U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1 TO
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
Commission file number: 33-37751-D
SOFTLOCK.COM, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1130229
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization )
5 Clock Tower Place Suite 440 Maynard, MA 01754
(Address of principal executive offices)
(978) 461-5940
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
Period that the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes -X- No ---
As of November 10, 1999, 10,913,730 shares of common stock, par value $0.01 per
share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes --- No -X-
<PAGE>
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet (Unaudited) September 30, 1999 1
Consolidated Statements of Operations (Unaudited)
for the three months and nine months ended
September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations 5-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
Item 1.
SoftLock.com, Inc.
CONSOLIDATED BALANCE SHEET
September 30, 1999
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,020,601
Other current assets 77,026
---------
Total current assets 1,097,627
PROPERTY AND EQUIPMENT, NET 460,894
OTHER ASSETS 1,013,570
---------
TOTAL ASSETS $ 2,572,091
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 428,814
Accrued compensation 170,126
Other accrued liabilities 965,034
---------
Total current liabilities 1,563,974
OTHER LIABILITIES 638,376
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized, 10,913,730 shares issued and outstanding 109,137
Additional paid-in capital 5,426,742
Retained earnings deficit (4,897,258)
Less- Note receivable-exercise of options (268,880)
----------
Total stockholders' equity 369,741
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,572,091
=========
1
<PAGE>
SoftLock.com, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1999 and 1998
(unaudited)
For the three For the nine
months ended September 30, months ended September 30,
1999 1998 1999 1998
REVENUES $ 11,373 $ 27,114 $ 77,484 $ 88,733
COST OF REVENUES: 5,095 6,431 18,071 18,481
---------- -------- ----------- ----------
Gross profit 6,278 20,683 59,413 70,252
OPERATING EXPENSES: 1,430,023 144,904 3,007,407 476,966
---------- -------- ----------- ----------
Loss from operations (1,423,745) (124,221) (2,947,994) (406,714)
OTHER INCOME: 12,219 7,980 43,662 27,505
---------- -------- ----------- ----------
Loss before income
Taxes (1,411,526) (116,241) (2,904,332) (379,209)
INCOME TAX EXPENSE 345 - 1,078 513
---------- -------- ----------- ----------
NET LOSS $ (1,411,871) $ (116,241) $ (2,905,410) $ (379,722)
========== ======== ========== ==========
NET LOSS PER SHARE:
Basic $ (0.13) $ (0.02) $ (0.29) $ (0.05)
========== ======== ========== ==========
Wtd. average shares
Outstanding 10,888,188 7,661,170 10,081,387 7,285,234
=========== ========= ========== =========
2
<PAGE>
SoftLock.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(unaudited)
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES: $ (1,381,394) $ (297,304)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized Website Development Costs (992,760) -
Purchases of property and equipment (289,219) -
---------- ---------
(1,281,979) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,037,346 499,999
Cash effect of Fieldcrest transaction - (3,030)
Note payable - SI Ventures 500,000 -
Lease payments (14,213) -
---------- ---------
3,523,133 496,969
---------- ---------
NET INCREASE IN CASH 859,760 199,665
CASH, beginning of period 160,841 119,563
---------- ---------
CASH, end of period $ 1,020,601 $ 319,228
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for-
Interest $ 6,939 $ 229
========== =========
Income taxes $ 1,078 $ 513
========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING
ACTIVITIES:
Capital lease $ 177,596 $ -
========== =========
3
<PAGE>
SoftLock.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
1. Management's Representation of Interim Financial Information
The accompanying consolidated financial statements have been prepared by
SoftLock.com, Inc. (the "Company") without audit pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted as allowed by such rules and regulations, and
management believes that the disclosures are adequate to make the information
presented not misleading.
The accompanying consolidated financial statements as of September 30, 1999
reflect the financial condition of the Company and its wholly owned operating
subsidiary, SoftLock Services, Inc. ("SSI").
These consolidated financial statements include all of the adjustments which,
in the opinion of management, are necessary to a fair presentation of
financial position and results of operations. All such adjustments are of a
normal and recurring nature.
These consolidated financial statements should be read in conjunction with
the audited financial statements at December 31, 1998 filed as part of the
Company's Annual Report on Form 10-KSB.
The Company has reviewed the status of its legal contingencies and believes
that there are no material changes from that disclosed in Form 10-KSB for the
year ended December 31, 1998. The results for the nine (9) month period ended
September 30, 1999 are not necessarily indicative of the results for the entire
year 1999.
2. Private Placement of Equity Securities
In January and February 1999, the Company issued a total of 1,540,000
shares of common stock for net cash proceeds of $1,882,210 in a private
placement of its common stock under Section 4(2) of the Securities Act of
1933, as amended (the "Act") and Regulation D promulgated thereunder.
In June 1999, the Company issued a total of 235,000 shares of common stock
for net cash proceeds of $1,155,136 in a private placement of its common
stock under Section 4(2) of the Securities Act of 1933, as amended (the
"Act") and Regulation D promulgated thereunder.
4
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to
the Safe Harbor Provisions of the Private Securities Litigation Reform Act
of 1995. The forward-looking statements herein are based on current
expectations that involve a number of risks and uncertainties. Such
forward-looking statements are based on assumptions that the Company will
obtain or have access to adequate financing for each successive phase of
its growth, that the Company will market and provide software products and
services on a timely basis, that there will be no material adverse
competitive or technological change in the condition of the Company's
business, that demand for the Company's software products and services will
significantly increase, that the Company's Chief Executive Officer and other
key employees will remain employed as such by the Company, that the Company's
forecasts accurately anticipate market demand and that there will be no
material adverse change in the Company's operations, business or governmental
regulation affecting the Company or its suppliers. The foregoing assumptions
are based on judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of
which are difficult or impossible to predict accurately and many of which
are beyond the Company's control. Accordingly, although the Company believes
that the assumptions underlying the forward-looking statements are reasonable,
any such assumption could prove to be inaccurate and therefore there can be
no assurance that the results contemplated in forward-looking statements will
be realized. In addition, as disclosed elsewhere in the Company's public
filings with the Securities and Exchange Commission, there are a number of
other risks inherent in the Company's business and operations which could
cause the Company's operating results to vary markedly and adversely from
prior results or the results contemplated by the forward-looking statements.
In light of significant uncertainties inherent in the forward-looking
information included in this report, the inclusion of such information
should not be regarded as a representation by the Company or any other
person that the Company's objectives or plans will be achieved.
Background
SoftLock.com, Inc. provides a sales and merchandising system for digital
content on the Internet and has been vending passwords to unlock secure
digital content since 1992. The SoftLock CyberSales Solution(tm), which had
its "soft opening" in October 1999, will update the Company's offerings and
is intended to allow publishers of electronic content to securely sell their
digital content from their own Web sites using the SoftLock Chain Reaction
Channel(tm) and through the SoftLock Merchandising Network(tm).
The SoftLock Chain Reaction Channel promotes the secure distribution of
digital information by taking advantage of consumers' natural tendency to
pass along relevant content to colleagues, friends and family. SoftLock's
patented (US #5,509,070) technology prevents electronic shoplifting (piracy)
while "SoftLocked" content is securely sampled, electronically purchased,
and redistributed.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS (continued)
Background (continued)
When a prospective end-user receives a SoftLocked product, the prospect can
sample a portion of the final product (i.e. "demo" the product). The
prospect can then instantly purchase access to the complete product
via the World Wide Web. The end-user then has permanent access to the product
for the user's own use. The end-user is also encouraged to copy the product
and redistribute the product to friends or colleagues because SoftLocked
products automatically return to the locked state "demo" mode and invite
another purchase of the full content when copied from one computer to another.
The SoftLock Merchandising Network is a distribution system enabling
SoftLock's Content Providers to securely sell documents through SoftLock
Affiliate web sites. SoftLock assists in brokering and merchandising content,
remits payments to Content Providers and SoftLock Affiliates, and also
provides reports and customer service.
SoftLock Content Providers include traditional print publishers, web-based
information services, financial/business research, magazines, books,
newspapers, and new media companies.
Corporate Structure
Prior to July, 1998, the Company was a public shell company organized to
locate and acquire an operating company. In July, 1998, pursuant to a Plan
and Agreement of Reorganization, the Company exchanged 7,097,266 shares of
its restricted common stock for all of the issued and outstanding shares of
SoftLock Services, Inc. ("SSI"), and the owners of SSI became the majority
owners of the Company. The Company's only asset consists of shares of
capital stock of SSI, its wholly owned, operating subsidiary. All
operations presented herein are the consolidated operations of the Company
and SSI, including results of operations for the comparative, partial pre-
acquisition quarter and nine months ended September 30, 1998.
Results of Operations
Total revenues for the three and nine month periods ending September 30, 1999
were $11,373 and $77,484, a 58% and 13% decrease, respectively, as compared
with $27,114 and $88,733 earned during the same periods in 1998. Password
sales declined $3,569 as compared to the three month period in 1998, but
were up $1,244 during the first nine months of 1999. These decreases are a
result of the Company concentrating its efforts on its new SoftLock
CyberSales Solution(tm) released in October 1999. The remainder of the decline
in the third quarter of this year over last year was attributable to decreased
revenues from licensing, custom tools, and consulting fees which is consistent
with the Company's strategy to derive future revenues primarily from
commissions from the SoftLock CyberSales Solution(tm) system.
Cost of sales decreased to $5,095 and $18,071 in the three and nine month
periods ended September 30, 1999 from $6,431 and $18,481 in 1998. The
resulting net decrease arose from fewer transactions thus fewer incremental
fees for the processing of passwords. Gross profit for the quarter and nine
months was $6,278 and $59,413, or 54% and 76% of revenue in 1999, as compared
with $20,683 and $70,252 (76% and 79% of revenue, respectively) in 1998, due
to lower
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS (continued)
Results of Operations (continued)
recognized margins on non-password related revenues. The decrease in gross
margin in the third quarter is attributable to fixed transaction being spread
over a smaller amount of revenue.
Selling, general and administrative expenses totaled $1,430,023 and
$3,007,407 for the quarter and nine months ended September 1999, versus
$144,904 and $476,966 for the quarter and nine months ended September 30,
1998, an increase of $1,285,119 and $2,530,441. The increases are primarily
due to costs associated with significant staffing increases to support the
SoftLock CyberSales Solution(tm) system, related operating and consulting costs
and other miscellaneous administrative costs. Management anticipates that
the trend toward increased quarterly operating expenses will continue in order
to support increased marketing and promotional efforts, development and
release of new products, continuing to build a strong management team, raising
necessary capital and otherwise creating the infrastructure the Company will
need to provide its services.
Other income increased to $12,219 and $43,662 for the quarter and nine months
ended September 30, 1999 from $7,980 and $27,505 for the comparable periods
in 1998. The change relates to investment earnings on the Company's cash
reserves, which increased as a result of the Company's $2,000,000 private
placement completed in the first quarter and its $1,175,000 private placement
in the second quarter.
Net loss increased to $1,411,871 and $2,905,410 for the quarter and nine
months ended September 30, 1999 from $116,241 and $379,722 for the comparable
periods in 1998. The increase resulted primarily from the increase in
selling, general and administrative expenses. The Company's business plan
called for higher losses in 1999 as the Company continued to develop products,
hire the personnel needed to grow the business and expand its marketing
strategy. The Company anticipates that it will incur significant operating
losses through the remainder of 1999 and 2000.
Liquidity and Capital Resources
The following is a summary of the Company's nine-month cash flows:
1999 1998
Operations $ (1,381,394) $ (297,304)
Investing (1,281,979) -
Financing 3,523,133 496,969
Cash used in operations totaled $1,381,394 for the first three quarters
of 1999 as compared with $297,304 for the first three quarters of 1998.
The increase in cash used relates to the net loss sustained during the
quarter, plus working capital changes. At September 30, 1999, working
capital deficit (current assets minus current liabilities) totaled $466,347.
Investing activities during the nine month period included $992,760 of
capitalized web site development costs, $215,299 of leasehold improvements
related to the building-out of the new main office, and $73,920 of computer
related hardware and software purchases.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
The Company's primary source of liquidity continues to be proceeds from the
sale of securities in two private placements, from which $3,037,346, after
commissions and expenses of the offering, was raised in the first nine months
of 1999 through the issuance of 1,775,000 common shares. These funds will be
used to finance continued operations, product development and marketing.
On April 30, 1999, the Company entered into a Master Agreement of Terms and
Conditions for Lease with TLP Leasing Programs, Inc. (the "Master
Agreement"). The Master Agreement provides the Company with a source of
financing in the amount of $400,000 with which to obtain certain equipment.
As of September 30, 1999 the Company has utilized $177,596 of the lease line
of credit.
On August 20, 1999 the Company entered into a Master Equipment Lease
Agreement with DDI Leasing, Inc. that provides the Company with $75,000 of
financing to obtain additional various equipment.
On September 2, 1999, the Company entered into a non-binding term sheet
(the "Term Sheet") with SI Venture Associates, LLC ("SI Ventures") to
acquire shares of the Company's Series A preferred stock for $1.25 million,
provided that the Company can identify a second venture capital investor to
contribute at least another $1.25 million. The Series A preferred stock to
be purchased pursuant to the Term Sheet is convertible into shares of the
Company's common stock. The Term Sheet provides these investors with,
among other rights, certain registration rights, rights of first refusal to
participate in subsequent equity financings, the right to appoint one (1)
director to the Company's Board, voting rights on certain significant matters
and redemption rights. In connection with its proposed investment, SI Ventures
provided to the Company a $500,000 bridge loan (the "Bridge Loan") and
received warrants to purchase an additional $100,000 in Series A preferred
stock [or if the issuance of the Series A preferred stock does not close,
$100,000 of Series A preferred stock (or common stock if SI Ventures so
consents) in the next equity financing involving preferred stock that results
in proceeds to the Company of $1 million or more]. The Bridge Loan is to be
converted into preferred stock within ninety (90) days of the date of the
Bridge Loan. Additionally, in connection with the Bridge Loan, the Company
has issued a default warrant, entitling SI Ventures, upon the Company's
default of its obligations under the Bridge Loan, to purchase twenty percent
(20%) of the fully diluted equity of the Company at a price of $.01 per
share. Upon the issuance of any shares of common stock upon exercise of the
default warrant, SI Ventures will be entitled to certain rights set forth in
the Term Sheet, including certain registration rights, rights of first refusal
to participate in subsequent equity financings, the right to appoint one (1)
director to the Company's Board, and informational rights.
The Company's cash requirements depend upon many factors, including, but not
limited to, the Company's net cash flows from operations, the length of time
it may take for the Company to develop a market for its products or services,
the market acceptance of these products or services and the response of
competitors who may develop competing products or services at lower costs.
The Company expects that it will continue to require additional funding over
at least the next twelve months. To the extent that the Company is unable to
raise additional financing, the Company anticipates that it will be necessary
to eliminate current and planned software development programs and other
operating expenses. There can be no assurance that the Company would be able
to secure
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
additional funding sources, or that financing would be made available on
terms favorable to the Company. The failure to acquire additional funding
when required could have a material adverse effect on the Company.
Year 2000 Readiness Disclosure
Based on the Company's assessment to date, the Company believes that the
versions of its software products and services released in October 1999 will
be "Year 2000 compliant". That is, they will be capable of adequately
distinguishing twenty-first century dates from twentieth century dates.
Although the Company's products have undergone, or will undergo, the
Company's normal quality testing procedures, there can, however, be no
assurance that the Company's products will contain all necessary date code
algorithms. Furthermore, use of the Company's products in connection with
other products that are not Year 2000 compliant, including non-compliant
hardware and software may result in the inaccurate exchange of dates and
result in performance problems or system failure. Any failure of the
Company's products to perform, including system malfunctions associated with
the onset of year 2000, could result in claims against the Company. However,
success of the Company's Year 2000 compliance efforts may depend on the
success of its customers in dealing with the Year 2000 issue.
Although the Company has not been a party to any litigation or arbitration
proceeding to date that involves Year 2000 compliance issues with its products
or services, there can be no assurance that the Company will not in the future
be required to defend its products or services in such proceedings, or to
negotiate resolutions of claims based on Year 2000 issues. The costs of
defending and resolving Year 2000-related disputes, regardless of the merits
of such disputes, and any liability of the Company for Year 2000-related
damages, including consequential damages, could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company's business depends on numerous systems that could potentially be
impacted by Year 2000 related problems. Those systems include, among others,
hardware and software systems used by the Company to deliver products and
services to its customers (including software supplied by third parties),
communications networks such as the world wide web upon which the Company
depends to generate product orders; the internal systems of the Company's
customers and suppliers, software products sold to customers; the hardware
and software systems used internally by the Company in the management of its
business, and non-information technology systems and services used by the
Company in the management of its business, such as power, telephone systems
and building systems.
The Company has evaluated its information technology infrastructure in order
to identify and modify any products, services or systems that are not Year
2000 compliant. Based on its analysis of the systems potentially impacted by
conducting business in the twenty-first century, the Company has applied a
phased approach to making such systems, and accordingly, the Company's
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS (continued)
Year 2000 Readiness Disclosure (continued)
operations, ready for the year 2000. Beyond awareness of the issues and
scope of systems involved, the phases of activities included: an assessment
of specific underlying computer systems, programs and hardware; renovation
or replacement of Year 2000 non-compliant technology; and implementation of
Year 2000 compliant systems.
The Company has completed its phased review and upgrade or replacement of the
following mission critical systems: software products delivered to customers;
hardware and software systems used to deliver products and services;
communication networks used to carry products and services; hardware and
software systems used to manage the Company's business; non-information
technology systems and services.
It is our belief that all key vendors and suppliers of the Company are Year
2000 compliant However, in the event that any of the Company's significant
suppliers or customers do not successfully and timely achieve Year 2000
compliance, the Company's business or operations could be adversely affected.
This could result in system failures or generation of erroneous information
and could cause significant disruption to business activities. The Company is
reviewing what further actions are required to make all software systems used
internally Year 2000 compliant as well as actions needed to mitigate
vulnerability to problems with suppliers and other third parties' systems.
Costs to Address Year 2000 Issues
The total incremental cost of these Year 2000 compliance activities on system
design and implementation that is in process for other reasons has not been,
and is not anticipated to be, material to the Company's business, results of
operations and financial condition. These costs and the timing in which the
Company plans to complete its Year 2000 modification and testing processes are
based on management's estimates. However, there can be no assurance that the
Company will timely identify and remedy all significant Year 2000 problems,
that remediation efforts will not involve significant time and expense or that
such problems will not have a material adverse effect on the Company's
business, results of operations and financial condition.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as previously disclosed in the Company's Form 10-KSB for the year
ended December 31, 1998 and the Form 10-QSB for the first and second quarter
of 1999, the Company is not a party to any legal proceedings which management
believes to be material, and there are no such proceedings which are known to
be contemplated for which the Company anticipates a material risk of loss.
Item 2. Changes in Securities
Beginning in May 1999, the Company commenced a private placement offering of
up to 1,200,000 shares of its common stock at an offering price of $5 per
share, pursuant to Section 4(2) of the Act and Regulation D promulgated under
the Act. From May 1999 to July 1999, the Company sold 235,000 shares of its
common stock resulting in net proceeds of $1,155,136.
The Company offered the shares on a "best efforts" basis through officers and
directors of the Company and through selected members of the National
Association of Securities Dealers, Inc. ("NASD").
The shares were offered for sale to accredited investors only, pursuant to the
exemptions from registration contained in Section 4(2) of the Act and
Regulation D promulgated under the Act. All of the certificates evidencing the
shares of the Company's common stock received as a result of the Agreement
were impressed with the form of restrictive legend utilized by the Company,
and stop transfer instructions have been noted against the transfer of such
certificates.
On September 22, 1999, in connection with the Bridge Loan from SI Ventures
discussed above, the Company issued warrants to purchase that number of shares
equal to $100,000 divided by the price per share paid for equity securities by
the investors pursuant to the earlier of either (i) the closing of the
issuance of the Series A preferred stock described in the Term Sheet or (ii)
the first equity financing of the Company consummated after September 22, 1999
involving the issuance of preferred stock (or common stock if acceptable to SI
Ventures) resulting in gross proceeds to the Company of at least $1 million.
The warrant has an exercise price of $.01 per share. Additionally, the
Company has issued a default warrant, entitling SI Ventures, upon the Company's
default of its obligations under the Bridge Loan, to purchase twenty percent
(20%) of the fully diluted equity of the Company at a price of $.01 per share.
Upon the issuance of any shares of common stock upon exercise of the default
warrant, SI Ventures will be entitled to certain rights set forth in the Term
Sheet, including certain registration rights, rights of first refusal to
participate in subsequent equity financings, the right to appoint one (1)
director to the Company's Board, and informational rights.
11
<PAGE>
PART II. OTHER INFORMATION
(continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit 10.1 Note and Warrant Purchase Agreement between the
Company, SSI and SI Ventures
Exhibit (27) - Financial Data Schedule, filed herewith electronically
(b) Reports on Form 8-K:
None
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 17, 1999 SoftLock.com, Inc.
BY: /s/ Douglas R. Johnson
Douglas R. Johnson
Executive Vice President and CFO
13
<PAGE>
EXHIBIT 10.1
NOTE AND WARRANT PURCHASE AGREEMENT
THIS NOTE AND WARRANT PURCHASE AGREEMENT (this "Agreement") is made as of the
22nd day of September, 1999, by and among SOFTLOCK.COM, INC., a Delaware
corporation (the "Company"), SOFTLOCK SERVICES, INC., a Delaware corporation
(the "Subsidiary" and together with the Company, the "Obligors" or
individually, an "Obligor") and SI VENTURE ASSOCIATES, L.L.C. (the
"Investor").
W I T N E S S E T H
WHEREAS, the Obligors desire to enter into this Agreement with the Investor
to sell and issue (i) a convertible promissory note of the Obligors in the
aggregate principal amount of Five Hundred Thousand Dollars ($500,000),
which note shall be in substantially the form attached hereto as Exhibit A
(the "Note"), (ii) a warrant to purchase capital stock of the Company in
substantially the form attached hereto as Exhibit B (the "Warrant") and (iii)
a warrant to purchase common stock of the Company only upon certain events, in
substantially the form attached hereto as Exhibit C (the "Default Warrant"
and together with the Warrant, the "Warrants"); and
WHEREAS, the Investor desires to enter into this Agreement to acquire the
Note, the Warrant and the Default Warrant on the terms and conditions set
forth herein;
NOW, THEREFORE, in consideration for the mutual covenants and agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
1. Authorization, Sale and Conversion.
a. Authorization. The Obligors have authorized the issuance and sale of
the Note and the Company has authorized the issuance and sale of the Warrant
and the Default Warrant.
b. Sale. Subject to the terms and conditions hereof, the Investor
agrees to purchase from the Company and/or the Subsidiary (as applicable), and
the Obligors agree to sell and issue to the Investor, the Note, the Warrant
and the Default Warrant for the purchase price of Five Hundred Thousand
Dollars ($500,000.00). The Investor and the Obligors agree that any original
issue discount attributable to the Note as a result of the delivery of the
Warrants is less than one-quarter of one percent (0.25%) of the stated
redemption price at maturity (as such term is defined in Section 1273(a) of
the Internal Revenue Code, as amended), of the Note multiplied by the number
of complete years to maturity of the Note (determined as provided in such
Section 1273(a)).
c. Convertibility Feature; Exercise of Warrants. The Note shall be
convertible into shares of the Company's capital stock in accordance with the
terms and conditions thereof. The Warrant shall be exercisable for shares of
the Company's capital stock in accordance with the terms and conditions
contained in the Warrant. The Default Warrant shall be exercisable for
shares of the Company's common stock in accordance with the terms and
conditions contained in the Default Warrant.
<PAGE>
Exhibit 10.1 (continued)
2. Closing; Delivery
a. Closing. The closing of the purchase and sale of the Note and the
issuance of the Warrants under this Agreement shall take place at the
Company's offices, Five Clock Tower Place, Suite 440, Maynard, Massachusetts
01754 on September ___, 1999 (the "Closing") or at such other time and date
as the parties may agree.
b. Delivery. At the Closing, subject to the terms and conditions
hereof, the Obligors will deliver to the Investor the Note, the Warrants, and
such other certificates, consents, waivers and agreements as are reasonably
requested by the Investor (together with this Agreement, collectively the
"Transaction Documents"), dated the date of the Closing, against payment of
the purchase price therefor payable as of the date of the Closing by check or
wire transfer.
3. Representations and Warranties of the Obligors. The Obligors hereby
jointly and severally represent and warrant to the Investor as follows:
a. Organization, Good Standing and Qualification. Each Obligor is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, and has all requisite power and authority,
governmental licenses, authorizations, consents and approvals to carry on its
business as presently conducted and as contemplated to be conducted, to own,
hold and operate its properties and assets as now owned, held and operated
by it, to enter into this Agreement, to issue the Note and the Warrants (as
applicable) and to carry out the provisions of this Agreement and the terms
of the Note and the Warrants (as applicable). Each of the Obligors is duly
qualified to transact business, and is in good standing, in each
jurisdiction wherein the nature of its activities or its properties owned or
leased makes such qualification necessary. The Company has no subsidiaries,
except for the Subsidiary and the Subsidiary has no subsidiaries.
b. Capitalization. The authorized capital of the Company consists of
Fifty Million (50,000,000) shares of common stock and five million
(5,000,000) authorized shares of preferred stock. As of September 10, 1999
there were 10,913,730 shares of the Company's Common Stock outstanding. In
addition, 2,702,833 shares of the Company's Common Stock have been reserved
for issuance upon the exercise of outstanding options. No shares of the
Company's preferred stock are outstanding. Except as set forth in this
Agreement (including, without limitation, in this Section 3(b)) or on
Schedule 3(b), there are no outstanding or authorized options, warrants,
calls, subscriptions, rights (including any preemptive rights or rights of
first refusal), agreements or commitments of any character obligating the
Company to issue any Common Stock, Preferred Stock or any other equity
security of the Company. All of the outstanding capital stock of the
Subsidiary is owned beneficially and of record by the Company, and there
are no outstanding or authorized options, warrants, calls, subscriptions,
rights (including any preemptive rights or rights of first refusal),
agreements or commitments of any character obligating the Subsidiary to
issue any common stock or any other equity security of the Subsidiary.
<PAGE>
Exhibit 10.1 (continued)
c. Authorization. All action on the part of the Obligors necessary for
the authorization, execution and delivery of this Agreement, the Note and the
Warrants (as applicable), the performance of all obligations of the Obligors
hereunder and thereunder and the offer, sale, issuance and delivery of the
Note and the Warrants has been taken or will be taken on or prior to the
Closing, and each of the Obligors has all requisite power and authority to
enter into and perform this Agreement, the Note and the Warrants (as
applicable), and to offer, sell, issue and deliver the Note and the Warrants
(as applicable). This Agreement and the Note have been duly executed and
delivered by the Obligors, the Warrants have been duly executed and delivered
by the Company, this Agreement and the Note constitute the Obligors', and the
Warrants constitute the Company's, valid and legally binding obligations,
enforceable against them in accordance with their terms, subject to the
effect of any applicable bankruptcy, reorganization, insolvency, moratorium
or similar laws affecting creditors' rights generally, subject, as to
enforceability, to the effect of general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at
law) and subject to the effect of applicable securities laws as to rights of
indemnification.
d. Litigation. No claim, action, proceeding or investigation is pending,
or to the best knowledge of the Obligors, threatened, which seeks to delay or
prevent the consummation of the transactions contemplated hereby, or which
would be reasonably likely to adversely affect the Obligors' ability to
consummate the transactions contemplated hereby, or which would have a
material adverse effect on the business, prospects, property, condition
(financial or otherwise), or operations of either Obligor, except for those
claims, actions, proceedings or investigations listed on Schedule 3(d) hereto.
e. Consents and Approvals; No Conflict. The execution and delivery of
this Agreement and the Note by the Obligors, and of the Warrants by the
Company does not, and the performance of this Agreement, the Note and the
Warrants, and the offer, sale, issuance and delivery of the Note by the
Obligors and of the Warrants by the Company will not, require any consent,
approval, authorization or other action by, or filing with or notification to,
any governmental or regulatory authority. The execution, delivery and
performance of this Agreement and the Note by the Obligors and of the Warrants
by the Company does not (i) conflict with or violate the certificate of
incorporation or bylaws of either of the Obligors, (ii) conflict with or
violate any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award applicable to either of the Obligors, or (iii) conflict
with or result in a breach or violation of (and upon notice or lapse of time
or both would not result in such a conflict, breach or violation) under any
indenture, mortgage, agreement, contract or other instrument to which either
of the Obligors is a party or by which either of the Obligors or any of its
material properties or assets are bound.
f. SEC Documents. The Company has filed all required reports,
schedules, forms, statements and other documents with the Securities and
Exchange Commission (the "Commission") (any of the foregoing are referred to
herein as the "SEC Documents"). As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act of 1933 (the "1933 Act"), or the Securities Exchange Act of
1934 (the "Exchange Act"), as the case may be, and the rules and regulations
of the Commission
<PAGE>
Exhibit 10.1 (continued)
promulgated thereunder applicable to such SEC Documents, and
to the Obligors' knowledge, none of the SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Except to the extent that information contained in any SEC Document has been
revised or superseded by a later-filed SEC Document, to the Obligors'
knowledge, none of the SEC Documents currently contains any untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Obligors included in the SEC Documents comply as to form in
all material respects with applicable accounting requirements and the
published rules and regulations of the Commission with respect thereto, have
been prepared in accordance with generally accepted accounting principles
(except, in the case of unaudited statements, as permitted by Form 10-Q of
the Commission) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present the
consolidated financial position of the Obligors and their consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit adjustments). All of the
Company's SEC Documents have been provided to the Investor.
g. Debt; Liens. Schedule 3(g), to the Obligors' knowledge, sets forth
a true and correct list of (1) all indebtedness of either of the Obligors,
and (2) all liens, security interests and other encumbrances on either of the
Obligor's properties and assets.
h. Absence of Undisclosed Liabilities. The Obligors, to their
knowledge, do not have any liabilities (fixed or contingent, including without
limitation any tax liabilities due or to become due), which, either
individually or in the aggregate, are material and not reflected or disclosed
in the Obligors' most recent consolidated balance sheet provided to the
Investor (dated as of August 31, 1999), or on Schedule 3(g) or elsewhere in
this Agreement or its Schedules.
i. Taxes. The Obligors have filed all tax returns and reports required
to be filed and have paid all taxes due in connection therewith. The
Obligors have withheld or collected from each payment made to each of their
employees, the amount of all taxes required to be withheld or collected
therefrom, and have paid the same to the proper tax receiving officers or
authorized depositaries.
j. Transactions With Related Parties and Affiliates. Except as set
forth on Schedule 3(j), there is no loan, lease or other continuing
transaction between either Obligor and any Affiliate or Related Party of such
Obligor. As used in this Agreement, "Affiliate" shall mean any person or
entity controlling, controlled by or under common control with an Obligor and
"Related Party" shall mean the Obligors' respective employees, officers,
directors and shareholders (as applicable) and any affiliate or relative of
any such person.
<PAGE>
Exhibit 10.1 (continued)
k. Franchises, Licenses, Trademarks, Patents and Other Rights.
(A) All (i) franchises, permits, licenses and other similar
authority, (ii) patents, patent applications, patent rights, service marks,
trademarks, trademark applications, trademark rights, trade names, trade name
rights and copyrights (whether registered or not), and (iii) know-how,
technology and trade secrets, which, in any case, are owned, possessed or used
by any Related Party, or which any Related Party has the right to own, possess
or use, and which in any way are or may be usable now or in the future for the
conduct of the Obligors' business as now conducted or as planned to be
conducted, have been duly and validly transferred in full to the Obligors.
(B) To the best of the Obligors' knowledge, no Related Party is,
or is now expected to be, in violation of any term of any employment contract,
patent disclosure agreement, non-competition agreement, or any other contract
or agreement with any prior employer or any other person, corporation, or
other entity or any restrictive covenant in such an agreement, or any
obligation imposed by common law or otherwise, relating to the right of any
such Related Party to be employed by, to hold shares of the capital stock or
to serve as an officer or director of, the Obligors or companies similarly
situated because of the nature of the business conducted or to be conducted by
the Obligors, or companies similarly situated or relating to the use of trade
secrets or proprietary information of others, and the continued employment of,
or other relationship with, the Obligors' Related Parties does not subject
either of the Obligors to any liability for any such violation.
(C) Schedule 3(k) lists all patents, patent applications, patent
rights, trademarks, trademark applications, trademark rights, trade names,
trade name rights, service marks and copyrights (whether registered or not)
owned or possessed by the Obligors (collectively, the "Listed Rights"). There
is neither pending, nor, to the best of the Obligors' knowledge and belief,
threatened, any claim or litigation against either of the Obligors contesting
the validity or right to use any of the Listed Rights or any know-how,
technology and trade secrets not included in the Listed Rights (the Listed
Rights and such know-how, technology and trade secrets being collectively
called the "Technology"), nor are the Obligors' aware of any basis therefor,
and neither of the Obligors has received any notice of infringement upon or
conflict with any asserted right of others, except as set forth on Schedule
3(g). To the best of the Obligors' knowledge and belief, no person,
corporation or other entity is infringing or violating the Listed Rights or
any of the other Technology. Except as set forth on Schedule 3(k)(C), the
Obligors have no obligation to compensate others for the use of any
Technology, nor have the Obligors granted any license or other right to use,
in any manner, any of the Technology, whether or not requiring the payment of
royalties.
l. Offering. Subject in part to the truth and accuracy of the
Investor's representations set forth in this Agreement, the offer, sale and
issuance of the Note and the Warrants as contemplated by this Agreement are
exempt from the registration requirements of the 1933 Act, and all state
securities laws, and neither the Obligors nor anyone acting on their behalf
will take any action hereafter that would cause the loss of such exemption.
m. Disclosure. To the Obligors' knowledge, no representation or
warranty contained in this Agreement or information appearing in any writing
furnished by the Obligors to the Investor or its representatives pursuant
hereto or in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading.
<PAGE>
Exhibit 10.1 (continued)
4. Representations and Warranties of the Investor. The Investor hereby
represents and warrants to the Obligors as follows:
a. Organization; Good Standing; Power and Authority; Binding Obligation.
The Investor has full power and authority to enter into this Agreement, and,
(i) the Investor is a limited liability company duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization and
(ii) all action on the part of the Investor necessary for the
authorization, execution and delivery of this Agreement, the performance of
all obligations of the Investor hereunder, including, without limitation, the
payment of the purchase price for the Note, the Warrant and the Default
Warrant contemplated by this Agreement has been taken, and the Investor has
all the requisite power and authority to enter into this Agreement. This
Agreement has been duly executed and delivered by Investor and constitutes the
Investor's valid and legally binding obligation enforceable against the
Investor in accordance with its terms, subject to the effect of any applicable
bankruptcy, reorganization, insolvency, moratorium or similar laws affecting
creditors' rights generally, subject, as to enforceability, to the effect of
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) and subject to the effect of
applicable securities laws as to rights of indemnification.
b. Purchase Entirely for Own Account, Etc. The Note and the Warrants
will be acquired for investment for the Investor's own account, not as a
nominee or agent, and not with a view to the resale or distribution of any
part thereof. The Investor has no present intention of selling, granting any
participation in, or otherwise distributing the Note, the Warrant or the
Default Warrant. The Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to any person with respect to the Note, the Warrant or the
Default Warrant or the preferred or common stock issuable upon conversion
and exercise thereof (the "Underlying Stock"). The Investor understands that
the Note, the Warrant, the Default Warrant and the Underlying Stock have not
been registered under the 1933 Act on the grounds that the sale provided for
in this Agreement and the issuance of securities hereunder is exempt from
registration under the 1933 Act, and that the Obligors' reliance on such
exemption is predicated in part upon the Investor's representations and
warranties set forth in this Section 4.
c. Disclosure. The Investor has received or reviewed all the information
which the Investor has requested for the purposes of determining the merits of
the purchase of the Note, the Warrant and the Default Warrant as an
investment. The Investor also has received and reviewed a copy of the
Obligors' consolidated, unaudited financial statements for the period ended
August 31, 1999, attached hereto as Exhibit F (the "Unaudited Financials").
The Obligors plan to provide to the Investor audited financial statements as
soon as practicable after such statements become available from the Obligors'
auditors.
The Investor has had an opportunity to ask questions and receive answers from
the Obligors regarding the Obligors, their business, operations and financial
condition and the terms and conditions of the purchase of the Note and the
Warrant, and answers have been provided to the Investor's full satisfaction.
The Investor has fully reviewed all corporate and governance documents of the
Obligors provided to it, understands all relevant terms and has asked all
questions and received answers thereto to the Investor's full satisfaction.
If deemed necessary by the Investor, the Investor has consulted with a
professional advisor who has provided the Investor with advice concerning
terms. THE INVESTOR ACKNOWLEDGES AND AGREES THAT THE PURCHASE OF THE NOTE AND
<PAGE>
Exhibit 10.1 (continued)
THE WARRANTS INVOLVES A HIGH DEGREE OF RISK, AND MAY RESULT IN A LOSS OF THE
ENTIRE AMOUNT INVESTED. THE INVESTOR FURTHER ACKNOWLEDGES AND AGREES THAT
THERE IS NO PUBLIC MARKET FOR THE NOTE OR THE WARRANTS. THERE IS NO ASSURANCE
THAT THE OBLIGORS' OPERATIONS WILL RESULT IN REVENUES OR BE PROFITABLE OR THAT
A PUBLIC MARKET FOR THE NOTE OR THE WARRANTS WILL DEVELOP AT ANY TIME.
d. Accredited Investor. The Investor is an accredited investor as defined
in Rule 501(a) of Regulation D under the 1933 Act. The information provided by
the Investor on the Statement of Accredited Investor, attached hereto as
Exhibit E, is true and correct in all respects. The Investor is capable of
bearing the economic risk of an investment in the purchase of the Note and the
Warrants, including the possible loss of the Investor's entire investment.
The Investor has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of an investment
in the Note and the Warrants offered hereby. The Investor has not been
organized solely for the purpose of acquiring the Note and the Warrants. The
Investor has not construed the contents of this Agreement, or any additional
agreement with respect to the proposed purchase of the Note, the Warrant or
the Default Warrant or any prior or subsequent communications from the
Obligors, or any of their officers, employees or representatives, as
investment, tax or legal advice or as information necessarily applicable to
the Investor's particular financial situation. The Investor has consulted its
own financial advisor, tax advisor, legal counsel and accountant, as necessary
or desirable, as to matters concerning the purchase of the Note, the Warrant
and the Default Warrant.
e. Restricted Securities. The Investor understands that the Note, the
Warrant and the Default Warrant being purchased hereunder, as well as the
Underlying Stock, are "restricted securities" as defined in the 1933 Act, and
that under federal and state securities laws the Note, Warrant, Default
Warrant and the Underlying Stock may be resold without registration under the
1933 Act only in certain limited circumstances. Investor is familiar with
Rule 144 promulgated by the Commission under the 1933 Act, and understands the
resale limitations imposed thereby and by the 1933 Act generally. Investor
also acknowledges that the Note, Warrant, Default Warrant and the Underlying
Stock are subject to significant restrictions on transfer, pledge or
hypothecation. The Investor agrees that in no event will it make a transfer
or disposition of the Note, the Warrant, the Default Warrant or the Underlying
Stock other than in compliance with all applicable securities laws.
f. Legends. It is understood that certificates or other evidence of the
Underlying Stock may bear the following legend, as well as any legend required
by the laws of any state:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED PURSUANT TO
A VALID EXEMPTION THEREFROM UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE
STATE SECURITIES LAWS."
<PAGE>
Exhibit 10.1 (continued)
5. Covenants of the Obligors.
a. Covenants Prior to Satisfaction of the Note. The Obligors jointly
and severally covenant and agree that for so long as the Note has not been
satisfied in full, each of them will:
i. in the case of the Company, cause to be reserved and kept available
out of its authorized and unissued shares of Preferred Stock (or other equity
securities issuable upon conversion of the Note) such number of shares that
will be sufficient to permit the conversion in full of the Note;
ii. in the case of the Company, take all such action as may be necessary
to ensure that all shares of Preferred Stock (or other equity securities
issuable upon conversion of the Note) delivered upon conversion of the Note
shall, at the time of delivery of the certificates for such shares, be duly and
validly authorized, issued, fully paid and non-assessable;
iii. duly and punctually pay, or cause to be paid, the principal and
interest on the Note on the date(s) on which such principal, premium (if any)
and interest becomes due;
iv. furnish to the Investor promptly after filing, copies of the
Company's reports filed pursuant to the Exchange Act on form 10-K, 10-Q,
8-K, or any successor form or forms;
v. permit the Investor (or its designated representative) to visit
and inspect any of the properties of the Obligors, including their books of
account, and to discuss their affairs, finances and accounts with the
Obligors' officers and its independent public accountants, all at such
reasonable times and as often as any such party may reasonably request;
vi. if the Investor does not have a voting representative on the
Board of Directors of the Company or the Subsidiary, permit the Investor
to send a representative (without voting rights) to each meeting of the
Board of Directors of the Company or the Subsidiary (as applicable) and
all committees of such Board;
vii. promptly pay and discharge, or cause to be paid and discharged,
when due and payable, unless contested by the Obligors in good faith, all
lawful taxes, assessments and governmental charges or levies imposed upon the
income, profits, property or business of the Obligors or any subsidiary;
viii. keep their properties in good repair, working order and
condition, and from time to time make all needful and proper, or legally
required, repairs, renewals, replacements, additions and improvements thereto;
and the Obligors will at all times materially comply with each provision of
all leases to which either of them is a party or under which either of them
occupies, or has possession of, any property;
<PAGE>
Exhibit 10.1 (continued)
ix. keep their assets which are of an insurable character insured
by financially sound and reputable insurers, against loss or damage by fire,
extended coverage and explosion and insurance against other hazards and risks
and liability to persons and property all to the extent, in amounts and in
the manner customary for companies in similar businesses similarly situated;
x. keep true records and books of account in which full, true and
correct entries will be made of all dealings or transactions in relation to
their business and affairs;
xi. duly observe and conform in all material respects to all laws,
rules, regulations and requirements of governmental authorities relating to
the conduct of their business or to their property or assets;
xii. maintain in full force and effect its legal existence, rights,
government approvals and franchises and all licenses and other rights to use
patents, processes, licenses, trademarks, trade names or copyrights owned or
possessed by either of them;
xiii. not (without the written consent of the Investor):
(a) Sell or otherwise dispose of all or substantially
all of the assets or business of either Obligor (whether by sale of assets,
exclusive license or otherwise); or
(b) Consolidate with or merge into or with any other
person or entity or permit any other person or entity to consolidate with or
merge into it or permit a controlling interest in the Company to be acquired
by one or more parties (through merger, consolidation or otherwise).
xiv. in the case of the Company, not (without the written
consent of the Investor), sell or other dispose of, any shares of the capital
stock of the Subsidiary or any other interest in the Subsidiary;
xv. in the case of the Subsidiary, not (without the written
consent of the Investor), offer, sell or issue, or obligate itself to offer,
sell or issue, any shares of its capital stock or any other interest in
itself;
xvi. not enter into any transaction, including, without limitation,
the purchase, sale or exchange of property, the making of loans or advances
or the rendering of any service with any Affiliate or Related Party except in
the ordinary course of and pursuant to the reasonable requirements of the
applicable Obligor's business and upon fair and reasonable terms no less
favorable to such Obligor than would obtain in a comparable arm's-length
transaction with a person not an Affiliate or Related Party;
xvii. not to make any (i) declaration, setting aside or
payment of any dividend or other distribution in respect of any of the
Company's capital stock, or (ii) direct or indirect redemption, purchase or
other acquisition of any of such stock (or any warrant, option or other right
with respect to such stock), or (iii) any repayment of Company or Subsidiary
debt held by any Related Party or by any Affiliate;
<PAGE>
Exhibit 10.1 (continued)
xviii. use the proceeds from the issuance of the Note and the
Warrants for the Obligors' working capital purposes;
xix. not change the nature of their business without the prior
written consent of the Investor;
xx. not create, incur, assume or permit to exist any material
indebtedness for borrowed money, or create or suffer to exist any mortgage,
pledge, security interest, lien or encumbrance upon their real or personal
properties, in each case without the prior written consent of the Investor,
except for obligations as lessee under leases that would have been or should
be, in accordance with GAAP, recorded as capital leases.
xxi. require all officers, department heads and those
performing similar functions, and all other persons now or hereafter employed
by the Obligors or their subsidiaries who may be deemed by the Board of
Directors to be a "Key Employee" to execute a non-competition agreement, and
all employees, officers and consultants of the Obligors who have access to
confidential information to execute a proprietary information and
non-disclosure agreement, in favor of the Obligors;
xxii. cause any subsidiary which it may now have and/or which
it may organize or acquire in the future to comply fully with all terms and
provisions of this Article 5 to the same extent as if such subsidiary or
subsidiaries were an "Obligor" herein.
b. Covenants Upon Issuance of Warrants under the Default Warrant. The
Company and Jonathan Schull (the "Shareholder"), by signing below, covenant
and agree that, upon the issuance of any shares of Common Stock upon exercise
of the Default Warrant and for the benefit of the Investor as holder of such
shares of Common Stock, they will perform the obligations described in that
certain Term Sheet between the Investor and the Company executed on or about
September 2, 1999 and attached hereto as Exhibit D under the headings
"Registration Rights", "Right of First Refusal on Issuances by SoftLock",
"Right of First Refusal/Co-Sale on Sale by Management", "Financial
Information", "Board of Directors", and "Investor Market Standoff," and the
rights and obligations of the Company, the Investor and the Shareholder set
forth therein shall apply and be binding upon the Company, the Investor and
the Shareholder, provided that such provisions shall apply without regard to
any requirement set forth therein that at least a specified percentage of
"Preferred Stock" or "Common Stock" be held by the Investor. In addition, the
Company and the Shareholder agree that upon request of the Investor, they will
enter into definitive agreements setting forth in greater detail such rights
and obligations, in form reasonably requested by Investor and customary for
institutional venture capital investments (provided that execution of such
definitive agreements shall not be a condition to the effectiveness of such
rights and obligations, which shall automatically bind the parties upon the
issuance of any shares of common stock pursuant to the Default Warrants). By
signing below, Maurice LaFlamme covenants and agrees that in the circumstances
described in the foregoing provisions of this Section 5(b), he will vote all
shares of the Company's Common Stock held by him or over which he has voting
control, at all regular and special meetings of shareholders of the Company
(and in all written consents), for election of one nominee designated by the
<PAGE>
Exhibit 10.1 (continued)
Investor for election to the Company's Board of Directors. In addition, the
Company further covenants and agrees for the benefit of the Investor as the
holder of the Default Warrant and the shares of Common Stock issued upon
exercise of the Default Warrant, that it will (i) cause to be reserved and
kept available out of its authorized and unissued shares of common stock such
number of shares that will be sufficient to permit the exercise in full of the
Default Warrant; (ii) take all such action as may be necessary to ensure that
all shares of common stock delivered upon exercise of the Default Warrant
shall, at the time of delivery of the certificates for such shares, be duly
and validly authorized, issued, fully paid and non-assessable; (iii) preserve
and keep in full force and effect its corporate existence and that of each of
its subsidiaries; and (iv) comply with, and the Subsidiary agrees that it will
in such circumstances comply with, the covenants set forth in Sections
5(a)(iv), (v), (vi)-(xvii) and (xxii).
6. Covenants of the Investor.
a. Investment Covenants. The Investor hereby covenants with the Company
that, without in any way limiting the representations set forth in Section 4
above, the Investor shall not make any disposition of all or any portion of
the Note, the Warrant or the Default Warrant unless and until:
i. there is then in effect a registration statement under the 1933 Act
covering such proposed disposition, and such disposition is made in accordance
with such registration statement; or
ii. the Investor shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and, if requested by
the Company (except in transactions in compliance with Rule 144), the Investor
shall have furnished the Company with an opinion of counsel, in form and
substance satisfactory to the Company, that such disposition will not require
registration of the securities under the 1933 Act.
b. Covenant to Not Impede Closing Contemplated by Term Sheet. The
Investor acknowledges that there are significant contingencies affecting the
Company's ability to convert the Note into capital stock that are controlled
or affected by the actions of the Investor, including but not limited to (i)
approving the Second Investor (as defined in the Term Sheet), (ii) completing
and being satisfied with its due diligence review of the Company, and (iii)
being satisfied with the legal structure of the Company, its anticipated
sources and uses of funds and the terms and conditions of the transaction
contemplated by the Term Sheet. Accordingly, the Investor hereby covenants
and agrees to use reasonable efforts to diligently and consistently assist the
Company in attracting potential Second Investors, and to not unreasonably
withhold or delay its approval of any willing potential Second Investor and
otherwise to exercise the foregoing rights in good faith and not with a view
to contributing to the Company's inability to convert the Note to capital
stock.
7. Conditions of the Investor's Obligations at Closing. The obligations
of the Investor hereunder are subject to, and contingent upon, the
fulfillment, on or before the Closing, of each of the following conditions:
<PAGE>
Exhibit 10.1 (continued)
a. Representations and Warranties. The representations and warranties of
the Obligors contained in Section 3 hereof shall be true and correct on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
b. Performance. The Obligors shall have performed and complied with all
agreements, obligations and covenants contained in this Agreement that are
required to be performed or complied with by them on or before the Closing.
c. Delivery of the Note and the Warrant. The Obligors shall have
delivered to the Investor the Note, the Warrant and the Default Warrant in the
forms attached hereto as Exhibits A, B and C, respectively.
d. Other. The Investor shall have received such other
certificates, opinions and instruments as the Investor may reasonably request.
8. Conditions of the Obligors' Obligations at Closing. The obligations of
the Obligors to the Investor hereunder are subject to and contingent upon the
fulfillment by the Investor, on or before the Closing, of each of the
following conditions:
a. Representations and Warranties. The representations and warranties of
the Investor contained herein shall be true and correct on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of the Closing.
b. Payment of Purchase Price by the Investor. The Investor shall have
delivered to the Obligors the Purchase Price in the manner specified in
Section 1.b. hereof.
c. Delivery of Note and Statement of Accredited Investor. The Investor
shall have delivered to the Obligors a Statement of Accredited Investor in the
form set forth in Exhibit E attached hereto, and the information provided in
the Statement of Accredited Investor shall be complete and correct on and as of
the Closing with the same effect as though such information had been provided
as of the date of the Closing.
9. Miscellaneous.
a. Survival of Warranties. The representations and warranties of the
Obligors and the Investor contained in this Agreement shall survive the
execution and delivery of this Agreement and the Closing.
b. Successors and Assigns. This Agreement may not be assigned by any
party hereto, except that the Investor may assign or transfer all or a portion
of the Note and the Warrants (i) after the "Trigger Date" (as defined in the
Note) or (ii) to a member or affiliate, subject in either case to compliance
with applicable securities laws (and its rights under this Agreement shall
inure to the benefit of each transferee under the Note and the Warrants). The
terms and conditions of this Agreement shall inure to the benefit of, and be
<PAGE>
Exhibit 10.1 (continued)
binding upon, the respective successors and permitted assigns of the parties.
Nothing in this Agreement, express or implied, is intended to confer upon any
party, other than the parties hereto or their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities under or
by reason of this Agreement, except as expressly provided in this Agreement.
c. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut, without regard to the
principles of conflict of laws thereof.
d. Counterparts; Delivery by Facsimile. This Agreement may be executed
in one or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument. Delivery of
this Agreement may be effected by facsimile.
e. Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
f. Notices. Unless otherwise provided, any notice required or permitted
hereunder shall be given by personal service upon the party to be notified, by
nationwide overnight delivery service or upon deposit with the United States
Post Office, by certified mail, return receipt requested and:
i. if to either of the Obligors, addressed to SOFTLOCK.COM,
INC., Five Clock Tower Place, Suite 440, Maynard, Massachusetts 01754,
Attention: Keith Loris, with a copy to Clive R. G. O'Grady, Esquire, McGuire,
Woods Battle & Booth LLP, 1750 Tysons Blvd., Suite 1800, Tysons Corner,
McLean, Virginia 22102-3915 or at such other address as the Company may
designate by notice to the Investor in accordance with the provisions of
this Section 9.f.; and
ii. if to the Investor, at its address indicated on the
signature page hereof, or at such other addresses as the Investor may
designate by notice to the Company in accordance with the provisions of
this Section 9.f.
g. Expenses. The Obligors shall bear their own expenses and legal fees
incurred on their behalf with respect to this Agreement and the transactions
contemplated hereby, whether or not a closing takes place. On the closing
date (or if no closing shall take place, within thirty (30) days of receiving
any statement or invoice therefor), the Obligors will pay the reasonable legal
fees and out-of-pocket expenses of the Investor and special counsel to the
Investor with respect to this Agreement and the transactions contemplated
hereby, but only up to the maximum amount of Ten Thousand Dollars ($10,000).
The Obligors shall also pay the reasonable legal fees and the fees of experts
and consultants engaged by the Investor incurred with respect to the
enforcement of the Agreement, the Note and/or the Warrants and/or with respect
to responding to any request made by either of the Obligors for the consent of
the Investor to any action that the Obligors wish to take that is either
barred under terms of any such document or requires the consent of the
Investor therefor. The Investor shall pay the reasonable legal fees and
expenses incurred by the Company in enforcing this Agreement against the
Investor after a breach by the Investor.
h. Trial by Jury. EACH PARTY HEREBY WAIVES ITS RIGHT TO CLAIM A
TRIAL BY JURY WITH RESPECT TO ANY ACTION BY OR AGAINST INVESTOR ARISING
HEREUNDER.
<PAGE>
Exhibit 10.1 (continued)
i. Waiver. EACH PARTY ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS
AGREEMENT IS A PART IS A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED
UNDER CONNECTICUT GENERAL STATUTES SECTION 52-278a TO 52-278g INCLUSIVE, OR BY
ANY OTHER APPLICABLE LAW, STATE OR FEDERAL, HEREBY WAIVES ITS RIGHTS TO NOTICE
AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH ANY PARTY, AND/OR THE
SUCCESSORS OR ASSIGNS OF ANY PARTY MAY DESIRE TO USE.
j. Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either prospectively or retroactively), only with
the written consent of the Obligors and the Investor.
k. Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, it shall, to the extent practicable, be
modified so as to make it valid, legal and enforceable and to retain as
nearly as practicable the intent of the parties, and the validity, legality
and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
l. Entire Agreement. This Agreement (including the exhibits hereto)
and the documents referred to herein constitute the entire agreement among
the parties hereto with respect to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and discussions, whether
oral or written, of the parties hereto.
m. Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to the Obligors or the Investor upon any breach,
default or noncompliance of the Investor or the Obligors under this Agreement
shall impair any such right, power or remedy, nor shall it be construed to be
a waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit, consent or approval
of any kind or character on the part of the Obligors or the Investor of any
breach, default or noncompliance under this Agreement or any waiver on the
Obligors' or the Investor's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing and that all remedies, either under
this Agreement, by law, or otherwise afforded to the Obligors and the
Investor, shall be cumulative and not alternative.
n. Further Assurances. Prior to and after the Closing, at the request of
the Investor, the Obligors will take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate in doing, as the Investor
may reasonably deem necessary or desirable, all things necessary to consummate
and make effective in a practicable manner, the Closing, and the other
transactions contemplated by this Agreement, the Note, the Warrant and the
Default Warrant, including, without limitation, (i) the execution and delivery
of any additional waivers, consents, confirmations, agreements, instruments or
documents, or the taking of all actions, whether prior to or after the
Closing, necessary to issue and sell the Notes, the Warrant, the Default
Warrant and the Underlying Stock to the Investor and (ii) to otherwise carry
out the purpose and intent of this Agreement.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
<PAGE>
Exhibit 10.1 (continued)
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SOFTLOCK.COM, INC., a
Delaware corporation
By:________________________________
Douglas R. Johnson
Executive Vice President and Chief Financial Officer
SOFTLOCK SERVICES, INC., a
Delaware corporation
By:________________________________
Douglas R. Johnson
Executive Vice President and Chief Financial Officer
SI VENTURE ASSOCIATES, L.L.C., a
Delaware limited liability company
By:_________________________________
John Halligan, Managing Member
[SIGNATURES OF SHAREHOLDERS APPEAR ON FOLLOWING PAGE]
<PAGE>
Exhibit 10.1 (continued)
Acknowledged and agreed, for purposes of Section 5(b) only:
Jonathan Schull
Maurice LaFlamme
Exhibit List
Exhibit A Promissory Note
Exhibit B Warrant
Exhibit C Default Warrant
Exhibit D Term Sheet
Exhibit E Statement of Accredited Investor
Exhibit F Unaudited Financials
Schedule 3(b) Capitalization Table
Schedule 3(j) Loans, Leases Or Transactions with
Related Parties
Schedule 3(k) Intellectual Property
Schedule 3(k)(c) Licenses
Schedule 5(b) Shareholders
Doc.:250983 v.06
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1020601
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1097627
<PP&E> 460894
<DEPRECIATION> 0
<TOTAL-ASSETS> 2572091
<CURRENT-LIABILITIES> 1563974
<BONDS> 0
0
0
<COMMON> 109137
<OTHER-SE> 260604
<TOTAL-LIABILITY-AND-EQUITY> 2572091
<SALES> 77484
<TOTAL-REVENUES> 77484
<CGS> 18071
<TOTAL-COSTS> 3007407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2904332)
<INCOME-TAX> 1078
<INCOME-CONTINUING> (2905410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2905410)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
