<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2000
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 April 30, 2000, 12,862,841 shares of common stock, par value $0.01 per
share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes --- No -X-
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INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (Unaudited)
and December 31, 1999 2
Consolidated Statements of Operations (Unaudited) for the
three months ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2000 and 1999 4-5
Notes to consolidated financial statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations 7-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
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SOFTLOCK.COM,INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 10,344,464 $ 3,695,409
Accounts receivable 54,145 5,979
Prepaid expenses and other current assets 397,329 274,831
------------ -----------
Total current assets 10,795,938 3,976,219
PROPERTY AND EQUIPMENT - Net 969,136 620,769
WEBSITE AND PRODUCT DEVELOPMENT COSTS, net 1,596,782 1,444,360
SECURITY DEPOSITS 41,212 31,888
PREPAID ROYALTIES 65,579 65,579
------------ -----------
TOTAL ASSETS $ 13,468,737 $ 6,138,815
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 646,093 $ 603,053
Accrued expenses 1,145,993 963,744
Current portion of obligations under capital leases 178,812 112,990
------------ -----------
Total current liabilities 1,970,898 1,679,786
OBLIGATIONS UNDER CAPITAL LEASES, Less current portion 417,236 227,981
OTHER LONG-TERM LIABILITIES 87,588 56,294
COMMITMENTS AND CONTINGENCIES (Note 1) - -
REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK 12,535,545 3,210,604
(Aggregate liquidation preference of $13,068,957 at March 31, 2000)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, $0.01 par value; 50,000,000 shares authorized;
12,862,841 and 12,819,582 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively 128,628 128,195
Deferred compensation (2,642,767) (2,834,952)
Deferred royalties (2,515,035) (639,866)
Additional paid-in capital 15,569,311 13,301,296
Accumulated deficit (11,813,787) (8,721,644)
Notes receivable from officer and directors (268,880) (268,880)
------------ -----------
Total stockholders' equity (deficiency) (1,542,530) 964,149
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,468,737 $ 6,138,816
============ ===========
</TABLE>
See Notes to consolidated financial statements
<PAGE>
SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net Revenues $ 12,734 $ 48,097
Cost of Revenues 4,832 6,537
------------ ------------
Gross Profit 7,902 41,560
Research and Development Expense(1) 1,008,487 121,671
Selling and Marketing Expense(2) 1,146,147 54,340
General and Administrative Expense(3) 1,044,200 456,629
------------ ------------
Total Operating expenses 3,198,834 632,640
------------ ------------
Operating loss (3,190,932) (591,080)
Other income
Interest expense (12,856) (92)
Interest income 111,644 13,567
Other income -- 60
------------ ------------
Loss before income tax (benefit) (3,092,144) (577,545)
Income tax expense (benefit) -- --
------------ ------------
Net loss (3,092,144) (577,545)
Beneficial conversion feature on convertible preferred
stock, including accretion of dividends on Series A
and B Preferred Stock of $318,755 at March 31, 2000 (9,643,696) --
------------ ------------
Net loss attributable to common stockholders $(12,735,840) $ (577,545)
============ ============
Basic and diluted net loss per common share $ (0.99) $ (0.06)
============ ============
Basic and diluted weighted average shares outstanding 12,848,104 9,004,760
============ ============
</TABLE>
- -----------------
(1) including noncash compensation and consulting expense of $4,212 and
$4,212, respectively.
(2) including noncash compensation and consulting expense of $60,694 and
$2,212, respectively.
(3) including noncash compensation and consulting expense of $127,280 and
$235,610, respectively.
<PAGE>
SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATION ACTIVITIES:
Net loss $ (3,092,144) $ (577,545)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 175,221 3,016
Noncash compensation and consulting expense 192,186 242,034
Deferred rent expense 31,294 -
Increase (decrease) in cash from:
Accounts receivable (48,166) (3,131)
Prepaid expenses and other current assets (122,498) (4,732)
Accounts payable 43,040 (10,421)
Accrued compensation and benefits (22,569) (5,502)
Other accrued expenses 321,243 (781)
------------ -----------
Net cash used for operating activities (2,522,393) (357,061)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of security deposits (9,929) -
Purchases of property and equipment (117,438) (7,294)
------------ -----------
Net cash used for investing activities (127,367) (7,294)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (30,102) (1,069)
Proceeds from issuance of Series A preferred, net of
issuance costs 1,969,781 -
Proceeds from issuance of Series B preferred, net of
issuance costs 7,355,160 -
Proceeds from issuance of common stock, net of issuance
costs - 1,882,210
Proceeds from exercise of stock options 3,976 -
------------ -----------
Net cash provided by financing activities 9,298,815 1,881,141
NET INCREASE IN CASH 6,649,055 1,516,786
CASH, BEGINNING OF PERIOD 3,695,409 160,841
------------ -----------
CASH, END OF PERIOD $ 10,344,464 $ 1,677,627
============ ===========
</TABLE>
<PAGE>
SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 12,856 $ 92
========= =========
Cash paid during the period for taxes $ 10,254 $ --
========= ==========
SUMMARY OF NONCASH FINANCING AND INVESTING ACTIVITIES
Payable and accrued website development costs $ 116,426 $ --
========= ==========
Issuance of common stock for web development costs $ 272,876 $ --
========= ==========
Capital lease obligation - property and equipment $ 285,785 $ --
========= ==========
</TABLE>
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SOFTlOCK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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. 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 March 31, 2000 and
December 31, 1999 reflect the financial condition of the Company and its
wholly owned operating subsidiary, SoftLock Services, Inc.
These consolidated financial statements include all adjustments, which in the
opinion of management, are necessary to reflect a fair presentation of the
Company's 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 consolidated financial statements for the year ended December 31,
1999 filed as part of the Company's Annual Report on Form 10-KSB/A.
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/A for the year
ended December 31, 1999. The results for the three month period ended March 31,
2000 are not necessarily indicative of the results for the entire year 2000.
2. Private Placement of Equity Securities
On January 7, 2000, the Company received $500,004 in exchange for 4,902 shares
of the Company's Series A Preferred Stock (the "Series A Preferred").
In connection with the Series A Preferred transaction, the Company entered
into a Series A Preferred Stock Purchase Agreement dated as of December 30,
1999 as supplemented on January 7, 2000 (the "Purchase Agreement") with SI
Venture Fund II, L.P. ("SI"), Apex Investment Fund IV, L.P., Apex Strategic
Partners IV, LLC, (collectively, "Apex") and RSA Security Inc. ("RSA")
(collectively, the "Purchasers") and a Shareholders and Rights Agreement (the
"Shareholders Agreement") with the Purchasers and the President and Chief
Executive Officer and the Chief Technology Officer of the Company. The
Company also filed a Certificate of Designation with the Delaware Secretary
of State that states the powers, preferences and rights of the Series A
Preferred.
On February 10, 2000, the Company issued 46,876 shares of Series B Preferred
Stock (the "Series B Preferred") to a group of investors, including
affiliates of Tudor Investment Corp. and Ritchie Capital, as well as
investors in an earlier round of financing, SI and Apex (collectively, the
"Investors") for a purchase price of $160 per share for an aggregate purchase
price of $7,500,160. Investors were also issued two warrants, one of which
becomes exercisable for an aggregate of 312,500 shares of common stock if, as
of August 15, 2000, the Company's registration statement for the shares of
common stock issuable upon conversion of the Series B Preferred is not
declared effective and the NASDAQ listing application for the common stock is
not accepted, and the second of which becomes exercisable for an aggregate of
an additional 312,500 shares of common stock if, as of November 15, 2000,
these two conditions are not met.
Ascent Venture Partners III, L.P. ("Ascent") also purchased 14,706 shares of the
Company's Series A Preferred for $102 per share for an aggregate purchase price
of $1,500,012 in February 2000. In connection with the investment by Ascent, the
Company agreed to appoint an Ascent representative to its Board of Directors.
In connection with the Series B Preferred transaction, the Company entered into
a Series B Preferred Stock and Warrant Purchase Agreement dated as of February
10, 2000 (the "Purchase Agreement") with the investors and an Amended and
Restated Shareholders and Rights Agreement (the "Amended Shareholders
Agreement") with the
<PAGE>
investors, the holders of the Series A Preferred and the Company's President
and Chief Executive Officer and its Chief Technology Officer. The rights and
preferences of the Series B Preferred are similar to those of the Series A
Preferred.
The Company recorded, immediately upon issuance, a preferred stock dividend
representing the value of the beneficial conversion feature on the issuance of
Series A and B preferred stocks. Such amount was limited to the proceeds
received from issuing the beneficial conversion securities or approximately
$9,324,941.
3. Prepaid Royalties
In December 1999, the Company entered into an agreement with Intel for the use
of certain of Intel's technology. In connection with such agreement, the Company
paid $75,000 and issued 224,514 shares of its common stock to Intel. Under the
agreement, the Company has the right to recoup a portion of the shares issued if
Intel fails to meet its performance obligations. The fair value of the
forfeitable shares has been recorded as a reduction of stockholders' equity. The
value of such forfeitable shares is remeasured at each reporting period until
such shares become nonforfeitable. The change in the fair market value of the
forfeitable shares at March 31, 2000 was $1,875,170.
4. Subsequent Event
On May 12, 2000, the Company completed its acquisition of certain assets of
Chili Pepper, Inc. ("Chili Pepper"), a Boston-based strategic marketing
consulting firm. Under the terms of the agreement, the Company issued 193,289
shares of the Company's common stock, $.01 par value, with an aggregate value
of $1,404,365 and paid $351,090 in cash (collectively, the "Purchase Price").
The acquisition will be accounted for as a purchase, and accordingly, the
results of operations of Chili Pepper will be included in the Company's
consolidated financial statements from the date of acquisition. The Purchase
Price will be allocated to the assets acquired based upon their fair values.
Under the terms of the agreement, 30% of the shares issued shall be entitled
to non-priority piggy-back registration rights, under certain restrictions.
Such rights are subordinated to the registration rights of the holders of
Series A Preferred Stock and Series B Preferred Stock and to the registration
rights of Intel Corporation. In addition, the Company entered into an
employment with one of the shareholders of Chili Pepper.
Effective April 17, 2000, Scott W. Griffith was appointed as Chief Executive
Officer of the Company. In connection with that appointment, Mr. Griffith
entered into an employment agreement with the Company, as part of which, he
was granted a stock option to purchase 1,168,670 shares of common stock at an
exercise price of $8.50 per share, the fair market value of the Company's
common stock on the dated of the grant.
On May 5, 2000, the Company and Keith Loris, the former Chief Executive
Officer and President entered into a Separation Agreement setting forth their
agreement whereby Keith Loris would no longer serve as Chief Executive
Officer as of April 17, 2000 and would no longer serve as President as of May
5, 2000. Pursuant to that agreement, Keith Loris shall engage in Transition
Period Employment with the Company until November 6, 2000. In connection with
the Separation Agreement, approximately 670,800 options to purchase shares of
the Company's stock were cancelled.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF
OPERATIONS
Certain statements contained in this report, including statements concerning the
Company's future cash and financing requirements, and other statements contained
herein regarding matters that are not historical facts, are forward looking
statements. Forward looking statements involve known and unknown risks and
uncertainties which may cause the actual results in future periods to differ
materially from what is anticipated. You should read the following discussion
and analysis together with our consolidated financial statements for the
periods specified and notes included herein. Further reference should be made
to our annual report on Form 10-KSB/A for the year ended December 31, 1999.
Background
The Company provides a system that combines content management and context
marketing to allow commercial web sites to securely market and sell digital
content. Publishers of digital content, including research reports,
newsletters and electronic books, use the Company's system to package and
securely distribute their products while protecting their intellectual
property. The Company markets digital content through strategic relationships
with many affiliates who offer the digital content on their web sites. When a
prospective consumer accesses the content, the consumer can preview selected
portions of the final product. The consumer can then instantly purchase access
to the complete product twenty-four (24) hours a day, seven (7) days a week
via the World Wide Web. The consumer then has
<PAGE>
permanent access to the product for the consumer's own use. Consumers are
encouraged to pass along the digital content they have purchased, but recipients
can only preview the selected portions of the final product chosen by the
content provider until they complete the purchase process themselves.
The Company's patented persistent security technology (US #5,509,070) for
information commerce prevents electronic shoplifting (piracy) not just during
the initial download, but also when the digital content is passed from one
consumer to another, thus allowing commercial web sites to sell their
electronic information simply and securely. Because content offered by the
Company can be instantly purchased and re-distributed, but not pirated, the
technology is useful in many markets, especially information "publishing" web
sites (news, media, finance, research, etc.).
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.
Chili Pepper Asset Acquisition
On May 12, 2000, the Company completed its acquisition of certain assets of
Chili Pepper, Inc. ("Chili Pepper"), a Boston-based strategic marketing
consulting firm. Under the terms of the agreement, the Company issued 193,289
shares of the Company's common stock, $.01 par value, with an aggregate value
of $1,404,365 and paid $351,090 in cash (collectively, the "Purchase Price").
The acquisition will be accounted for as a purchase, and accordingly, the
results of operations of Chili Pepper will be included in the Company's
consolidated financial statements from the date of acquisition. The Purchase
Price will be allocated to the assets acquired based upon their fair values.
Under the terms of the agreement, 30% of the shares issued shall be entitled
to non-priority piggy-back registration rights, under certain restrictions.
Such rights are subordinated to the registration rights of the holders of
Series A Preferred Stock and Series B Preferred Stock and to the registration
rights of Intel Corporation. In addition, the Company entered into an
employment with one of the shareholders of Chili Pepper.
Results of Operations
MARCH 31, 2000 AS COMPARED TO MARCH 31, 1999
Total revenues for the three months ended March 31, 2000 were $12,734, a
73.5% decrease as compared to $48,097 earned during the three months ended
March 31, 1999. In 2000, revenue from password vending (the process by which
documents are "unlocked" in the Company's system) decreased to $12,734 from
$18,597 in 1999, a 32% decrease. This decrease reflects the lower average
commissions per unit received by the Company during their participation in
the Stephen King ebook launch. The Stephen King ebook provided the Company a
unique opportunity to participate in an event in the ebook merchandising
space. However, due to unexpected volumes, particularly on the first day of
its introduction when the book was given away for free by certain affiliates,
the Company was not able to fulfill all requested orders, thereby not
realizing its full profitability on each unit. While sales continue for the
book in subsequent months, albeit on a significantly lower volume, the
Company is still generating revenue from its release. In addition, for the
three months ended March 31, 2000, the Company did not receive any revenues
from licensing, custom tools and programming, and consulting and speaking
fees. Revenues from such services for the three months ended March 31, 1999
were $29,500. These decreases are consistent with the Company's strategy to
derive future revenues primarily from commissions from the SoftLock
eMerchandising system.
Cost of sales decreased to $4,832 for the three months ended March 31,
2000 as compared to $6,537 for the three months ended March 31, 1999. Cost of
sales are primarily related to credit card transaction fees.
Gross profit was $7,902, or 62.1% of revenue for the three months ended
March 31, 2000, as compared with $41,560, or 86.4% of revenue for the three
months ended March 31, 1999. The decrease in gross margin in the first quarter
of 2000 is attributable to an increase in both the fixed and variable
transaction costs associated with a higher number of transactions, a majority of
which had a lower average commission per unit. In addition, in the first quarter
of 1999, there were inconsequential costs associated with the licensing, custom
tools and programming, and consulting and speaking revenues.
Operating expenses totaled $3,198,834 for the three months ended March
31, 2000 as compared with $632,640 for the same period in 1999, an increase
of $2,566,194. The increase is primarily due to costs associated with
significant staffing increases (from 11 employees at March 31, 1999 to 45
employees as of March 31, 2000) to support the SoftLock eMerchandising
system, related operating and consulting costs, research and development
costs, and other miscellaneous administrative costs. Included in operating
expenses are costs related to noncash compensation and consulting
transactions in the amounts of $192,186 and $242,034 for the three months
ended March 31, 2000 and 1999, respectively.
Research and development costs increased to $1,008,487 for the three
months ended March 31, 2000 versus $121,671 for the same period in 1999, an
increase of $886,816. This increase is related to the additional staffing, as
well as outside consulting, in connection with the research and development
of the eMerchandising
<PAGE>
system and related proprietary software. Included in research and development
expenses are costs related to noncash compensation and consulting in the amount
of $4,212 for both the three months ended March 31, 2000 and 1999.
Selling and marketing costs increased to $1,146,147 in the first quarter
of 2000 as compared to $54,340 in the first quarter of 1999, an increase of
$1,091,807. This increase is primarily attributable to additional staffing
and outside consulting costs associated with the enrollment of content
providers and affiliates for the SoftLock Affiliate Network. Included in
selling and marketing expenses are costs related to noncash compensation and
consulting in the amount of $60,694 and $2,212 for the three months ended
March 31, 2000 and 1999, respectively.
General and administrative costs for the three months ended March 31, 2000
were $1,044,200 as compared to $456,629 for the same period in 1999, an increase
of $587,571. This increase relates primarily to additional staffing and outside
consulting costs incurred in the building of the management infrastructure and
support team for the eMerchandising system. Included in the above costs are
salaries and wages, consulting, and all other related operating expenses. Also
included in general and administrative expenses are costs related to noncash
compensation and consulting in the amount of $127,280 and $235,610 for the three
months ended March 31, 2000 and 1999, respectively.
Other income, net increased to $98,788 for the three months ended March 31,
2000 from $13,535 for the same period in 1999. This change relates primarily to
investment earnings on the Company's cash reserves which increased as a result
of the Company's private placement offerings of preferred stock.
Net loss increased to $3,092,144 for the three months ended March 31,
2000 from $577,545 for the same period in 1999. The increase resulted
primarily from the increase in operating expenses. The Company's business
plan calls for higher losses in 2000 as the Company continues to develop
products, hire the personnel necessary to grow the business and expand its
marketing strategy. The company anticipates that it will incur significant
operating losses for the remainder of 2000 and into 2001.
Management anticipates that the trend toward increased quarterly operating
expenses will continue in order to support increased marketing and promotional
efforts, to develop and release new products, to continue to build a strong
management team, to raise necessary capital, and to otherwise create the
infrastructure that the Company will need to provide its services in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations totaled $2,522,393 for the three months ended March
31, 2000 as compared with $357,061 for the same period in 1999. The increase in
cash used related primarily to the net loss sustained during the period, plus
a decrease in accounts receivable and prepaid expenses of $48,166 and
$122,498, respectively, offset by an increase in accounts payable and accrued
expenses of $43,040 and $321,243, respectively. At March 31, 2000, working
capital (current assets less current liabilities) totaled $8,825,040.
Investing activities for the three months ended March 31, 2000 included,
among other things, $102,005 of computer and software purchases and $10,866 of
leasehold improvements related to the building-out of the new main office.
The Company's primary source of liquidity continues to be proceeds from
the sale of securities in private placements. A total of $9,324,941 was
raised in the first quarter of 2000, $1,969,781, net of commission and
expenses, through the issuance of 19,608 of Series A Preferred Stock and
$7,355,160 net of commissions and expenses, in the first quarter of 2000
through the issuance of 46,876 shares of Series B Preferred Stock. These
funds will be used to finance continued operations, product development and
marketing. Net proceeds from the issuance of common stock in the first
quarter of 1999, net of issuance costs, was $1,882,210.
During the three months ended March 31, 2000, the Company financed the
purchase of certain computer hardware and office furniture totaling $285,785
through capital leases.
The Company, based upon its current operating plan, anticipates that its
currently available funds will be sufficient to satisfy its anticipated needs
<PAGE>
for working capital, capital expenditures and business expansion through the
rest of this fiscal year. 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 may require additional
financing over the next twelve months. To the extent that the Company is
unable to raise additional financing, the Company may be required 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 additional financing sources, or that financing would be made
available on terms favorable to the Company. The failure to acquire
additional financing when required could have a material adverse effect on
the Company.
The Company plans to continue to develop, improve and enhance its product
offerings as part of its continuous plan for research and development.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as set forth below, 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.
The Company is one of approximately 18 defendants in an action in the United
States District Court for the Southern District of New York entitled INTERACTIVE
GIFT V. COMPUSERVE INC. ET AL, filed August 23, 1995. The action alleges
infringement of the so-called Freeny patent. The plaintiff seeks judgment
declaring the validity of its patent and further declaring that each of the
defendants has infringed the plaintiff's patent, enjoining further infringement
and treble damages plus attorneys fees and costs and disbursements.
On March 12, 1999 judgment was entered in the Company's favor and the patent
owner's claims were dismissed on the merits. The patent owner filed a Notice
of Appeal to the Court of Appeals for the Federal Circuit, arguing error by
the District Court. The appeal (number 99-1324) stands fully briefed and oral
argument took place on February 7, 2000.
Although the Company and its counsel are unable to predict the ultimate outcome
of the appeal with any reasonable degree of certainty, the Company and the other
defendants will continue to defend their positions vigorously.
Other patent-related suits are possible, including legal actions which might be
pursued to litigate or defend the Company's patent, and the outcomes and
expenses cannot be predicted with confidence. Liability lawsuits are also a risk
to be considered. The Company has developed software technology to protect
intellectual property, but there can be no assurance that such technology will
not be breached, resulting in lost revenues for which the Company might be held
responsible. Similarly, the software which incorporates the Company's tools can
have adverse consequences which might lead to claims of liability against the
Company.
The Company is subjected to this and other litigation from time to time in the
ordinary course of business. Although the amount of the liability, if any, with
respect to such litigation can not be determined, in the opinion of management,
such liability, if any, will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
<PAGE>
Item 2. Changes in Securities.
Beginning in December 1999, the Company commenced a private placement
offering of 36,765 shares of the Series A Preferred at an offering price of
$102 per share, pursuant to Section 4(2) of the Securities Act of 1933 (the
"Act") and Regulation D promulgated under the Act. The Company sold the
Series A Preferred to a group of investors: SI, Apex and RSA resulting in net
proceeds of approximately $3,210,604 from the closing on December 30, 2000
and approximately $1,969,781 from the closing on January 7, 2000. The Company
offered the shares on a "best efforts" basis through officers and directors
of the Company. The Series A Preferred 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. Each
share of the Series A Preferred is convertible into 100 shares of the
Company's common stock, subject to certain anti-dilution adjustments, at any
time at the holder's option at a conversion price of $1.02 per share of
common stock. The holders of the Series A Preferred are entitled to receive a
quarterly dividend of $10.20 per share, prior to any distribution to common
shareholders, unless the Company offers the holders of Series A Preferred the
opportunity to register their underlying common stock in connection with a
qualifying public offering. The Series A Preferred also have a liquidation
preference over the common stock, and the holders of the Series A Preferred
are entitled to vote with the common shareholders as a single class. Each
share of Series A Preferred is entitled to the number of votes into which
that share is convertible into common stock. In connection with the placement
of the Series A Preferred, we issued 1,964 warrants convertible into the
Series A Preferred Stock. In February 2000, SI exercised all of those
warrants.
In connection with the Series A Preferred transaction, the Company entered
into a Shareholders' and Rights Agreement with the purchasers and the former
President and Chief Executive Officer and the Chief Technology Officer of the
Company and into a Registration Rights Agreement requiring registration of the
underlying common stock upon the occurrence of certain events. The Company
also filed a Certificate of Designation with the Delaware Secretary of State
that states the powers, preferences and rights of the Series A Preferred.
In February, 2000, Ascent purchased 14,706 shares of the Company's Series A
Preferred Stock for $102 per share for an aggregate purchase price of
$1,500,000. In connection with the investment by Ascent, the Company agreed
to appoint an Ascent representative to its Board of Directors.
Beginning in February, 2000, the Company commenced a private placement
offering of 46,875 shares of the Series B Preferred at an offering price of
$160 per share, pursuant to Section 4(2) of the Act and Regulation D
promulgated under the Act. The Company sold the Series B Preferred to a group
of investors, including affiliates of Tudor Investment Corp. and Ritchie
Capital as well as to SI and Apex, purchasers of the Series A Preferred,
resulting in net proceeds of approximately $7,355,160. The Company offered
the shares on a "best efforts" basis through officers and directors of the
Company. The Series B Preferred 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. Each share of the
Series B Preferred is convertible into 100 shares of the Company's common
stock, subject to certain anti-dilution adjustments, at any time at the
holder's option. The Series B Preferred will automatically convert into the
underlying common stock upon a qualifying public offering of the Company's
common stock or upon the election of two-thirds of the outstanding Series B
Preferred. The Series B Preferred also have a liquidation preference over the
common stock, and the holders of the Series B Preferred are entitled to vote
with the common shareholders as a single class. Each share of Series B
Preferred is entitled to the number of votes into which that share is
convertible into common stock.
Pursuant to a Registration Rights Agreement between the Company and the
holders of the Series B Preferred, such holders were also issued two
warrants, one of which becomes exercisable for an aggregate of 312,500 shares
of common stock if as of August 15, 2000 the Company's registration statement
for the shares of common stock issuable upon conversion of the Series B
Preferred Stock is not declared effective and the Nasdaq listing application
for the common stock is not accepted and the second of which becomes
exercisable for an aggregate of an additional 312,500 shares of common stock
if as of November 15, 2000 these two conditions were not met.
In connection with the Series B Preferred transaction, the Company entered into
a Series B Preferred Stock and Warrant Purchase Agreement dated as of February
10, 2000 with the investors and an Amended and Restated Shareholders' and Rights
Agreement with the investors, the holders of the Series A Preferred Stock and
the Company's former President and Chief Executive Officer and its Chief
Technology Officer. The Company also filed a Certificate of Designation with
the Delaware Secretary of State that states the powers, preferences and rights
of the Series B Preferred.
Item 5. Other Information
On May 5, 2000, the Company and Keith Loris, the former Chief Executive
Officer and President entered into a Separation Agreement setting forth their
agreement whereby Keith Loris would no longer serve as Chief Executive
Officer as of April 17, 2000 and would no longer serve as President as of May
5, 2000. Pursuant to that agreement, Keith Loris shall engage in Transition
Period Employment with the Company until November 6, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Employment Agreement, dated April 17, 2000, between
SoftLock.com, Inc. and Scott Griffith.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on January 13, 2000
The form reported a change in the Company's principal accountants from
Comiskey & Company, P.C. to Deloitte & Touche LLP.
Form 8-K filed on January 18, 2000
The form reported that the Company had issued 36,765 shares of Series A
Preferred Stock to a group of investors. The form also reported that,
in a separate offering in late October 1999, the Company sold 1,600,000
shares of common stock through a private placement with certain of the
Company's shareholders.
Form 8-K filed on February 15, 2000
The form reported that the Company issued 46,875 shares of Series B
Preferred Stock and two warrants to a group of investors. The form also
reported a sale of 14,706 shares of Series A Preferred Stock to another
investor. In connection with the sale of Series A Preferred Stock, the
Company agreed to appoint an investor representative to the Board of
Directors.
Form 8-K filed on March 9, 2000
The form announced that the Company had entered into a letter of intent
to acquire all of the outstanding stock of Chili Pepper in exchange for
shares of the Company's common stock.
Form 8-K filed on May 9, 2000
The form announced that the letter of intent between Chili Pepper and the
Company regarding acquisition of the outstanding stock of Chili Pepper
was terminated and a letter of intent dated May 8, 2000 was entered into
between Chili Pepper and the Company whereby the Company agreed to
purchase certain assets of Chili Pepper.
<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: May 15, 2000 SoftLock.com, Inc.
BY: /s/ Michael J. Dziczkowski
Michael J. Dziczkowski
Corporate Controller
(Principal Accounting Officer)
<PAGE>
Exhibit 10.1
SOFTLOCK.COM, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of this 17th day of
April, 2000 by and between SoftLock.com, Inc., a Delaware corporation, with
principal offices at Five Clock Tower Place, Suite 440, Maynard, Massachusetts
01754 (the "Company"), and Scott W. Griffith ("Employee").
In consideration of the promises and mutual covenants herein set forth,
the Company and the Employee agree as follows:
ARTICLE I: EMPLOYMENT TERMS
Section 1.1. EMPLOYMENT AND TERM. The Company hereby employs the
Employee, and the Employee accepts such employment, upon the terms and
conditions hereinafter set forth, for the period (the "Employment Term")
commencing on and as of April 17, 2000 and terminating as provided in Section
2.3 hereof.
Section 1.2. EMPLOYMENT SERVICES. The Employee shall devote his full
working time and effort to promote the business and affairs of the Company and
its Affiliates (hereinafter, as such term is defined in Section 2.18 hereof) as
necessary in order to enable them to achieve their business objectives. The
Employee's principal assignment shall be to serve as Chief Executive Officer of
the Company. In this capacity, the Employee shall be responsible for and shall
also perform the duties and assignments which are consistent with his
responsibilities as Chief
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Executive Officer and/or other duties which may be reasonably assigned to him
from time to time by the Board of Directors of the Company. As Chief Executive
Officer, the Employee shall possess the senior executive office in the Company
and shall have day to day control of the Company's operations subject to the
directives of the Board of Directors. In addition, the Board of Directors of the
Company will take the steps necessary to elect the Employee to a seat on the
Board of Directors to serve during each year of the Employment Term as the
Board's Chairman. The Employee agrees that he will serve as a director of the
Company and Chairman of the Board of Directors. Nothing in this Section 1.2
shall be deemed to prevent the Employee from:
(a) investing his assets in a manner not prohibited by Section
2.6 hereof, and in such form and manner as shall not require any material
services on his part in the operations or affairs of the companies or other
entities in which such investments are made; or
(b) serving on the board of directors of any other company,
subject to the prohibitions set forth in Section 2.6 hereof, provided the Board
of Directors of the Company shall have approved such service in writing; or
(c) engaging in religious, charitable or other community or
non-profit activities which do not impair his ability to fulfill his duties and
responsibilities under this Agreement.
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Section 1.3. EMPLOYMENT COMPENSATION.
(a) BASE SALARY. For services rendered by the Employee under
this Agreement, the Company shall pay the Employee an initial amount in base
salary of $250,000 per annum, payable in equal semi-monthly installments (the
"Base Salary"). The Base Salary shall be subject to review by the Board of
Directors of the Company on or about January 1, 2001, and on or about each
January 1 thereafter for so long as this Agreement is in effect or in more
frequent intervals as deemed appropriate by the Board of Directors. The parties
agree that Employee's Base Salary shall not be fixed below the annual salary of
$250,000 for the term of this Agreement.
(b) INCENTIVE BONUS COMPENSATION. For services rendered by the
Employee under this Agreement, the Company, by action of the Board of Directors,
shall establish an executive incentive bonus plan in which the Employee shall
participate in recognition of the Employee's contribution to the overall
performance of the Company ("Bonus"). In the first year of employment, this
Bonus will be based upon the accomplishment of specific objectives to be
developed by the Employee within 90 days of the commencement of his employment
as Chief Executive Officer and mutually agreed upon by the Board of Directors
and the Employee. Thereafter, the Bonus shall be based upon the accomplishment
of specific objectives for each subsequent fiscal year as agreed to by the
Employee and the Board of Directors. The incentive bonus plan will provide the
opportunity for additional cash compensation equivalent to fifty percent (50%)
of Employee's Base Salary as then in effect. The parties agree that at or near
the midway point of each fiscal year the Employee and the Board of Directors or
a Committee thereof shall meet to discuss the Employee's and the Company's
performance as they relate to, among other things, achievement of the objectives
necessary for the Employee to earn all or any
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part of the Bonus for that fiscal year. If it is determined in the judgment of
the Board of Directors or a Committee thereof that the Employee is progressing
satisfactorily toward achieving the objectives set forth in the Bonus plan for
the fiscal year, the parties agree to use good faith efforts to establish a
percentage of the Bonus that will be due to the Employee for that fiscal year if
the Employee legitimately terminates his employment during the second half of
the fiscal year for Good Cause as defined in Section 2.3 (e) of this Agreement.
The parties further agree that during the first fiscal year in which this
Agreement is in effect, the Bonus amount for which the Employee is eligible
shall be calculated upon that portion of the Base Compensation paid to him
during the fiscal year. This Bonus is not guaranteed in part or in full, and
determination of Employee's accomplishments against these objectives will be at
the sole discretion of the Board of Directors except as set forth in paragraph
1.3(b)(i) below. Such Bonus, if any, shall be granted and paid to the Employee
within ninety (90) days following the conclusion of each calendar year
commencing December 31, 2000, after assessment of the Employee's and Company's
performance pursuant to the criteria, terms and conditions of the bonus plan to
be established. The amount of any Bonus which the Company may grant to the
Employee from time to time shall be in addition to his Base Salary and shall,
under no circumstances, be included in the Employee's Base Salary.
(i) The parties agree that notwithstanding any other
agreement they shall reach concerning the objectives that qualify the Employee
for a Bonus, the Bonus requirements will be considered met if a definitive
agreement for the sale of the Company is executed by a buyer and the Company
within one (1) year of the date Employee begins to serve as the Company's Chief
Executive Officer, and the sale in the definitive agreement is closed at
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any time, and the price per share for which the Company is sold exceeds $15.00
per share. Notwithstanding any other provision of this Agreement, the parties
agree and understand that any Bonus earned under the provisions of this
Subsection shall become due and payable to the Employee only if and upon the
date there is a closing of the sale set forth in the definitive agreement. If
the sale defined in any definitive agreement does not close, then the Employee
can earn no Bonus under this Subsection. The parties further agree and
understand, however, that nothing in this Subsection shall prevent the Employee
from otherwise earning a Bonus under the provisions of Section 1.3(b) above.
(ii) For purposes of this Agreement, the term "sale of the
Company" means any of the following (whether completed in a single transaction
or a series of related transactions): sale of all or substantially all of the
Company's assets to an unaffiliated third party or any merger, tender offer,
sale, exchange or other transaction where the holders of in the aggregate 67% of
the Company's voting control prior thereto own in the aggregate less than 25%
thereafter.
(c) STOCK OPTIONS. The Employee shall be entitled to
participate in the SoftLock.com, Inc. Stock Option Plan ("Option Plan").
(d) OPTION TO PURCHASE SHARES. The Company agrees to provide
Employee the option to purchase up to 1,164,670 shares of the Company's stock at
the agreed strike price of $8.50 per share. The first 20% (232,934) of these
options to purchase at the strike price shall vest upon execution of this
Agreement by the Employee. The second 20% of the total options to
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<PAGE>
purchase (232,934) shall vest on the first anniversary of the effective date of
this Agreement: (April 17, 2001). The third, fourth and fifth 20% of these
options shall vest during the the second, third and fourth years of this
Agreement as calculated from the effective date of the Agreement on a monthly
basis such that one twelfth (19,411.17) of each 20% (232,934) shall vest at the
completion of each full month of calendar service by the Employee as Chief
Executive Officer of the Company. No monthly vesting shall occur for fractions
of a month of service. The parties further agree that should the Employee's
employment be terminated during the first year of this Agreement by the Company
pursuant to Section 2.3 (b)(iii) of this Agreement or by the Employee pursuant
to Section 2.3 (b)(iv) of this Agreement or because of a sale of the company (as
defined in Section 1.3(b)(ii)), vesting of the second 20% of the total options
mentioned above shall be accelerated and vesting of this second 20% will occur
no later than the last day of the Employee's employment.
(i) The parties further agree that the value of Employee's
options to purchase shall be protected from dilution for a period of one (1)
year from the date of execution of this Agreement. The parties agree that this
protection shall be implemented during this one (1) year period using the
formula set forth in Appendix A of this Agreement (incorporated herein and made
a part hereof by reference) only if an equity offering of more than 10% of the
currently fully diluted and outstanding shares is consummated for a price that
is more than 20% (I.E., less than $6.80 per share) below the agreed strike price
of Employee's option to purchase ($8.50 per share).
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<PAGE>
Section 1.4. BENEFITS. Employee will be offered the opportunity to
participate in any health care, disability and life insurance coverage, if any,
at the benefit levels and costs offered to the Company's other employees as
adjusted from time to time provided the Employee otherwise meets the eligibility
requirements of the plan or plans. The Company further agrees to pay the
premiums of any other supplemental health coverage maintained by the Employee if
necessary to obtain coverage for the services of physicians used by the Employee
at the time of execution of this agreement but not otherwise covered by the
Company's health plan.
Section 1.5. WITHHOLDING. The amount of payments to be made by the
Company to the Employee are set forth herein prior to the deduction of any taxes
or other amounts, and all such payments shall be made by the Company to the
Employee under this Agreement net of any tax or other amounts required to be
withheld by the Company under applicable law and any other deductions authorized
by the Employee in writing.
Section 1.6. VACATION. The Employee shall be entitled to vacation and
holiday plans under the same terms and considerations as they are available to
all Company employees, in accordance with Company policy as adjusted from time
to time.
ARTICLE 2: GENERAL PROVISIONS
Section 2.1 EXPENSE ACCOUNT AND ALLOWANCE. The Company agrees to
reimburse the Employee for all reasonable travel, entertainment and other
documented, itemized business expenses incurred by him in connection with the
performance of his duties under this Agreement; provided, however, that the
amount available for such travel, entertainment, and other business expenses
shall be consistent with expense reimbursement policies adopted by the
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<PAGE>
Company as in effect at the time of the incurrence of such expenses by the
Employee or as may be fixed in advance by the Company's Board of Directors. The
Employee understands that the Company or the Board of Directors by majority vote
reserves the rights to disallow an Employee expense and to decline to reimburse
any portion or all of an expense it deems unreasonable in it judgment in
accordance with company policy.
Section 2.2. LOCATION. The Employee shall perform services under this
Agreement at the Company's principal office. If the Company decides to move its
principal office, each party to this Agreement shall exercise good faith efforts
to address and, to the extent practicable, accommodate the interests of the
other party with respect to the Company's decision to move on the one hand and
the Employee's desire at the time of execution of this Agreement to avoid having
to relocate to maintain his position on the other. The Employee shall also make
himself available to make reasonable business trips at the Company's expense,
both within and outside the United States of America, for purposes of consulting
with customers, agents, representatives and suppliers of the Company and its
Affiliates, as well as with other members of the Company's management.
Section 2.3 EMPLOYMENT TERM; TERMINATION.
(a) The Employment Term shall run indefinitely, unless
terminated pursuant to the following provisions of this Section 2.3.
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<PAGE>
(b) The Employment Term shall terminate (i) at the death or 30
days after the Permanent Disability (as hereinafter defined) of the Employee,
(ii) at the election of the Company, for Cause (as hereinafter defined), (iii)
at the election of either the Company or the Employee upon fifteen (15) days'
prior written notice to the other, or (iv) at the election of the Employee for
Good Cause (as hereinafter defined).
(c) "Permanent Disability", for purposes of this Section 2.3,
shall mean any physical or mental incapacitation which makes him unable to
perform the essential functions of his position with or without reasonable
accommodation for a period of 90 consecutive days or longer.
(d) "Cause", for purpose of this Section 2.3, shall mean any
of the following, as determined by the majority vote of the Board of Directors
of the Company: (i) a failure or refusal of the Employee to perform his duties
hereunder, insubordination regarding express instructions of the Board of
Directors or the Executive Committee thereof, or material breach by the Employee
of one or more of the terms of this Agreement; (ii) any substantial dishonesty
by the Employee in connection with the performance of his duties hereunder,
habitual insobriety or misappropriation of the funds or property of the Company;
or (iii) any conviction of, or plea of guilty by, the Employee with respect to
any crime, which conviction or plea is likely in the reasonable judgment of the
Board of Directors of the Company to adversely affect the Employee's
professional reputation, the reputation of the Company or of any other member of
the Group or the ability of the Employee to perform his duties satisfactorily
hereunder. In the event the Board decides to terminate the Employee for cause
for any reason set forth in
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<PAGE>
Subsection (i) above, except where a material breach of this agreement involves
a breach of Section 2.4 or 2.5 or 2.6 below, the Board agrees to provide the
Employee with written notice of the reason the Board believes cause to terminate
exists and shall provide the Employee with 30 days to cure or remedy any causes
or breaches. If the Employee does not cure and/or remedy each and every cause or
breach of which he is notified by the Board to the Board's satisfaction within
the specified period, the Board will notify the Employee of its conclusion in
writing and thereafter may immediately terminate the employment of the Employee.
The Employee agrees that upon notification of his termination for cause, he
shall resign from all positions on the Board of Directors within 10 days of the
effective date of termination. The parties agree that neither this resignation
nor its acceptance shall be considered or construed as an admission against
interest or a waiver of any rights or defenses either party may have as a result
of the termination of employment or resignation from the Board of Directors.
(e) "Good Cause", for purposes of Section 2.3 shall mean the
following: a material breach of this Agreement by the Company, a material
reduction in duties or responsibilities that results in the Employee no longer
performing the duties of Chief Executive Officer of the Company, or a sale of
the company (as defined in Section 1.3(b)(ii)) that results in the Employee no
longer performing the duties of Chief Executive Officer of the Company. In the
event the Employee believes he has Good Cause to terminate this Agreement under
this Section 2.3(e), he agrees to provide to the Board of Directors written
notice of each reason he believes Good Cause to terminate this Agreement exists
and shall provide the Company with 30 days to cure and or remedy each cause or
breach. If the Company does not cure or remedy each cause or breach of which it
is notified by the Employee to the Employee's reasonable satisfaction
10
<PAGE>
within the specified period, the Employee will notify the Board of his
conclusions in writing and thereafter may immediately terminate his employment
with the Company. The Employee agrees that upon termination of his employment
with the Company, he shall resign from all positions on the Board of Directors
within 10 days of the effective date of termination. The parties agree that
neither this resignation nor its acceptance shall be considered or construed as
an admission against interest or a waiver of any rights or defenses either party
may have as a result of the termination of employment or resignation from the
Board of Directors.
(f) Each of the parties' rights of termination pursuant to
this Section 2.3 shall be in addition to, and shall not affect, his or its
rights and remedies under any other provisions of this Agreement or under
applicable law, and all such rights and remedies shall survive termination of
this Agreement and the employment of the Employee hereunder. Nothing herein
shall be deemed to constitute a wavier by the Employee or the Company or the
Board of Directors of any rights or defenses he or it may have under applicable
law.
(g) In the event of termination of employment pursuant to the
terms of this Section 2.3, the Employee shall have no right to receive any
compensation or fees or benefits or unaccrued options or options to purchase
stock for any period subsequent to the date of termination as established by the
Board of Directors; provided that:
(i) in the event such termination is due to death or
Permanent Disability, the Company shall pay the Employee or his estate, as the
case may be, a pro rata portion of the Bonus, if any, for the year in which such
termination occurs; and
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(ii) in the event that such termination is made by the
Company pursuant to Section 2.3(b)(iii) hereof, or by the Employee the pursuant
to Section 2.3(b)(iv), the Company agrees that during the Severance Period (as
such term is defined below) it will continue to pay the Employee his then
current Base Salary and will provide the Employee continuation of benefits
provided under the Company employee benefits programs exclusive of the right to
accrue any stock options or options to purchase stock, except that if a
termination occurs pursuant to Sections 2.3(b)(iii) or 2.3(b)(iv) of this
Agreement in the first year of this Agreement, the second 20% of the options to
purchase stock mentioned in Section 1.3(d) shall accelerate as set forth in that
Section without further right to accumulate any additional options to purchase
stock.
(h) "Severance Period", for the purposes of this Section 2.3,
shall mean the period commencing on the date of such termination as established
by the Board of Directors and ending six (6) months thereafter.
(i) The obligations of the Employee pursuant to Sections 2.4
and 2.5 of this Agreement shall survive the termination for any reason of the
Employment Term. The obligations of the Employee pursuant to Section 2.6 hereof
shall survive the termination of this Agreement.
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Section 2.4. CONFIDENTIAL INFORMATION.
(a) The Employee hereby agrees to hold and maintain
confidential and private all papers, plans, drawings, specifications, methods,
processes, techniques, shop practices, formulae, customer lists, personnel and
financial data, plans, trade secrets and all proprietary information belonging
to the Company or any Affiliate thereof, as well as any and all copies or
reproductions thereof regardless of form, of which the Employee may have or
acquire knowledge or possession whether prior to, during or after the
termination of the Employment Term, and to maintain as confidential and secret
any new processes, formulations, designs, devices, research data, machines or
compositions of matter of the Company or of any of its Affiliates or of any
persons granting rights to the Company or any of its Affiliates revealed to the
Employee or discovered, originated, made or conceived by the Employee in
connection with the furnishing of employment and consulting services to the
Company or any of its Affiliates.
(b) The Employee hereby agrees that he shall not at any time,
either during or subsequent to the Employment Term, disclose or divulge to any
person, other than to the Company's or any of its Affiliates' officers and other
employees as required by the Employee's duties under this Agreement and to third
parties when required in the ordinary course of business of the Company, any of
the information specified in Section 2.4(a) above or any trade or business
secrets or any other confidential information belonging to the Company or any of
its Affiliates of which the Employee may have or acquire knowledge or
possession.
(c) Notwithstanding anything to the contrary set forth above,
the confidentiality and nondisclosure provisions contained in this Section 2.4
shall not apply to any
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<PAGE>
information or data not copyrighted or trade marked or otherwise protected from
disclosure or use or reproduction by applicable law, if and when such
information or data becomes a matter of public knowledge through no act or
omission of the Employee or to any information or data which was already known
by the Employee or the other party in question other than as a result of a
breach of this Agreement.
(d) Immediately upon the Company's request or promptly upon
termination for any reason or expiration of this Agreement, the Employee shall
deliver to the Company all memoranda, notes, records, reports, photographs,
drawings, plans, papers or other documents made or compiled by the Employee in
the course of his services to the Company or any of its Affiliates or made
available to the Employee during the course of his services to the Company or
any of its Affiliates which are in the possession of or under the control of the
Employee, and any copies or abstracts thereof regardless of form, whether or not
of a secret or confidential nature, and all such memoranda or other documents as
well as all copies and reproductions and abstracts thereof regardless of form,
shall during and after the termination of the Employment Term, be deemed to be
and shall be the property of the Company.
Section 2.5. INTELLECTUAL PROPERTY.
(a) Any and all inventions, improvements, ideas and
innovations, whether or not patentable or copyrightable, which the Employee may
invent, discover, originate, make or conceive during his employment with the
Company or any of its Affiliates, either solely or jointly with others, and
which in any way relate to or are or may be used in connection with the
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<PAGE>
business of the Company or any of its Affiliates shall be, to the extent of the
Employee's interest therein, the sole and exclusive property of the Company or
such Affiliate and the Employee's interest therein shall be assigned by the
Employee to the Company or such Affiliate, as the case may be, or to the
Company's or such Affiliate's nominee(s) and the Employee agrees to assign and
hereby does assign all such inventories, improvements, ideas and innovations to
the Company or its appropriate Affiliate(s). For the purpose of copyright laws,
all inventions or works of authorship made by or on behalf of Employee under the
terms of this Agreement of whatever kind shall be deemed works made for hire. If
the Company or its Affiliate(s) do not desire to copyright or patent any
invention but should desire to keep the invention secret, Employee agrees to
assist the Company or the Affiliate(s) and will not disclose any information
without the Company's or the appropriate Affiliate's written consent. The
Employee, upon the request and at the expense of the Company, shall and shall
use all reasonable efforts to cause any such other person(s) to promptly and
fully disclose each and all such discoveries, inventions, improvements, ideas or
innovations to the Company, the applicable Affiliate or any nominee(s) thereof.
Further, the Employee, upon the request and at the expense of the Company, shall
and shall use all reasonable efforts to cause any such other person(s) to,
assign to the Company or the applicable Affiliate, without further compensation
therefor, all right, title and interest in and to each and all such discoveries,
inventions, improvements, ideas or innovations which are reduced to writings,
drawings or practice within two (2) years after the termination of the
Employment Term.
(b) The Employee further agrees to execute at any time, upon
the request and at the expense of the Company, for the benefit of the Company,
any of its Affiliates or any
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nominee(s) thereof, and all appropriate applications, instruments, assignments
and other documents, which the Company shall deem necessary or desirable to
protect its (or any of its Affiliate's) entire right, title and interest in and
to any of the discoveries, inventions, improvements, ideas and innovations
described in Section 2.5(a) hereof.
(c) The Employee agrees, upon the request and at the expense
of the Company or any person to whom the Company or any of its Affiliates may
have granted or grants rights, to execute any and all appropriate applications,
assignments, instruments and papers, which the Company shall deem necessary for
the procurement in the United States of America and foreign countries of patent
and/or copyright protection for the discoveries, inventions, improvements, ideas
and innovations to be so assigned, including the executing of new, provisional,
continuing and reissue applications, to make all rightful oaths, to testify in
any proceeding before any governmental authority authorized to grant or
administer patent and/or copyright protection or before any court, and generally
to do everything lawfully possible to aid the Company, its Affiliates and its
and their successors, assigns and nominees to obtain, enjoy and enforce proper
patent and/or copyright protection for the discoveries, inventions,
improvements, ideas or innovations conceived or made by him during the course of
his services to the Company or any of its Affiliates for a period of two (2)
years after the termination of the Employment Term.
Section 2.6. NONCOMPETITION. The Company and the Employee acknowledge
that the Company and its Affiliates conduct business throughout the world and
the engagement by the Employee in the Designated Industry (as hereinafter
defined) could cause the Company
16
<PAGE>
irreparable harm. For the period commencing on the date hereof and ending one
(1) year after the termination of the Employment Term (the "Restricted Period"),
the Employee shall not (a) except as an officer and director of the Company and
its Affiliates, engage in any business the same as or substantially similar to
the business then being conducted by the Company or its Affiliates (the
"Designated Industry"), whether directly or indirectly, for his own account or
as an employee, partner, officer, directors, consultant or holder of more than
five percent (5%) of the equity interest in any other person, firm, partnership
or corporation, (b) divert to any competitor of the Company or its Affiliates
any customer of the Company or its Affiliates, or (c) solicit or encourage any
officer, key employee or consultant of the Company or its Affiliates to leave
its or their employ for alternative employment in the Designated Industry or
otherwise end its or their relationship with the Company, or hire or offer
employment to any person employed by the Company within one (1) year preceding
the termination of the Employment Term. The Employee will continue to be bound
by the terms of this Section 2.6 until their expiration and shall not be
entitled to any compensation with respect thereto.
Section 2.7. SEVERABILITY. The parties agree and acknowledge that the
provisions of this Article shall be devisable and separate, so that, if any
provision or provisions of this Article are held to be unreasonable, unlawful,
or unenforceable, such holdings shall not impair or render invalid the remaining
provisions of this Article or this Agreement. If any provision hereof is held to
be too broad or unreasonable in duration, scope or character of restriction to
be enforced, such provisions shall be modified to the extent necessary so that
any provision or portion hereof shall be legally enforceable to the fullest
extent permitted by law, and the parties hereto expressly authorize any Court of
competent jurisdiction to modify and enforce any such
17
<PAGE>
provision or portion hereof so that any and all provisions or portions hereof
shall be enforced by such Court to the fullest extent permitted by law as
intended by the parties.
Section 2.8. EQUITABLE REMEDIES. Each of the parties hereto
acknowledges and agrees that upon any breach by the Employee of his obligations
under Section 2.4, 2.5 or 2.6 hereof, the Company will suffer immediate and
irreparable damage and have no adequate remedy at law, and accordingly will be
entitled to specific performance and other appropriate immediate, temporary and
permanent injunctive and equitable relief.
Section 2.9. ASSIGNMENT. The rights and obligations of the Company
under this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of the Company, provided that neither this Agreement nor
the rights and obligations of the Company under this Agreement may be assigned
by the Company other than to an Affiliate of the Company except for the rights
of the Company created by Sections 2.4 or 2.5 and 2.6 above. The Employee may
not assign to any other person his rights and/or obligations under this
Agreement.
Section 2.10. AMENDMENT. This Agreement and any term, covenant,
condition or other provision hereof may be changed, waived, discharged, or
terminated solely by an instrument in writing signed by the parties hereto.
18
<PAGE>
Section 2.11. WAIVER OF BREACH. The waiver by the Company of a breach
of any provision of this Agreement by the Employee shall not operate or be
construed as a waiver of any other breach by the Employee.
Section 2.12. NOTICES. All notices, requests, demands, consents and
other communications in connection with this Agreement shall be in writing or by
written telecommunication and shall be delivered personally or mailed as
follows: be registered or certified mail or by overnight courier, postage
prepaid, or sent by written telecommunication as follows:
(a) If to the Company:
SoftLock.Com, Inc.
Five Clock Tower Place, Suite 440
Maynard, Massachusetts 01754
Phone: (978) 461-5944
(b) If the Employee:
Scott W. Griffith
34 Mitchell Grant Way
Bedford, Massachusetts 01730
or at such other address as the parties hereto may from time to time designate
in writing.
19
<PAGE>
Section 2.13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of The Commonwealth of Massachusetts.
Section 2.14. ARBITRATION OF DISPUTES. Any controversy or claim arising
out of or relating to this Agreement or the breach thereof except as excluded in
this Section shall be settled by arbitration in accordance with the laws of the
Commonwealth of Massachusetts by a single independent arbitrator appointed by
and in accordance with the rules established by J.A.M.S. Endispute. The
arbitration shall be conducted in a mutually agreeable location within 20 miles
of the Company's principal location in accordance with the rules of J.A.M.S.
Endispute except that the parties agree that any arbitrator selected must be
familiar with and apply the Federal Rules of Evidence in any arbitration
proceeding conducted pursuant to this Section. Judgment upon the award rendered
by the arbitrator may be entered in any court having jurisdiction thereof. All
fees and expenses of the arbitration process shall be borne equally by the
parties hereto regardless of the final outcome, unless and to the extent the
arbitrator shall determine that under the circumstances the sharing of all or a
part of any such fees and expenses would be unjust. The parties expressly agree
and understand that this Arbitration of Disputes
20
<PAGE>
Article shall not apply to any dispute or action brought to the Company to
enforce any right created by or to prevent or remedy any breach by Employee of
any one or more of the provisions of Sections 2.4 or 2.5 or 2.6; in these cases,
the Company reserves the right to bring an action in any court having
jurisdiction over these matters for the purpose of obtaining immediate and
complete enforcement of its rights and remedies including without limitation any
available immediate, temporary and/or permanent injunctive relief.
Section 2.15. ENTIRE AGREEMENT. This Agreement embodies the entire
agreement between the Company and the Employee relating to the subject matter
hereof, and, except as otherwise expressly provided herein, this Agreement shall
not be affected by reference to any other document not made an appendix to this
Agreement.
Section 2.16. HEADINGS, ETC. The headings of the sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be a part of this Agreement.
Section 2.17. COUNTERPARTS. This Agreement may be executed in several
identical counterparts, each of which when executed by the parties hereto and
delivered shall be an original, but all of which together shall constitute a
single instrument. In making proof of this Agreement, it shall not be necessary
to produce or account for more than one such counterpart.
21
<PAGE>
Section 2.18. ADDITIONAL DEFINED TERMS.
(a) "Affiliate" means any person, corporation or other
business entity which directly or indirectly controls, or is controlled by, or
is under common control with another person, corporation or business entity.
(b) "Subsidiary" means any corporation fifty percent (50%) or
more of the capital stock of which having ordinary voting power for the election
of directors is owned directly or indirectly by another corporation or business
entity.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Accepted and Agreed to:
/s/ Francis J. Knott /s/ Scott W. Griffith
- ------------------------------- --------------------------
Francis J. Knott Scott W. Griffith
Chairman
For: Softlock.com, Inc. (SEAL)
4/17/00 4/17/00
- ------------ ------------
Date Date
22
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