency before any Governmental Entity, administrative agency
or court of competent jurisdiction, nor shall there be in effect any
judgment, decree or order of any Governmental Entity, administrative agency
or court of competent jurisdiction, in either case, seeking to prohibit or
limit Parent from exercising all material rights and privileges pertaining to
its ownership of the Surviving Corporation or the ownership or operation by
Parent of all or a material portion of the business or assets of Parent, or
seeking to compel Parent to dispose of or hold separate all or any portion of
the business or assets of Parent (including the Surviving Corporation and its
subsidiaries), as a result of the Merger or the transactions contemplated by
this Agreement;
(g) NASDAQ LISTING. The shares of Parent Common Stock issuable in
the Merger shall have been authorized for listing on the NASDAQ upon official
notice of issuance;
(h) OPINION OF ACCOUNTANTS. Parent shall have received (and
delivered to the Company copies of) a letter from Arthur Andersen LLP, dated
a date within two business days of the Proxy Statement/Prospectus and within
two business days of the Closing Date, stating that the business combination
to be effected by the Merger will qualify as a pooling of interests
transaction under generally accepted accounting principles. The Company shall
have received (and delivered to Parent copies of) a letter from Ernst & Young
LLP, dated a date within two business days of the Proxy Statement/Prospectus
and within two business days of the Closing Date, stating that neither the
Company nor any of its Subsidiaries has taken or agreed to take any action
that (without giving effect to this Agreement, the transactions contemplated
hereby, or any action taken or agreed to be taken by Parent or any of its
Subsidiaries) would prevent Parent from accounting for the business
combination to be effected by the Merger as a pooling of interests
transaction under generally accepted accounting principles; and
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(i) STOCKHOLDER APPROVAL. The Parent Voting Proposal shall have been
approved and adopted by the requisite vote of the stockholders of Parent.
SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND
MERGER SUB . The obligations of Parent and Merger Sub to effect the Merger
are also subject to the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Company contained in this Agreement shall be true and
correct, in each case as of the date of this Agreement and (except to the
extent such representations speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date, except (x) for changes
contemplated by this Agreement and (y) where the failures to be true and
correct (without regard to any materiality, Company Material Adverse Effect
or knowledge qualifications contained therein), individually or in the
aggregate, have not had, and could not reasonably be expected to have, a
Company Material Adverse Effect; and Parent and Merger Sub shall have
received a certificate signed on behalf of the Company by the chief executive
officer and chief financial officer of the Company to such effect;
(b) AGREEMENTS AND COVENANTS. The Company shall have performed or
complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by it at or prior to the
Closing Date; and Parent and Merger Sub shall have received a certificate
signed by the chief executive officer and the chief financial officer of the
Company to such effect;
(c) CONSENTS OBTAINED. All consents, waivers, approvals,
authorizations and orders required to be obtained, and all filings required
to be made, by the Company for the authorization, execution and delivery of
this Agreement and the consummation by it of the transactions contemplated
hereby shall have been obtained and made by the Company; and
(d) AFFILIATE AGREEMENTS. Parent shall have received from each
person within the time frame specified in Section 6.6(a) who is identified in
Section 3.28 of the Company Disclosure Schedule or in any notice delivered by
the Company to Parent pursuant to Section 6.6(a) as an "affiliate" of the
Company, an Affiliate Agreement, and each such Affiliate Agreement shall be
in full force and effect.
SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY .
The obligation of the Company to effect the Merger is also subject to the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Parent and Merger Sub contained in this Agreement shall be true
and
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correct, in each case as of the date of this Agreement and (except to the
extent such representations speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date, except (x) for changes
contemplated by this Agreement, and, (y) where the failures to be true and
correct (without regard to any materiality, Parent Material Adverse Effect or
knowledge qualifications contained therein), individually or in the
aggregate, have not had, and could not reasonably be expected to have, a
Parent Material Adverse Effect; and the Company shall have received a
certificate signed on behalf of the Company by the chief executive officer
and chief financial officer of Parent to such effect;
(b) AGREEMENTS AND COVENANTS. Parent and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by them
at or prior to the Closing Date; and the Company shall have received a
certificate signed by the chief executive officer and the chief financial
officer of Parent to such effect; and
(c) AFFILIATE AGREEMENTS. The Company shall have received from each
person within the time frame specified in Section 6.6(b) who is identified in
Section 4.22 of the Parent Disclosure Schedule or in any notice delivered by
Parent to the Company pursuant to Section 6.6(b) as an "affiliate" of the
Company, an Affiliate Agreement, and each such Affiliate Agreement shall be
in full force and effect.
ARTICLE VIII
TERMINATION
SECTION 8.1 TERMINATION. This Agreement may be terminated at any
time prior to the Effective Time, notwithstanding approval thereof by the
shareholders of the Company:
(a) by mutual written consent duly authorized by the Boards of
Directors of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have
been consummated by June 30, 2000 (the "Outside Date") (provided that the
right to terminate this Agreement under this Section 8.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date);
(c) by either Parent or the Company if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued a nonappealable final order, decree or ruling or
taken any other action having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger (provided that the party
seeking to terminate pursuant to this Section 8.1(c) shall
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have complied with its obligations under Section 6.5 and used its reasonable
best efforts to have any such order, decree, ruling or other action vacated
or lifted);
(d) by either Parent or the Company, if at the Company Shareholders
Meeting (including any adjournment or postponement), the requisite vote of
the shareholders of the Company in favor of the Company Voting Proposal shall
not have been obtained;
(e) by Parent, if the Company shall have breached or failed to
perform any of its representations, warranties, covenants or other agreements
contained in this Agreement, which breach or failure to perform would cause
the conditions set forth in Sections 7.2(a) or 7.2(b) to not be satisfied and
which breach shall not have been cured within 10 business days following
receipt by the Company of written notice of such breach from Parent;
(f) by the Company, if Parent shall have breached or failed to
perform any of its representations, warranties, covenants or other agreements
contained in this Agreement, which breach or failure to perform would cause
the conditions set forth in Sections 7.3(a) or 7.3(b), to not be satisfied
and which breach shall not have been cured within 10 business days following
receipt by Parent of written notice of such breach from the Company;
(g) by the Company at any time prior to the date of the Company
Shareholders Meeting if, in response to an unsolicited Superior Proposal,
and, subject to the Company's compliance with Section 6.2(c), the Board of
Directors of the Company determines in good faith, after consultation with
outside counsel, that it is necessary to terminate this Agreement in order to
comply with its fiduciary duties to the Company's shareholders under
applicable law; provided that any termination by the Company pursuant to this
Section 8.1(g) shall not be effective unless and until the Company shall have
paid to Parent all amounts due Parent in connection with such termination
pursuant to Sections 8.3(b) and (c) in accordance therewith;
(h) by Parent in the event of a breach of Section 6.2 or Section
6.4(a) or (b);
(i) by Parent or the Company if, at the Parent Stockholders Meeting
(including any adjournment or postponement thereof), the Parent Stockholder
Proposal shall not have been approved ;
(j) by Parent, if for any reason other than Parent's failure to
perform its obligations under this Agreement the Company fails to call and
hold the Company Shareholders Meeting by the date which is one business day
prior to the Outside Date; or
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(k) by the Company, if for any reason other than the Company's
failure to perform its obligations under this Agreement Parent fails to call
and hold the Parent Stockholders Meeting by the date which is one business
day prior to the Outside Date.
SECTION 8.2 EFFECT OF TERMINATION . In the event of the termination
of this Agreement pursuant to Section 8.1, this Agreement shall forthwith
become void and there shall be no liability on the part of any party hereto
or any of its affiliates, directors, officers, stockholders or shareholders
except (i) that the provisions of Sections 3.27, 4.19, 8.3, this Section 8.2
and Article IX shall survive termination and (ii) nothing herein shall
relieve any party from liability for any breach hereof prior to such
termination.
SECTION 8.3 FEES AND EXPENSES .
(a) Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; PROVIDED, HOWEVER, that Parent shall bear all fees and
expenses, other than the Company's financial advisor's, accountant's and
attorneys' fees and expenses, incurred in connection with preparing the
printing and filing of the Proxy Statement/Prospectus (including any
preliminary materials related thereto), the Registration Statement (including
financial statements and exhibits) and any amendments or supplements thereto
and filings under the HSR Act.
(b) The Company shall reimburse Parent for all fees and expenses of
Parent (or in the case of clause (i) of this Section 8.3(b), up to $750,000
of fees and expenses of Parent) actually incurred relating to the
transactions contemplated by this Agreement prior to termination (including
without limitation fees and expenses of Parent's counsel, accountants and
financial advisors), upon the termination of this Agreement (i) by Parent or
the Company pursuant to Section 8.1(d) (if prior to such termination an
Acquisition Proposal shall have been publicly announced or otherwise become
publicly known or any person shall have publicly announced an intention
(whether or not conditional) to make an Acquisition Proposal), or (ii) by
Parent pursuant to Sections 8.1(e), 8.1(h) or 8.1(j) or (iii) by the Company
pursuant to Section 8.1(g).
(c) The Company shall pay Parent a termination fee of $1,620,000
(and in the case of termination of this Agreement pursuant to Section 8.1(d),
the Company shall also reimburse Parent for all fees and expenses of Parent
actually incurred relating to the transactions contemplated by this Agreement
prior to termination in excess of the amount previously reimbursed pursuant
to 8.3(b)) on the date of the first to occur of the following events:
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(i) the entry by the Company into an agreement with respect
to, or the consummation of, any Acquisition Proposal within six months of the
termination of this Agreement pursuant to Sections 8.1(d), 8.1(e), 8.1(h) or
8.1(j) if prior to such termination an Acquisition Proposal shall have been
publicly announced or otherwise become publicly known or any person shall
have publicly announced an intention (whether or not conditional) to make an
Acquisition Proposal; or
(ii) the termination of this Agreement by the Company
pursuant to Section 8.1(g).
(d) Parent shall reimburse the Company for all fees and expenses of
the Company actually incurred relating to the transactions contemplated by
this Agreement prior to termination (including without limitation fees and
expenses of the Company's counsel, accountants and financial advisors), upon
the termination of this Agreement (i) by Parent or the Company pursuant to
Section 8.1(i), or (ii) by the Company pursuant to Sections 8.1(f) or 8.1(k).
(e) Parent and the Company each acknowledge that the agreements
contained in this Section 8.3 are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, the other
party would not enter into this Agreement; accordingly, if Parent or the
Company fails promptly to pay the amount due pursuant to this Section 8.3,
and, in order to obtain such payment, the other party commences a suit which
results in a judgment against Parent or the Company, as the case may be, for
the fee set forth in this Section 8.3, Parent or the Company, as the case may
be, shall pay to the other party its costs and expenses (including attorneys'
fees and expenses) in connection with such suit, together with interest on
the amount of the fee at the prime rate of Citibank, N.A. in effect on the
date such payment was required to be made.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 NONSURVIVAL OF REPRESENTATIONS; WARRANTIES AND
AGREEMENTS . None of the representations, warranties or agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for the agreements contained in Articles I
and II, Sections 6.12, 6.14 and 6.15, this Article IX and the Affiliate
Agreements.
SECTION 9.2 NOTICES . All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been
duly given or made if and when delivered personally or by overnight courier
to the parties at the following addresses or sent by electronic transmission,
with confirmation
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received, to the telecopy numbers specified below (or at such other address
or telecopy number for a party as shall be specified by like notice):
(a) If to Parent or Merger Sub:
290 Donald Lynch Boulevard
Marlborough, Massachusetts 01752-4748
Attention: Steven Shea
Telecopier No.: (508) 303-4620
Telephone No.: (508) 303-4800
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
One Beacon Street
Boston, MA 02108
Attn: David Brewster, Esq.
Telecopier No.: (617) 573-4822
Telephone No.: (617) 573-4825
(b) If to the Company:
460 E. Middlefield Road
Mountain View, California 94043
Attention: Mark Housley
Telecopier No.: (650) 404-6205
Telephone No.: (650) 404-6301
With a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attention: Gordon Davidson, Esq.
Telecopier No.: (650) 494-1417
Telephone No.: (650) 858-7237
SECTION 9.3 CERTAIN DEFINITIONS . For purposes of this Agreement, the
term:
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(a) "affiliate" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person; including, without limitation, any
partnership or joint venture in which the first mentioned person (either
alone, or through or together with any other subsidiary) has, directly or
indirectly, an interest of 5% or more;
(b) "beneficial owner" with respect to any shares of Company Common
Stock means a person who shall be deemed to be the beneficial owner of such
shares (i) which such person or any of its affiliates or associates (as such
term is defined in Rule 12b-2 of the Exchange Act) beneficially owns,
directly or indirectly, (ii) which such person or any of its affiliates or
associates has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject only to the passage of
time), pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement or
understanding, or (iii) which are beneficially owned, directly or indirectly,
by any other persons with whom such person or any of its affiliates or
associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares;
(c) "business day" means any day other than a Saturday or Sunday or
any day on which banks in The Commonwealth of Massachusetts are required or
authorized to be closed;
(d) "control" including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management or
policies of a person, whether through the ownership of stock, as trustee or
executor, by contract or credit arrangement or otherwise; and
(e) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d)(3) of the Exchange Act).
SECTION 9.4 AMENDMENT . This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time; PROVIDED, HOWEVER, that,
after approval of the Company Voting Proposal by the shareholders of the
Company, no amendment may be made which by law requires further approval by
such shareholders without such further approval. This Agreement may not be
amended except by an instrument in writing signed by the parties hereto.
SECTION 9.5 EXTENSION; WAIVER . At any time prior to the Effective
Time, the parties hereto, by action taken or authorized by their respective
Boards of Directors, may to the extent legally allowed, (a) extend the time
for the performance
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of any of the obligations or other acts of any other party hereto, (b) waive
any inaccuracies in the representations and warranties of any other party
hereto contained herein or in any document delivered pursuant hereto or (c)
waive compliance with any of the agreements or conditions of any other party
hereto contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9.6 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.
SECTION 9.7 SEVERABILITY . If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in
any manner adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the fullest extent possible.
SECTION 9.8 ENTIRE AGREEMENT, NO THIRD PARTY BENEFICIARIES . This
Agreement (including the documents and instruments referred to herein,
including the Confidentiality Agreement) (a) constitutes the entire agreement
and supersedes all prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof and (b) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder, other than the persons
intended to benefit from the provisions of Section 6.14, who shall have the
right to enforce such provisions directly.
SECTION 9.9 ASSIGNMENT . This Agreement shall not be assigned by
operation of law or otherwise, except that Parent and Merger Sub may assign
all or any of their rights hereunder to any wholly owned subsidiary thereof;
PROVIDED, HOWEVER, that no such assignment pursuant to this Section 9.9 shall
relieve Parent of its obligations hereunder.
SECTION 9.10 INTERPRETATION . When a reference is made in this
Agreement to Sections, such reference shall be to a Section of this Agreement
unless otherwise indicated. The table of contents and headings contained in
this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement they shall be
deemed to be followed by the words "without limitation."
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SECTION 9.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE .
No failure or delay on the part of any party hereto in the exercise of any
right hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement
herein, nor shall any single or partial exercise of any such right preclude
any other or further exercise thereof or of any other right. All rights and
remedies existing under this Agreement are cumulative to, and not exclusive
of, any rights or remedies otherwise available.
SECTION 9.12 GOVERNING LAW . This Agreement shall be governed by,
and construed in accordance with, the internal laws of the State of
California, without regard to the conflict of law provisions thereof,
including that the Merger shall be effected in accordance with the applicable
provisions of the CGCL. Each of the parties hereto agrees that any action or
proceeding brought to enforce the rights or obligations of any party hereto
under this Agreement will be commenced and maintained in any court of
competent jurisdiction located in the State of California. Each of the
parties hereto further agrees that process may be served upon it by certified
mail, return receipt requested, addressed as more generally provided in
Section 9.2, and consents to the exercise of jurisdiction of a court of the
State of California over it and its properties with respect to any action,
suit or proceeding arising out of or in connection with this Agreement or the
transactions contemplated hereby or the enforcement of any rights under this
Agreement.
SECTION 9.13 COUNTERPARTS . This Agreement may be executed in two or
more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original
but all of which taken together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused
this Agreement to be executed as of the date first written above by their
respective officers thereunto duly authorized.
MEDIA 100 INC.
By:
------------------------------------------
Name: Steven D. Shea
Title: Vice President of Finance
DERRINGER ACQUISITION CORP.
By:
------------------------------------------
Name: Steven D. Shea
Title: President and Secretary
DIGITAL ORIGIN, INC.
By:
------------------------------------------
Name: Mark Housley
Title: Chairman and Chief Executive
Officer
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TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
Cross Reference
Terms in Agreement
- ----- --------------
<S> <C>
Acquisition Proposal Section 6.2(b)
Affiliate Section 9.3(a)
Affiliated Group Section 3.15(a)
Affiliated Return Section 3.15(a)
Agreement Preamble
Beneficial Owner Section 9.3(b)
Business Day Section 9.3(c)
Certificates Section 2.1(a)
CGCL Preamble
Closing Section 1.6
Closing Date Section 1.6
Code Preamble
Common Shares Trust Section 2.2(d)(ii)
Company Preamble
Company Affiliate Agreement Section 6.6(a)
Company Balance Sheet Section 3.6(b)
Company By-Laws Section 3.2
Company Charter Section 3.2
Company Common Stock Section 2.1
Company Disclosure Schedule Article III
Company ESPP Section 2.1(e)
Company Intellectual Property Rights Section 3.17(a)
Company Material Adverse Effect Section 3.1
Company Merger Documents Section 3.4
Company Option Section 6.12
Company Permits Section 3.11(b)
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Company Plans Section 3.12(a)
Company Preferred Stock Section 3.3(a)
Company SEC Reports Section 3.6(a)
Company Shareholders Meeting Section 3.20
Company Stock Option Plans Section 2.1(e)
Company Voting Proposal Section 3.4
Company Warrants Section 2.1(b)
Confidentiality Agreement Section 6.1(c)
Control Section 9.3(d)
DGCL Preamble
Dissenting Shares Section 2.1(c)
Effective Time Section 1.2
Environmental Claim Section 3.16(e)
Environmental Laws Section 3.16(f)
ERISA Section 3.12(a)
ERISA Affiliate Section 3.12(a)
Excess Shares Section 2.2(a)(ii)
Exchange Act Section 3.5(b)
Exchange Agent Section 2.2(a)
Exchange Ratio Section 2.1(a)
Existing Indemnification Obligations Section 6.14(a)
GAAP Section 3.6(b)
Governmental Entity Section 3.5(b)
Hazardous Materials Section 3.16(g)
HSR Act Section 3.5(b)
Liens Section 3.3(a)
Material Contract Section 3.10(b)
Maximum Amount Section 6.14(b)
Merger Preamble
Merger Agreement Section 1.2
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Merger Consideration Section 2.1(a)
Merger Sub Preamble
Merger Sub Common Shares Section 2.1(d)
NASDAQ Section 2.2.(d)(ii)
Other Company Options Section 2.1(e)
Outside Date Section 8.1(b)
Parent Preamble
Parent Affiliate Agreement Section 6.6(b)
Parent Affiliated Group Section 4.14(a)
Parent Affiliated Return Section 4.14(a)
Parent Balance Sheet Section 4.7
Parent By-Laws Section 4.2
Parent Charter Section 4.2
Parent Common Stock Section 2.1(a)
Parent Disclosure Schedule Article IV
Parent ERISA Affiliate Section 4.11(a)
Parent Intellectual Property Rights Section 4.16(a)
Parent Material Adverse Effect Section 4.1
Parent Merger Documents Section 4.4
Parent Option Section 6.12
Parent Plans Section 4.11(a)
Parent Preferred Stock Section 4.3(a)
Parent SEC Reports Section 4.6(a)
Parent Stockholders' Meeting Section 3.20
Parent Voting Proposal Section 4.4
Person Section 9.3(e)
Proxy Statement/Prospectus Section 3.20
Registration Statement Section 3.5(b)
Release Section 3.16(h)
Rule 145 Section 6.6(a)
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SEC Section 3.5(b)
Securities Act Section 3.5(b)
Subsidiary Section 3.1
Subsidiary Documents Section 3.2
Superior Proposal Section 6.2(b)
Surviving Corporation Section 1.1
Tax Returns Section 3.15(e)
Tax/Taxes Section 3.15(e)
Year 2000 Compliant Section 3.23(e)
</TABLE>
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- -FOOTER 1-
159001.08-Boston S1A
- -FOOTER 2-
Footer Discontinued
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EXHIBIT 10.14
OEM DEVELOPMENT AND LICENSE AGREEMENT
WHEREAS, Media 100 develops and markets certain software and other
computer-related products and services and desires to include Supplier's
software product as a component of Media 100's product or services.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties agree to the following terms and conditions, which set forth the
rights, duties, and obligations of the parties.
1. DEFINITIONS. The following terms, when used with initial capital
letters in this Agreement, shall have the following definitions, unless the
context in which the term is used expressly provides otherwise.
"ACCEPTANCE CRITERIA" means a set of criteria (set forth in the
Specifications) that will be used to judge whether a Deliverable meets the
Specifications.
"AFFILIATE" means with respect to any entity, any other entity controlling,
controlled by or under common control of such entity.
"APPLICATIONS PROGRAMMING INTERFACE" means the specifications of a Supplier
Product which define the external programming interface between that Supplier
Product and other Object Code. The Applications Programming Interface
includes the elements of such programming interface that are directly exposed
and recommended as mandatory to implement extension to that Supplier Product.
"APPLICATIONS PROGRAMMING INTERFACE ITEMS" means the following set of items
implementing the Applications Programming Interface: (a) System Documentation
describing the Applications Programming Interface; (b) fully functional and
tested Supplier Product (Object Code and System Documentation) designed for
use on, and implementing the Applications Programming Interface; and (c) a
fully functional and tested validation test suite and System Documentation
describing the associated test procedures.
"CONFIDENTIAL INFORMATION" means any information disclosed by one party to
the other pursuant to this Agreement which is in written, graphic, machine
readable or other tangible form and is marked "Confidential", "Proprietary",
"Source Code", or in some other manner to indicate its confidential nature.
Confidential Information may also include oral or visual information
disclosed by one party to the other pursuant to this Agreement, provided that
such information is designated as confidential at the time of disclosure and
is reduced to writing by the disclosing party within a reasonable time (not
to exceed thirty (30) calendar days) after its oral or visual disclosure, and
such writing is marked in a manner to indicate its confidential nature and
delivered to the receiving party.
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"BUNDLED PRODUCT" means the combination of a Restricted Streaming Product and
a Supplier Product being distributed to third parties in accordance with this
Agreement.
"CONTRACTOR" of a company means a person or group of persons (whether
incorporated or not) providing services to that company as independent
contractors.
"DELIVERABLES" means the Supplier Product or any portion thereof to be
delivered by the Supplier identified in Exhibits A and B.
"DERIVATIVE WORKS" means a revision, modification, translation, abridgment,
condensation or expansion of the Supplier Product or Documentation or any
form in which the Supplier Product or Documentation may be recast,
transferred, or adapted, which, if prepared without the consent of Supplier,
would be a copyright infringement.
"DISTRIBUTOR" means any third party which acquires possession of the Supplier
Product from Media 100 and is not a Reseller or End User and distributes it
to a Reseller.
"DOCUMENTATION" means End User Documentation and System Documentation. "END
USER DOCUMENTATION" means those software user manuals, reference manuals and
installation guides, or portions thereof, which are distributed in
conjunction with the Supplier Product including but not limited to those set
forth in Exhibit C. "End User Documentation" excludes System Documentation.
"SYSTEM DOCUMENTATION" means all user manuals and other written materials,
including style guides, that relate to particular Source Code or Object Code,
including without limitation materials useful for understanding, designing,
developing, building, implementing, maintaining and operating Source Code or
Object Code (for example, logic manuals, flow charts and principles of
operation) and machine-readable text or graphic files subject to display or
printout.
"END USER" means an entity that acquires the Supplier Product for Internal
Use and is not an affiliate of Media 100's enterprise. "End User" does not
include an entity that distributes, resells, sells, licenses, rents or leases
the Supplier Product to other parties in the regular course of business.
"ERROR" means any mistake, problem or defect that causes either an incorrect
functioning of code or an incorrect or incomplete statement or graphic in
Documentation, if such mistake, problem or defect (a) renders the code
inoperable, (b) causes the code to fail to meet the Specifications or
Acceptance Criteria, (c) causes the Documentation to be inaccurate or
inadequate in any material respect, (d) causes incorrect results, or (e)
causes incorrect functions to occur.
"EVENT OF BANKRUPTCY" with respect to a company means (a) the commencement by
the company of a voluntary case under the United States Bankruptcy Code or
under any similar law, (b) the commencement against the company of an
involuntary case under the United States Bankruptcy Code or under any similar
law if the case is not vacated within ninety calendar days, (c) the entry of
a final order by a court of competent jurisdiction finding the company to be
bankrupt or insolvent, ordering or approving its liquidation, reorganization
or any modification or alteration of the rights of its general creditors or
assuming custody of or appointing a receiver or other custodian for all or a
substantial
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part of its property and such order shall not be vacated or stayed upon
appeal or otherwise stayed within ninety calendar days or (d) the company
making an assignment for the benefit of, or entering into a composition with,
its creditors, or appointing or consenting to the appointment of a receiver
or other custodian for all or a substantial part of its property.
"INTERNAL USE" means use for purposes that do not directly produce revenue
for the user.
"MAJOR AND MINOR UPDATES" means updates, if any, to the Supplier Product.
Major Updates involve additions of substantial functionality while Minor
Updates do not. Major Updates are customarily designated by a change in the
number to the left of the decimal point of the number appearing after the
product name while Minor Updates are customarily designated by a change in
such number to the right of the decimal point. Major Updates exclude software
releases which are reasonably designated by Supplier as new products. Where
used herein "Updates" shall mean Major Updates or Minor Updates
interchangeably.
"MARKS" means Supplier's trademarks, service marks, logos, designations and
insignias.
"MILESTONE SCHEDULE" means the schedule for delivery of Deliverables and
payment therefor attached to this Agreement as Exhibit B.
"MILESTONE" means the milestones set forth in the Milestone Schedule.
"MEDIA 100 RELATED PERSONS" means Media 100 and Media 100's subsidiaries, and
their respective directors, officers, employees, agents and Contractors.
"MEDIA 100" means Media 100 Inc.
"MONTH(S)" and "MONTHLY" refers to a calendar month.
"OBJECT CODE" means any computer programming code that loads and executes
without further processing by a software compiler or linker or that results
when Source Code is processed by a software compiler.
"RESELLER" means any third party which is not a Distributor but acquires the
Supplier Product from Media 100 or an authorized Distributor and resells,
licenses, rents, or leases to End Users.
"RESTRICTED STREAMING PRODUCTS" means the Media Cleaner Product of Terran
Interactive, Inc. (a subsidiary of Media 100), and any product which is
reasonably a derivative or extension of such product; provided each such
product shall be considered a "Restricted Streaming Product" only if it can
ONLY produce streaming media output; for the purposes of this provision,
products designed to or capable of output to physical media (such as video
tape or DVD disk) or in "mini-DV" format shall not be considered to produce
only streaming media output and thus not be "Restricted Streaming Products";
however, the ability to store a streaming media output on physical media
shall not disqualify a product otherwise compliant from being a "Restricted
Streaming Product".
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"SALE," "SELL" and other similar terms, when used in connection with the
marketing and distribution of the Supplier Product shall mean the granting of
a license or sublicense and shall not be deemed for any purpose to mean a
transfer of title or other rights of ownership to the Supplier Product, other
than the rights to copy and use as specifically set out in this Agreement.
"SOURCE CODE" means the human-readable form of programming code and related
System Documentation, including all comments and any procedural language.
Source Code does not include End User Documentation.
"SPECIFICATIONS" mean specifications for the Supplier Product API necessary
to ensure effective integration with the Restricted Streaming Products and as
set forth in Exhibit B
"SUBSIDIARY" of an entity means a corporation, company or other entity (a)
more than fifty percent (50%) of whose outstanding shares or securities
(representing the right to vote for the election of directors or other
managing authority) are; or (b) which does not have outstanding shares or
securities, as may be the case in a partnership, joint venture or
unincorporated association, but more than fifty percent (50%) of whose
ownership interest (representing the right to make decisions for such
corporation, company or other entity) is; in each of (a) and (b) now or
hereafter, owned or controlled, directly or indirectly, by the entity in
question, as the case may be, but such corporation, company or other entity
shall be deemed to be a Subsidiary only so long as such ownership or control
exists.
"SUPPLIER PRODUCT" means the Supplier's product identified in Exhibit A that
Media 100 is authorized to sublicense, market and sell under this Agreement,
including each of the Deliverables, if any.
"SUPPLIER RELATED PARTY" means Supplier and Supplier's subsidiaries,
Affiliates, directors, officers, employees, agents and Contractors.
"SUPPLIER" means the company identified as such on the signature page to this
Agreement.
"SUPPORT SPECIFICATIONS" means the items set forth in Exhibit C.
"TERM" means the term of this Agreement, as it may be extended or earlier
terminated in accordance with Section 10.
2. DELIVERY OF DELIVERABLES; ACCEPTANCE.
(a) DELIVERABLES. To the extent the Supplier Product or any part thereof
is an existing product, then Supplier will deliver to Media 100 such existing
materials in connection with the execution of this Agreement, and each Update
thereto immediately upon such materials being released by Supplier, and Media
100 will make any payment specified in respect thereto as indicated in
Exhibit A. These deliverables will be in object code form only. Despite the
foregoing and except as provided by separate agreement, Major
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Updates will not be supplied by Supplier after May 31, 2003 and no Updates
will be delivered after Supplier terminates its general distribution of the
Supplier Product.
To the extent the Supplier Product consists of Deliverables to be created
under this Agreement, Supplier will deliver to Media 100 the Deliverables in
accordance with due dates for each set forth on the Milestone Schedule. Upon
acceptance of each Deliverable pursuant to the provisions of this Section 2,
Media 100 will make the payment specified on the Exhibit B - Milestone
Schedule. These deliverables will be in object code form only.
Supplier agrees that it will provide the Applications Programming Interface
for the Supplier Product by delivery to Media 100 of the Applications
Programming Interface Items together with such Supplier Product, and
thereafter promptly following any changes made thereafter to such items.
(b) CREATION OF MILESTONE SCHEDULE. As of the date of execution of this
Agreement, Exhibit B - Milestone Schedule and Exhibit C -- specifications of
API, are not completed. The parties will use all reasonable efforts to
complete Exhibits B and C and attach them hereto as promptly as possible. In
general, the parties expect that an alpha release of the API will be
available in February 2000 and that the commercial release version of such
product will be available no later than the anniversary of this Agreement.
(c) ENGINEERING SUPPORT FOR DEVELOPMENT. Supplier will make available
sufficient internal engineering support from its organization to ensure that
the Supplier Product is commercially viable from a technical point of view,
it being understood that the foregoing does not obligate Supplier to hire
personnel not then employed at the Supplier, and is only a statement of
allocation of resources, not a representation or promise that the Supplier
Product will in fact be commercially viable. Appropriate Media100 engineering
personnel will reasonably cooperate with Supplier's personnel.
(d) REVIEW. Media 100 may conduct periodic reviews, including reviews at
Supplier's premises to take place at a mutually convenient time, of the
Supplier Product. At Media 100's reasonable request, Supplier will provide
Media 100 with written reports regarding its work on the Supplier Product and
with copies of any work in progress and related materials.
(e) CHANGES TO THE SPECIFICATIONS.
(i) Additional Specifications for the API may be agreed upon by
the parties until Media 100's final acceptance of the Supplier Product.
Media 100 acknowledges that significant changes to the Specifications
may result in a change in the delivery time table.
(ii) If any such modification of the Specifications by Media 100
does require Supplier's expenditure of significantly more time and
effort, additional fees must be agreed upon in writing by the parties
prior to implementation of modifications.
(f) ACCEPTANCE OF SUPPLIER PRODUCT.
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(i) Delivery will occur when Supplier delivers a testable
Deliverable to Media 100 accompanied by a written statement listing the
items delivered and stating that they are ready for Media 100's
acceptance testing. Delivery of software will be via electronic
transmission only, unless Media 100 gives Supplier written notice that
such a Deliverable is to be delivered via another medium. Media 100,
with the assistance of Supplier if requested by Media 100, will examine
and test each Deliverable upon delivery to determine whether the
Deliverable conforms to the Acceptance Criteria for the Deliverable.
Within thirty (30) calendar days or such other number of days specified
in the applicable Acceptance Criteria after such delivery, Media 100
will provide Supplier with written acceptance of such Deliverable or a
specific and objective statement of Errors to be corrected prior to
the next Milestone.
(ii) Supplier will correct the Errors in any Deliverable set forth
in the statement of Errors and redeliver the Deliverable to Media 100
within thirty (30) calendar days or such other number of days specified
in the applicable Acceptance Criteria after receipt of the statement of
Errors, and Media 100 will within fourteen (14) calendar days after
such redelivery provide Supplier with written acceptance or another
statement of Errors. The procedure set forth in this clause (ii) will
be repeated until Media 100 accepts the Deliverable.
(iii) If Media 100 fails to give a statement of Errors within the
specified time, Media 100 will be deemed to have accepted the
Deliverables as of the expiration of such specified time; provided that
such acceptance shall not affect the Supplier's obligation hereunder to
correct any Errors after such acceptance.
(g) APPLICATIONS PROGRAMMING INTERFACE; SUPPLYING SOURCE CODE. Supplier
agrees that the Applications Programming Interface Items to be delivered to
Media 100 are intended to be used for, among other things, extension of the
user interface functionality of Supplier Products by Media 100 without the
use of Source Code of the Supplier Products, and Supplier has and will in
creating such Applications Programming Interface's do so taking into account
the need to facilitate such use. It is the Supplier's intention that the
creation of such Applications Programming Interface will give Media 100 the
same capability to extend user interface functionality as the Supplier has.
In the event the Applications Programming Interface, as so supplied, fails to
permit a reasonably skilled programmer the ability to do so, or if the
parties otherwise agree it is appropriate for Supplier to provide Media 100
access to modules of Source Code to perform development work, the Supplier
shall immediately give Media 100 access to those modules of Source Code
necessary for Media 100 to perform such work, but only to the extent and for
the time reasonably required for Media 100 to perform such work. Any
modifications to Source Code made by Media 100 (but not the project developed
by Media 100 using Source Code) shall belong to Supplier, and Media 100 shall
convey any ownership rights it has in the modifications to the Source Code to
Supplier.
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3. GRANT OF LICENSES.
(a) LICENSE GRANT. Subject to the terms and conditions of this
Agreement, Supplier grants to Media 100 a non-exclusive, worldwide, perpetual
license to the Supplier Product: (i) to use, reproduce and distribute the
Supplier Product and System Documentation internally within Media 100; (ii)
to create or have created Derivative Works based upon or compatible with the
Supplier Applications Programming Interface (whether Supplier Applications
Programming Interface-compliant or not) with or without the use of code
supplied by Supplier and to reproduce and distribute internally the
Derivative Works in Source Code form or in Object Code form; (iii) to the
extent Source Code is supplied pursuant to Section 2(g) or 3(c), to create or
have created Derivative Works by modifying the Source Code of the Supplier
Product and to reproduce and distribute internally the Derivative Works in
Source Code form or in Object Code form; (iv) to create or have created
Derivative Works by modifying the End User Documentation of the Supplier
Product and to reproduce and distribute internally such Derivative Works in
any form; (v) to distribute externally to End Users, either directly or
through distributors, but only in bundled form with Restricted Streaming
Products, copies in Object Code form only of the Supplier Product or
Derivative Works and copies in any form of the End User Documentation or any
Derivative Works of the End User Documentation, such distribution shall be in
accordance with Media 100's standard software distribution license agreement
for a particular channel of distribution; and (vi) to exercise all rights to
the Supplier Product with regard to pictorial, graphic or audio/visual works,
including icons, screens, music and characters, that are created as a result
of execution of any code or any Derivative Work thereof in accordance with
the granted license
(b) PROPRIETARY NATURE OF PRODUCTS AND OWNERSHIP. No title to or
ownership of software licensed under this Agreement or proprietary technology
in hardware acquired under this Agreement is transferred to Media 100.
Notwithstanding any provision of this Agreement to the contrary, Supplier, or
the licensor through which Supplier obtained the rights to distribute the
Supplier Product, owns and retains all title and ownership of all
intellectual property rights in the Supplier Product, including all software,
firmware, software master diskettes, copies of software, master diskettes,
documentation and related materials that are acquired, produced or shipped by
Supplier under this Agreement, and all modifications to and derivative works
of software acquired under this Agreement that are made by Supplier or any
third party (other than on behalf of Media 100). Supplier does not transfer
any portion of such title and ownership, or any of the associated goodwill,
to Media 100. Supplier shall own all Derivative Works of the Supplier Product
produced or created by or on behalf of Media 100 provided that Supplier shall
have no rights independently to market or sublicense any Derivative Works
created by Media 100 without Media 100's prior written approval. Media 100
shall have rights to use such Derivative Works subject to the terms and
conditions of this Agreement.
(c) ACCESS TO SOURCE CODE. Supplier agrees to execute a standard
software escrow agreement (the "Escrow Agreement") supplied by an escrow
agent selected by Media 100 and reasonably acceptable to Supplier (the
"Escrow Agent"), and in connection therewith Supplier agrees that from time
to time upon request of Media 100, Supplier shall deposit
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in escrow with the Escrow Agent the latest versions of all intellectual
property, as defined in section 101 of Title 11 of the United States Code,
with respect to those portions of the software and other technology
incorporated in the Supplier Product and reasonably relevant to the
implementation of this Agreement (the "Technology") including without
limitation all Source Code, designs, patents and Documentation ("Supplier
Product Materials"), to be made available to Media 100 upon the conditions
set forth in this Section. Media 100 will pay the Escrow Agent's charges.
Regardless of whether "Source Code Escrowed" is indicated on Exhibit A and
regardless of whether this license is identified in Exhibit A as including
the right to Source Code, in the event that a trustee in bankruptcy is
appointed for Supplier, then unless and until such trustee has rejected this
Agreement, the trustee shall, at the written request of Media 100, (i)
continue to perform all of the obligations of Supplier under this Agreement,
or (ii) promptly deliver to Media 100 the Technology, including all Supplier
Product Materials held by the trustee, including any embodiment of such
intellectual property to the extent protected by applicable nonbankruptcy
law, and in either case not interfere with the rights of Media 100 to use
such intellectual property (including such embodiment) as provided in this
Agreement or any agreement supplementary hereto, including any right to
obtain such intellectual property or such embodiment from any Escrow Agent
under an Escrow Agreement.
Regardless of whether "Source Code Escrowed" is indicated on Exhibit A and
regardless of whether this license is identified in Exhibit A as including
the right to Source Code, if the trustee rejects this Agreement, and Media
100 elects under section 365(n)(1)(B) of Title 11 of the United States Code
to retain its rights under this Agreement, the trustee shall promptly deliver
to Media 100 all intellectual property, as defined in section 101 of Title 11
of the United States Code, with respect to the Technology, including all
Supplier Product Materials held by the trustee, including any embodiment of
such intellectual property to the extent protected by applicable
nonbankruptcy law, and not interfere with the rights of Media 100 to use such
intellectual property (including such embodiment) under this Agreement or any
agreement supplementary hereto, including any right to obtain such
intellectual property or such embodiment from any Escrow Agent under any
Escrow Agreement.
4. SUPPORT, MARKETING AND DISTRIBUTION.
(a) MAINTENANCE AND SUPPORT. Supplier shall provide Media 100 with
maintenance and support according to the terms and conditions specified in
Exhibit D.
(b) NONEXCLUSIVITY; NO MARKETING OBLIGATION. Media 100 understands that
Supplier reserves the right to directly license and sell the Supplier Product
and to appoint other OEM's, distributors and resellers without restriction as
to number or location. Supplier understands that Media 100 has no obligation
to incorporate, bundle or market the Supplier Product with or into any Media
100 products, or otherwise, unless Media 100 believes in its sole discretion
that such action is desirable from the Media 100's perspective.
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(c) USE OF AUTHORIZED OEM TITLE. During the term of this Agreement,
Media 100 may refer to itself and Supplier may refer to Media 100, in
connection with exercising its rights under this Agreement, as a Supplier
"Authorized OEM".
(d) PUBLIC ANNOUNCEMENTS AND PROMOTIONAL MATERIALS. Supplier and Media
100 shall cooperate with each other so that each party may issue a press
release other than as a customer reference concerning this Agreement,
provided that each party must approve such press release prior to its release.
(e) SOFTWARE. When marketing products incorporating the Supplier
Product, Media 100 agrees to exercise commercially reasonable efforts (and no
less effort than expended with respect to its own products) to ensure that
each End User receiving the products or services through Media 100 or Media
100's lines of distribution understands and agrees to be bound by a Media 100
standard Software License Agreement consistent with the line of distribution.
(f) USE OF SUPPLIER MARKS AND TRADE NAMES. Media 100 is authorized to
use the Supplier Marks applicable to the Supplier Product in connection with
its marketing of products or services incorporating the Supplier Product.
Media 100 agrees not to alter, erase or overprint any notice provided by
Supplier without the prior written consent of Supplier or affix any Supplier
Marks. Media 100 recognizes Supplier's ownership and title to the Trade Names
and Marks. Media 100 will abide by Supplier's generally applicable and
reasonable usage guidelines established by Supplier from time to time.
5. FEES AND PAYMENT.
(a) ROYALTY AND LICENSE FEES. As license fees for the rights herein
granted, Media 100 shall pay to Supplier royalties on Media 100 sales and
related licensing or sublicensing of Bundled Product at the rates and on the
terms specified in Exhibit A hereto.
Media 100 is free to determine its own resale prices for the Bundled Product
it is authorized to license and sell hereunder. Although Supplier may publish
suggested list prices, these are suggestions only and not binding in any way.
Royalties shall accrue for a particular transaction in the Media 100 fiscal
quarter in which Media 100 recognizes for its financial statement purposes
the revenue for the shipment by Media 100 of the relevant quantity of the
Bundled Product (to a distributor or end-user). Media 100 shall pay Supplier
such license fees accrued during each such fiscal quarter, within forty-five
(45) days following the end of such fiscal quarter, and shall be accompanied
by a report in reasonable detail showing the calculation of such fees. All
payments shall be made in United States dollars. For sales for which Supplier
would otherwise be entitled to a royalty on a non-dollar based amount, Media
100 will make payment to Supplier in U.S. Dollars based upon the exchange
rate used in connection with preparing its internal financial statements with
respect to such transaction. In no event shall Media 100 be responsible to
protect the value of sums against currency fluctuation, effects of inflation,
or other economic or monetary adjustment. The
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applicable fees for the products and services provided under this Agreement
do not include any sales, use or similar taxes ("Taxes") payable on the part
of the acquisition of the Supplier Product from Supplier. Such Taxes, if
applicable and imposed on Supplier, shall be presented in a billing statement
by Supplier to Media 100, and shall be payable by the Media 100 as specified
herein; provided that Media 100 shall not be liable for any taxes based upon
Supplier's net income or real or personal property owned by Supplier. Any
payment to Supplier shall be net of any required withholding due to taxes
under applicable law. Media 100 is responsible for Taxes resulting from its
sales of Bundled Products to its customers.
(b) INTERNATIONAL SALES RESTRICTIONS. If any payment to Media 100 with
respect to sales in any country is blocked or subject to restrictions by
governmental authorities, royalties with respect to such sales may either be
held in the blocking or restricting country (if permitted by local
regulations) or may be removed from such country and paid to Supplier,
subject to whatever restrictions, limitations and/or taxes may be imposed by
the government of such country on receipts from the underlying sale. If the
government of a country requires a reduction in the royalty rate set forth in
this Agreement as a condition of approving the payment of royalties to
Supplier, Supplier agrees to reduce such rate for that country so as to
provide for the maximum royalty payment allowed by such government. When
deemed reasonably necessary by Media 100, Supplier shall enter into separate
agreements with affiliates of Media 100 for the purpose of facilitating the
payment of royalties.
(c) RECORDS EXAMINATIONS. Media 100 agrees to allow Supplier to examine
its records to determine compliance or noncompliance with this Agreement. Any
examination will be conducted only by an authorized representative of
Supplier, and will occur during regular business hours at Media 100's offices
and will not interfere unreasonably with Media 100's business activities.
Examinations will be made no more frequently than annually, and Supplier will
give Media 100 fifteen (15) business days or more prior written notice of the
date of the examination and the name of Supplier's authorized representative
who will be conducting the examination. The audit will be conducted at
Supplier's expense, unless the audit reveals an underpayment for the reviewed
period of more than five percent, in which case the reasonable audit cost
will be borne by Media 100. . All information obtained by Supplier's
authorized representative conducting the audit will be maintained
confidential by the representative. The examiner will give Media 100 and
Supplier an examination report containing only the information necessary to
indicate compliance or non-compliance with this Agreement. Underpayments will
be promptly paid. All late payments will bear interest at the rate of one
percent per month until paid.
6. WARRANTIES.
(a) GENERAL. Supplier represents and warrants (i) that the Supplier
Product being delivered to Media 100 is identical to that generally marketed
by Supplier, except to the extent specifically agreed to between the parties;
and (ii) it has and will have full and sufficient authority to assign or
grant the rights and/or licenses granted in the Supplier Product pursuant to
this Agreement.
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(b) NO VIRUS. Supplier has taken reasonable steps to test the Supplier
Product for programming devices (e.g., viruses, key locks (including, without
limitation, that control the number of users), backdoors, etc.) that would
(i) disrupt the use of the Supplier Product or any system, device or software
to which the Supplier Product is interfaced or other computer equipment with
which such equipment communicates; (ii) destroy or damage data or make data
inaccessible or delayed, except for file and purge routines necessary to the
routine functioning of the Supplier Product; or (iii) permit Supplier
personnel, agents or subcontractors access to any portion of the Supplier
Product other than as necessary to carry out the terms of this Agreement.
Supplier agrees to use programming practices and security procedures to avoid
insertion of such devices and to scan for viruses before sending any media
containing programming code to Customer.
(c) NO EXPORT RESTRICTION. Supplier further represents and warrants that
to its knowledge, except as disclosed to Media 100 the Supplier Product does
not contain cryptographic code or any other code that would subject it any
United States export license restrictions.
THE WARRANTIES DESCRIBED IN THIS SECTION 6 ARE IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND
NONINFRINGEMENT.
7. INDEMNIFICATION.
(a) INDEMNIFICATION. Supplier will indemnify, defend and hold Media 100,
its affiliates and, subsidiaries, and its and their respective directors,
officers, employees and agents (collectively, "Media 100 Persons") harmless
from any and all damages, liabilities, costs and expenses incurred by any
Media 100 Person as a result of any claim, judgment or adjudication against
Media 100 Person that alleges that the Supplier Product, Trade Names or the
Marks infringe any trademark, copyright, patent or trade secret rights of any
third party. Media 100 shall promptly notify Supplier in writing of any claim
for which it seeks indemnification, provided the failure or delay in doing so
shall not relieve Supplier from any obligation to indemnify any Media 100
Person except to the extent such delay or failure materially prejudices the
defense of any such claim. Supplier will have control of the defense of any
action and all negotiations for settlement and compromise, but shall not make
any settlement binding on any Media 100 Person without Media 100's consent
except if such settlement provides a complete and absolute release of such
person. Media 100 shall provide Supplier with reasonable assistance and
information necessary to perform the above, with Supplier to be responsible
for any out-of-pocket expenses of any Media 100 Person in providing such
assistance. If any Media 100 Person desires to have separate legal
representation in any such action, such Media 100 Person shall be responsible
for the costs and fees of its separate counsel.
(b) LIMITATION ON INDEMNIFICATION. Supplier shall have no liability for
infringement to the extent based on (i) modification of the Products by Media
100 or to Media 100's specifications, or (ii) the combination or use of the
Supplier Product with any other computer program, equipment, product, device,
item or process to the extent (A) such
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program, equipment, product, device or process is not furnished by Supplier
and (B) such infringement would have been avoided by the use of the Supplier
Product alone and in its unmodified form. Moreover, Supplier shall have no
liability for infringement, unless it knew or should have known of the
infringement on the date of this Agreement or any significant amendment
thereto and had not previously disclosed the possibility of such infringement
to Media100 in writing specifying either the specific technology, algorithm,
standard or similar item which is anticipated to be the source of
infringement, or the party from which infringement is reasonably expected.
8. CONFIDENTIAL INFORMATION.
(a) RESTRICTION ON USE. Each party and its Related Persons shall treat
as confidential all Confidential Information of the other party, shall not
use such Confidential Information except as contemplated under this
Agreement, and each party and its Related Persons shall not disclose such
Confidential Information to any third party except as may be reasonably
required in connection with the manufacture, use, sale or distribution of
products pursuant to this Agreement, and subject to confidentiality
obligations at least as protective as those set forth in this Agreement.
Without limiting the foregoing, each of the parties shall use at least the
same degree of care which it uses to prevent the disclosure of confidential
information of like importance to the disclosing party to prevent the
disclosure of Confidential Information disclosed to it by the other party
under this Agreement.
(b) EXCEPTIONS. Notwithstanding the above, neither party shall have
liability to the other with regard to any Confidential Information of the
other which
(i) was in the public domain at the time it was disclosed or enters the
public domain without violation of this Agreement by the receiver;
(ii)was known to the receiver, without restriction, at the time of the
disclosure as shown by the files of the receiver in existence at the time
of disclosure;
(iii)is disclosed with the prior written approval of the discloser;
(iv)was independently developed by the receiver without any use of the
Confidential Information and by employees or other agents of (or
Contractors hired by) the receiver who have not been exposed to the
Confidential Information;
(v) becomes known to the receiver, without restriction, from a third party
without breach of this Agreement by the receiver and otherwise not in
violation of the discloser's rights;
(vi)is disclosed to third parties by the discloser, intentionally without
restrictions similar to those contained in this Agreement;
(vii) to the extent disclosed in accordance with the order or requirement
of a court, administrative agency, or other governmental body, provided,
however, that the receiver shall provide prompt notice thereof to enable
the discloser to seek a protective order or otherwise prevent such
disclosure; or
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(viii) is inherently disclosed in the use, lease, sale or other
distribution of, or publicly available supporting documentation for, any
present or future product or service by or for the receiving party or any
of its Subsidiaries as otherwise permitted in this Agreement.
(c) TERMINATION OF OBLIGATIONS.
The parties' obligations under this Section with respect to nontechnical
sales, marketing and financial Confidential Information terminate three (3)
years from the end of the Term, if not terminated earlier pursuant to Section
8(b). The parties' obligations with respect to all technical Confidential
Information shall be terminated only pursuant to Section 8(b).
9. LIMITATION OF REMEDIES.
(a) LIMITATIONS. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS
AGREEMENT, NEITHER SUPPLIER NOR MEDIA 100 WILL BE LIABLE TO THE OTHER PARTY
FOR ANY INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST
PROFITS) SUSTAINED OR INCURRED IN CONNECTION WITH THIS AGREEMENT AND THE
SUPPLIER PRODUCT THAT IS SUBJECT TO THIS AGREEMENT REGARDLESS OF THE FORM OF
ACTION AND WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE. Supplier's liability
to Media 100 under this Agreement shall not exceed the greater of amounts
paid by Media 100 to Supplier under this Agreement. Media 100's liability to
Supplier under this Agreement shall not exceed the amounts payable by Media
100 to Supplier under Section 5.
(b) EXCEPTIONS. The limitation set forth in subsection (a) above do not
apply to any payment under Section 7; to breach of Section 8; to claims by
either party for personal injury or damage to real property or tangible
personal property caused by other's negligence; or in the case of fraud.
10. TERM; TERMINATION.
(a) TERM. This Agreement shall commence on the date it is executed by an
authorized Supplier signatory and continue until terminated in accordance
with its terms.
(b) TERMINATION FOR CAUSE. Either party may terminate this Agreement for
the substantial breach by the other party of a material term. The terminating
party will first give the other party written notice of the breach and a
reasonable period of at least sixty (60) days in which to cure the alleged
breach. If a cure is not achieved during the cure period, then the
non-breaching party may terminate this Agreement upon written notice.
(c) INSOLVENCY, ASSIGNMENT, OR BANKRUPTCY. Either party may terminate
this Agreement upon written notice to the other party if the other party (i)
is not paying its debts as such debts generally become due, (ii) becomes
insolvent, (iii) files or has filed against it a petition (or other document)
under any Bankruptcy Law or similar law that is unresolved within sixty (60)
days of the filing of such petition (or document), (iv) proposes any
dissolution, liquidation, composition, financial reorganization or
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recapitalization with creditors, (v) makes a general assignment or trust
mortgage for the benefit of creditors, or (vi) if a receiver, trustee,
custodian or similar agent is appointed or takes possession of any of its
property or business.
(d) TERMINATION BY MEDIA 100 FOR CONVENIENCE. Media 100 may terminate
this Agreement for its convenience at any time, for any reason or for no
reason, by giving Supplier written notice of termination prior to the
beginning of the next Media 100 fiscal quarter. Termination will become
effective upon receipt of such notice by Supplier.
(e) EFFECT OF TERMINATION ON OBLIGATIONS. Termination of this Agreement
will not affect any pre-termination obligations of either party under this
Agreement, and any termination is without prejudice to the enforcement of any
undischarged obligations existing at the time of termination. Within thirty
(30) calendar days after termination of this Agreement, Media 100 shall
either deliver to Supplier or destroy all copies of the Supplier Product and
Documentation and any other materials provided by Supplier to Media 100
hereunder in its possession or under its control, and shall furnish to
Supplier an affidavit signed by an officer of Media 100 certifying that, to
the best of its knowledge, such delivery or destruction has been fully
effected. Notwithstanding the foregoing, (i) all licenses to the Bundled
Product granted prior to termination to End Users by or on behalf of Media
100 and in connection with products incorporating the Supplier Product shall
survive any termination of the Agreement, and in particular, it is agreed
that upon the termination of the Agreement for any reason, such termination
shall not abridge or diminish in any way the rights of existing End Users to
the licensed use and enjoyment of any product utilizing or incorporating the
Supplier Product or any Derivative Work already distributed in accordance
with the Agreement prior to its termination; and (ii) for a period of up to
one year after the date of the termination of this Agreement Media 100 may
continue, subject to payment of amounts which may be due as of the date of
such termination and at any time thereafter, to sell the Bundled Product and
grant End User licenses to in connection therewith, under the provisions of
this Agreement solely to (A) work off existing inventory, (B) fulfill
contract commitments existing at the date of termination, or (C) satisfy
binding quotations in effect at the date of termination, and may thereafter
retain such rights as are necessary to support users at the release level
existing at the time of termination.
Upon termination, Media 100's sole monetary obligation arising out of
termination will be to pay Supplier the fees set forth in Exhibit A of this
Agreement.
11. GENERAL PROVISIONS.
(a) FORCE MAJEURE. If either party is prevented from performing any
portion of this Agreement (except the payment of money) by causes beyond its
control, including labor disputes, civil commotion, war, governmental
regulations or controls, casualty, inability to obtain materials or services
or acts of God, such defaulting party will be excused from performance for
the period of the delay and for a reasonable time thereafter.
(b) CHOICE OF LAW; JURISDICTION. The validity, construction and
performance of this Agreement will be governed by and construed in accordance
with the laws of the State of
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California applicable to contracts executed in and performed entirely within
such State, without reference to any choice of law principles of such State.
With respect to any suit, action or other proceeding arising out of this
Agreement, or any other transaction contemplated thereby, the parties hereto
expressly waive any right they may have to a jury trial and agree that any
proceeding hereunder shall be tried by a judge without a jury. Each party
acknowledges that injunctive relief is an appropriate remedy for a breach of
Sections 3, 8 or 11. The parties agree to non-exclusive personal jurisdiction
and venue of the United States District Court for Massachusetts (and any
Massachusetts State Court) and the United States District Court for the
Northern District of California (and any California State Court in Santa
Clara County) for that purpose.
(c) SURVIVAL OF TERMS. The provisions of this Agreement that by their
nature extend beyond the termination of this Agreement will survive and
remain in effect until all obligations are satisfied. Confidentiality
provisions of Section 8 shall remain in effect until the Confidential
Information is no longer Confidential.
(d) ENTIRE AGREEMENT. This Agreement, including the following Exhibits,
constitutes the entire Agreement between the parties pertaining to the
subject matter and supersedes all prior agreements and understandings between
the parties, written or oral, with respect to such subject matter. No
representations or statements of any kind made by any representative of
either party which are not stated in this Agreement or other substantially
contemporaneous written agreements between the parties shall be binding on
such party. No course of dealing or course of performance shall be relevant
to explain or supplement any term expressed in this contract. In the event of
any conflict between this Agreement and any purchase order or acknowledgment,
this Agreement shall take precedence over any written or typed instructions
in a written or electronic purchase order or acknowledgment. References to
Sections without decimals (such as "Section 2") shall include all sections
numbered with decimals in such Section (i.e. Section 2.1, 2.2, etc.). The
pre-printed provisions of any written or electronic purchase order or
acknowledgment shall be void and of no effect. This Agreement shall be valid
when signed by authorized officers of both parties. The parties agree that
this Agreement, together with any appendices, addenda or exhibits attached
hereto, may be amended from time to time in writing by mutual agreement of
the parties. No party shall be bound by any change, alteration, amendment,
modification or attempted waiver of any of the provisions of this Agreement
unless in writing and signed by an authorized officer of the party against
whom it is sought to be enforced.
(e) ASSIGNMENT.
(i) The rights and liabilities of the parties hereto will bind and inure to
the benefit of their respective successors, executors and administrators,
as the case may be; provided that neither party may assign or delegate its
obligations under this Agreement either in whole or in part, expressly or
by operation of law, without the prior written consent of the other, except
that each party may assign this Agreement (A) to any Subsidiary or company
of which it is a Subsidiary so long as it remains responsible for such
Subsidiary's performance or (B) to a person or entity into which it has
merged or which has otherwise succeeded to all or substantially all of its
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business and assets to which this Agreement pertains, by purchase of stock,
assets, merger, reorganization or otherwise, and which has assumed in
writing or by operation of law its obligations under this Agreement. Any
attempted assignment in violation of the provisions of this Section will be
void.
(ii) All rights and licenses granted to a party under this Agreement shall
apply to that party's Subsidiaries so long as such Subsidiaries agree to
comply fully with the obligations imposed on that party by this Agreement
and so long as such Subsidiary continues to be a Subsidiary of a party.
Each party shall remain fully liable for the actions and omissions of its
Subsidiaries relative to rights granted under this Section 11(f).
(f) NOTICE. All notices, demands, requests or other communications that
may be or are required to be given, served or sent by any party pursuant to
this Agreement will be in writing (and shall be deemed to have been duly
given upon receipt), will reference this Agreement and shall be mailed by
first class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by express courier or hand delivery or facsimile
transmission, addressed to the address below the party's name on the
signature page of this Agreement. Each party may designate by notice in
writing a new address to which any notice, demand, request or communication
may thereafter be so given, served or sent. Each notice that is mailed,
delivered or transmitted in the manner described above shall be deemed
sufficiently given, served, sent and received for all purposes at such time
as it is delivered to the addressee (with the return receipt, the delivery
receipt or the affidavit of messenger or courier being deemed conclusive
evidence of such delivery) or at such time as delivery is refused by the
addressee upon presentation.
(g) SEVERABILITY. If any term, provision, covenant or condition of this
Agreement is held invalid or unenforceable for any reason, the remainder of
the provisions will continue in full force and effect as if this Agreement
had been executed with the invalid portion eliminated. The parties further
agree to substitute for the invalid provision a valid provision that most
closely approximates the intent and economic effect of the invalid provision.
(h) INDEPENDENT CONTRACTORS. Each party acknowledges that the parties to
this Agreement are independent contractors and that it will not, except in
accordance with this Agreement, represent itself as an agent or legal
representative of the other.
(i) EXPORT CONTROL. Each party agrees that it will comply with the
provisions of United States laws restricting export of any software,
technical data or other information or materials, including without
limitation the United States Export Administration Act and regulations
thereunder, and will not export any software, technical data or other
information or materials to any country in violation thereof. This clause
shall survive termination or cancellation of this Agreement.
(j) HEADINGS. The headings provided in this Agreement are for
convenience only and will not be used in interpreting or construing this
Agreement.
16
<PAGE>
(j) NONSOLICITATION. During the term of this Agreement and for one year
thereafter, (i) neither party shall solicit the employees or contractors of
the other for employment or consulting and shall promptly advise the other if
approached by same for such purposes; and (ii) Media100 agrees not to
distribute the Bundled Products through any distributor of Supplier's as of
the date of this Agreement without Supplier's prior written approval, which
approval will not be unreasonably withheld..
(k) ATTORNEYS' FEES. In the event of any dispute in connection with this
Agreement, the prevailing party shall be entitled to recover its reasonable
attorneys' and experts' charges, in addition to such other relief as the
court may award.
Executed as of the date first above written.
SUPPLIER: Media 100:
DIGITAL ORIGIN, INC. MEDIA 100 INC.
By By
------------------------------- -------------------------------
Name: Name:
Title: Title:
Address: 460 East Middlefield Road Address: 290 Donald Lynch Boulevard
Mountain View CA 94043 Marlboro, MA 01752-4748
17
<PAGE>
EXHIBIT A
SUPPLIER PRODUCT, ROYALTIES
1. SUPPLIER PRODUCT: The Agreement to which this is appended applies
to the following Supplier Product:
a. IntroDV 1.0 For Windows, Software Only Version. The
Digital Origin Software content of retail SKU 0752 (see company website for
complete description). Specifically excludes all other bundled products from
DO or third parties, specifically excluded hardware, cables, and other
miscellaneous contained in that SKU.
2. ROYALTY/LICENSE FEES:
a. DEVELOPMENT PAYMENTS
Payment of $500,000 upon the earlier to occur of February
1, 2000 and Acceptance of all Deliverables of the Supplier Product (in
accordance with Exhibit B).
b. ONGOING ROYALTIES
1. Payment of $250,000 advance pre-paid royalty upon
execution of this Agreement, considered to be the minimum royalty payment for
the quarter ending February 29, 2000.
2. Royalty of 5% of Net Sales of Bundled Product each
quarter. Net Sales means gross receipts from the license or sale of the
Bundled Products less applicable sales and use taxes, shipping, insurance and
reasonable returns.
3. Cumulative minimum payment of $250,000 per quarter
for the first 14 quarters of the Agreement, such last payment being for the
quarter ended May 31, 2003. "Cumulative" means that if in a particular
quarter, (a) the cumulative payments under this Agreement under clause (1)
and (2) in previous quarters, plus the amount to be paid based on the
foregoing 5% royalty, is less than (b) $250,000 multiplied by the total
number of elapsed quarters, then the payment due in such quarter is such
difference, up to $250,000.) The $500,000 payment made pursuant to clause (a)
shall not be considered in making the calculation of "cumulative", but shall
be treated as an advance against royalties for the payments for the quarters
ended August 31, 2003, and November 30, 2003 payments under clause (b), such
that only to the extent the 5% royalty set for in clause (b) above exceeds
such amount would Media 100 be obligated to make payments under clause (b)
above for such quarters.
(Note: because of the $250,000 payment on execution, no further minimum
royalty payment is due for the quarter ended February 29, 2000; payment with
respect to such
18
<PAGE>
quarter shall only be made if the amount payable under the 5% royalty exceeds
that amount.).
C. TREATMENT OF TERMINATION
1. In the event of termination of the Agreement prior
to February 28, 2001 by Media 100 for cause or convenience pursuant to
Section 10, the $500,000 payment made pursuant to clause (a) above shall be
promptly refunded by Supplier to Media 100 by March 15, 2001. However,
payments made under clause (b) above shall not be refundable.
2. In the event of termination of the Agreement by
Media 100 pursuant to Section 10 prior to the end of a quarter which quarter
is after the quarter ended February 28, 2001, Media 100 shall pay to Supplier
in accordance with the Agreement the payment for such quarter in accordance
with the provisions of (b) above. If Media 100 terminates the Agreement in or
prior to the quarter ended February 28, 2001, or if, pursuant to Section
10(e) above, Media 100 shall provide residual post-termination copies of
materials in a quarter following any quarter in which the Agreement is
terminated, it shall pay to Supplier solely the 5% royalty specified in
clause (b)(2) above with respect to such sales, without any obligation of a
minimum royalty. For avoidance of doubt, in no case will Media 100 have
liability for any minimum royalties following termination of the Agreement
other than as specifically stated in the first sentence of this clause (c)(2).
19
<PAGE>
EXHIBIT B
MILESTONES SCHEDULE
[to be completed after execution, in accordance with Section 2(b)]
DESCRIPTION OF MILESTONE DUE DATE
20
<PAGE>
EXHIBIT C
PRODUCT SPECIFICATIONS
[to be completed after execution, in accordance with Section 2(b)]
21
<PAGE>
EXHIBIT D
MAINTENANCE AND SUPPORT
Supplier shall not be responsible for first-level support (i.e., direct
support of customer questions) of products incorporating the Supplier
Product. However, during the term of this Agreement, and for a period of one
(1) year thereafter but not longer than Supplier provides general support for
the Supplier Product or if Supplier terminates the Agreement pursuant to
Section 10(b), Supplier shall provide to Media 100 second level support
services, consistent with the support obligations described below with
respect to the Supplier Product including, without limitation, identification
of defective Source Code and Object Code and providing corrections,
Workarounds and/or patches to correct defects or errors in such Code. During
the term of this Agreement and for one year thereafter, Media 100 shall
provide first-level customer support of products incorporating the Supplier
Product on the same basis as the Restricted Streaming Products or other
comparable products that do not incorporate the Supplier Product.
TECHNICAL SUPPORT. While obligated to provide second level support as
provided above, in addition to the second level support services described
above, (i) Supplier shall appoint a technical contact to whom Media 100 may
address all technical questions relating to Supplier technologies; (ii) the
parties shall determine a mutually acceptable procedure by which Media 100
shall direct its technical questions to the appropriate Supplier technical
contact; and (iii) Supplier shall promptly answer all technical questions
asked by Media 100 relative to the Supplier Product.
TRAINING OF MEDIA 100. Supplier shall provide training of up to two members
of Media 100's technical and marketing staff on the following topics:
IntroDV. Training of Media 100 personnel will be provided by Supplier at
Mountain View CA or other mutually agreeable location. The training duration
is estimated at 2 days. Media 100 is responsible for Media 100 personnel's
out of pocket expenses including travel, room and board. Supplier is
responsible for the facilities, training materials and equipment.
There are no tuition charges. The course will be scheduled at a mutually
agreed upon time.
UPGRADES, UPDATES, ERROR CORRECTIONS AND ENHANCEMENTS. Supplier will include
Media 100 in its alpha programs for any Updates to the technology underlying
the Supplier Product (the "Technology") released during the term of this
Agreement, and will provide Media 100 with the production version of such
upgrades, subject to Section 2(a) of the Agreement. Beta testing will be
managed by Media 100, with support from Supplier. Media 100 may, but is not
required to, incorporate any such Updates in a product.
To enable Media 100 to provide standard support, while Supplier provides
second level support as provided above, Supplier shall provide to Media 100,
at no cost, all pertinent System Documentation for the Supplier Product and
any new releases thereof which is reasonably necessary for the purpose of
providing standard software support for the Supplier Product. Supplier shall
also provide to Media 100, at no cost and on an as needed basis, timely
qualified technical support by phone during Supplier's Business
22
<PAGE>
Hours to answer questions from a designated Media 100 representative
consistent with the following support obligations. Errors may be reported, on
a 24 hours per day, 365 day per year basis, by electronic mail, voice mail,
fax or telephonic recording capability.
While Supplier is obligated to provide second level support as provided
above, Supplier will use reasonable commercial efforts to resolve each
significant Error by providing either a reasonable work around, an object
code patch, or a specific action plan for how Supplier will address the
problem and an estimate of how long it will take to rectify the defect.
Notwithstanding the foregoing, Supplier has no obligation to perform services
in connection with (i) Errors resolution from hardware or software not
supplied by Supplier or (ii) which occur in the Supplier Product release
which is not the then-current release.
23
<PAGE>
EXHIBIT 21.01 --- LIST OF SUBSIDIARIES
SUBSIDIARY
FRANCE
- ------
Radius France S.A.
Radius S.A.R.L.
ASIA
- ----
Nihon SuperMac K.K.
SuperMac Asia Pacific
UNITED KINGDOM
- --------------
SuperMac Technology Europe
GERMANY
- -------
Radius GmbH
OTHERS
- ------
Radius FSC Inc.
Radius (Cayman Island) Ltd.
Radius Canada
All subsidiaries are either inactive or in dissolution or preparation therefor,
except Radius (Cayman Island) Ltd.
-42-
<PAGE>
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-37376, 33-43116, 33-47525, 33-71636, 33-77238, 33-83824,
33-59571, 333-17881, 333-04765, and 333-85213) pertaining to the 1986 Stock
Option Plan, the 1988 SuperMac Technology, Inc. Stock Option Plan, the
Directors' Stock Option Plan, the 1990 Employee Stock Purchase Plan, the 1999
Employee Stock Purchase Plan, Non-Plan Stock Options and the 1995 Stock Option
Plan, as amended, of Digital Origin, Inc. of our report dated November 3, 1999
with respect to the consolidated financial statements and schedule of Digital
Origin, Inc. included in this Annual Report (Form 10-K) for the year ended
September 30, 1999.
/s/ ERNST & YOUNG LLP
San Jose, California
December 29, 1999
-43-
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