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SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the registrant |X|
Filed by a party other than the registrant
Check the appropriate box:
|X| Preliminary proxy statement
|_| Definitive proxy statement
|_| Definitive additional materials
|_| Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
INTERACTIVE NETWORK, INC.
(Name of Registrant as Specified in Its Charter)
INTERACTIVE NETWORK, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(2) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total Fee paid:
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the filing by registration statement number, or the form or
schedule and the date of its filing.
The aggregate market value of the voting stock held by non-affiliates
(non-officers, directors and 10% shareholders and excluding the shares held by a
certain voting trust of the Registrant), based on the closing price of the
common stock on March 29, 2000, as reported on the OTC Bulletin Board for the
last trading day prior to that date, was approximately $116.9 million. Shares of
common stock held by each executive officer and director and holder of 5% or
more of the outstanding common stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of March 29, 2000, the Registrant had outstanding 39,368,364 shares
of common stock.
<PAGE>
June , 2000
TO THE SHAREHOLDERS OF
INTERACTIVE NETWORK, INC.:
You are cordially invited to attend the annual meeting of the
shareholders of Interactive Network, Inc. on June 30, 2000, at 9:00 a.m., local
time, which will be held at the San Mateo Marriott, 1770 South Amphlett
Boulevard, San Mateo, California 94402.
At the annual meeting, you will consider and vote upon a proposal to
approve the grant to TWIN Entertainment Inc., a Delaware corporation, of an
exclusive license to use certain of our intellectual property for developing,
marketing and providing digital and analog interactive services, products and
technology in specified territories pursuant to the terms and conditions of a
joint venture license agreement we entered into with TWIN Entertainment and Two
Way TV Ltd., a corporation organized under the laws of England and Wales, on
January 31, 2000.
A copy of the joint venture license agreement is attached as Exhibit A
to the proxy statement.
In addition, you will consider and vote upon proposals to (1) increase
the number of shares of our common stock authorized for issuance under our 1999
stock option plan from 3,650,000 shares to 5,000,000 shares, (2) re-elect our
four directors, and (3) ratify the appointment of Marc Lumer & Company as our
independent accountants for the fiscal year ending December 31, 2000, each as
more fully described in the attached proxy statement.
AFTER CAREFUL CONSIDERATION, OUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE EXCLUSIVE LICENSE GRANT PURSUANT TO THE TERMS AND CONDITIONS OF THE
JOINT VENTURE LICENSE AGREEMENT AND DETERMINED THAT IT IS FAIR AND IN OUR BEST
INTERESTS AND THE BEST INTERESTS OF OUR SHAREHOLDERS. FURTHER, OUR BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE (1) APPROVAL OF THE
EXCLUSIVE LICENSE GRANT PURSUANT TO THE JOINT VENTURE LICENSE AGREEMENT, (2)
increase the number of AUTHORIZED shares under OUR 1999 Stock Option Plan, (3)
election of the listed directors and (4) ratification of the appointed
accountants.
You do not need to attend the annual meeting. Whether or not you
attend, after reading the proxy statement, please mark, date, sign and return
the enclosed proxy card in the accompanying reply envelope. If you decide to
attend the annual meeting, please notify our company secretary at the meeting if
you wish to vote in person and your proxy will not be voted.
YOU SHOULD CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS" ON PAGE
15 OF THE ENCLOSED PROXY STATEMENT BEFORE VOTING. WE URGE YOU TO CAREFULLY
REVIEW ALL THE INFORMATION IN THE PROXY STATEMENT AND THE EXHIBITS.
A copy of our 1999 annual report has been mailed concurrently with this
proxy statement to all shareholders entitled to notice of and to vote at the
annual meeting.
Sincerely yours,
/S/ Bruce W. Bauer
------------------
Bruce W. Bauer
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
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INTERACTIVE NETWORK, INC.
1161 Old County Road
Belmont, California 94002
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
- --------------------------------------------------------------------------------
TO BE HELD ON JUNE 30, 2000
The annual meeting of the shareholders of Interactive Network, Inc.
will be held at San Mateo Marriott, 1770 South Amphlett Boulevard, San Mateo,
California 94402, on June 30, 2000, at 9:00 a.m., local time, to:
1. Approve the grant to TWIN Entertainment Inc., a Delaware
corporation, of an exclusive license to use our intellectual property for
developing, marketing and providing digital and analog interactive services,
products and technology in specified territories pursuant to the terms and
conditions of a joint venture license agreement we entered into with TWIN
Entertainment and Two Way TV Ltd., a corporation organized under the laws of
England and Wales, on January 31, 2000;
2. Approve an amendment to our 1999 stock option plan increasing the
number of shares of our common stock authorized for issuance under the plan from
3,650,000 shares to 5,000,000 shares;
3. Re-elect our four directors to serve until the 2001 annual meeting
of shareholders or until their successors are elected and qualified;
4. Ratify the appointment of Marc Lumer & Company as our independent
accountants for the fiscal year ending December 31, 2000; and
5. Transact any other business which may properly come before the
annual meeting and any adjournments or postponements thereof.
Each of the foregoing items of business are more fully described in the
proxy statement that accompanies this notice.
Only shareholders of record at the close of business on May 19, 2000
will be entitled to notice of, and to vote at, the annual meeting and at any
continuation or adjournment thereof.
All shareholders are cordially invited to attend the annual meeting. In
any event, to ensure your representation at the annual meeting, please carefully
read the accompanying proxy statement which describes the matters to be voted on
at the annual meeting and sign, date and return the enclosed proxy card in the
reply envelope provided. Should you receive more than one proxy because your
shares are registered under different names and addresses, each proxy should be
returned to ensure that all your shares will be voted. If you attend the annual
meeting and vote by ballot, your proxy will be revoked automatically and only
your vote at the annual meeting will be counted. The prompt return of your proxy
card will assist us in preparing for the annual meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/S/ Bruce W. Bauer
------------------
Bruce W. Bauer
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Belmont, California
June , 2000
- --------------------------------------------------------------------------------
IMPORTANT: EVERY SHAREHOLDER, WHETHER NOT HE OR SHE EXPECTS TO ATTEND THE ANNUAL
MEETING IN PERSON, IS URGED TO EXECUTE THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ACCOMPANYING REPLY ENVELOPE.
- --------------------------------------------------------------------------------
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PROXY STATEMENT
FOR THE ANNUAL MEETING OF THE SHAREHOLDERS OF
INTERACTIVE NETWORK, INC.
This proxy statement is furnished in connection with the solicitation
by the board of directors of Interactive Network, Inc., a California
corporation, of proxies for an annual meeting of the shareholders to be held at
9:00 a.m., local time, on June 30, 2000, and any adjournment or postponement
thereof. The annual meeting will be held at San Mateo Marriott, 1770 South
Amphlett Boulevard, San Mateo, California 94402. Our principal executive offices
are located at 1161 Old County Road, Belmont, California 94002. Our telephone
number at that address is (650) 508-8793.
These proxy solicitation materials will be first mailed on or about
June 1, 2000 to all of our shareholders entitled to vote at the annual meeting.
PURPOSE OF THE ANNUAL MEETING
At our annual meeting, holders of our common stock will consider and
vote upon proposals to:
1. Approve the grant to TWIN Entertainment Inc., a Delaware
corporation, of an exclusive license to use our intellectual
property for developing, marketing and providing digital and
analog interactive services, products and technology in
specified territories pursuant to the terms and conditions of
a joint venture license agreement we entered into with TWIN
Entertainment and Two Way TV Ltd., a corporation organized
under the laws of England and Wales, on January 31, 2000;
2. Approve an amendment to our 1999 stock option plan increasing
the number of shares of our common stock authorized for
issuance under the plan from 3,650,000 shares to 5,000,000
shares;
3. Re-elect our four directors to serve until the 2001 annual
meeting of shareholders or until their successors are elected
and qualified; and
4. Ratify the appointment of Marc Lumer & Company as our
independent accountants for the fiscal year ending December
31, 2000.
For a description of the terms of the exclusive license grant proposal,
see "Proposal 1 - Approval of the Exclusive License Grant Pursuant to the Joint
Venture License Agreement" on page 6. For a description of the amendment to our
1999 stock option plan, see "Proposal 2 - Approval of an Amendment to the 1999
Stock Option" on page 19. For a description of the directors for election, see
"Proposal 3 - Election of Directors" on page 24. For a description of the
appointment of our independent accountants, see "Proposal 4 - Ratification of
Independent Public Accountants" on page 31. Our shareholders also will consider
and vote on any other matter that may properly come before the annual meeting.
RECORD DATE
Shareholders of record at the close of business on May 19, 2000 will be
entitled to notice of, and to vote at, the annual meeting and any continuations
or adjournments thereof.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before the proxy is exercised by: (1) sending
written notice of revocation to our company secretary; (2) executing and
delivering a proxy bearing a later date; or (3) attending the annual meeting and
voting in person.
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VOTING RIGHTS OF SHAREHOLDERS
As of the close of business on May 19, 2000, we had ________ shares of
our common stock outstanding and entitled to vote at the annual meeting, held by
___ shareholders of record. The presence at the annual meeting of a majority of
these shares of our common stock, either in person or by proxy, will constitute
a quorum for the transaction of business at the annual meeting. Votes cast by
proxy or in person at the annual meeting will be tabulated by the inspectors of
election appointed for the annual meeting and they will determine whether or not
a quorum is present. Each outstanding share of our common stock on May 19, 2000
is entitled to one vote on all matters to come before the annual meeting.
If any shareholder is unable to attend the annual meeting, the
shareholder may vote by proxy. The enclosed proxy is solicited by our board of
directors, and, when the proxy card is returned properly completed, it will be
voted as directed by the shareholder on the proxy card. Shareholders are urged
to specify their choices on the enclosed proxy card. If a proxy card is signed
and returned without choices specified, in the absence of contrary instructions,
the shares of our common stock represented by the proxy will be voted FOR
Proposals 1, 2, 3 and 4 and will be voted in the proxyholders' discretion as to
other matters that may properly come before the annual meeting.
Each of the proposals requires the affirmative vote of the holders of a
majority of the shares of our common stock voting by proxy or in person at the
annual meeting, except for the following: (1) the approval of the exclusive
license grant requires the affirmative vote of the holders of a majority of the
outstanding shares of our common stock entitled to vote; and (2) our directors
shall be elected by a plurality of the votes cast.
Abstentions are included in the determination of the number of shares
of our common stock present and voting for quorum purposes but will not be
counted for purposes of calculating the vote with respect to such matters. If a
broker returns a "non-vote" proxy as to any matter, including a lack of
authority to vote on such matter, then the "broker non-vote" proxy will not be
considered as present or voting with respect to such matter.
As of May 19, 2000, our directors and executive officers and their
affiliates were beneficial owners of an aggregate of ________ shares of our
common stock (exclusive of any shares issuable upon the exercise of stock
options remaining unexercised as of that date), or approximately ____% of the
________ shares of our common stock that were issued and outstanding as of that
date. See "Security Ownership of Certain Beneficial Owners and Management" on
page 29 of this proxy statement.
COST OF SOLICITATION
We will bear the entire cost of solicitation by management, including
the preparation, assembly, printing and mailing of the proxy solicitation
materials. In addition, we may reimburse brokerage firms and other persons
representing beneficial owners of our common stock for their expenses in
forwarding proxy solicitation materials to such beneficial owners. Proxies may
also be solicited by certain of our directors, officers and regular employees,
without additional compensation, personally or by telephone, telegram, email or
facsimile. Except as described above, we do not intend to solicit proxies other
than by mail.
OUR ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999, HAS BEEN
MAILED CONCURRENTLY WITH THE MAILING OF THE NOTICE OF ANNUAL MEETING AND PROXY
STATEMENT TO ALL SHAREHOLDERS ENTITLED TO NOTICE OF AND TO VOTE AT THE ANNUAL
MEETING. THE ANNUAL REPORT IS NOT INCORPORATED INTO THIS PROXY STATEMENT AND IS
NOT CONSIDERED PROXY SOLICITING MATERIAL.
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PROPOSAL 1
APPROVAL OF THE EXCLUSIVE LICENSE GRANT PURSUANT TO
THE JOINT VENTURE LICENSE AGREEMENT
THIS SECTION OF THE PROXY STATEMENT DESCRIBES ASPECTS OF THE PROPOSED
EXCLUSIVE LICENSE GRANT. THE DESCRIPTION OF THE JOINT VENTURE LICENSE AGREEMENT
SET FORTH BELOW IS ONLY A SUMMARY OF THE KEY TERMS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE JOINT VENTURE LICENSE
AGREEMENT. A COPY OF THE JOINT VENTURE LICENSE AGREEMENT IS ATTACHED AS EXHIBIT
A TO THIS PROXY STATEMENT AND IS INCORPORATED INTO THIS PROXY STATEMENT BY
REFERENCE. YOU ARE URGED TO READ THE ENTIRE AGREEMENT CAREFULLY.
GENERAL
We are currently engaged primarily in the business of developing and
licensing intellectual property for interactive television systems and other
telecommunications applications. Since the approval of our plan of
reorganization by the U.S. Bankruptcy Court and the consummation of a settlement
agreement with various creditors in April 1999, we have concentrated primarily
on the further development and exploitation of our patent portfolio through
potential licenses, joint ventures and other methods that will not involve
substantial capital requirements or large overhead expenses.
Two Way TV Ltd. is a company organized under the laws of England and
Wales and is an affiliate of Cable & Wireless Communications PLC, which has a
50.1% stake in Two Way. Two Way is a leading company in the development and
deployment of interactive television services in Europe and is currently
offering interactive television services to approximately 100,000 subscribers of
Cable & Wireless' digital cable television services, and has agreements in place
to extend its services to other operators of digital television networks in the
United Kingdom. To enable delivery of these services, Two Way has developed an
extensive technology infrastructure which is also the subject of various current
patent filings. This infrastructure can be targeted to deliver services over a
wide range of digital television software systems. Two Way has also developed an
extensive library of games and other applications that are delivered using Two
Way's technology infrastructure. These games are currently the most popular
elements of Cable and Wireless' digital interactive services.
In April 2000, Two Way entered into an agreement with Liberate
Technologies pursuant to which Liberate was licensed, on a non-exclusive basis,
the right to incorporate certain elements of Two Way's interactive technologies
into its platform for the purpose of enabling its platform to offer Two Way's
interactive entertainment services. This agreement also includes joint marketing
commitments. In the event that our license grant to TWIN Entertainment becomes
exclusive, in which case Two Way's license grant will also become exclusive, the
benefits of these agreements may be transferred to TWIN Entertainment in the
United States and Canada. Otherwise, Two Way will continue to support this
agreement and derive resulting benefits independently.
On December 6, 1999, we entered into a joint venture and stock purchase
agreement with Two Way which resulted in the formation of TWIN Entertainment
Inc., a new company 50-50 jointly owned and co-managed by us and Two Way. TWIN
Entertainment will develop interactive products, services and technology for
distribution initially in the United States and Canada and, additionally, in
other mutually agreed upon areas (collectively, the "Territory"). On January 31,
2000, we further entered into a joint venture license agreement with Two Way and
TWIN Entertainment setting forth which of our and Two Way's existing
intellectual property will be initially licensed to TWIN Entertainment. Pursuant
to the joint venture license agreement, we granted TWIN Entertainment a
non-exclusive, royalty-free, non-transferable license for all of our existing
patents specifically disclosed and existing as of the date of the joint venture
and stock purchase agreement, as well as any potential patents based on those
patents (the "IN Patents") in the Territory. Similarly, Two Way granted TWIN
Entertainment a non-exclusive, royalty-free, non-transferable license in the
Territory for all patents, trade secrets, copyrights and certain other
intellectual property and proprietary rights now existing or developed after or
coming into existence during the term of the joint venture license agreement
("TW's Proprietary Rights"). Additionally, Two Way granted TWIN Entertainment a
similar license for certain of its trademarks, service marks, trade names and
logos. TWIN Entertainment may, among other things, develop, market and supply
products and services embodying the IN Patents and TW's Proprietary Rights in
the Territory.
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In the joint venture and stock purchase agreement, we also agreed to
seek the requisite approval from our shareholders to convert our license grant
to TWIN Entertainment in the Territory from nonexclusive to exclusive, at which
time, Two Way's license grant to TWIN Entertainment also will become exclusive.
We believe that the IN Patents constitute a substantial portion of our
assets. Accordingly, we feel that it is important for our shareholders to
approve the exclusive license grant of the IN Patents to TWIN Entertainment in
the Territory. Further, shareholders' approval for the exclusivity of the
license grant may be required under California law if such license grant is
perceived as an exchange of substantially all of our assets. Upon the
affirmative vote by holders of a majority of the outstanding shares of our
common stock entitled to vote, our license grant for the IN Patents and Two
Way's license grant for TW's Proprietary Rights to TWIN Entertainment in the
Territory will become exclusive.
BOARD OF DIRECTORS' RECOMMENDATION
Our board of directors has unanimously determined that the terms and
conditions of the joint venture license agreement are fair and in our best
interests and in the best interests of our shareholders, and has approved the
exclusive license grant of IN Patents to TWIN Entertainment in the Territory.
Our board of directors unanimously recommends that our shareholders vote "FOR"
approval of the exclusive license grant.
BOARD OF DIRECTORS' REASONS FOR RECOMMENDING THE EXCLUSIVE LICENSE GRANT
The decision of our board of directors to approve the exclusive license
grant of the IN Patents to TWIN Entertainment in the Territory is based on an
analysis of our current and future business prospects, as well as pursuant to
discussions with our advisory panel of consultants.
Our board of directors' decision is based primarily on the following
factors:
o Our patents, primarily related to the interactive television
market and other interactive technology, expire between 2004
and 2015;
o There is a large potential market for interactive
communications and applications in the fields of
entertainment, advertising, games and gambling through
Internet and television delivery;
o Because of the approaching date of expiration of some of our
patents, coupled with the current high degree of interest in
interactive communications and applications, we have an
opportunity to capitalize on our patent portfolio, and we
believe the most expeditious manner to do so would be to
provide TWIN Entertainment with the anticipated exclusive
access to our and Two Way's intellectual property;
o Our cash resources are limited due to our involvement in
various bankruptcy proceedings, as well as other litigation
and settlement proceedings with our creditors. As a result, we
must effectively exploit our patent portfolio without
incurring large operating or overhead expenses;
o Licensing our intellectual property allows us to retain
ownership of our patent portfolio, while simultaneously
delivering shareholder value by capitalizing on this valuable
asset;
o Two Way is a suitable strategic partner because of our
existing relationship and the similar line of business it is
engaged in;
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o We believe Two Way can leverage its operating experience to
help enable TWIN Entertainment to more rapidly exploit IN's
Patents. If our license grant remains non-exclusive, this
expertise will also be available to our potential competitors
and potential competitors of TWIN Entertainment;
o We believe the incorporation of IN's Patents into Two Way's
technology platform could accelerate the realization of value
for our shareholders. If our license grant remains
non-exclusive, Two Way's license grant will also remain
non-exclusive and its technology platform will be available
for license to our potential competitors and potential
competitors of TWIN Entertainment;
o If our license grant remains non-exclusive, Two Way's popular
interactive games will be available for license to our
potential competitors and potential competitors of TWIN
Entertainment;
o If our license grant becomes exclusive, Two Way's license
grant also will become exclusive, in which case, TWIN
Entertainment may enjoy any benefits derived from the
agreement that Two Way has with Liberate Technologies. If our
license grant remains non-exclusive, this agreement could
accelerate the ability of Liberate, or its customers, to
compete with us or TWIN Entertainment;
o Our cooperation with Two Way to co-manage TWIN Entertainment
will significantly enhance our ability to capitalize on our
patent portfolio without incurring operating and overhead
costs and allow us to secure the necessary cash reserve to
prepare and file additional patent applications to safeguard
our intellectual property; and
o The anticipated exclusivity of our and Two Way's license
grants to TWIN Entertainment diminishes its burden of
competing with us or Two Way or with any third party using our
or Two Way's intellectual property, and thus allowing it to
have greater opportunities and resources to advance in the
interactive television market.
The terms of the joint venture license agreement, including the
provision contemplating the exclusive license grant of the IN Patents to TWIN
Entertainment in the Territory, are the result of our arm's length negotiations
with Two Way.
Our board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the exclusive
license grant of the IN Patents to TWIN Entertainment in the Territory,
including the following:
o The fact that our U.S. and Canadian patent portfolio is our
most valuable asset and the exclusive license grant of such
patents to TWIN Entertainment will be royalty-free and
perpetual (subject to certain termination rights);
o TWIN Entertainment has no operating history and thus we cannot
assure you that it will successfully develop, market and sell
products and services embodying the combined intellectual
property licensed from us and Two Way or that it will ever
earn a profit on such activities;
o We will be significantly dependent on TWIN Entertainment, a
third party (although a 50% affiliate), to generate revenues
that capitalize upon the patents we are licensing in the
Territory; and
o We cannot assure you that the combined transfer of our and Two
Way's intellectual property to TWIN Entertainment will produce
the intended benefits.
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As a result of the foregoing considerations, our board of directors has
determined that the potential advantages of the exclusive license grant outweigh
the associated potential risks. Our board of directors believes that TWIN
Entertainment will have better capital resources to develop, market and sell
products and services embodying our patent portfolio than if we were to
internally develop, market and sell our own products and services in the
Territory. Our board of directors further believes that the exclusive licensing
arrangement is more cost-effective and has better revenue-generating potential
because such an arrangement diminishes TWIN Entertainment's burden of competing
with us or Two Way or with any third party using our or Two Way's intellectual
property. However, the foregoing discussion of the information and factors
considered by our board of directors is not intended to be exhaustive; rather it
is a summary of the material factors that our board of directors considered in
making its recommendation. Our board of directors considered these factors in
light of its knowledge of our business, the interactive communications industry
in general and information provided by our management and advisory panel of
consultants. In view of the variety of factors considered in connection with its
evaluation of the proposed exclusive license grant, our board of directors did
not find it practicable to and did not quantify or otherwise assign relative
weight to the specific factors considered in reaching its determination.
REQUIRED VOTE
Upon the affirmative vote of the holders of a majority of the
outstanding shares of our common stock entitled to vote, our license grant for
the IN Patents will become exclusive, at which time Two Way's license grant also
will become exclusive. Shareholders abstaining from voting on this proposal will
be counted for purposes of determining a quorum, but will not be counted for
purposes of calculating the vote with respect to this proposal. If a broker
returns a "non-vote" proxy as to this proposal, including a lack of authority to
vote on this proposal, then the "broker non-vote" proxy will not be considered
as present or voting with respect to this proposal.
RECOMMENDATION OF THE BOARD
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF
THE EXCLUSIVE LICENSE GRANT OF THE IN PATENTS TO TWIN ENTERTAINMENT IN THE
TERRITORY.
BACKGROUND TO THE JOINT VENTURE LICENSE AGREEMENT
As disclosed in our 1998 annual report to shareholders, in connection
with the reassessment of our business strategy, we concluded that it is in our
best interests and the best interests of our shareholders to reaffirm and
further develop our relationship with Two Way. We entered into a know-how
license agreement with Two Way originally in 1992 whereby we granted Two Way an
exclusive license covering our know-how related to our interactive systems and
other telecommunications applications for Two Way's use in the United Kingdom
and certain other European countries. This exclusive license grant was
terminated in January 2000 in connection with our entering into the joint
venture with Two Way, pursuant to which we entered into a termination and
license agreement with Two Way for this intellectual property and related
patents.
In connection with the termination and license agreement, on December
6, 1999, we entered into a joint venture and stock purchase agreement with Two
Way under which we established TWIN Entertainment, a 50-50 jointly owned and
co-managed Delaware corporation, to develop, market and provide digital and
analog interactive products, services and technology in the Territory embodying
our and Two Way's intellectual property. In connection therewith, we agreed and
Two Way also agreed to purchase 2,500,000 shares of TWIN Entertainment's common
stock at a purchase price of $500,000 or $0.20 per share. Further, we agreed to
immediately cease all discussion or negotiation with any person or group
relating to any acquisition of our company, substantial sale of our assets or
any other action that would inhibit the exclusivity of our and Two Way's license
grants to TWIN Entertainment as contemplated by the joint venture license
agreement. In the event that we fail to abide by this obligation, we will pay
Two Way a fee of $150,000 plus reasonable out-of-pocket expenses incurred by Two
Way in connection with the transactions contemplated by the joint venture and
stock purchase agreement.
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In exchange for the equity investment in TWIN Entertainment, we and Two
Way were granted certain governance and other rights pursuant to various related
agreements we entered into with TWIN Entertainment and Two Way. These rights
include (1) written notice upon and restrictions on the sale and transfer of any
shares of TWIN Entertainment's common stock; (2) in the event either of us
wishes to sell our interest in TWIN Entertainment, first TWIN Entertainment and
then the other party has the right to purchase the shares and the right to
participate in the sale or transfer of the shares pursuant to the same terms and
conditions; (3) right to elect a certain number of directors based on our and
Two Way's ownership percentage of TWIN Entertainment's common stock; (4) our and
Two Way's right to approve certain of TWIN Entertainment's major actions; (5)
specific procedures upon the occurrence of a deadlock on any matter properly
before TWIN Entertainment's board of directors; (6) subject to certain
restrictions, the right of each of Interactive Network and Two Way to demand
TWIN Entertainment to register the TWIN Entertainment common stock under the
Securities Act of 1933, as amended, and the right for our and Two Way's common
stock to be included among the securities to be registered in any other public
offering TWIN Entertainment may engage in; and (7) access to certain of TWIN
Entertainment's financial information.
We and Two Way have also agreed that Two Way, subject to certain
limitations, shall make the day-to-day operating decisions for TWIN
Entertainment. In April 2000, TWIN Entertainment hired Robert J. Regan, an
experienced executive in the interactive television industry, to serve as
president and chief executive officer. He comes from GTE mainStreet Interactive
Television, a division of GTE, where he was senior vice president of
programming.
We believe that TWIN Entertainment will have better resources to
develop, market and provide digital and analog interactive products, services
and technology in the Territory with access to both our and Two Way's
intellectual property. As a result, we entered into the joint venture license
agreement setting forth which of our and Two Way's existing intellectual
property will be initially licensed to TWIN Entertainment. Further, we believe
that the exclusive licensing arrangement is more cost-effective and has better
revenue-generating potential because such an arrangement diminishes TWIN
Entertainment's burden of competing with us or Two Way or with any third party
using our or Two Way's intellectual property.
SUMMARY OF THE JOINT VENTURE LICENSE AGREEMENT
The joint venture license agreement contains a grant by the licensors,
comprised of us and Two Way, to TWIN Entertainment of a license to use certain
of our and Two Way's intellectual property for its development, marketing and
provision of digital and analog interactive products, services and technology in
the Territory. In return, TWIN Entertainment agreed to grant each licensor a
right of first refusal to license for use, outside the Territory, certain
intellectual property that TWIN Entertainment may develop in the future. Two Way
further agreed to supply TWIN Entertainment with certain technical training,
maintenance and support services.
THE LICENSE GRANTS
OUR LICENSE GRANT TO TWIN ENTERTAINMENT. We granted TWIN Entertainment
a non-exclusive, royalty-free, perpetual (subject to certain termination
rights), non-transferable license to all of the IN Patents, for the life of such
patents, in the Territory to, among other things, develop, market and sell
products, services and technology embodying the IN Patents.
TWO WAY'S LICENSE GRANT TO TWIN ENTERTAINMENT. Two Way granted TWIN
Entertainment a non-exclusive, royalty-free, perpetual (subject to certain
termination rights), non-transferable license to TW's Proprietary Rights in the
Territory and to, among other things, develop, use, modify and sell products,
services and technology embodying TW's Proprietary Rights in the Territory.
Further, Two Way agreed to grant TWIN Entertainment a non-exclusive,
non-transferable, royalty-free license for certain of its trademarks, service
marks, trade names and logos.
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RESERVED INTELLECTUAL PROPERTY RIGHTS. Other than the license rights
granted under the joint venture license agreement, each licensor retains
ownership of its respective intellectual property. Similarly, TWIN Entertainment
retains ownership of any intellectual property it develops in the future,
irrespective of whether such intellectual property is subsequently licensed to
one of the licensors.
TERMS AND CONDITIONS UPON THE EXCLUSIVITY OF THE LICENSE GRANTS
OUR LICENSE GRANT TO TWIN ENTERTAINMENT. Our non-exclusive license
grant of the IN Patents to TWIN Entertainment in the Territory becomes exclusive
upon our shareholders' approval of this arrangement. Upon approval of
exclusivity by our shareholders, TWIN Entertainment may sublicense, on a
non-exclusive basis, the rights granted by our license in the Territory, subject
to our prior written approval (not to be unreasonably withheld) and TWIN
Entertainment's notification to Two Way and us of the sublicensee's identity.
The right to sublicense terminates automatically if our license grant reverts to
non-exclusive for any reason.
TWO WAY'S LICENSE GRANT TO TWIN ENTERTAINMENT. Upon our license grant
becoming exclusive, Two Way's non-exclusive license grant of TW's Proprietary
Rights in the Territory becomes exclusive. Upon Two Way's license grant becoming
exclusive, TWIN Entertainment may sublicense, on a non-exclusive basis, the
rights granted by Two Way's license in the Territory, subject to Two Way's prior
written approval (not to be unreasonably withheld), and TWIN Entertainment's
notification to Two Way and us of the sublicensee's identity. The right to
sublicense terminates automatically if our license grant to TWIN Entertainment
reverts to non-exclusive. Further, upon our license grant becoming exclusive,
Two Way will exclusively license certain of its trademarks, service marks, trade
names and logos to TWIN Entertainment for use in the Territory for products and
services incorporating TW's Proprietary Rights.
NON-COMPETITION OBLIGATIONS. Upon our shareholders' approval of the
exclusivity of our license grant, we are and Two Way is prohibited from
competing, directly or indirectly, with TWIN Entertainment in the Territory for
so long as each of our license grants remains exclusive and has not been
transferred or assigned by TWIN Entertainment to a third party. Notwithstanding
our foregoing non-competition obligations, we have the right to create, develop
or engage in business activities within or outside the scope of TWIN
Entertainment's business, provided that such business activities do not directly
compete with TWIN Entertainment's then-current primary business activities.
Prior to our shareholders' approval of the exclusivity of our license grant, we
agree and Two Way also agrees not to compete directly with TWIN Entertainment so
long as the license grants remain in effect and have not been transferred or
assigned by TWIN Entertainment to any third party, PROVIDED we have and Two Way
has the right to grant sublicenses of our respective technology and proprietary
rights to unaffiliated persons in the Territory.
ENFORCEMENT OF RIGHTS IN THE TERRITORY. Upon our license grant becoming
exclusive, TWIN Entertainment will become solely responsible for policing,
protecting and enforcing our and Two Way's respective intellectual property
exclusively licensed to it in the Territory. If TWIN Entertainment fails to
adequately fulfill this obligation, the infringed licensor may take whatever
action it deems appropriate. If the infringed licensor exercises its right of
action, it will bear all associated expenses and receive all resulting benefits.
TWIN ENTERTAINMENT'S OBLIGATIONS
Pursuant to the joint venture license agreement, TWIN Entertainment is
obligated to fulfill certain performance criteria, including (1) execution of a
definitive agreement with a multiple system operator or other distributor
whereby such entity will offer TWIN Entertainment's interactive television
service to an excess of 1 million subscribers by September 1, 2000; (2)
execution of definitive agreements(s) whereby TWIN Entertainment receives
funding of at least $10 million by January 1, 2001; and (3) commercial launch by
TWIN Entertainment of an interactive service by April 1, 2001. In the event that
TWIN Entertainment fails to meet any of these performance criteria, each
licensor has the option, exercisable upon written notice to TWIN Entertainment
and the other licensor within a specified period, to convert its license grant
from exclusive to non-exclusive and/or terminate its non-competition
obligations. However, if one licensor unreasonably prevents TWIN Entertainment
from meeting any of its performance criteria, such licensor will not have the
right to convert its license grant from exclusive to non-exclusive basis or
terminate its non-competition obligations. In the event of such a "prevention,"
the other licensor will have the option, exercisable upon written notice to TWIN
Entertainment and the "preventing" party within a specified period, to convert
such other licensor's license grant from exclusive to non-exclusive basis,
provided the "preventing" party does not cure the breach within 30 days of
receipt of notice. Any such license conversion or termination of non-competition
obligations by the "non-preventing" party will not modify, terminate or
otherwise affect the exclusivity of the license grant by or the non-competition
obligations of the "preventing" party.
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OUR AND TWO WAY'S OBLIGATIONS
TWO WAY'S SUPPORT AND TRAINING SERVICES. Subject to certain
limitations, Two Way is obligated to provide TWIN Entertainment with initial as
well as on-going technical training and support services in connection with TW's
Proprietary Rights. TWIN Entertainment agrees to pay Two Way support fees (and
reimbursements for certain initial transition services) in the amount of four
percent of TWIN Entertainment's gross revenues received prior to the fifth
anniversary of the date of the joint venture license agreement, and three
percent of TWIN Entertainment's gross revenues received any time afterwards.
Subject to our prior written approval, TWIN Entertainment may elect to terminate
Two Way's technical training and support services. Upon termination, TWIN
Entertainment will cease to have payment obligations to Two Way, and Two Way
will have no further technical training and support, delivery and
non-competition obligations to TWIN Entertainment, and Two Way's license grant
to TWIN Entertainment becomes non-exclusive.
DELIVERY OBLIGATIONS. Subject to the terms of the joint venture license
agreement, Two Way must deliver its current technology and proprietary rights in
tangible form to TWIN Entertainment. Further, subject to the terms of the joint
venture license agreement, Two Way must, on an on-going basis, deliver all new
Two Way technology and proprietary rights that are related to TWIN
Entertainment's business to TWIN Entertainment. We must deliver to TWIN
Entertainment a copy of each IN Patent and related documents in existence as of
the date of the joint venture license agreement.
RIGHT OF FIRST REFUSAL
RESERVATION OF RIGHTS. We have no obligation to license any of our
respective technology or proprietary rights developed after the date of the
joint venture license agreement to TWIN Entertainment. Two Way has no obligation
to license any of its technology or proprietary rights independently developed
by it after the date of the joint venture license agreement or coming into
existence after the date of the joint venture license agreement, PROVIDED such
technology or proprietary right is entirely new and not related to TWIN
Entertainment's business. However, we must and Two Way must offer TWIN
Entertainment a right of first refusal to any such technology or proprietary
right pursuant to the procedures described below. Subject to the board
determination and the procedures described below, the joint venture license
agreement sets forth that the determination of "related to TWIN Entertainment's
business" will be broadly interpreted.
OUR AND TWO WAY'S RIGHT OF FIRST REFUSAL. In any country where only one
licensor, either us or Two Way, is actively marketing products or services, that
licensor has the right of first refusal to enter into an exclusive license in
that country for any technology wholly-owned by TWIN Entertainment. In any
country where both licensors are actively marketing their products and services,
each licensor has the opportunity to enter into a non-exclusive license with
TWIN Entertainment in that country on substantially similar terms and
conditions. Further, TWIN Entertainment is prohibited from licensing its
technology to a third party in that country. If neither licensor is actively
marketing its products or services in a country, both licensors are free to
negotiate for an exclusive or non-exclusive license for the technology for that
country. Further, if TWIN Entertainment wishes to license its technology to a
third party, it must provide each licensor with a 30-day prior written notice of
its intent prior to doing so. If either licensor delivers a written notice to
TWIN Entertainment within 30 days indicating a desire to enter into a license
agreement for such technology in the specified country, TWIN Entertainment must
negotiate exclusively and in good faith with such licensor for a period of 60
days. If no agreement is reached after 60 days, TWIN Entertainment may proceed
to license that technology to a third party, provided the license is on no
better terms than those offered to the last licensor that negotiated with TWIN
Entertainment.
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EXCLUSION OF TWO WAY'S TECHNOLOGY OR PROPRIETARY RIGHTS. If Two Way
excludes any of its technology or proprietary rights from the license grant to
TWIN Entertainment based on Two Way's good faith belief that such technology or
proprietary right is not related to TWIN Entertainment's business, Two Way must
notify us and TWIN Entertainment of its intent and present such technology or
proprietary right to TWIN Entertainment's board of directors for their review
prior to making the same available to a third party. TWIN Entertainment's board
of directors will hold a special meeting to decide whether the specified
technology or proprietary right is related to TWIN Entertainment's business. An
unanimous decision that the specified technology or proprietary right is NOT
related to TWIN Entertainment's business is conclusive if such a decision was
determined by director(s) representing us and Two Way. If the decision is not
unanimous, the specified technology or proprietary right will be deemed as
related to TWIN Entertainment's business. Except for an unanimous vote in which
director(s) representing us and Two Way participated, we may or Two Way may
request arbitration if either believes the final vote to be unreasonable.
Further, we may or Two Way may request arbitration if either believes the final
vote to be unreasonable and neither was represented by a representative director
on TWIN Entertainment's board of directors. If neither us nor Two Way was
represented by a representative director on TWIN Entertainment's board, then the
entire board will decide whether the specified technology or proprietary right
of Two Way is related to TWIN Entertainment's business and unless such vote is
unanimous, either Two Way or us may request arbitration.
TWIN ENTERTAINMENT'S RIGHT OF FIRST REFUSAL. After the date of the
joint venture license agreement, if we develop any technology that is related to
TWIN Entertainment's business or if Two Way develops any technology that is not
related to TWIN Entertainment's business and either of us desires to disclose,
license or otherwise make such developed technology available to a third party
in the Territory, such licensor must promptly notify the other licensor and TWIN
Entertainment of its intent, and for a period of 30 days following the receipt
of notice, TWIN Entertainment has the right to accept the terms such licensor
offers in such notice, or negotiate further if the licensor is willing. If TWIN
Entertainment does not unconditionally accept the offered terms, then such
licensor may license such technology to a third party on terms and conditions no
more favorable than those offered to TWIN Entertainment.
LIMITATION OF LIABILITY
REPRESENTATIONS AND WARRANTIES. Two Way represented in the joint
venture license agreement that (1) it and its licensors are the sole and
rightful owners of all right, title and interest in and to its technology and
proprietary rights, except as disclosed in the joint venture license agreement;
(2) the same do not infringe or misappropriate any third-party copyright or
trade secret rights; and (3) to the best of its knowledge, no claims have been
made with respect to the same. Similarly, we represented that (1) other than
third-party licenses disclosed in the joint venture license agreement, we and
our licensors are the sole and rightful owners of all right, title and interest
in and to the IN Patents and we have the unrestricted right to license the IN
Patents; (2) to the best of our knowledge, except as disclosed in the joint
venture license agreement, no claims have been made with respect to the same;
and (3) as of the date of the joint venture license agreement, the patents and
patent applications listed in the joint venture license agreement comprised of
all of IN Patents issued or filed in the Territory.
LIMITATION OF LIABILITY. Neither licensor made any warranty as to the
validity of any of its respective patents or that its respective patents are or
will be free from claims of infringement by third parties. Also, all implied
warranties and claims to consequential damages were disclaimed by all parties to
the joint venture license agreement. Notwithstanding the foregoing, each party's
liability arising out of or related to the joint venture license agreement is
limited to five million dollars; EXCEPT, Two Way's liability will not exceed ten
million dollars if that liability arises out of or relates to a third-party
claim based on Two Way's breach of its representations regarding (1) ownership
of its technology and proprietary rights; or (2) infringement or
misappropriation by Two Way of its technology of any third-party copyright or
trade secret rights; or any claim that TW's Proprietary Rights licensed to TWIN
Entertainment infringes or misappropriates any copyright, trade secret,
trademark or other proprietary rights (other than patents) of any third party.
INDEMNIFICATION. We agreed and Two Way similarly agreed to defend,
indemnify and hold TWIN Entertainment and the other licensor harmless against
any liability based on a breach of any representation and warranty made in the
joint venture license agreement. Further, Two Way agreed to defend, indemnify
and hold TWIN Entertainment and us harmless against any claim that TW's
Proprietary Rights licensed to TWIN Entertainment infringes or misappropriates
any copyright, trade secret, trademark or other proprietary rights (other than
patents) of any third party. However, Two Way will have no indemnification
obligations if the claim is based on TWIN Entertainment's modification of TW's
Proprietary Rights. The sole remedy by TWIN Entertainment and Two Way for our
breach of representation regarding our ownership of the IN Patents is the right
to seek monetary damages if the breach is material. Each licensor's
indemnification obligations require written notice of the claim, control of
defense by the indemnifying party and cooperation from the other parties.
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CONFIDENTIALITY
Without express authorization and except under specific circumstances,
for a period of 10 years from the date of disclosure, each party to the joint
venture license agreement agrees not to disclose, use or permit the disclosure
or use by others of any of the other party's source code and other information
or materials marked or orally identified as "confidential" or "proprietary" by
the disclosing party. A longer non-disclosure period may apply upon request.
TERMINATION OF THE JOINT VENTURE LICENSE AGREEMENT
Either we may or Two Way may terminate each's respective license grant
upon written notice if TWIN Entertainment materially breaches certain material
obligations and fails to cure or make a reasonable effort to cure such breach
within 30 days of written notice of the breach. A material obligation includes
(1) observing the terms and conditions of our and Two Way's license grant; (2)
paying technical training and support fees to Two Way; and (3) observing
confidentiality obligations. Upon termination, such licensor's rights and
obligations under the joint venture license agreement are released and the other
licensor may terminate its license grant to TWIN Entertainment upon written
notice. Further, if TWIN Entertainment enters into a bankruptcy, reorganization,
liquidation or receivership proceeding, all license grants to TWIN Entertainment
terminate and each's respective license grants are released from the
non-competition obligations.
Similarly, upon our or Two Way's material breach of any material
provision of the joint venture license agreement and failure to cure or make a
reasonable effort to cure such breach within 30 days of written notice of the
breach, TWIN Entertainment has to right to seek arbitration or injunctive
relief, terminate the breaching licensor's license upon written notice and/or
purchase the breaching licensor's equity interest in TWIN Entertainment at its
fair market value less 25 percent. The non-breaching licensor has the right, if
TWIN Entertainment elects to terminate the breaching licensor's license, to
convert its own license grant from exclusive to non-exclusive and/or to purchase
the breaching licensor's equity interest in TWIN Entertainment at the same
discount if TWIN Entertainment fails to do so. If any bankruptcy, liquidation or
winding-up proceeding is instituted against us or Two Way, TWIN Entertainment
has the right to purchase such licensor's equity interest in TWIN Entertainment
at its fair market value or allow the other licensor to do so if TWIN
Entertainment fails to do so.
GOVERNING LAW AND ARBITRATION
The joint venture license agreement is governed by the laws of the
State of California, U.S.A. If a dispute arises, any party may choose to settle
the matter by binding arbitration under the rules of the American Arbitration
Association in San Francisco, California, U.S.A. or such other mutually agreed
upon location. The parties agree that any judgment resulting from such
arbitration proceeding is final and binding.
OUR OPERATIONS AFTER THE EXCLUSIVE LICENSE GRANT
If the proposed exclusive license grant of the IN Patents to TWIN
Entertainment in the Territory is approved by our shareholders, our license
grant of the IN Patents and Two Way's license grant of TW's Proprietary Rights
to TWIN Entertainment will become exclusive. Upon the exclusivity of our and Two
Way's license grants, TWIN Entertainment will be solely responsible for
developing, marketing and providing digital and analog interactive products,
services and technology, as well as policing, protecting and enforcing our and
Two Way's intellectual property licensed to it in the Territory. We will,
however, have to the right to create, develop or engage in business activities
within or outside the scope of TWIN Entertainment's business, provided that such
business activities do not directly compete with TWIN Entertainment's
then-current primary business activities.
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We will receive no royalty payment for the perpetual (except for
certain termination rights), exclusive license grant of the IN Patents to TWIN
Entertainment in the Territory. Rather, we seek to receive a favorable return on
our equity investment in TWIN Entertainment.
With access to both the IN Patents and TW's Proprietary Rights, we
believe that TWIN Entertainment will have better resources to develop, market
and provide digital and analog interactive products, services and technology in
the Territory. Further, we believe that the exclusive licensing arrangement is
more cost-effective and has better revenue-generating potential because such an
arrangement diminishes TWIN Entertainment's burden of competing with us or Two
Way or with a third party using our or Two Way's intellectual property. For
greater detail of our board of directors' decision to recommend the exclusive
license grant, see "Board of Directors' Reasons for Recommending the Exclusive
License Grant" on page 7.
SELECTED FINANCIAL DATA
The selected financial data is contained in the Annual Report on Form
10-K for the fiscal year ended 1999 filed with the Commission on April 14, 2000
and in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 to
be filed with the Commission on May 15, 2000, and both reports are incorporated
herein by reference.
RISK FACTORS RELATED TO THE EXCLUSIVE LICENSE GRANT
IN ADDITION TO OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE
IN THIS PROXY STATEMENT, OUR SHAREHOLDERS SHOULD CAREFULLY CONSIDER THE RISKS
DESCRIBED BELOW IN DETERMINING WHETHER TO APPROVE THE EXCLUSIVE LICENSE GRANT AT
THE ANNUAL MEETING.
WE WILL DEPEND SUBSTANTIALLY ON A THIRD PARTY TO GENERATE REVENUE FROM PRODUCTS,
SERVICES AND TECHNOLOGY EMBODYING OUR CURRENT INTELLECTUAL PROPERTY.
Upon approval by our shareholders, the exclusive license grant will
shift all responsibility for the development, marketing and provision of
products, services and technology for interactive television systems and other
telecommunications applications embodying our current patents in the Territory
to a third party, TWIN Entertainment. A favorable return on our equity
investment in TWIN Entertainment will depend significantly on its ability to
generate substantial sales and revenues from these products and services. We
cannot assure you that we will receive a favorable return of our equity
investment in TWIN Entertainment in exchange for our exclusive license grant of
IN Patents in the Territory. In addition, while we are contributing the
exclusive use of our intellectual property in our primary markets to TWIN
Entertainment upon approval of the exclusivity of the license grant, we will
receive only half of any dividend declared by TWIN Entertainment.
WE MAY NOT HAVE AN ADEQUATE REMEDY IF TWIN ENTERTAINMENT FAILS TO SATISFY ITS
OBLIGATIONS UNDER THE JOINT VENTURE LICENSE AGREEMENT.
If TWIN Entertainment does not meet its obligations under the joint
venture license agreement, our primary remedies will be to convert our license
grant from exclusive to non-exclusive or to terminate the joint venture license
agreement. The conversion to non-exclusivity or the termination of the joint
venture license agreement are feasible remedies only if we can identify and
secure other favorable strategic partners or third parties to license our
intellectual property or if we are able to internally develop, market and sell
products and services embodying our intellectual property before our patents
expire. We cannot assure you that we will be able to meet these challenges in
the event that TWIN Entertainment fails to satisfy its obligations under the
joint venture license agreement, and if we cannot, our business, prospects and
financial condition will be harmed.
THE BENEFITS FROM THE INTEGRATION OF OUR AND TWO WAY'S INTELLECTUAL PROPERTY MAY
NOT BE REALIZED.
Achieving the benefits of our exclusive license grant will depend in
part on the successful integration of our and Two Way's intellectual property by
TWIN Entertainment and its successful development, marketing and provision of
products, services and technology for interactive television systems and other
telecommunications applications incorporating the combined intellectual
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property. None of the parties to the joint venture license agreement has
significant experience relating to a strategic alliance on the scale and under
the circumstances contemplated by the joint venture license agreement. We cannot
assure you that we will be successful in integrating our intellectual property
with Two Way's or that the combined intellectual property will be successfully
incorporated by TWIN Entertainment. Further, we cannot assure you that the
successful business operations of TWIN Entertainment can be effected in a timely
manner, if at all. If the anticipated benefits from the exclusive license grant
are not realized due to the occurrence of any one of the above risks, our
business and operating results could be seriously harmed.
WE ARE SUBJECT TO NON-COMPETITION OBLIGATIONS UNDER THE JOINT VENTURE LICENSE
AGREEMENT WHICH COULD LIMIT OUR ABILITY TO CONDUCT OTHER BUSINESS.
If the exclusive license grant is approved and to the extent that
either TWIN Entertainment or Two Way challenges any of our business activities
unrelated to TWIN Entertainment's business based on our non-competition
obligations under the joint venture license agreement, we may be required to
incur significant time, effort, expense and possibly litigation to enforce our
rights to conduct business activities that do not directly compete with TWIN
Entertainment's then-current primary business activities. Litigation, whether
successful or not, could harm our relationship with TWIN Entertainment and/or
Two Way, divert our management's time and result in substantial costs, any of
which could seriously harm our business.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY BE
LIABLE TO TWO WAY AND TWIN ENTERTAINMENT UNDER THE JOINT VENTURE LICENSE
AGREEMENT.
We rely or may in the future rely on a combination of patent,
trademark, trade secret and copyright law and contractual restrictions to
protect the proprietary aspects of our technology. Despite our efforts, we may
not be successful in protecting our intellectual property or unauthorized
parties may attempt to copy aspects of our technology. Litigation may be
necessary in the future to enforce and protect our intellectual property rights
and determine the validity and scope of our and others' proprietary rights.
Pursuant to the terms and conditions of the joint venture license agreement, we
have represented that to our knowledge, we own all right, title and interest in
and to the IN Patents and all related proprietary rights. If there are unknown
defects in our ownership of those rights, we may be liable to Two Way and TWIN
Entertainment if a third party successfully challenges our ownership and our
financial condition may be harmed.
CHANGE IN OUR BUSINESS STRATEGY UPON THE APPROVAL BY OUR SHAREHOLDERS OF THE
EXCLUSIVITY OF THE LICENSE GRANT MAY DEPRESS THE PRICE OF OUR COMMON STOCK.
Completion of the proposed exclusive license grant and other related
transactions represent a significant departure from our initial business
strategy. Subsequent to the approval of the exclusive license grant, all
responsibility for the development, marketing and sale of products, services and
technology for interactive television systems and other telecommunications
applications embodying our patents in the Territory will be shifted to a third
party (although a 50% affiliate). We have plans to engage in other activities,
but cannot assure you that we will successfully develop other technologies or
services or that any such new businesses will generate sufficient revenue. There
is no operating history upon which to assess whether or not our strategic
alliance with Two Way and TWIN Entertainment to develop, market and sell
products, services and technology embodying our and Two Way's intellectual
property will succeed or whether the anticipated return on our equity investment
in TWIN Entertainment will be realized. As a result of these uncertainties, the
price of our common stock may be adversely affected.
THERE IS NO PUBLIC MARKET FOR THE TWIN ENTERTAINMENT'S COMMON STOCK WE
PURCHASED.
Pursuant to the stock purchase agreement, we purchased half of the
outstanding shares of TWIN Entertainment's common stock. There is currently no
public market for TWIN Entertainment's common stock nor can we assure you that a
trading market for this common stock will develop in the future. Further, TWIN
Entertainment has no obligation to pay us dividends on its common stock, and we
may not be able to resell TWIN Entertainment's common stock at a price that
reflects its fair market value, if at all. Upon the approval of the exclusivity
of our license grant to TWIN Entertainment, our business and financial condition
will depend significantly on receiving a favorable return on our purchase of
TWIN Entertainment's common stock. If we are unable to divest our equity
investment in TWIN Entertainment or if we divest our equity investment at a
discount, our operating results and financial condition could be adversely
affected.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR THE EXCLUSIVE
LICENSE GRANT
THE FOLLOWING DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY
VARY WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCE. MOREOVER, THIS
DISCUSSION DOES NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL
TAX CONSEQUENCES OF THE PROPOSED EXCLUSIVE LICENSE GRANT. THIS DISCUSSION DOES
NOT ADDRESS THE TAX CONSEQUENCES OF ANY TRANSACTION OTHER THAN THE PROPOSED
EXCLUSIVE LICENSE GRANT.
The exclusive license grant of the IN Patents to TWIN Entertainment in
the Territory is intended to qualify for non-recognition of gain or loss for
federal income tax purposes. However, the federal income tax treatment of the
exclusive license grant is not entirely clear. The exclusive license grant
(either taken together with the exclusive license grant by Two Way, or taken
together with all of the transactions under the joint venture and stock purchase
agreement and the joint venture license agreement) could be viewed for federal
income tax purposes as a transaction qualifying for tax-free treatment under
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"): that
is, a transfer of property by one or more transferors to a domestic corporation
controlled by the transferors, without the receipt by the transferors of any
consideration other than stock of the controlled corporation. The exclusive
license grant will also qualify for non-recognition treatment if it is
determined for federal income tax purposes to be a non-taxable, voluntary
shareholder contribution to the capital of TWIN Entertainment. If the Internal
Revenue Service were to successfully assert that the exclusive license grant
does not qualify for non-recognition treatment due to the absence of any
applicable authority directly on point, we could recognize taxable income or
gain equal to the fair market value of the TWIN Entertainment common stock and
related rights considered for federal income tax purposes to have been received
in exchange for the exclusive license grant.
Although it is our intention to do so, we have not filed federal and
state income tax returns for the years ended December 31, 1994 through December
31, 1999. As of December 31, 1993, we had approximately $47 million and $23
million of federal and California net operating losses, respectively. We also
had approximately $456,000 and $190,000 of federal and California research and
experimentation credits carryforwards, respectively.
We have not determined whether the reorganization of our business or
the lack of proper filing of income tax returns from December 31, 1993 through
December 31, 1998 has caused us to forfeit our net operating loss carryforwards.
Should the net operating losses and credits described above be
available for use, such carryforwards may be restricted in the event of an
"ownership change", as defined in Section 382 of the Internal Revenue Code. We
did have such a change in July 1989, and again in November 1991, subjecting
$13.9 million of our net operating loss carryforwards to an annual limitation
not to exceed $1.6 million. We have not determined whether an ownership change
has occurred after December 31, 1993. Further, Section 382 provides that in the
event we cease our trade or business, our net operating losses and credit
carryforwards would be forfeited.
Management believes there are sufficient net operating loss
carryforwards to offset any taxable income earned in 1999.
Even if the exclusive license grant were determined to be a taxable
transaction as described above, there should not be any federal income tax
consequences for our shareholders. However, you should consult your own tax
advisors if you have specific questions regarding the tax consequences of the
proposed exclusive license grant.
ACCOUNTING TREATMENT FOR THE PROPOSED EXCLUSIVE LICENSE GRANT
We intend to account for the exclusive license grant of the IN Patents
to TWIN Entertainment in the Territory as an additional investment in a
fifty-percent-owned domestic subsidiary. Income and losses will be recognized on
the equity method in proportion to our proportion of ownership, when earned by
TWIN Entertainment.
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DIVIDEND POLICY RELATING TO THE PROPOSED EXCLUSIVE LICENSE GRANT
We have never paid any dividend on our common stock since our inception
and do not anticipate paying any dividend as a result of the transactions
contemplated by the joint venture license agreement. We do not anticipate
distributing any TWIN Entertainment common stock received pursuant to the joint
venture and stock purchase agreement.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE PROPOSED EXCLUSIVE
LICENSE GRANT
No regulatory filings and approvals will be required to complete the
proposed exclusive license grant of the IN Patents to TWIN Entertainment in the
Territory.
AVAILABILITY OF PRINCIPAL ACCOUNTANTS
A representative of Marc Lumer & Company is expected to be present at
the annual meeting, will have the opportunity to make a statement about the
proposed exclusive license grant, and will be available to respond to
appropriate questions.
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PROPOSAL 2
APPROVAL OF AN AMENDMENT TO THE 1999 STOCK OPTION PLAN
THIS SECTION OF THE PROXY STATEMENT DESCRIBES ASPECTS OF THE 1999 STOCK
OPTION PLAN. THE DESCRIPTION OF THE 1999 PLAN SET FORTH BELOW IS ONLY A SUMMARY
OF THE KEY TERMS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE
TEXT OF THE PLAN. A COPY OF THE 1999 PLAN IS ATTACHED AS EXHIBIT B TO THIS PROXY
STATEMENT AND IS INCORPORATED INTO THIS PROXY STATEMENT BY REFERENCE. YOU ARE
URGED TO READ THE ENTIRE PLAN CAREFULLY
At this annual meeting, our shareholders will be asked to vote on the
proposed amendment to our 1999 stock option plan to increase the number of
shares authorized for issuance under the plan from 3,650,000 shares to 5,000,000
shares.
The 1999 plan, which was approved by our shareholders at our 1999
annual meeting, provides for the issuance of stock options and stock awards
covering up to 3,650,000 shares of our common stock. Stock awards issued under
the 1999 plan may be made in the form of stock options, stock grants or
purchases. Our board of directors has concluded that the number of shares
authorized under the 1999 plan will not be sufficient to achieve our objective
of providing sufficient incentives to our management and employees. The increase
in the authorized number of shares will enable us to retain talented employees
and to attract talented new employees by offering them participation in the 1999
plan. Although we have no current plans to issue additional options, our
management believes that without the ability to offer these incentives, we will
not be able to attract and retain the services of those individuals essential to
our growth and financial success.
Shareholder approval of the amendment to our 1999 stock option plan is
being sought to (1) permit options under the plan to qualify as incentive stock
options under Section 422 of the Internal Revenue Code; (2) permit stock options
and stock appreciation rights granted to our executive officers under the plan
to qualify as "performance-based compensation" under 162(m) of the Internal
Revenue Code; and (3) permit the 1999 plan to be eligible under the "plan
lender" exemption from the margin requirements of Regulation G promulgated under
the Exchange Act of 1934.
OUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDMENT TO THE
1999 STOCK OPTION PLAN AND UNANIMOUSLY RECOMMENDS THAT OUR SHAREHOLDERS VOTE FOR
APPROVAL OF THE PROPOSAL.
GENERAL DESCRIPTION
The 1999 plan was approved by our shareholders at our 1999 annual
meeting. A total of 3,650,000 shares of our common stock were initially reserved
for issuance over the ten year term of the 1999 plan. Options granted under the
1999 plan may be either incentive stock options, as defined in Section 422 of
the Internal Revenue Code, or nonstatutory stock options. See "Federal Income
Tax Consequences" below for information concerning the tax treatment of both
incentive stock options and nonstatutory stock options. As of December 31, 1999,
options to purchase approximately 2,737,500 shares were outstanding under the
1999 plan, no options to purchase shares had been exercised, and approximately
912,500 shares remained reserved for issuance.
SUMMARY OF 1999 STOCK OPTION PLAN
The essential terms of the 1999 plan, as proposed to be amended, are
summarized below. This summary is not intended to be a complete description of
all terms of the 1999 plan.
19
<PAGE>
PURPOSE
The purpose of the 1999 plan is to advance our interests and the
interests of our shareholders by giving employees, directors and consultants a
proprietary interest in our success, thus providing them with an additional
incentive to contribute toward our success.
ADMINISTRATION
The 1999 plan is administered by our board of directors, or by a
committee appointed by our board. The interpretation and construction of any
provision of the 1999 plan by our board or the designated committee shall be
final and conclusive.
ELIGIBILITY
The 1999 plan provides that options may be granted to our and certain
related entities' employees (including officers and employee directors),
non-employee directors and consultants. The appointed committee selects the
participants and determines the number of shares to be subject to each option.
The value of the shares subject to all incentive stock options held by
an optionee that become exercisable for the first time during any calendar year
cannot exceed $100,000 (determined as of the date of grant). The 1999 plan
provides that options to purchase a maximum of 1,000,000 shares of our common
stock may be granted to any employee in any fiscal year.
VALUATION
For purposes of establishing the option price and for all other
valuation purposes under the 1999 plan, the fair market value per share of our
common stock on any relevant date under the 1999 plan, in most cases, will be
the closing selling price per share of our common stock on that date, as the
price is reported on the OTC Bulletin Board.
TERMS OF OPTIONS
Each option is evidenced by a stock option agreement between us and the
person to whom such option is granted, which sets forth the terms and conditions
of the option. The following terms and conditions generally apply to all
options, unless the stock option agreement provides otherwise:
EXERCISE OF OPTIONS. The administrator determines when options granted
under the 1999 plan may be exercisable. An option is exercised by giving written
notice of exercise to us specifying the number of full shares of our common
stock and tendering payment to us of the purchase price. Unless otherwise
provided in the stock option agreement, the purchase price of shares purchased
upon exercise of an option may be paid by any of the following means, or by any
combination thereof: (1) cash; (2) check; (3) other shares of our common stock;
(4) the optionee's instruction to us to withhold from the shares that would
otherwise be issued upon exercise of the option that number of whole shares
having a fair market value equal to the purchase price; (5) a cashless
exercise/sale procedure (through which the funds to pay for the shares purchased
upon exercise of an option are delivered to us by a broker upon receipt of stock
certificates representing the shares being purchased).
EXERCISE PRICE. The exercise price of options granted under the 1999
plan is determined by the administrator and must not be less than the fair
market value of our common stock on the date the option grant. Where the
participant owns stock representing more than ten percent of the total combined
voting power of our or the related entities' outstanding capital stock, the
exercise price for an incentive stock option must not be less than 110% of such
fair market value.
20
<PAGE>
TERMINATION OF EMPLOYMENT. If an optionee's employment or other service
with us terminates, for any reason other than permanent and total disability or
death, options under the 1999 plan may be exercised not later than three months
after such termination, but may be exercised only to the extent the options were
exercisable on the date of termination subject to the condition that no option
may be exercised after expiration of its term.
DISABILITY. If an optionee should become permanently disabled and
unable to carry out the responsibilities of the position held by the optionee by
reason of any medically determinable physical or mental impairment while
employed by or engaged in other service for us, options may be exercised at
anytime within twelve months following the date of termination, but only to the
extent the options were exercisable on the date of termination, subject to the
condition that no option may be exercised after expiration of its term.
DEATH. If an optionee should die while employed by or engaged in other
service to us, or within three months after termination of employment or other
service (or within twelve months if such termination is due to disability),
options may be exercised at any time within twelve months following the date of
death, but only to the extent the options were exercisable on the date of death,
subject to the condition that no option maybe exercised after expiration of its
term.
TERMINATION OF OPTIONS. Each option granted under the 1999 plan expires
no more than ten years after the date of grant. In no event shall the term of
any option exceed five years in the case of any participant who owns stock
possessing more than ten percent of the total combined voting power of our, or
the related entities' outstanding capital stock.
NONTRANSFERABILITY OF OPTIONS. An option is not transferable by the
optionee other than by will or the laws of descent and distribution and is
exercisable during his lifetime only by him, or in the event of his death, by a
person who acquires the right to exercise the option by bequest or inheritance
or by reason of the death of the optionee.
OTHER PROVISIONS. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the 1999 plan as may be
determined by our board of directors or the appointed committee.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in our capital structure (whether by reason
of any recapitalization, stock dividend, stock split, combination of shares or
other similar change in corporate structure), appropriate adjustments shall be
made in the number of shares subject to each option and the per share exercise
price. The 1999 plan provides for appropriate adjustment to the maximum
aggregate number of shares subject to options that may be granted to any
employee. The designated committee may also adjust the number or class of
securities covered by any option, as well as the exercise price, in the event
that we effect a reorganization, recapitalization, rights offering or other
increase or reduction of shares of our outstanding common stock or is merged or
consolidated with or into any other corporation. Upon any merger or
consolidation in which we are not the surviving entity, the sale or other
disposition of all or substantially all of our assets, or an acquisition of more
than fifty percent of the total combined voting power of our securities (except
as otherwise determined by our board of directors or the designated committee),
the options granted under the 1999 plan shall be assumed by the surviving entity
or its parent, and if not assumed, the options shall terminate. In the event of
the disposition of a related entity, the service of the optionees to the related
entity shall be deemed to terminate, and the options of such optionees will be
exercisable in accordance with the terms of the option agreements. However, the
service of such optionees will not be deemed to terminate if such options are
assumed by the successor entity or its parent.
21
<PAGE>
AMENDMENT AND TERMINATION OF THE 1999 STOCK OPTION PLAN
Our board of directors may amend the 1999 plan at any time or from time
to time or may terminate the 1999 plan and, to the extent required by any
applicable law, we must obtain shareholder approval of any amendment. However,
no such action by our board or shareholders may alter or impair any option
previously granted under the 1999 plan without the consent of the optionee. In
any event the 1999 plan shall terminate in February 2009.
FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS
Section 422 of the Internal Revenue Code provides favorable federal
income tax treatment for "incentive stock options." When an option granted under
the 1999 plan qualifies as an incentive stock option, the optionee does not
recognize income for federal income tax purposes upon grant or exercise of the
incentive stock option (unless the alternative minimum tax applies as discussed
below). We are not allowed a deduction for federal income tax purposes as a
result of the exercise of the incentive stock option regardless of the
applicability of the alternative minimum tax. Upon a sale of the shares
(assuming that the sale occurs no sooner than two years after the grant of the
option and one year after the receipt of the shares by the optionee), any gain
or loss will be treated as long-term capital gain or loss for federal income tax
purposes.
The favorable federal income tax consequences described above will not
apply to the extent the optionee disposes of the shares acquired within one year
of the date of exercise or two years of the date of grant of the option. In the
event of a disqualifying disposition, the optionee generally will recognize
ordinary income in the year of disposition equal to the difference between the
exercise price and the lesser of (i) the fair market value of the stock at the
date of exercise or (ii) the sale price of the shares. Any additional gain will
be long-term or short-term gain, depending on how long the optionee has held the
stock.
ALTERNATIVE MINIMUM TAX
The excess of the stock's fair market value over the exercise price of
an incentive stock option, which is generally not subject to tax at the time of
exercise, is treated as an item of income in determining an individual
taxpayer's alternative minimum tax liability.
NONSTATUTORY STOCK OPTIONS
Options granted under the 1999 plan that do not qualify as incentive
stock options are considered "nonstatutory" stock options and will not qualify
for any special tax benefits to the optionee. Because our stock options are not
deemed to have a readily ascertainable value, the optionee will not recognize
any taxable income at the time he or she is granted a nonstatutory option.
However, upon exercise of a nonstatutory stock option, the optionee will
recognize ordinary income measured by the excess of the then fair market value
of the shares over the option price. Upon a sale of the shares by the optionee,
any difference between the sale price and the exercise price, to the extent not
recognized as ordinary income, will be treated as capital gain or loss.
The income recognized by the optionee will be treated as wage
compensation and will be subject to income and employment tax and withholding by
us out of the current earnings paid to the optionee.
COMPANY TAX DEDUCTIONS
We generally will be allowed a tax deduction to the extent and in the
year that compensation income is recognized by the optionee upon the exercise of
nonstatutory stock options, provided we have withheld income and employment
taxes in accordance with the law. We receive no deduction in connection with the
exercise of an incentive stock option. In the event of a disqualifying
disposition, however, we will be allowed a deduction for the amount of income
recognized by the optionee for the tax year in which the disqualifying
disposition occurs.
22
<PAGE>
As amended in 1993, the Internal Revenue Code limits the tax deduction
for expenses in connection with remuneration of our chief executive officer and
our four other most highly compensated executive officers during any fiscal year
to the extent the remuneration of any such person exceeds $1,000,000 for such
fiscal year. Under the Code, the remuneration to which this limit applies
excludes certain types of "qualified performance-based compensation." The 1999
plan is designed to qualify option grants to such officers for the qualified
performance-based compensation exception to the deduction limitation.
AMENDED PLAN BENEFITS
We cannot currently determine the number of options to be granted in
the future under the 1999 plan to all current executive officers as a group, all
current members of our board of directors excluding current executive officers
as a group, or all employees (excluding current executive officers) as a group.
The following table sets forth information with respect to options granted under
the 1999 plan during fiscal year 1999. There are no grants to these persons
which would have been made in 1999 had the proposed amendment to the plan been
approved:
<TABLE>
<CAPTION>
Weighted
Average
Options % of Total Exercise Price
Identity of Group Granted Options Granted Per Share
----------------- ------- --------------- ---------
<S> <C> <C> <C>
Bruce Bauer, CEO 1,000,000 36.5% $0.59
All current executive officers, 1,300,000 47.5% $0.58
as a group
Directors that are not executive
officers, as a group 237,500 8.7% $0.71
Employees that are not officers, 0 0% -
as a group
</TABLE>
REQUIRED VOTE
The affirmative vote of the holders of a majority of the shares of our
common stock by proxy or in person at the annual meeting is required for the
approval of the amendment to our 1999 stock option plan. Shareholders abstaining
from voting on this proposal will be counted for purposes of determining a
quorum, but will not be counted for purposes of calculating the vote with
respect to this proposal. If a broker returns a "non-vote" proxy as to this
proposal, including a lack of authority to vote on this proposal, then the
"broker non-vote" proxy will not be considered as present or voting with respect
to this proposal.
RECOMMENDATION OF THE BOARD
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF
THE PROPOSED AMENDMENT TO OUR 1999 STOCK OPTION PLAN.
23
<PAGE>
PROPOSAL 3
ELECTION OF DIRECTORS
At the annual meeting, four directors, which constitute our entire
current board of directors, are to be elected to serve until the next annual
meeting of the shareholders or until their successor are elected and qualified,
or until the death, resignation, or removal of the director.
The California General Corporation Law as well as our articles of
incorporation and bylaws require shareholder election of the nominees for
director.
It is intended that the proxies will be voted for the four nominees
named below for election to our board of directors unless authority to vote for
any of the nominee is withheld. There are four nominees, all of whom are
currently our directors. Each person nominated for election has agreed to serve
if elected, and our board has no reason to believe that any nominee will be
unavailable or will decline to serve. In the event, however, that any nominee is
unable or declines to serve as a director at the time of the annual meeting, the
proxies will be voted for any nominee who is designated by the current board to
fill the vacancy. Unless otherwise instructed, the proxyholders will vote the
proxies received by them for the nominees named below. The four candidates
receiving the highest number of the affirmative votes of the shares entitled to
vote at this annual meeting will be elected our directors. The proxies solicited
by this proxy statement may not be voted for more than four nominees.
NOMINEES
Set forth below is information regarding the nominees to our board of
directors.
<TABLE>
<CAPTION>
NAME AGE POSITION FIRST ELECTED DIRECTOR
---- --- -------- ----------------------
<S> <C> <C> <C>
Bruce W. Bauer 49 Chairman of the Board of Directors, 1995
President and Chief Executive Officer
John J. Bohrer 77 Secretary, Treasurer and Director 1995
William H. Green 73 Director 1998
William L. Groeneveld 34 Director 1998
</TABLE>
BRUCE W. BAUER has served as our chairman of the board of directors,
president and chief executive officer since June 1998. Prior to that, he served
as our secretary from November 1996 through June 1998, and has been a member of
our board since October 1995. From 1980 to June 1998, Mr. Bauer owned and
operated Unlimited Services and Marathon Management Services, which provided
building and clean room services, supplies and consulting. Mr. Bauer received a
B.S. degree from Wittenberg University in 1974.
JOHN J. BOHRER has served as our secretary and treasurer since June
1998 and a member of our board of directors since October 1995. From July 1978
to June 1993, Mr. Bohrer served as a branch manager of Dickinson & Company, a
firm rendering investment services. From June 1993 until his retirement in June
1997, he served as vice president and a branch manager of BDF Investments, which
also renders investment services. He is now a semi-retired investor. Mr. Bohrer
graduated from the New York Institute of Finance in 1947.
WILLIAM H. GREEN has served as a member of our board of directors since
June 1998. Since 1998, Mr. Green has served as a vice president of D.S.I.
Corporation, a dredging specialty company. From 1993 to 1998, he served as a
consultant in the aggregate division of Martin Marietta. He currently sits on
the boards of various private companies. Mr. Green attended the University of
Nebraska at Omaha from 1946 through 1949.
24
<PAGE>
WILLIAM L. GROENEVELD has served as a member of our board of directors
since 1998. Since January 1995, Mr. Groeneveld has served as a head trader and
vice president of Program Trading Corp.
VOTE REQUIRED
The approval of the nominees as directors requires the affirmative vote
of the holders of a plurality of the shares of our common stock voting by proxy
or in person at the annual meeting. Shareholders abstaining from voting on this
proposal will be counted for purposes of determining a quorum, but will not be
counted for any other purpose; broker non-votes will not be considered as
present or voting, and as such broker non-votes will have no effect on the vote
for this proposal.
RECOMMENDATION OF THE BOARD
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR SHAREHOLDERS
VOTE FOR ELECTION OF ALL OF THE NOMINEES FOR DIRECTORS.
BOARD MEETINGS AND COMMITTEES
The board of directors held five meetings during fiscal year 1999.
During fiscal year 1999, each director attended more than seventy-five percent
of the aggregate of (1) the total number of meetings of the board of directors;
and (2) the total number of meetings held by all committees of the board on
which the director served. Additionally, the executive committee established by
the board of directors held five meetings during fiscal year 1999. We have no
audit or compensation committee.
There are no family relationships among our executive officers or
directors.
EXECUTIVE OFFICER AND DIRECTOR COMPENSATION
Summary of Cash and Certain Other Compensation
The following summary compensation table sets forth the compensation
earned by our current chief executive officer in fiscal year 1999 for his
services rendered to us for the fiscal years ended December 31, 1999, 1998 and
1997. We had no executive officer in fiscal year 1999 whose compensation
exceeded $100,000.00.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
SECURITIES
SALARY BONUS UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR $ $ (#)
--------------------------- ---- ---------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Bruce W. Bauer 1999 131,771 0 1,000,000
Chairman of the Board of Directors, 1998 67,708(1) 0 900,000
Chief Executive Officer and President 1997 0 0 0
</TABLE>
- -----------------
(1) Represents partial year salary from June 14, 1998 through December 31, 1998
($125,000 on an annualized basis).
25
<PAGE>
OPTION GRANTS
The following table sets forth information concerning the stock options
granted to the named executive officer in the summary compensation table for the
1999 fiscal year. In accordance with the Securities and Exchange Commission
rules, also shown below is the potential realizable value over the term of the
option (the period from the grant date to the expiration date) based on 5% and
10% assumed annual rates of compounded stock price appreciation. These amounts
are based on certain assumed rates of appreciation and do not represent our
estimate of future stock price. Actual gains, if any, on stock option exercises
will be dependent on the future performance of our common stock.
<TABLE>
OPTION GRANTS IN FISCAL 1999
INDIVIDUAL GRANTS (1)
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF POTENTIAL REALIZABLE
UNDERLYING TOTAL OPTIONS VALUE AT ASSUMED ANNUAL RATES
OPTIONS GRANTED TO EXERCISE OF STOCK PRICE APPRECIATION
GRANTED EMPLOYEES PRICE EXPIRATION FOR OPTION TERM
NAME (#) IN 1999 ($/SHARE) DATE 5% 10%
----------- ------------ ------------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Bruce W. Bauer 1,000,000(2) 90.91% $0.59 6/16/2004 165,200 359,000
</TABLE>
--------------------
(1) Gains are reported net of the option exercise price but before taxes
associated with exercise. These amounts represent certain assumed rates
of appreciation daily. Actual gains, if any, on stock option exercises
are dependent on future performance of our common stock.
(2) All options under this grant were fully exercisable as of the date of
the grant.
OPTION HOLDING AND EXERCISES AND OPTION VALUES
The following table sets forth information concerning option holdings
and exercises for the 1999 fiscal year and the aggregate value of unexercised
options as of December 31, 1999 held by the named executive officer in the
summary compensation table.
<TABLE>
AGGREGATED OPTION EXERCISES IN FISCAL 1999
AND OPTION VALUES AT DECEMBER 31, 1999
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
AGGREGATE OPTION OPTIONS AT IN-THE-MONEY OPTIONS AT
EXERCISES IN 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 (1)
---------------------- --------------------------- ---------------------------
SHARES VALUE
ACQUIRED REALIZED
ON EXERCISE ($)
NAME (#) (2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------- ------------ ------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce W. Bauer 0 0 2,050,000 0 $13,005,000 0
</TABLE>
--------------------------
(1) Calculated on the basis of the closing price of our common stock as
reported on the OTC Bulletin Board on March 1, 2000 of $6.75 per share,
minus the exercise price.
(2) Calculated on the basis of the broker's reported sale price of our
common stock subject to the option, minus the exercise price.
EMPLOYMENT AGREEMENTS
BRUCE BAUER
On June 15, 1999, we entered into an employment agreement with Bruce
Bauer, our chief executive officer. This agreement provides for an annual salary
of $135,000 from June 15, 1999 through June 14, 2000, $145,000 from June 15,
2000 through June 14, 2001, and $155,000 from June 15, 2001 through June 14,
2002. No specific bonus provisions are included in this employment agreement.
Should we terminate this employment agreement without cause or should Mr. Bauer
26
<PAGE>
terminate his employment for good reason, all earned salary amounts not
previously paid plus an amount equal to the greater of Mr. Bauer's then-present
salary for six months or the remainder of the term of the agreement shall become
due and payable effective immediately and paid within a twenty four-hour period
after the termination. A penalty of ten percent per annum interest, compounded
daily shall be added effective after twenty-four hours on all unpaid balances
due Mr. Bauer.
On June 16, 1999, our board of directors granted Mr. Bauer, in
connection with his renewed employment agreement, a fully vested option to
purchase 1,000,000 shares of our common stock with a term of five years and an
exercise price equal to $0.59 per share, the fair market value of our common
stock at the time of the option grant.
ROBERT BROWN
On June 15, 1999, we entered into an employment agreement with Dr.
Robert Brown, our chief technology officer. This agreement provides for an
annual salary of $125,000 from June 22, 1999 through June 21, 2000, $135,000
from June 22, 2000 through June 21, 2001, and $145,000 from June 22, 2001
through June 21, 2002, and an option to purchase 300,000 shares of our common
stock, vesting 1/3 on each anniversary of the agreement. No specific bonus
provisions are included in the employment agreement. Dr. Brown is also entitled
to vacation and standard benefits. Should we terminate the employment agreement
without cause or should Dr. Brown terminate his employment for good reason, all
earned salary amounts not previously paid plus an amount equal to the greater of
Dr. Brown's then-present salary for six months or the remainder of the term of
the agreement shall be paid upon such termination.
DIRECTOR COMPENSATION
Our directors who are also employees do not receive any additional
compensation for their services as directors. Directors who are not employees
receive an annual stock option grant of 50,000 shares in lieu of cash
competition. All directors are reimbursed for expenses incurred in connection
with attending board of directors and committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Bruce Bauer and John Bohrer were officers of Interactive Network and
during the last fiscal year participated in deliberations of our board of
directors concerning executive officer compensation.
BOARD REPORT ON EXECUTIVE COMPENSATION
Annual compensation of our executive officers is determined by our
board of directors. Our board of directors was also responsible for
administering the 1999 stock option plan, including the grant of options under
such plan. Messrs. Bauer and Bohrer are our employees and have voted on matters
relating to executive compensation and stock option grants, including their own
compensation and stock option grants.
We are currently operating with a skeleton staff of three officers (Mr.
Bauer as president and chief executive officer, Mr. Bohrer as secretary and
treasurer and Dr. Robert Brown as chief technology officer), and one
administrative assistant and one secretary/receptionist, to conserve resources.
We plan to rehire additional staff, as appropriate, in the future as our
business develops. In that connection, we have and may also use and compensate
consultants, including our advisory panel, to assist our management.
Our compensation philosophy is to provide strong incentives to our
executives to maximize the overall value of our company. Our executive officers
are given an opportunity to participate in our growth through equity
participation in the form of stock options granted under our option plan. As a
result, our executive officers are directly rewarded for our performance as
reflected in our stock price and given an additional incentive to contribute to
our future success. Recent option grants have been made fully vested in order to
induce our executives and directors to remain with us through the settlement
with our creditors and in lieu of substantial cash compensation.
27
<PAGE>
Base salaries and stock option grants are initially determined on the
basis of (1) the individual officer's position, and (2) our desire to attract
and retain qualified personnel in a competitive marketplace. Salaries are
generally reviewed annually and are subject to increases based on our
determination that the individual's level of contribution to us has increased
since his or her salary had last been reviewed and increases in competitive pay
levels and the cost of living. Under normal circumstances, our board of
directors also determines initial awards of stock options, within a range
established for employees at various salary levels, based on the employee's
position and responsibilities. As stock options held by employees, including
executive officers, vest, we may approve grants of additional options based on
the employee's past performance and contributions to us. There is no provision
for bonus in the employment agreement of the current president and chief
executive officer, although we may decide to award such in our discretion. No
particular weighting is given to any of the factors considered.
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
our common stock with that of the Standard & Poor's 500 Index and the Nasdaq
Telecommunications Index. The comparison for each of the periods assumes that
$100 was invested on December 31, 1994 in our common stock including
reinvestment of dividends. These indices, which reflect formulas for dividend
reinvestment and weighing of individual stocks, do not necessarily reflect
returns that could be achieved by individual investors.
[PERFORMANCE GRAPH HERE]
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C> <C>
Interactive Network,
Inc. 100.00 2.00 4.00 12.00 20.00 177.00
NASDAQ Telco. Index 100.00 83.00 109.00 112.00 165.00 270.00
NASDAQ Market Index 100.00 141.00 174.00 213.00 300.00 542.00
------ ------ ------ ------ ------ ------
</TABLE>
- -----------------
(1) The graph assumes that $100 was invested on December 31, 1994 in our common
stock, the NASDAQ Market Index and the NASDAQ Telecommunications Index and that
all dividends were reinvested. No dividends have been declared or paid on our
common stock. Stockholder returns over the indicated period should not be
considered indicative of future stockholder returns.
Notwithstanding anything to the contrary set forth in any of our
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings, the
preceding compensation committee report on executive compensation and the
preceding performance graph shall not be incorporated by reference into any such
filings, nor shall such report or graph be incorporated by reference into any
future filings.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and executive officers, and persons who own more than ten
percent of a registered class of our equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities. Officers,
directors and greater than ten percent shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
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<PAGE>
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required during the fiscal year ended December 31, 1999, Section 16(a) filing
requirements applicable to Messrs. Bauer, Brown, Bohrer, Green and Groeneveld,
and former director Mr. Donald Graham were not complied with on a timely basis.
However, all but former director Mr. Graham have since filed a Form 5 disclosure
to bring their required disclosure up to date.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common stock as of May 19, 2000, by
(i) each shareholder known to us to own beneficially more than 5% of our common
stock; (ii) each of our directors; (iii) the named executive officer in the
summary compensation table; and (iv) all of our directors and executive officers
as a group.
<TABLE>
<CAPTION>
APPROXIMATE
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) OWNED(1)
- ------------------------ -------- --------
<S> <C> <C>
AT&T Corp. (2) ................................................. [7,773,815] [20.00]%
32 Avenue of the Americas
New York, NY 10013-2412
National Broadcasting Company Holding, Inc. (3) .............. [3,645,575] [9.38]%
30 Rockefeller Plaza
New York, NY 10112
Voting Agreement (4) ........................................... [7,814,589] [20.11%]
David Lockton (5) .............................................. [2,250,000] [5.47%]
Bruce W. Bauer (6) ............................................. [2,150,500] [5.03%]
John J. Bohrer (7) ............................................. [222,850] *
William H. Green (8)............................................ [75,000] *
William L. Groeneveld (9)....................................... [62,500] *
Robert Brown (10)............................................... [137,375] *
All executive officers and directors as a group (5 persons) (11) [2,548,225] [6.19%]
</TABLE>
- -------------------
* Less than 1% of outstanding shares.
(1) Except as indicated and pursuant to applicable community property laws,
we believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially
owned by them.
(2) Includes 2,942,907 shares held by Tele-Communications, Inc., a
wholly-owned subsidiary of AT&T Corp.
(3) Includes 1,902,279 shares held by National Broadcasting Company Holding,
Inc., a wholly-owned subsidiary of General Electric Company which are
subject to the Voting Agreement (see footnote 4 below).
(4) Pursuant to a certain voting agreement, each of the parties to a certain
settlement agreement agreed to vote their shares issued in such agreement
as directed by a committee (except for matters relating to David Lockton
and certain major transactions of our company), which will currently
consists of John Bohrer, William H. Greene and Bruce Bauer. This
agreement does not provide for any other joint action by the parties
thereto. The parties to the voting agreement disclaim beneficial
ownership of shares owned by other parties thereto, and the committee
disclaims beneficial ownership of all of the shares subject to the voting
agreement.
29
<PAGE>
(5) David Lockton is claiming ownership of options to purchase 2,250,000
shares. He claims that one option granted in October of 1994 gave him the
right to purchase 450,000 shares that may be acquired upon exercise of
stock options that are currently exercisable and a second option granted
as of November 3, 1995 gave him the right to purchase 1,800,000 shares
that may be acquired upon exercise of stock options that are currently
exercisable. We dispute the ownership and validity of these options.
Trial on these matters is set for May 8, 2000 in U.S. Bankruptcy Court.
We have no knowledge regarding Lockton's ownership of any other shares.
(6) Includes (i) 100,500 shares of Common Stock and (ii) 2,050,000 shares
that may be acquired upon exercise of stock options that are currently
exercisable.
(7) Includes 150,000 shares of Common Stock that may be acquired upon
exercise of stock options that are currently exercisable.
(8) Includes 75,000 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable.
(9) Includes 62,500 shares of Common Stock that may be acquired upon exercise
of stock options that are exercisable.
(10) Includes 100,000 shares of Common Stock that may be acquired upon
exercise of stock options that are currently exercisable within 60 days
of March 1, 2000.
(11) Includes 2,337,500 shares of Common Stock that may be acquired upon
exercise of stock options that are exercisable within 60 days of March 1,
2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into indemnification agreements with each of our
directors and executive officers. These agreements require us to indemnify our
directors and executive officers to the fullest extent permitted by California
law.
All future transactions between us and our executive officers,
directors, principal stockholders and affiliates will be approved by a majority
of our board of directors, including a majority of the disinterested,
non-employee directors on our board of directors, and will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
30
<PAGE>
PROPOSAL 4
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
Marc Lumer & Company served as our independent public accountants for
fiscal year 1999. As a matter of corporate policy, our board of directors is
asking our shareholders to ratify the selection of Marc Lumer & Company as our
independent public accountants for the fiscal year ending December 31, 2000.
In the event our shareholders fail to ratify the appointment of Marc
Lumer & Company as our independent public accountants, our board of directors
will consider it as a direction to select other auditors for the subsequent
year. Even if the selection is ratified, our board in its discretion may direct
the appointment of a different independent accounting firm at any time during
the year if our board determines that the change would be in our best interests
and the best interests of our shareholders.
A representative of Marc Lumer & Company is expected to be present at
the annual meeting, will have the opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions.
On May 26, 1999, we filed a Form 8-K Report announcing that Interactive
Network and KPMG LLP have each decided that it was in our best interest that
KPMG LLP, our former independent accountants engaged to audit our financial
statements, be replaced with an accountant more suitable to our current
budgetary needs. This decision was made for Interactive Network by Bruce Bauer,
our chief executive officer, and ratified by the executive committee of our
board of directors. KPMG LLP's resignation was effective on May 20, 1999. On
March 3, 2000, we engaged Marc Lumer & Company as our independent public
accountants for the fiscal year ended December 1999.
As is required by disclosure rules of the Securities and Exchange
Commission, we must state any qualification in KPMG LLP's opinion for either of
the last two years. KPMG LLP did state in its opinion for fiscal years ended
December 31, 1998 and 1997 that certain contingencies described in its opinion
and the uncertainties inherent in the bankruptcy process to which we were then
subject raised substantial doubts about our ability to continue as a going
concern. The following contingencies were referred to in KPMG LLP's opinion as
the basis for its opinion, namely, our ability to: (1) formulate an acceptable
plan of reorganization that will be confirmed by the Bankruptcy Court, and our
ability to fully implement such a plan in compliance with a certain settlement
agreement; (2) settle the claims of unsecured creditors within available cash
resources as contemplated by our management; (3) develop an appropriate business
plan and strategic direction for our planned future operations after
reorganization, including conservation of available capital and working capital
as we seek to further develop and exploit our patent portfolio; (4) confirm the
availability of net operating tax losses after reorganization; and (5) generate
adequate sources of working capital and other liquidity as necessary to meet
future obligations. Subsequent to the issuance of KPMG LLP's opinion, the
contingencies referred to in its opinion were resolved as follows: (1) the U.S.
Bankruptcy Court confirmed our plan of reorganization under Chapter 11 of the
Bankruptcy Act; (2) we consummated that certain settlement agreement with our
senior secured creditors, as a result of which $38.4 million in principal and
accrued interest of our senior secured debt was converted at $5.00 per share
into 7,814,588 shares of our common stock, clear title to our patent portfolio
and other assets was returned to us, and the senior secured creditors paid $10.3
million to us; (3) we began paying allowed claims of unsecured creditors in full
and setting aside a reserve for claims we expect to contest within available
cash resources; (4) we began to implement our business plan for developing and
exploiting our patent portfolio, including the joint license agreement which is
the subject of proposal one to this proxy statement; and (5) we believe we
currently have adequate working capital to meet our obligations, based on our
current business plan. We intend to undertake steps to calculate our available
net operating tax losses. There were no disagreements in the two most recent
fiscal years with KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. We authorized
KPMG LLP to respond fully to the inquiries of Marc Lumer & Company, its
successor accountant. There were no "reportable events" (as defined in Item 304
of Regulation S-K) in our two most recent fiscal years.
KPMG LLP's letter to the Securities and Exchange Commission, dated May
26, 1999, in response to our disclosure of its resignation in the Form 8-K
Report, filed on May 26, 1999, is attached as EXHIBIT C.
REQUIRED VOTE
The approval of the ratification of the selection of Marc Lumer &
Company as our independent public accountants for the fiscal year ended December
31, 2000 requires the affirmative vote of the holders of a majority of the
shares of our common stock voting by proxy or in person at the annual meeting.
Shareholders abstaining from voting on this proposal will be counted for
purposes of determining a quorum, but will not be counted for purposes of
calculating the vote with respect to this proposal. If a broker returns a
"non-vote" proxy as to this proposal, including a lack of authority to vote on
this proposal, then the "broker non-vote" proxy will not be considered as
present or voting with respect to this proposal.
RECOMMENDATION OF THE BOARD
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR SHAREHOLDERS
VOTE FOR THE PROPOSAL TO RATIFY THE SELECTION OF MARC LUMER & COMPANY AS OUR
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2000.
31
<PAGE>
OTHER BUSINESS
Our board of directors is not aware of any other matter which may be
presented for action at the annual meeting. Should any other matter requiring a
vote of the shareholders arise, the enclosed proxy card gives authority to the
persons listed on the proxy card to vote at their discretion in our best
interests.
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at our
annual meeting of shareholders for the fiscal 2001 year must be received at our
principal executive offices by [February 1, 2001], in order to be included in
the proxy statement and proxy relating to that meeting.
INCORPORATION OF DOCUMENTS BY REFERENCE
The selected financial data is contained in the Annual Report on Form
10-K for the fiscal year ended 1999 filed with the Commission on April 14, 2000
and in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 to
be filed with the Commission on May 15, 2000, and both reports are incorporated
herein by reference.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Bruce W. Bauer
------------------
Bruce W. Bauer
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dated: June __ , 2000
32
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF INTERACTIVE NETWORK, INC.
FOR THE ANNUAL MEETING OF THE SHAREHOLDERS
TO BE HELD ON JUNE 30, 2000
The undersigned shareholder of INTERACTIVE NETWORK, INC., a California
corporation, hereby acknowledges receipt of the notice of the annual meeting of
INTERACTIVE NETWORK, INC. and the proxy statement, each dated __________, 2000,
and hereby appoints Bruce W. Bauer and Dr. Robert Brown or any one of them,
proxies, with full power to each of substitution, on behalf and in the name of
the undersigned, to represent the undersigned at the annual meeting to be held
on June 30, 2000 at 9:00 a.m., local time, at San Mateo Marriott, 1770 South
Amphlett Boulevard, San Mateo, California 94402, and at any adjournment or
adjournments thereof, and to vote all shares of the common stock of INTERACTIVE
NETWORK, INC., which the undersigned would be entitled to vote if then and there
personally present, on the matters set forth below.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE PROPOSAL SET FORTH BELOW, AS MORE FULLY
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT, AND AS SAID PROXIES DEEM
ADVISABLE ON SUCH MATTERS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
1. APPROVE THE EXCLUSIVE LICENSE GRANT OF THE IN PATENTS TO TWIN
ENTERTAINMENT IN THE TERRITORY PURSUANT TO THE JOINT VENTURE LICENSE AGREEMENT,
DATED AS OF JANUARY 31, 2000:
_____ FOR _____ AGAINST _____ ABSTAIN
2. APPROVE THE AMENDMENT TO INTERACTIVE NETWORK'S 1999 STOCK OPTION
PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR ISSUANCE THEREUNDER:
_____ FOR _____ AGAINST _____ ABSTAIN
3. ELECTION OF DIRECTORS:
____ FOR all nominees listed below ____ WITHHOLD AUTHORITY to vote
(except as indicated) for all nominees listed
below
If you wish to withhold authority to vote for any individual nominee, strike a
line through that nominee's name in the list below.
Bruce W. Bauer
John J. Bohrer
William H. Green
William L. Groeneveld
4. RATIFY THE APPOINTMENT OF MARC LUMER & COMPANY AS THE INDEPENDENT
PUBLIC ACCOUNTANTS OF INTERACTIVE NETWORK FOR THE FISCAL YEAR ENDING DECEMBER
31, 2000:
_____ FOR _____ AGAINST _____ ABSTAIN
DATED: _____________________, 2000
___________________________________
Signature
___________________________________
Signature
This Proxy should be marked, dated
and signed by the shareholder(s)
exactly as his or her name appears
hereon, and returned promptly in
the enclosed envelope. Persons
signing in a fiduciary capacity
should so indicate. If shares are
held by joint tenants or as
community property, both should
sign.
<PAGE>
EXHIBIT A
JOINT VENTURE LICENSE AGREEMENT
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS 1
1. DEFINITIONS........................................................... 2
2. LICENSES TO TWIN...................................................... 5
3. TRADEMARK LICENSE..................................................... 10
4. DELIVERY OBLIGATIONS.................................................. 11
5. LICENSES FROM TWIN.................................................... 13
6. SUPPORT AND TRAINING.................................................. 13
7. OTHER LICENSOR OBLIGATIONS............................................ 14
8. PAYMENTS.............................................................. 17
9. TAXATION.............................................................. 18
10. INTELLECTUAL PROPERTY RIGHTS.......................................... 19
11. CONFIDENTIALITY....................................................... 19
12. INDEMNIFICATION....................................................... 21
13. WARRANTIES............................................................ 22
14. DISCLAIMER; LIMITATION OF LIABILITY................................... 25
15. TERM AND TERMINATION.................................................. 26
16. MISCELLANEOUS......................................................... 28
</TABLE>
EXHIBIT A - DESCRIPTION OF THE IN PATENTS
EXHIBIT B - TWIN BUSINESS
EXHIBIT C - PERFORMANCE CRITERIA
EXHIBIT D - DESCRIPTION OF CURRENT TW TECHNOLOGY
EXHIBIT E - THIRD-PARTY LICENSES
EXHIBIT F - SUPPORT SERVICES
EXHIBIT G - LITIGATION
<PAGE>
JOINT VENTURE LICENSE AGREEMENT
This Joint Venture License Agreement ("Agreement"), dated as of January 31,
2000 ("Effective Date"), is among Two Way TV Limited ("TW"), a corporation
organized under the laws of England and Wales, having its principal office at
Beaumont House, Kensington Village, Avonmore Road, London, England W148TS,
Interactive Network, Inc. ("IN"), a California corporation having its principal
office at 1161 Old County Road, Belmont, California 94002 U.S.A. (each a
"Licensor" and together "Licensors") and TWIN Entertainment Inc. ("TWIN"), a
Delaware corporation having its principal office at 50 Francisco Street, Suite
490, San Francisco, California 94111 U.S.A. (hereinafter collectively referred
to as the "Parties" and individually as a "Party").
RECITALS
A. IN and TW have entered into a Joint Venture and Stock Purchase
Agreement dated as of December 6, 1999 and contemporaneously with the execution
of this Agreement are entering into a Stockholders Agreement and Investors
Rights Agreement to establish TWIN to develop, market and supply digital (as
well as analog) interactive and related services, products and technology in the
Territory (as defined below).
B. TW is, among other things, in the business of developing, marketing,
and selling certain software and hardware products for interactive television
systems and other telecommunications uses, and has developed valuable
intellectual property related to such products, services and technology.
C. IN is, among other things, in the business of designing, developing
and licensing certain technology useful for interactive television and other
telecommunications applications, and has developed valuable intellectual
property related to such products, services and technology.
D. TWIN desires Licensors to grant to TWIN, and Licensors are each
willing to grant to TWIN, a license to use certain of their respective
intellectual property rights for developing, marketing and supplying certain
digital and analog interactive services, products and technology, in the
Territory and subject to the terms and conditions as hereinafter set forth.
E. Licensors have determined, through mutual agreement prior to the
Effective Date, which of each Licensor's technology and intellectual property
rights related to TWIN's business and existing as of the Effective Date will
initially be licensed to TWIN.
F. TWIN desires to receive from TW, and TW is willing to supply to TWIN,
certain relevant technical training, maintenance and support services.
G. Licensors desire TWIN to grant to Licensors, and TWIN is willing to
grant to Licensors, a right of first refusal to license for use outside the
Territory certain of TWIN's technology and associated intellectual property
rights that may be developed in the future, subject to the terms and conditions
as hereinafter set forth.
<PAGE>
ACCORDINGLY, in consideration of the mutual covenants and promises
contained herein, the Parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
1.1 "Applicable Law" shall mean, as to any person, any statute, law,
rule, regulation, directive, treaty, judgment, order, decree or injunction of
any Governmental Authority that is applicable to or binding upon such person or
any of its properties.
1.2 "Approval Date" shall mean the date on which IN has received the
requisite vote by IN's shareholders approving the grant to TWIN of an exclusive
license under the Licensed Patents on the terms and conditions contained herein,
which date shall occur before the six (6) month anniversary of the Effective
Date.
1.3 "Associated Agreements" shall mean the Joint Venture and Stock
Purchase Agreement among the Parties dated as of December 6, 1999, and the
Stockholders Agreement and Investors Rights Agreement among the Parties and TWIN
of even date herewith.
1.4 "Confidential Information" shall mean information or materials
disclosed to a Party by another Party that are marked as "Confidential" or
"Proprietary" or, if disclosed orally, identified as such at the time of
disclosure and reduced by the disclosing Party to written form marked
"Confidential" or "Proprietary" within twenty (20) days after oral disclosure.
"Confidential Information" shall include, whether or not marked "Confidential"
or "Proprietary," all source code of any Party.
1.5 "Current TW Technology" shall mean all of the TW Technology and TW's
Proprietary Rights developed, reduced to practice and/or existing prior to the
Effective Date. A summary listing of certain key items of Current TW Technology
is set for th in Exhibit D.
---------
1.6 "Customer" shall mean a Person having a valid business or residential
mailing address in the Territory (which is not a post office box number unless
there is another valid mailing address in the Territory) who receives TWIN
services or products in the Territory. Customers may include, without
limitation, telecommunications service, equipment and content providers;
Internet service providers; cable television service, equipment and content
providers; satellite television service, equipment and content providers; and
end user consumers in the Territory.
1.7 "Derivative Work" shall mean a "derivative work" or "compilation"
within the meaning of such terms under the U.S. Copyright Act (17 U.S.C. (S) 101
et seq.), which meaning is as follows: a "derivative work" is a work based upon
one or more preexisting works, such as a translation, abridgment, condensation,
or any other form in which a work may be recast, transformed, or adapted, or a
work consisting of editorial revisions, annotations, elaborations, or other
modifications which, as a whole, represent an original work of authorship; and a
"compilation" is a work formed by the collection and assembling of preexisting
materials or of data that are selected, coordinated, or arranged in such a way
that the resulting work as a whole constitutes an original work of authorship,
and including collective works.
2
<PAGE>
1.8 "Effective Date" shall mean the date of this Agreement as set forth
in the preamble.
1.9 "Gannett Rights" shall mean the right of Gannett Co., Inc. to
participate in opportunities related to real-time electronic news services on a
national basis as described in the Stock Purchase Agreement listed in Exhibit E.
---------
1.10 "Governmental Authority" shall mean any domestic or foreign
government, governmental authority, court, tribunal, agency or other regulatory,
administrative or judicial agency, commission or organization, and any
subdivision, branch or department of any of the foregoing.
1.11 "Gross Revenues" shall mean the total revenues derived from the sale,
licensing, provision and distribution of products, services and technology and
intellectual property rights by TWIN and its Subsidiaries, without duplication,
less any sales, excise and consumption taxes and customs duties levied in
respect of such transactions, accepted returns of the pertinent items, bona fide
price adjustments (including distributor price adjustments), commissions, and
any packing, shipping, transportation and insurance costs related to the sale of
such items which costs are passed through to (i.e., the actual costs incurred
are billed on to) a customer or other Person.
1.12 "Handset Technology," as used herein, shall mean the subset of TW
Technology comprising inventions, whether patented or not, software, hardware
and knowhow that enable the transmission of data between a handheld transmitting
device (e.g., a set-top box remote control device) and a receiving device (e.g.,
a set-top box) or between a set-top box to a handheld or other "slave" device.
1.13 "IN Patents" shall mean the specific patents set forth in Exhibit A
---------
and the initial patents, if any, issuing on the applications set forth in
Exhibit A and, in either case, any continuations, divisionals, continued
- ---------
prosecution applications, reissues, and reexaminations thereof (but excluding
any continuations in part and new inventions).
1.14 "IN Technology" shall mean all of IN's future content, interactive
content, software (in source code, object code, byte code, script, or other
form), software documentation, technologies, inventions, know-how, trade
secrets, market and test data, technical data, techniques, methods, processes,
and other technological materials or information that are wholly owned by IN.
1.15 "Licensed Marks" shall mean all trademarks, service marks, trade
names, logos and marks now owned or hereafter developed, acquired or used by TW
in connection with the TW Technology Related to TWIN Business.
1.16 "Localization" shall mean the adaptation of the TW Technology for
purposes of developing the TWIN services and products and conducting the TWIN
Business, including the conversion of art and other materials (including logos,
if any) to American English for use in connection with the TWIN services and
products. Any modification of the Licensed Marks shall be mutually agreed upon
by the Parties in writing.
3
<PAGE>
1.17 "Performance Criteria" shall mean the performance milestones and
schedule set forth in Exhibit C, as may be amended by the Licensors from time to
---------
time hereafter in a writing signed by the Licensors.
1.18 "Person" shall mean a natural individual, Governmental Authority,
legal entity, partnership, firm, corporation and other association.
1.19 "Proprietary Rights" shall mean, collectively, Patents, Trade
Secrets, Copyrights, Moral Rights, rights in trade dress, design and maskwork
rights, any rights analogous to those set forth in the preceding clauses, and
all other intellectual property rights and proprietary rights, excluding
trademarks and service marks, whether arising under the laws of the United
States or any other state, country or jurisdiction in each case now existing or
hereafter developed or coming into existence during the term of this Agreement.
For purposes of this Agreement: (a) "Patents" shall mean all patent rights and
all right, title and interest in all letters patent or equivalent rights and
applications, including any reissue, extension, division, continuation, or
continuation-in-part applications throughout the world; (b) "Trade Secrets"
shall mean all right, title and interest in all trade secrets and trade secret
rights arising under common law, state law, federal law or laws of foreign
countries; (c) "Copyrights" shall mean all copyrights, and all right, title and
interest in all copyrights, copyright registrations and applications for
copyright registration, certificates of copyright and copyrighted interests
throughout the world, and all right, title and interest in related applications
and registrations throughout the world; and (d) "Moral Rights" shall mean any
right to claim authorship, to prevent modification or other derogatory action in
relation to the subject work, to withdraw from or control distribution, and any
similar rights, existing under the law of any country or under any treaty,
regardless of whether such right is referred to as a "moral right."
1.20 "Related to TWIN Business" shall mean useful to, relevant to or
capable of being used in connection with the TWIN Business, as broadly
interpreted and as determined by vote in accordance with Section 2.6 with
respect to TW's Proprietary Rights and TW Technology that are developed or
reduced to practice or that come into existence on or after the Effective Date.
1.21 "Subsidiary," with respect to a Party, shall mean any corporation,
partnership or other entity, more than fifty percent (50%) of whose shares or
ownership interests entitled to vote for the election of directors (other than
any shares whose voting rights are subject to restriction) or, in the case of a
noncorporate entity, the equivalent interests, are owned or controlled by such
party, directly or indirectly, now or hereafter, but such corporation,
partnership or other entity shall be deemed to be a Subsidiary only for so long
as such ownership or control exists.
1.22 "Territory" shall mean (a) the United States of America and all its
territories, and Canada, and (b) such additional countries and jurisdictions as
the Licensors may hereafter mutually agree in writing to include in the
definition of "Territory."
1.23 "TW Technology" shall mean all of TW's existing and future: content,
interactive content, software (in source code, object code, byte code, script,
or other form), software documentation, technologies, inventions, know-how,
trade secrets, Handset Technology, circuit diagrams, schematics, logic-flow
diagrams, market and test data, technical data, techniques, methods, processes,
and other technological materials and information that are wholly owned by
4
<PAGE>
TW or as to which, and only to the extent and subject to the conditions under
which, TW has the right, as of the Effective Date or thereafter during the term
of this Agreement, to grant licenses or sublicenses of the scope granted herein,
without such grant resulting in the payment of royalties or other consideration
to third parties (unless and until TW is reimbursed for any payments so made, in
which case such information shall be included within TW Technology for any
license or sublicense to TWIN) except for payments to a Subsidiary of TW, if
any, or payments to third parties for TW Technology developed or created by such
third parties while employed by TW or any Subsidiary thereof. TW Technology
includes all of the foregoing and any improvements, enhancements and upgrades
thereto hereafter developed or acquired by TW.
1.24 "TWIN Business" shall mean the business activities expected to be
conducted by TWIN as described in Exhibit B, and any additional business
---------
activities contained in any future business plan of TWIN or amendment thereto,
which additional activities have been approved by the Board of Directors of TWIN
and by both TW and IN.
1.25 "TWIN Derivative Works" shall mean Derivative Works based on the TW
Technology licensed to TWIN hereunder which are developed solely by (or under
contract for) TWIN, and includes without limitation Localizations of the TW
Technology and Licensed Marks.
1.26 "TWIN Technology" shall mean all of TWIN's content, interactive
content, software (in source code, object code, byte code, script, or other
form), technologies, inventions, know-how, trade secrets, market and test data,
technical data, techniques, methods, processes, and other technological
materials or information that is wholly owned by TWIN (excluding all of the TW
Technology and IN Patents, and associated Proprietary Rights thereto, that are
licensed to TWIN hereunder).
2. LICENSES TO TWIN.
2.1 TW License. Subject to all the terms and conditions of this
----------
Agreement, TW hereby grants to TWIN a non-exclusive, royalty-free, perpetual
(subject to termination under Section 16 ("Term and Termination")), non-
transferable license under all of TW's Proprietary Rights (exclusive of the
Licensed Marks), in the Territory, to:
(a) Reproduce, publicly perform, publicly display, modify,
distribute and otherwise use the Current TW Technology, the TW Technology
Related to TWIN Business, and any TWIN Derivative Works thereof, including
without limitation the rights to perform Localization and to create TWIN
Derivative Works;
(b) Reproduce and otherwise use the Current TW Technology, the TW
Technology Related to TWIN Business, and TWIN Derivative Works for back-up,
archival, maintenance, and technical support purposes;
(c) Make, have made (which terms shall include the acts of
assembling and/or testing), use, sell, offer for sale, import, lease and
otherwise dispose of products and services in the Territory; and
5
<PAGE>
(d) Effective as of the Approval Date and only during the periods
when the license granted in this Section 2.1 ("TW License") is exclusive,
sublicense any of the foregoing rights in the Territory on a non-exclusive
basis, provided that the other terms and conditions of any such sublicense are
substantially similar to the terms and conditions of this Agreement, provided
further that any such sublicense (or amendment or extension thereof) shall be
subject to the prior written approval of TW, which approval shall not be
unreasonably withheld, provided further that TWIN shall provide written notice
to Licensors of the name and address of each sublicensee promptly upon entering
any such sublicense, and provided further that such right to sublicense shall
terminate immediately and automatically upon any conversion of the license grant
in this Section 2.2 ("IN License") from exclusive to non-exclusive in accordance
with the terms hereof. This right to sublicense shall not include the right of
any sublicensee to grant further sublicenses.
The foregoing license shall become exclusive (even as against TW), effective as
---------
of the Approval Date, subject to Section 2.4 ("Performance Criteria"), Section
7.3(b) ("Casco Agreement") and Section 8.3 ("Termination of Support Fees").
2.2 IN License. Subject to all the terms and conditions of this
----------
Agreement and the Gannett Rights, IN hereby grants to TWIN a non-exclusive
royalty-free, non-transferable license, under the IN Patents, for the life of
such IN Patents (subject to termination under Section 16 ("Term and
Termination")) in the Territory, to:
(a) Make, have made (which terms shall include the acts of
assembling and/or testing), use, sell, offer for sale, lease or otherwise
dispose of products and services embodying the inventions described in the IN
Patents; and
(b) Effective as of the Approval Date and only during the periods
when the license granted in this Section 2.2 ("IN License") is exclusive,
sublicense any of the foregoing rights in the Territory on a non-exclusive
basis, provided that the other terms and conditions of any such sublicense are
substantially similar to the terms and conditions of this Agreement, provided
further that TWIN shall provide written notice to Licensors of the name and
address of each sublicensee promptly upon entering any such sublicense, provided
further that any such sublicense (or amendment or extension thereof) shall be
subject to the prior written approval of IN, which approval shall not be
unreasonably withheld, and provided further that such right to sublicense shall
terminate immediately and automatically upon any conversion of the license grant
in this Section 2.2 ("IN License") from exclusive to non-exclusive in accordance
with the terms hereof. This right to sublicense shall not include the right of
any sublicensee to grant further sublicenses.
The foregoing license shall become exclusive (even as against IN), effective as
---------
of the Approval Date, subject to Section 2.4 ("Performance Criteria") and to the
third-party rights and licenses under the IN Patents existing as of the
Effective Date as set forth in Exhibit E. No other rights to the IN Patents or
---------
any other Proprietary Rights of IN are granted by IN.
2.3 Territorial Considerations. The foregoing licenses in Section 2.1
--------------------------
("TW License") and 2.2 ("IN License") include the following:
6
<PAGE>
(a) The incidental use of TWIN products and services by Customers
while outside of the Territory, but TWIN shall not promote such access;
(b) The incidental access to portions of TWIN products and services
from outside the Territory via any and all telephonic, broadcast and electronic
gateways and distribution channels, including without limitation telephone,
television, Internet, satellite and other wireless broadcast, and cable
networks, by third parties other than Customers by virtue of the accessibility
of TWIN products and services through the Internet and wireless transmission
media and methods, but TWIN shall not promote such access;
(c) The caching in the Territory of content, software, and other
portions of the TW Technology and TWIN Derivative Works by Internet Service
Providers and other third parties providing network and infrastructure services
for electronic and other gateways and distribution channels; and
(d) Other ancillary and limited uses of or access to the TW
Technology and TWIN Derivative Works by third parties other than Customers
reasonably related to TWIN's implementation and delivery of TWIN products and
services in the Territory.
Notwithstanding the provisions of this Section 2.3 ("Territorial
Considerations"), TWIN shall make its best commercial efforts to discourage
third parties' and Customers' access to or use of TWIN's products and services
outside the Territory and shall make reasonable efforts, if commercially
feasible and practical, to prevent access to or use of TWIN's products and
services outside the Territory.
2.4 Performance Criteria. The following provisions of Section 2.4
--------------------
("Performance Criteria") shall become effective on the Approval Date and shall
remain in effect thereafter only for so long as the license granted in Section
2.1 ("TW License") and/or the license granted in Section 2.2 ("IN License") are
exclusive:
In the event that TWIN does not meet any of the Performance Criteria in
accordance with the schedule set forth in Exhibit C, each Licensor shall
---------
have the option, exercisable by delivering written notice ("Conversion
Notice") simultaneously to TWIN and the other Licensor within sixty (60)
days after the date such particular Performance Criteria was not met, to
convert to non-exclusive all of its license grants to TWIN set forth in
-------------
Sections 2.1, 2.2 and 2.3, as applicable, which conversion shall become
effective thirty (30) days after receipt by both such Parties of the
Conversion Notice and/or (b) terminate its non-compete obligations set
forth in Section 7.1 (a) ("Non-compete During Exclusivity"), effective
thirty (30) days after receipt by both such Parties of such written notice.
Notwithstanding the foregoing, if a Licensor, whether through its
representative(s) on the Board of Directors of TWIN and whether by acting
or failing to act, unreasonably (i.e., without justification reasonable
under the circumstances) prevents TWIN from meeting any (or all) of the
Performance Criteria, such Licensor shall have no right under this Section
2.4 to convert its license grants hereunder to non-exclusive licenses or to
terminate its non-compete obligations in Section 7.1(a) ("Non-compete
During Exclusivity"). In the event of such "prevention" by a Licensor
("Preventing Licensor") the other Licensor ("Non-Preventing Licensor")
shall have the option,
7
<PAGE>
exercisable by delivering written notice simultaneously to TWIN and the
Preventing Licensor within sixty (60) days after the later of the date the
Non-Preventing Licensor first becomes aware of such prevention or the date
the Performance Criteria was not met, to: (a) convert to non-exclusive all
-------------
of its license grants to TWIN set forth in Sections 2.1, 2.2 and 2.3, as
applicable, which conversion shall become effective thirty (30) days after
receipt by TWIN and the Preventing Party of such written notice, and/or (b)
terminate its non-compete obligations set forth in Section 7.1 (a) ("Non-
compete During Exclusivity"), effective thirty (30) days after receipt by
both such Parties of such written notice; provided, however, that the Non-
Preventing Licensor shall not have such right if the Preventing Party cures
such breach within thirty (30) days of receipt of such written notice such
that the applicable Performance Criteria is met within such thirty (30) day
cure period. Any such license conversion or termination of non-compete
obligations by the Non-Preventing Party shall not modify, terminate or
otherwise affect the exclusivity of the license grants by or the non-
compete obligations of the Preventing Party, which shall remain unchanged.
2.5 Reservation of Rights.
---------------------
(a) TW Reservation of Rights. The Parties agree that TW shall have
------------------------
no obligation to license to TWIN, or provide support to TWIN for, TW Technology
or TW's Proprietary Rights independently developed by TW after the Effective
Date or coming into existence after the Effective Date which are entirely new
and not Related to TWIN Business, but any such TW Technology and TW's
Proprietary Rights shall nevertheless be offered to TWIN on a right of first
refusal basis in accordance with Section 2.7 (i.e. only if TW wishes to make it
available to any third party in the Territory).
(b) IN Reservation of Rights. The Parties agree that IN shall have
------------------------
no obligation to license any IN Technology or any of IN's Proprietary Rights
(other than the IN Patents licensed hereunder), but any such IN Technology and
IN's Proprietary Rights developed by IN or coming into existence after the
Effective Date shall nevertheless be offered to TWIN on a right of first refusal
basis in accordance with Section 2.7 (i.e. only if IN wishes to make it
available to any third party in the Territory).
2.6 Determination of "Related to TWIN Business." If TW intends or
--------------------------------------------
desires at any time to exclude any TW Technology or any of TW's Proprietary
Rights, other than the Current TW Technology, from TW's license grants to TWIN
hereunder, based on TW's good faith belief that such TW Technology and/or TW's
Proprietary Rights are not Related to TWIN Business, TW shall notify IN and TWIN
prior to licensing or otherwise making such TW Technology and/or TW's
Proprietary Rights available to any third party, and at least five (5) business
days prior to a meeting of the TWIN Board of Directors ("Board"), that TW wishes
to present such TW Technology and anticipated applications thereof to the Board
at such meeting. TW shall thereafter make such presentation to the Board,
providing appropriately detailed information and responding to Board member
questions, and the Licensors' respective representatives on the Board ("Licensor
Directors"), if any, shall vote on whether the TW Technology and/or TW's
Proprietary Rights are not Related to TWIN Business. For purposes of such
presentation and vote, TW shall have the right to call a special meeting of the
Board upon not less than ten (10) business days' notice. The effects of the vote
shall be as follows:
8
<PAGE>
(a) Unanimous "Not Related" Vote. If the Licensor Directors agree
---------------------------- -----
unanimously that the TW Technology and/or TW's Proprietary Rights at issue is
- -----------
not Related to TWIN Business (so as not to be subject to TW's license and
- ---
delivery obligations hereunder), then the TW Technology and/or TW's Proprietary
Rights shall be deemed not Related to TWIN Business and, effective as of the
---
date of the vote, such TW Technology and/or TW's Proprietary Rights shall not be
incorporated into this Agreement as TW Technology Related to TWIN Business. Such
unanimous vote of the Licensor Directors shall be binding on TW and TWIN.
(b) Other Vote. If the Licensor Directors vote in any other way
----------
than as set forth in the immediately preceding subsection (a), then the TW
Technology and/or TW's Proprietary Rights shall be deemed Related to TWIN
Business and, effective as of the date occurring ten (10) business days after
the date of such vote, such TW Technology and/or TW's Proprietary Rights shall
be incorporated into this Agreement as TW Technology Related to TWIN Business
(and/or, as applicable, as TW's Proprietary Rights under which the licenses are
granted in Section 2.1 ("TW License")).
(c) Dispute Resolution. Notwithstanding the foregoing, if either
------------------
Licensor believes any final vote, other than a unanimous vote pursuant to
subsection (a) above where such Licensor was represented by a Licensor Director
on the Board, was unreasonable, such Licensor may, by providing written notice
thereof to the other Parties within ten (10) business days of such vote, invoke
the dispute resolution procedure set forth in Section 16.5 ("Arbitration") and,
until such time as such dispute resolution procedure determines the issue, the
TW Technology and/or TW's Proprietary Rights at issue (a) shall not be deemed
incorporated into this Agreement as TW Technology Related to TWIN Business and
(b) shall not be used, licensed, disposed of or otherwise exploited by any
Person in the Territory (including without limitation by any of the Parties or
any of their successors, Subsidiaries, affiliates or licensees).
(d) Non-representation During Vote. If at any time a Licensor is
------------------------------
not represented by a Licensor Director on the Board, such Licensor may invoke
the dispute resolution procedure in accordance with Section 2.6 (c) ("Dispute
Resolution") above if it believes any final vote was unreasonable. If neither
Licensor has a Licensor Director on the Board, then the entire Board shall vote
on whether any TW Technology and/or TW's Proprietary Rights is not Related to
TWIN Business in place of the Licensor Directors in accordance with the
procedures set forth in this Section 2.6, and, unless such vote is unanimous in
accordance with Section 2.6 (a) ("Unanimous "Not Related" Vote"), either
Licensor who believes such final vote was unreasonable may invoke the dispute
resolution procedure in accordance with Section 2.6 (c) ("Dispute Resolution").
2.7 TWIN Right of First Refusal to License Other Technology of the
--------------------------------------------------------------
Licensors. If IN develops after the Effective Date any IN Technology that is
- ----------
Related to TWIN Business or TW develops after the Effective Date TW Technology
that is not Related to TWIN Business, and such Licensor proposes to disclose,
---
license or otherwise make such technology, and/or any associated Proprietary
Rights, available to any third party in the Territory, then such Licensor shall
promptly give written notice ("Notice") simultaneously to the other Parties,
describing in reasonable detail such technology, its potential applications and
the terms and conditions under which such Licensor is willing to license such
technology and/or associated Proprietary Rights to TWIN. For a period of thirty
(30) days following TWIN's receipt of the Notice, TWIN shall
9
<PAGE>
have the right to accept, or (if Licensor is willing to negotiate) negotiate,
finalize and accept, the terms and conditions offered. If TWIN does not deliver
written notice of unconditional acceptance of the offered terms (or of the
mutually agreed upon negotiated terms) to the relevant Licensor within such
thirty (30) day period following its receipt of the Notice, then such Licensor
shall have the right to license such technology to third parties in the
Territory on terms and conditions no more favorable than those offered to TWIN.
3. TRADEMARK LICENSE.
3.1 License Grant. Subject to all the terms and conditions of this
-------------
Agreement, TW hereby grants to TWIN a non-exclusive, non-transferable, royalty-
free license to (i) utilize the Licensed Marks solely in connection with the
marketing, promotion and supply of TWIN products and services incorporating any
TW Technology Related to TWIN Business in the Territory and (ii) modify the
Licensed Marks to include references to the United States or Canada (as
applicable) and perform other Localizations of the Licensed Marks subject to
TW's prior written consent (not to be unreasonably withheld), provided that the
use of all such modified Licensed Marks shall be subject to the terms and
conditions of this Agreement. The foregoing license shall become exclusive
---------
(even as against TW) effective as of the Approval Date, subject to Section 2.4
("Performance Criteria"), Section 8.3 ("Termination of Support Fees") and the
right of TW to grant licenses to the Licensed Marks in conjunction with its
license of Handset Technology to Casco Products International Inc. as permitted
by Section 7.3 (b) ("Casco Agreement"). No other rights to use the Licensed
Marks are granted by TW. TW shall have the right to terminate the license in
any Licensed Mark that is, or that TW reasonably believes may become, the
subject of an infringement claim.
3.2 Quality Standards. TW shall establish reasonable quality standards
-----------------
for the TWIN services and products provided under the Licensed Marks for the
purpose of protecting the Licensed Marks as provided herein, and TWIN will
comply with such standards. In addition, TWIN shall use best efforts to meet
TW's quality standards generally applicable to its licensees. TWIN shall comply
with such general quality standards as they may be amended from time to time by
TW in its sole discretion, provided that any such amendment is generally
applicable to TW's licensees offering similar services or products. TW will
provide reasonable written notice of any such amendment to TWIN and TWIN may use
previously complying materials until its stock runs out or for a period of six
(6) months after receipt of such notice, whichever is sooner.
3.3 Use Guidelines. TWIN will display the notice of trademark status
--------------
provided by TW with use of the Licensed Marks in each piece of advertising or
printed materials in which such Licensed Mark appears. Any co-branding or
private labeling shall be subject to TW's prior written approval (not to be
unreasonably withheld). TWIN acknowledges TW's ownership of the Licensed Marks,
and agrees that it will do nothing inconsistent with such ownership. All uses of
the Licensed Marks by TWIN shall inure to the benefit of and be on behalf of TW.
TW shall be solely responsible, at its own cost and expense, for filing
trademark applications in the Territory of the Licensed Marks, and shall,
promptly after the Effective Date, seek to register the trademark "Two Way TV"
or such substitute or other marks as the Licensors may agree upon in the United
States and Canada. After the Effective Date, TW shall apply to register such
other Licensed Marks in the Territory as TWIN may reasonably request from time
to time, which subsequent applications shall be at the cost and expense of TWIN
if made during the period the
10
<PAGE>
license under Section 2.1 ("TW License") is exclusive. TWIN agrees to supply TW
with specimens of TWIN's uses of the Licensed Marks upon request.
4. DELIVERY OBLIGATIONS.
4.1 TW Delivery.
(a) TW Technology Delivery. TW shall use its best efforts to provide
----------------------
the Current TW Technology (including, without limitation, all source code) in
tangible form to TWIN as soon as reasonably practicable after the Effective
Date. TW shall also, on an on-going basis (subject to Section 8.3), promptly
upon the earlier of such item's availability, its distribution to any third
party, or the earliest practicable time in its development but in any event no
later than a beta version or, to the extent such item is used for internal
purposes, when available in a commercially useful, deliverable form, provide to
TWIN, in tangible form, all new TW Technology and TW's Proprietary Rights that
are Related to the TWIN Business (including without limitation, all source
code), and a reasonable number of samples of tangible embodiments based on or
incorporating such TW Technology and/or TW's Proprietary Rights, such as
circuits, hardware, semiconductor chips, devices, apparatus and tangible
products such as set-top boxes, keyboards and handsets, and improvements,
enhancements and upgrades to the TW Technology as well as know-how, in each case
only if Related to TWIN Business. Any improvement, enhancement, upgrade or
Derivative Work of or to Current TW Technology or TW Technology (including,
without limitation, bug fixes, new features and new products) already determined
to be Related to TWIN Business in accordance with the terms of this Agreement
shall be automatically deemed to be Related to TWIN Business and shall not be
subject to the provisions of Section 2.6 ("Determination of `Related to TWIN
Business'"). As part of its delivery obligation under this Section 4.1, TW shall
(subject to Section 8.3), on an ongoing basis, deliver to TWIN all relevant
market and test data derived from the U.K. rollout (e.g., if available and
relevant, test market data, churn rates, quality control numbers and reports,
content changes and developments, customer satisfaction reports, advertising
data and revenue data, set top box configurations, security codes and other
platform designs and configurations) and any other non-U.S. markets exploited
directly by TW or indirectly through its licensees and Subsidiaries, as
permitted by relevant agreements with third parties or Subsidiaries, as
appropriate. TW shall use its reasonable commercial efforts to include in any
and all relevant future agreements with third parties and Subsidiaries
provisions allowing TWIN access to and use of relevant market and test data
derived from such market rollouts.
(b) Source Code. TWIN agrees that TWIN will not modify the source
-----------
code of TW delivered in accordance with Section 4.1(a) ("TW Technology
Delivery") (hereinafter "TW Source Code") except in accordance with the
provisions of this Section 4.1(b) ("Source Code"). Except for urgent maintenance
purposes as described below, prior to modifying any TW Source Code TWIN shall
provide written notice of its proposed modification(s) to both Licensors and
obtain Board (as defined in Section 2.6) approval for such modification(s). For
purposes of obtaining the Board's prior approval of modifications to TW Source
Code, TWIN may call a special meeting of the Board upon not less than ten (10)
business days' prior notice to Licensors. At the Board meeting, TW shall make a
presentation to the Board, explaining the likely impact of the proposed
modification(s) on TW's support obligations and why it supports or,
alternatively, does not support such modification(s). The Board shall then
determine, by
11
<PAGE>
majority vote, whether TWIN may so modify the TW Source Code. The effects of the
vote shall be as follows:
(i) if the Board determines not to permit such modification of
---
the TW Source Code as proposed, no such modification will be made to the TW
Source Code by TWIN nor to the terms of this Agreement;
(ii) if the Board determines to permit such modification of the
TW Source Code, then TWIN may so modify the TW Source Code, provided
however that (x) if TW did not support such modification(s), then TW shall
---
have no obligation to provide technical support for the particular modified
source code (or any module containing the modified source code) to the
extent such modification(s) make it impractical to do so in the regular
course of business or preclude TW from providing support on commercially
reasonable terms; or (y) if TW did support such modification(s), then TWIN
shall, when such modification is complete, deliver a copy of the
modification(s) ("Source Code Derivative Work") to TW; TWIN shall grant to
TW a non-exclusive, royalty-free, nontransferable (except that TW may
assign this Source Code Derivative Work license in connection with a merger
or sale of substantially all of its assets subject to IN's prior written
consent, not to be unreasonably withheld) license, on an as-is basis,
outside the Territory: (a) to internally use the source code version of the
Source Code Derivative Work solely for back-up, archival, maintenance, and
technical support purposes and (b) to reproduce, publicly perform, publicly
display, modify, distribute and otherwise use the object code version of
the Source Code Derivative Work, with a right to grant sublicenses only to
the object code version of the Source Code Derivative Work; TW shall
provide technical support to TWIN for such Source Code Derivative Work on
the same terms as TW supports TW Technology Related to TWIN Business; and
any modification(s) TW makes to such Source Code Derivative Work shall be
deemed TW Technology Related to TWIN Business, subject to the license and
delivery obligations of TW herein.
Notwithstanding the foregoing, TWIN shall have the right to modify the TW
Source Code without Board approval or notice to Licensors in the event TWIN in
good faith believes such modification(s) are necessary for urgent maintenance
purposes (e.g., to perform emergency fixes for a customer). In such event, TWIN
shall notify TW of the modification(s) it made as soon as reasonably practicable
thereafter, and, at the next regularly scheduled meeting of the Board, the Board
will be notified of such modification(s) and will have the right to require TWIN
to replace such urgent modification(s) with modification(s) that it determines
are preferable. If the Board does require replacement of such modification(s),
subsection (y) of Section 4.1(b)(ii) above (except for the condition that TW
supported such modification(s)) shall apply to such replacement modification(s).
If the Board does not require replacement of such modification(s), TW shall in
good faith determine whether it is practical to provide technical support in the
regular course of business for such modification(s), and, if not, whether to
offer to provide support on other terms. TWIN shall have no obligation to
deliver or license such Source Code Derivative Work to TW unless TW agrees to
provide such technical support on the same terms as TW supports TW Technology
Related to TWIN Business.
12
<PAGE>
4.2 IN Delivery. IN shall provide to TWIN access to any readily available
-----------
historical market or test data Related to TWIN Business existing as of the
Effective Date. IN shall deliver to TWIN, as soon as reasonably practicable
after the Effective Date, a copy of each IN Patent, and records related to
filings and approvals thereof. IN shall deliver to TWIN, as soon as reasonably
practicable after the Approval Date, such documents and other information
necessary, in IN's reasonable determination, to enable TWIN to perform its
obligations, if any, under Sections 12.4 ("Enforcement in the Territory") and
7.2 ("NTN Transactions"), which documents and information shall be deemed the
Confidential Information of IN except to the extent such information is excluded
from the definition of Confidential Information pursuant to Section 11.1 ("Non-
disclosure; Non-use").
5. LICENSES FROM TWIN.
5.1 Right of First Refusal to License TWIN Technology. At the written
-------------------------------------------------
request of one or both Licensors to license certain TWIN Technology (and
associated Proprietary Rights) outside the Territory, which request shall be
sent simultaneously to the other Parties, TWIN shall license such TWIN
Technology to the interested Licensor(s) for exploitation outside the Territory
on such terms and conditions as are negotiated between TWIN and the interested
Licensor(s) on an arm's length basis, in accordance with the provisions set
forth below. The following provisions shall not apply to any Source Code
Derivative Works licensed to TW in accordance with Section 4.1(b) ("Source
Code"). In any country where only one Licensor already actively markets products
or services, that Licensor shall have the right of first refusal to enter into
an exclusive license in such country. If both Licensors actively market products
or services in a particular country, each Licensor shall have the opportunity to
enter into a (non-exclusive) license in that country on substantially the same
terms and conditions as provided to the other Licensor (unless otherwise agreed
by the Parties), but TWIN shall not make such TWIN Technology (or associated
Proprietary Rights) available to any third party in that country. In a country
where neither Licensor actively markets products or services, both Licensors are
free to negotiate for an exclusive or non-exclusive license from TWIN for the
TWIN Technology after receipt of the notice described in the first sentence of
this Section 5.1. Prior to licensing the TWIN Technology (or TWIN Proprietary
Rights) in a particular country to a third party, TWIN shall provide the
Licensors with thirty (30) days' prior written notice of its intent to license
such TWIN Technology and/or Proprietary Rights to a third party. If either
Licensor delivers written notice to TWIN within such period stating that it
desires to enter into a license with respect to such TWIN Technology and/or
Proprietary Rights in such country ("Request to License"), TWIN shall negotiate
exclusively and in good faith with such Licensor (or both Licensors, if both
deliver such notice) for a period of sixty (60) days after such thirty (30) day
notice period, and if no agreement is reached within such sixty (60) day period,
TWIN shall have no further obligation to Licensors and may proceed to license to
third parties, provided, however, that any such license to a third party shall
be on no better terms to such third party than those that were last proposed by
TWIN to the applicable Licensor(s) pursuant to the negotiations described in
this sentence. If neither Licensor delivers a Request to License to TWIN within
such thirty (30) day period, TWIN shall have no further obligation to Licensors
and may proceed to license to third parties.
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<PAGE>
5.2 Notice of TWIN Technology. TWIN agrees that it will, within a
-------------------------
reasonable time after the development thereof, inform Licensors of any
significant TWIN Derivative Works, other than Localizations.
6. SUPPORT AND TRAINING.
6.1 TW Support. TW shall provide to TWIN initial transition services and
----------
on-going technical training and support services as described in more detail in
Exhibit F (collectively, "Support") in connection with the TW Technology
- ----------
licensed to TWIN hereunder. Such Support shall be provided in accordance with a
schedule to be mutually agreed upon by TWIN and TW. "Support" shall include
TW's obligation to provide future TW Technology and associated Proprietary
Rights to TWIN in accordance with Section 4.1 ("Technology Delivery"). TW shall
have no obligation to provide technical support of any TWIN modifications to TW
Source Code under this Section 6.1 ("TW Support"), except as provided in Section
4.1(b) ("Source Code"). IN shall have no training, maintenance or support
obligations under this Agreement.
6.2 Other Services. From time to time, TWIN may request and TW shall,
--------------
where reasonably possible, provide additional services other than those
described in Section 6.1 ("TW Support") upon terms and conditions as agreed
between TW and TWIN and negotiated on an arm's-length basis. If, in the future,
TWIN intends to develop new software functionality based on any TW software
licensed to TWIN hereunder, TWIN may notify TW of such intention and, if TW is
already developing such functionality, TW will provide such functionality to
TWIN at no charge as soon as available and if TW is not developing such
functionality, TW and TWIN may enter into good faith negotiations on an arm's-
length basis to enter into a development services and/or support agreement
whereby TWIN would hire TW to develop such functionality for TWIN and/or provide
technical support for such functionality. The Parties agree and acknowledge that
TWIN shall have no obligation to hire TW for development projects or special
support services.
6.3 Visits to TWIN Facility. Each Licensor shall be permitted to have a
-----------------------
limited number of engineers and technical personnel visit or temporarily work at
TWIN's facilities at such Party's own cost (subject to Section 6.2 ("Other
Services")) in order to assist TWIN and to enhance information exchange between
TWIN and Licensors. The number of engineers and technical personnel, and
length of their visits, shall be subject to TWIN's prior reasonable approval.
7. OTHER LICENSOR OBLIGATIONS.
7.1 Non-compete Obligations.
-----------------------
(a) Non-compete During Exclusivity. The following provisions of
------------------------------
Section 7.1(a) ("Non-compete During Exclusivity") shall become effective on the
Approval Date and shall remain in effect thereafter, with respect to a
particular Licensor, only for so long as the license granted by such Licensor in
Section 2.1 ("TW License") or Section 2.2 ("IN License"), as applicable, is
exclusive, and subject to termination pursuant to Section 8.3 ("Termination of
- ---------
Exclusivity and Support Fees"):
14
<PAGE>
Licensor agrees not to compete directly or indirectly (except as
provided in Section 7.1(c) below) with TWIN in the Territory for so
long as any of such Licensor's license grants to TWIN set forth in
Section 2 ("Licenses to TWIN") remains in effect and has not been
transferred or assigned by TWIN to any third party.
(b) Non-compete During Non-exclusivity. The following provisions of
----------------------------------
Section 7.1(b) ("Non-compete During Non-exclusivity") shall become effective on
the Effective Date and shall remain in effect thereafter, with respect to a
particular Licensor, only for so long as the license granted by such Licensor in
Section 2.1 ("TW License") or Section 2.2 ("IN License"), as applicable, is non-
----
exclusive (including without limitation, during such periods after the Approval
- ---------
Date when such Licensor's licenses have been converted from exclusive to non-
exclusive in accordance with the terms herein):
Licensor agrees not to compete directly with TWIN in the Territory for
so long as any of such Licensor's license grants to TWIN set forth in
Section 2 ("Licenses to TWIN") remains in effect and has not been
transferred or assigned by TWIN to any third party, but Licensor shall
have the right to grant sublicenses to such Licensor's technology and
Proprietary Rights to unaffiliated Persons in the Territory.
(c) IN Right to Conduct Business. Notwithstanding any provision
----------------------------
herein or in any Associated Agreement to the contrary, IN shall, in any event,
have the right to create or develop a business and engage in business activities
within or outside the scope of the TWIN Business, provided that such business
activities do not directly compete with the then-current primary business
activities of TWIN. By way of example but not limitation, in any event, IN shall
have the right to perform content production services for TWIN or for any third
party in the Territory.
7.2 NTN Transactions.
----------------
(a) Assignment of NTN Licenses. TW acknowledges that it has had an
--------------------------
opportunity to review a copy of the Patent License Agreement between IN and NTN
Communications, Inc. ("NTN") and the subsequent amendment thereto listed in
Exhibit E ("NTN Licenses"), which agreements shall be deemed the Confidential
- ---------
Information of IN disclosed to TW for use only for the purposes set forth in
this Section 7.2(a). TW shall have a period of sixty (60) days following the
Effective Date to determine, and notify the other Parties in writing as to,
whether it believes it is in the best interests of TWIN for IN to assign the NTN
Licenses to TWIN. If TW provides such notice that such agreements should not be
assigned to TWIN, then this Section 7.2 shall be deemed removed from this
Agreement and shall have no further force and effect. Such election not to
---
assign shall not modify or alter any other TW obligation in this Agreement,
including without limitation those set forth in Section 7.3 ("Handset
Technology"). In any other event, IN will, as soon as practicable following the
Approval Date, assign to TWIN the NTN Licenses.
(b) Management of Litigation. This Section 7.2 (b) shall take effect
------------------------
only if IN assigns the NTN Licenses to TWIN in accordance with Section 7.1(a).
IN will assign to TWIN
15
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the right to manage the actual NTN-related litigation listed on Exhibit G as
---------
well as the right to enforce the IN Patents against NTN in the Territory in the
future and to sue NTN for damages in the future. From the proceeds of any
settlement, award or license resulting from the actual litigation listed on
Exhibit G, TWIN will reimburse IN for any and all expenses incurred by IN in
- ---------
connection with such litigation, licenses and associated settlement efforts,
whether incurred prior to or after the date TWIN took over management of such
litigation and including all such expenses incurred by IN in cooperating with
TWIN in such litigation, settlement and licensing. If required by applicable
law, IN agrees to be joined as a party (whether as plaintiff or as defendant) in
any future patent infringement litigation proceedings (in which TWIN is a party)
arising out of or in connection with any of the IN Patents instituted by or
against NTN. The final outcome of such litigation and/or settlement as it
pertains to the IN Patents in the Territory will be binding on TWIN and IN and
the benefit of any license including future royalties (except for the use of
proceeds from the license to reimburse IN for its associated expenses, as
described above) will accrue to TWIN. Any and all recoverable damages, costs,
awards, judgments, or settlement funds derived from existing litigation for past
acts by NTN will go directly to IN. Notwithstanding the foregoing, any
settlement terms with NTN must be approved in writing by IN. TWIN agrees to
execute such documents as necessary to effect the foregoing arrangement with
IN's counsel in Canada currently handling the litigation listed on Exhibit G.
---------
7.3 Handset Technology.
------------------
(a) License Grant to TW Licensees. TWIN understands that handset
-----------------------------
manufacturers outside the Territory may wish to obtain licenses to the Handset
Technology from TW pursuant to which they can exploit the Handset Technology in
multiple jurisdictions. If, following the Approval Date, any such potential TW
licensee desires to exploit the Handset Technology in the Territory or any part
thereof and TWIN receives written notice of such desire, TWIN agrees to enter
into good faith negotiations with TW or such licensee, as appropriate, to enter
into a licensing arrangement whereby TWIN would grant a non-exclusive license to
exploit the Handset Technology in the Territory directly to such third party or
license such right to TW for further sublicensing to such third party, in either
case on terms and conditions mutually agreeable to TWIN and the party with whom
TWIN is contracting. Notwithstanding the foregoing, if, following the Approval
Date, TWIN is already exploiting (or has documented plans to exploit within nine
(9) months) the Handset Technology in the same market segment at the time of
receipt of the notice or is already under contract with a direct competitor of
the third party in the Territory with respect to the Handset Technology, TWIN
shall have no obligation to negotiate with or license the Handset Technology to
any such third party. Promptly after the later of (i) execution by TW of any
agreement which grants any rights or licenses to the Handset Technology in the
Territory and (ii) the Approval Date, TW shall assign to TWIN all of TW's
revenues under such agreement(s) which are derived from the Territory
(including, without limitation, sales of units in and to the Territory and all
sublicense income with respect to the Territory) and all of TW's licenses and
rights thereunder which may be exercised in or with respect to the Territory.
(b) Casco Agreement. The Parties acknowledge that, as of the
---------------
Effective Date, TW is in negotiations to conclude an agreement with Casco
Products International Inc. ("Casco") whereby Casco would license certain
Handset Technology for use in the Territory. TW agrees to keep IN informed of
the progress of negotiations, introduce IN to Casco, permit IN to review the
16
<PAGE>
license agreement prior to execution and to otherwise work with IN to finalize
the license agreement. Promptly after the later of (i) execution of such
agreement by TW and Casco and (ii) the Approval Date, TW shall assign to TWIN
all of TW's revenues thereunder (including without limitation those accrued
prior to the Approval Date) which are derived from the Territory (including,
without limitation, sales of units in and to the Territory and all sublicense
income with respect to the Territory) and all of TW's licenses and rights
thereunder which may be exercised in or with respect to the Territory.
(c) Exploitation in Territory. TWIN will undertake to exploit the
-------------------------
Handset Technology in the Territory under its licenses to TW Technology Related
to TWIN Business hereunder. If TWIN is not exploiting the Handset Technology
under its licenses to TW Technology Related to TWIN Business hereunder in any
particular market within the Territory, TW notifies TWIN in writing ("Handset
Notice") that TW desires to exploit the Handset Technology in such market, and
TWIN does not notify TW in writing within sixty (60) days of TWIN's receipt of
the Handset Notice that TWIN has documented plans to exploit such market within
nine (9) months of receipt of the Handset Notice, then TWIN shall thereafter
grant to TW a non-exclusive license to exploit the Handset Technology in such
specific market, provided that TWIN shall also retain the non-exclusive right to
exploit the Handset Technology in such market under Section 2.1 ("TW License").
7.4 Cooperation During Initial Non-Exclusivity. During the period between
------------------------------------------
the Effective Date and the Approval Date, each Licensor agrees (i) to consult
with each another and with TWIN with respect to any licenses or other rights
such Licensor may consider granting or may actually grant in the Territory, (ii)
to disclose to any such potential licensee that such license might be assigned
to TWIN, (iii) to include in any such license appropriate provisions permitting
such assignment and (iv) to assign any and all such licenses (including without
limitation revenues accrued thereunder prior to the Approval Date other than
payments for services actually provided prior to the Approval Date) to TWIN as
soon as practicable following the Approval Date.
8. PAYMENTS.
8.1 Royalties. The licenses set forth in Sections 2 ("Licenses to TWIN")
---------
and 3 ("Trademark License") shall be royalty-free.
8.2 Support Fees. In consideration of the Support services provided under
------------
Section 6.1 ("TW Support"), TWIN agrees to pay to TW fees ("Support Fees") of
four percent (4%) of its Gross Revenues received prior to the fifth (5th)
anniversary of the Effective Date, and three percent (3%) of its Gross Revenues
received thereafter.
8.3 Termination of Exclusivity and Support Fees. At any time, subject to
-------------------------------------------
IN's prior written approval, TWIN may elect to terminate the Support obligations
of TW under Section 6.1 ("TW Support") and any remaining obligations under
Section 4.1 ("TW Delivery") that were not required to be performed as of the
date of that termination along with TWIN's accompanying Support Fees payment
obligation, provided that (i) TWIN provides to Licensors sixty (60) days'
advance written notice of its intent to terminate; and (ii) TWIN pays to TW all
Support Fees owed through the date of such election. From such date of election,
(a) TW shall have no further
17
<PAGE>
obligations under Section 6.1 or Section 4.1, (b) TWIN's license to the TW
Technology under Section 2.1 ("TW License") and to the Licensed Marks under
Section 3 ("Trademark License") shall automatically convert to non-exclusive,
and (c) TW shall be released from its non-compete obligations in Section 7.1(a)
("Non-compete During Exclusivity").
8.4 Payment and Reports. All Support Fees payable under Section 8.2
-------------------
("Support Fees") shall be payable quarterly within sixty (60) days after the end
of each quarter of TWIN's fiscal year. On or before the date of such payment
TWIN shall send to IN and TW a report describing the basis for its payment
calculation. Notwithstanding the foregoing, in recognition of the need for TWIN
to attract funding from third parties, TWIN shall have the right to delay
payment of Support Fees to TW hereunder until the end of the quarter during
which cumulative Gross Revenues exceeds Ten Million U.S. Dollars (US$10
million).
8.5 Direct Expense Reimbursement. TWIN shall reimburse TW for all
----------------------------
reasonable actual incremental direct costs incurred by TW in providing the
initial transition services under Section 6.1 ("Support"), including the fees
paid to third-party consultants, and out-of-pocket costs of travel and
accommodations for such consultants and TW personnel sent to the United States
incurred in connection with providing the transition services, but not including
salaries of any TW personnel, up to a maximum amount of US$150,000, which amount
may be increased by mutual agreement of Licensors. TWIN shall pay such costs to
TW within thirty (30) days of receipt of the invoice therefor issued by TW,
provided, however, that TWIN may deduct any such amounts paid for costs from any
future Support Fees payable to TW pursuant to Section 8.2 ("Support Fees").
8.6 Currency. All payments made hereunder shall be free and clear of all
--------
deductions, withholding taxes or other charges, except as provided in Section 9,
and shall be made by TWIN in U.S. dollars by wire transfer to a bank account(s)
designated by TW, unless otherwise mutually agreed upon. Any currency conversion
required in connection with payment to TW shall be at the rate received by TWIN
at the time of such payment from the bank it utilizes to make such payment.
8.7 Audit. TW shall have the right, at its own expense, upon reasonable
-----
notice and at reasonable times, but not more than once each fiscal year, to
inspect, through an independent auditor or another person reasonably acceptable
to TWIN, TWIN's records for the purpose of verifying the accuracy of TWIN's
calculations of fees payable hereunder. Should TWIN's calculations be more than
five percent (5%) less than such auditor's or other person's calculations, TWIN
shall be responsible for the reasonable expenses of such audit. TWIN shall keep
records showing the TWIN products, services and technology sold, licensed or
otherwise disposed of in connection with the licenses granted herein and the
calculation of Gross Revenues in sufficient detail to enable the fees payable to
TW to be determined. Such records shall be maintained for a period of at least
three (3) years after the date when payment is due by TWIN.
8.8 Third-Party License Fees. In the event IN or TW, as the case may be,
------------------------
is required to pay a fee to a third party pursuant to any license agreement or
amendment to an existing license agreement for sublicensing such third party's
intellectual property rights to TWIN, TWIN shall be responsible for such fee to
the extent such fee is a separate royalty on sales or other use
18
<PAGE>
by TWIN. Where such fee is part of a general lump sum payment, the sublicensing
Licensor and TWIN shall agree upon a mutually acceptable allocation of such
payment.
9. TAXATION.
9.1 Withholding Tax. If required by Applicable Law, TWIN may withhold
---------------
income tax from any payment to TW. In the case of such withholding, TWIN shall,
(i) without delay, pay the withheld tax to the appropriate tax office and
furnish TW with appropriate evidence of the tax payment and (ii) increase the
amount payable by TWIN to TW hereunder to such amount which, after making all
required withholdings or deductions of withholding taxes therefrom, will equal
the amount payable hereunder had no such withholdings or deductions been
required. TWIN shall indicate on each statement the amount of payment thereunder
which represents TWIN's gross-up to cover required withholding taxes, if any.
Should TW be able, within the maximum period allowable by law, to utilize as a
tax credit an amount which has been paid by TWIN for such withholding taxes, TW
will notify TWIN of the amount which it is able to utilize as a tax credit and
TWIN may deduct such amount from any future payments owed to TW.
9.2 Other Taxes. TWIN shall bear all sales, use and other governmental
-----------
taxes or transaction charges imposed in any jurisdiction which arise in
connection with the delivery to or use by TWIN of TW Technology or IN Patents,
or the manufacture or sale of TWIN products, services and technology by TWIN
hereunder. The Parties will make reasonable commercial efforts to cooperate as
necessary to take advantage of such double taxation treaties as may be available
and to minimize the amount of taxes owed by either Party in connection with this
Agreement.
10. INTELLECTUAL PROPERTY RIGHTS.
10.1 TWIN Rights. TWIN shall own all right, title and interest in and to
-----------
the TWIN Technology and TWIN Derivative Works (subject to Licensors' respective
ownership interests in IN's Proprietary Rights, IN Technology, TW's Proprietary
Rights, TW Technology and Licensed Marks incorporated therein). TWIN shall have
the right, at its own expense, and solely in its own name, to apply for,
prosecute and defend its Proprietary Rights with respect to the TWIN Technology
and TWIN Derivative Works. Licensors agree to cooperate with TWIN to aid in any
application for registration and protection of such TWIN Derivative Works, and
all Proprietary Rights therein, at TWIN's expense. As between Licensors and
TWIN, except for the express licenses granted herein, Licensors and their
respective licensors shall retain and own all right, title and interest in and
to the TW Technology, IN Patents, IN Technology, and all Proprietary Rights
thereto.
10.2 TW Rights. As among the Parties, except for and to the extent of the
---------
express licenses granted herein, TW and its licensors shall retain and own all
right, title and interest in and to the Current TW Technology, TW Technology
Related to the TWIN Business, the Licensed Marks, and all Proprietary Rights
thereto.
10.3 IN Rights. As among the Parties, except for and to the extent of the
---------
express licenses granted herein, IN and its licensors shall retain and own all
right, title and interest in and to the IN Patents and all Proprietary Rights
thereto.
19
<PAGE>
11. CONFIDENTIALITY.
11.1 Non-disclosure; Non-use. Except as expressly authorized among the
-----------------------
Parties, (including, without limitation, the exercise of the rights granted to a
Party under this Agreement), each Party agrees not to disclose, use or permit
the disclosure or use by others of any other Party's Confidential Information,
unless and to the extent such Confidential Information (i) becomes a matter of
public knowledge through no action or inaction of the Party receiving the
Confidential Information, (ii) was in the receiving Party's possession under no
duty of confidentiality before receipt from the Party providing such
Confidential Information, (iii) is rightfully received by the receiving Party
from a third party without any duty of confidentiality, (iv) is disclosed to a
third party by the Party providing the Confidential Information without a duty
of confidentiality on the third party, (v) is disclosed with the prior written
approval of the Party providing such Confidential Information, or (vi) is
independently developed by employees, agents or subcontractors of the receiving
Party who had no access to and without any use of the other Party's Confidential
Information. Information shall not be deemed to be available to the general
public for the purpose of exclusion (ii) above with respect to each Party (x)
merely because it is embraced by more general information in the prior
possession of recipient or others, or (y) merely because it is expressed in
public literature in general terms not specifically in accordance with the
Confidential Information.
11.2 Care of Confidential Information. In furtherance, and not in
--------------------------------
limitation of the foregoing Section 11.1, each Party agrees to do the following
with respect to any such other Party's Confidential Information: (i) exercise
the same degree of care to safeguard the confidentiality of, and prevent the
unauthorized use of, such information as that Party exercises to safeguard the
confidentiality of its own similar information, (ii) restrict disclosure of such
information to those of its employees, agents and sublicensees who have a "need
to know", and (iii) instruct and require such employees, agents and sublicensees
to maintain the confidentiality of such information and not to use such
information except as expressly permitted herein. Each Party further agrees not
to remove or destroy any proprietary or confidential legends or markings placed
upon any documentation or other materials of any other Party.
11.3 Terms of Agreement. The foregoing confidentiality obligations shall
------------------
also apply to the terms and conditions of this Agreement and the Associated
Agreements.
11.4 Required Disclosure. The obligations under this Section 11 shall not
-------------------
prevent the Parties from disclosing the Confidential Information or the terms of
this Agreement to its legal and financial advisors or potential investors, in
each case subject to confidentiality provisions no less restrictive than those
contained herein, or to any government agency, regulatory body or stock exchange
authorities as required by law (provided that the Party intending to make such
disclosure in such circumstances has given prompt notice to the Party providing
such Confidential Information prior to making such disclosure so that such Party
may seek a protective order or other appropriate remedy prior to such disclosure
and cooperates fully with such other Party in seeking such order or remedy) or
as required to fulfill government filing or regulatory body or stock exchange
requirements.
11.5 Term of Confidentiality. The obligations under this Section 11 shall
-----------------------
apply with respect to any Confidential Information for a period of ten (10)
years from the date of disclosure
20
<PAGE>
of such Confidential Information to the receiving Party, unless, with respect to
any particular Confidential Information, the providing Party in good faith
notifies the receiving Party that a longer period shall apply, in which case the
obligations under this Section 11 with respect to such Confidential Information
shall apply for such longer period. Notwithstanding the foregoing, the
obligations under this Section 11 with respect to the source code of any Party
and any information that constitutes a Trade Secret will continue until the
source code or information no longer constitutes a Trade Secret.
11.6 Injunctive Relief. Notwithstanding Section 16.5 ("Arbitration"), the
-----------------
Parties agree that any material breach of Sections 2 ("License to TWIN"), 7.1
("Non-compete Obligations") and 11 ("Confidentiality") of this Agreement may
cause irreparable injury for which no adequate remedy at law exists; therefore,
the parties agree that equitable remedies, including without limitation
injunctive relief and specific performance, are appropriate remedies to redress
any such breach or threatened breach of this Agreement, in addition to other
remedies available to the Parties. If any legal action is brought under this
Section 11.6 ("Injunctive Relief"), the prevailing Party shall be entitled to
receive its attorneys' fees, court costs and other collection expenses, in
addition to any other relief it may receive. Each Party expressly waives the
defense that a remedy in damages will be adequate and any requirement in an
action for specific performance or injunction for the posting of a bond by the
Party seeking relief.
12. INDEMNIFICATION.
12.1 TW Obligation. TW shall defend, indemnify and hold harmless TWIN, IN
-------------
and their officers, shareholders, and employees from and against all costs,
expenses and losses (including reasonable attorneys' fees and costs) (i)
incurred through claims of any third parties against TWIN or IN based on a
breach by TW of any representation and warranty made in this Agreement and (ii)
arising out of any court ruling, arbitral ruling, judgment, or settlement
arising out of any claim that any TW Technology licensed to TWIN hereunder or
its use as permitted hereunder infringes or misappropriates any copyright, trade
secret, U.S. or Canadian nationally registered trademarks or other Proprietary
Rights (other than Patents) of any third party. TW shall have no obligation to
indemnify, hold harmless or defend, and shall have no liability for, any claim
of infringement or misappropriation to the extent any such claim is based on
modification of the TW Technology other than by or for TW where, absent such
modification, no valid claim would exist. If a final injunction against TWIN's
use of any of the TW Technology results from a claim of infringement or
misappropriation (or, if TW reasonably believes such a claim is likely), TW
shall, at its sole expense and option, obtain for TWIN the right to continue
using the subject TW Technology or replace or modify it so it becomes
noninfringing but functionally equivalent; if TWIN continues to use the
infringing TW Technology after receipt of such replacement or modification, TW
shall have no indemnification obligation for such further use.
12.2 IN Obligation. IN shall defend, indemnify and hold harmless TWIN and
-------------
TW and their officers, shareholders, and employees from and against all costs,
expenses and losses (including reasonable attorneys' fees and costs) incurred
through claims of third parties against TWIN based on a breach by IN of any
representation and warranty made in this Agreement.
21
<PAGE>
12.3 Condition to Obligations. The indemnification obligations herein are
------------------------
contingent upon (i) the indemnified Party giving prompt written notice to the
indemnifying Party(s) of any such claim, (ii) the indemnified Party allowing the
indemnifying Party(s) to control the defense and settlement of any such claim,
and (iii) the indemnified Party fully assisting, at the indemnifying Party's (or
Parties') expense, in the defense; provided, however, that without relieving the
indemnifying Party(s) of its (or their) obligations hereunder or impairing the
indemnifying Party's(s') right to control the defense or settlement thereof, the
indemnified Party may elect to participate through separate counsel in the
defense of any such claim, but the fees and expenses of such counsel shall be at
the expense of the indemnified Party unless (a) the employment of counsel by the
indemnified Party has been authorized in writing by the indemnifying Party(s),
(b) the indemnified Party shall have reasonably concluded that there exists a
material conflict of interest between the indemnified Party and the indemnifying
Party(s) in the conduct of the defense of such claim (in which case such
conflicted indemnifying Party(s) shall not have the right to control the defense
or settlement of such claim on behalf of the indemnified Party) or (c) the
indemnifying Party(s) shall not have employed counsel to assume the defense of
such claim within a reasonable time after notice of the commencement thereof.
In each of such cases the reasonable fees and expenses of counsel shall be at
the expense of the indemnifying Party(s).
12.4 Enforcement in the Territory. The following provisions of this
----------------------------
Section 12.4 ("Enforcement in the Territory") shall become effective on the
Approval Date and shall remain in effect thereafter, with respect to a
particular Licensor and its Proprietary Rights licensed hereunder, only for so
long as the license granted by such Licensor in Section 2.1 ("TW License") or
Section 2.2 ("IN License"), as applicable, is exclusive:
---------
The Parties agree that, commencing as of the Approval Date, TWIN shall be
responsible for, and shall bear all costs of (including without limitation
attorneys' fees), policing, protecting and enforcing in the Territory all
Proprietary Rights of the Licensors (whether existing as of the Approval
Date or coming into existence thereafter) which are exclusively licensed to
TWIN hereunder, but such obligation shall continue for each Proprietary
Right only for so long as such Proprietary Right remains subject to an
exclusive license grant hereunder. TWIN agrees to make its best efforts to
fulfill this obligation. If TWIN fails, for any reason, to fulfill this
obligation adequately, in the good faith judgment of the Licensor owner of
the affected Proprietary Right, such Licensor shall have the right to, upon
fifteen (15) days' prior written notice to TWIN, take whatever action it
deems appropriate and TWIN will fully cooperate therewith; provided,
however, that if TWIN fulfills this obligation during such 15-day period,
then such Licensor shall not have such right. In the event a Licensor
exercises such right in accordance with this Section 12.4, such Licensor
shall bear all expenses of such action and receive all benefits (which may
include money damages and cross-licenses) that may result therefrom.
Notwithstanding the foregoing, TWIN shall not take any formal legal action
on account of any suspected or actual infringement or in response to any
claim challenging any Proprietary Right of a Licensor without the prior
written consent of the relevant Licensor, which consent shall not be
unreasonably withheld.
12.5 Notice of Third Party Infringement. If any Party becomes aware of any
----------------------------------
product, service or activity of any third party that involves actual or
suspected infringement or violation
22
<PAGE>
of any Licensor Proprietary Rights in the Territory, whether or not subject to
an exclusive license grant hereunder, such Party shall promptly notify the other
Parties in writing of such infringement or violation. TWIN shall keep the other
Parties apprised of any action TWIN takes in accordance with Section 12.4
("Enforcement in the Territory").
13. WARRANTIES.
13.1 Representations and Warranties of TW. TW represents, warrants and
------------------------------------
agrees that (unless otherwise expressly stated):
(i) as of the Effective Date, it is a corporation duly
organized, validly existing and in good standing under the laws of England
and Wales, it has the corporate power and is authorized under its
memorandum and articles of association to carry on its business as now
conducted, and it is qualified to transact business and is in good standing
in England and Wales;
(ii) as of the Effective Date, it has performed all corporate
actions and received all corporate authorizations necessary to execute and
deliver this Agreement and to perform its obligations hereunder and this
Agreement is valid, binding and enforceable against it (subject to
applicable principles of equity and bankruptcy and insolvency laws);
(iii) as of the Effective Date, it has and shall maintain the
power and authority and all material governmental licenses, authorizations,
consents and approvals to be obtained within England to own its assets,
carry on its business and to execute, deliver, and perform its obligations
under this Agreement (but only to the extent that failure to do so would
have a material adverse effect on the TWIN Business; but the foregoing does
not include any representation regarding the operation of TWIN, as to which
TW makes no representation);
(iv) as of the Effective Date, there are no (A) non-governmental
third parties or (B) governmental or regulatory entities in England and
Wales or the United States who are entitled to any notice of the
transaction, licenses and services contemplated hereunder or whose consent
is required to be obtained by TW for the consummation of the transaction
contemplated hereunder;
(v) it and its licensors are the sole and rightful owners of
all right, title and interest in and to the TW Technology and the Licensed
Marks and all related Proprietary Rights therein and, other than the
necessary third-party consents set forth in Exhibit D which relate to
---------
immaterial portions of the TW Technology, it has the unrestricted right to
market, license and exploit the TW Technology and the Licensed Marks,
including the right to grant the licenses granted to TWIN hereunder;
(vi) the TW Technology as delivered does not infringe or
misappropriate any third-party Copyright or Trade Secret rights;
(vii) as of the Effective Date, to the best of its knowledge, (a)
no claims have been made in respect of the TW Technology or Licensed Marks and
no demands of
23
<PAGE>
any third party have been made pertaining to them, and (b) no proceedings
have been instituted or are pending or threatened that challenge the rights of
TW in respect thereof;
(viii) all software, firmware and systems containing software or
firmware licensed to TWIN hereunder (collectively, "Software Systems")
shall accurately and automatically handle and process all dates (including
without limitation all leap years), date values, and date-related data,
including, without limitation, interpreting, calculating, comparing and
sequencing and prior to, during, and after January 1, 2000; and
(ix) all Software Systems shall substantially conform to the
applicable user's manual, if any, specifications, and documentation
delivered to TWIN in connection with each such Software System; and
(x) upon the request of TWIN, following the Effective Date TW
will commence to deliver, and by completion of the initial transition
services will complete delivery of, all of the Current TW Technology.
13.2 Representations and Warranties of IN. IN represents, warrants and
------------------------------------
agrees that (unless otherwise expressly stated):
(i) as of the Effective Date, it is a corporation duly
organized and validly existing under the laws of California, it has the
corporate power and is authorized under its Certificate of Incorporation
and its Bylaws to carry on its business as now conducted, and it is
qualified to transact business and is in good standing in California;
(ii) as of the Effective Date, it has performed all corporate
actions and received all corporate authorizations necessary to execute and
deliver this Agreement and to perform its obligations hereunder and this
Agreement is valid, binding and enforceable against it (subject to
applicable principles of equity and bankruptcy and insolvency laws);
(iii) as of the Effective Date, it has and shall maintain the
power and authority and all material governmental licenses, authorizations,
consents and approvals to be obtained within the United States to own its
assets, carry on its business and to execute, deliver, and perform its
obligations under this Agreement (but only to the extent that failure to do
so would have a material adverse effect on the TWIN Business; but the
foregoing does not include any representation regarding the operation of
TWIN, as to which IN makes no representation;
(iv) as of the Effective Date, there are no (A) non-
governmental third parties or (B) governmental or regulatory entities in
the United States who are entitled to any notice of the transaction,
licenses and services contemplated hereunder or whose consent is required
to be obtained by IN for the consummation of the transaction contemplated
hereunder;
(v) to the best of its knowledge after due inquiry, other than
the third-party licenses set forth in Exhibit E and the rights granted
---------
therein, it and its licensors are the sole and rightful owners of all
right, title and interest in and to the IN Patents and it
24
<PAGE>
has the unrestricted right to license the IN Patents, including the right
to grant the licenses granted to TWIN hereunder, provided, however, that
the knowledge qualifier modifying this representation shall be deemed
deleted from this representation during any period when the license granted
by IN in Section 2.2 ("IN License") is exclusive;
(vi) as of the Effective Date, to the best of its knowledge,
other than claims asserted respectively by NTN Communications, Inc. and
David B. Lockton in connection with the litigation listed in Exhibit G, (a)
---------
no unresolved claims have been made in respect of the IN Patents and no
demands of any third party have been made pertaining to them, and (b) no
proceedings have been instituted or are pending or threatened that
challenge the rights of IN in respect thereof; and
(vii) as of the Effective Date, the list of patents and patent
applications in Exhibit A comprise all of IN's patents issued in the
---------
Territory prior to the Effective Date and all of IN's patent applications
filed in the Territory prior to the Effective Date.
13.3 Representations and Warranties of TWIN. TWIN represents, warrants and
--------------------------------------
agrees that:
(i) it is a corporation duly organized and validly existing
under the laws of the jurisdiction of its incorporation and it has the
corporate power and is authorized under its charter and organizational
documents to carry on its business as now conducted; and
(ii) it has performed all corporate actions and received all
corporate authorizations necessary to execute and deliver this Agreement
and to perform its obligations hereunder and this Agreement is valid,
binding and enforceable against it (subject to applicable principles of
equity and bankruptcy and insolvency laws).
13.4 No Warranty of Validity. Nothing in this Agreement shall be construed
-----------------------
as (a) a warranty or representation by IN or TW as to the validity of any IN
Patent or any of TW's Patents, respectively, or (b) a warranty or representation
that anything made, used, sold or otherwise disposed of under any license to the
IN Patents or TW's Patents is or will be free from infringement of patents of
third parties.
13.5 Sole Remedy. In the event of any breach by IN of Section 13.2(v), the
-----------
other Parties shall, as their sole and exclusive remedy for such breach, have
the right to seek monetary damages if the breach is material. For purposes of
this provision, "material" shall mean the breach directly caused actual monetary
losses (not including attorneys' fees) to a Party of Five Hundred Thousand U.S.
Dollars (US$500,000) or more. If IN and/or a Party claiming monetary damages
under this provision disagree as to the amount of damages or whether a breach is
material, such disagreement shall be resolved in accordance with the provisions
of Section 16.5 ("Arbitration"). For the sake of clarity, no Party shall have
the right to terminate this Agreement, terminate any license(s) hereunder, or
seek any other remedy for breach of Section 13.2(v) other than the sole and
exclusive remedy set forth in this Section 13.5 ("Sole Remedy").
14. DISCLAIMER; LIMITATION OF LIABILITY.
25
<PAGE>
14.1 Warranty Disclaimer. EXCEPT AS EXPRESSLY PROVIDED HEREIN, NONE OF THE
-------------------
PARTIES HERETO MAKES ANY WARRANTIES, WHETHER EXPRESS OR OTHERWISE, CONCERNING
ANY PROPRIETARY RIGHTS, TW TECHNOLOGY, IN TECHNOLOGY, IN PATENTS, TWIN
TECHNOLOGY, TWIN DERIVATIVE WORKS, TRADEMARKS, PRODUCTS, PROCESSES, DESIGNS,
DOCUMENTS OR INFORMATION LICENSED OR OTHERWISE PROVIDED PURSUANT TO THIS
AGREEMENT, AND EACH PARTY HEREBY EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES,
INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, AND WARRANTIES OF FREEDOM FROM ERRORS OR DEFECTS.
14.2 No Consequential Damages. NONE OF THE PARTIES HERETO SHALL BE
------------------------
RESPONSIBLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, HOWEVER
CAUSED, ON ANY THEORY OF LIABILITY AND WHETHER OR NOT SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES ARISING IN ANY WAY OUT OF THIS
AGREEMENT OR ANY PROPRIETARY RIGHTS, TW TECHNOLOGY, IN TECHNOLOGY, IN PATENTS,
TWIN TECHNOLOGY, TWIN DERIVATIVE WORKS, TRADEMARKS, PRODUCTS, PROCESSES,
DESIGNS, DOCUMENTS OR INFORMATION LICENSED OR OTHERWISE PROVIDED PURSUANT TO
THIS AGREEMENT.
14.3 Limitation on Liability. IN NO EVENT WILL ANY PARTY'S LIABILITY
-----------------------
ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE AMOUNT OF FIVE MILLION
U.S. DOLLARS (US$5,000,000), EXCEPT FOR LIABILITY (EXCLUDING LIABILITY FOR
PATENT INFRINGEMENT CLAIMS) ARISING OUT OF OR RELATED TO SECTION 12.1 (i)
(SOLELY WITH RESPECT TO CLAIMS BASED ON A BREACH OF SECTION 13.1(v) AND/OR (vi))
OR SECTION 12.1 (ii) WHICH SHALL IN NO EVENT EXCEED THE AMOUNT OF TEN MILLION
U.S. DOLLARS (US$10,000,000). Each Party acknowledges that its willingness to
grant such rights as it grants to any the other Party hereunder is expressly
conditioned on its ability to disclaim and exclude such warranties and to limit
its liabilities as set forth above.
15. TERM AND TERMINATION.
15.1 Term. This Agreement shall become effective as of the Effective Date
----
and continue in effect, unless and until terminated in accordance with the
provisions hereof.
15.2 Termination of Licenses on Material Breach by TWIN. Either Licensor
--------------------------------------------------
may terminate its licenses granted to TWIN hereunder, upon written notice to the
other Parties, if TWIN materially breaches Section 2.1 ("TW License") (only in
the case of TW), 2.2 ("IN License") (only in the case of IN), 3 ("Trademark
License") (only in the case of TW), 5 ("Licenses from TWIN"), 8.2 ("Support
Fees"), 8.5 ("Direct Expense Reimbursement") or 11 ("Confidentiality") of this
Agreement and (i) fails to cure such breach within thirty (30) days of written
notice to the other Parties describing the breach in reasonable detail, or (ii)
fails to make reasonably diligent efforts to begin to cure any such breach if a
cure cannot be accomplished within thirty (30) days. Such affected Licensor may
terminate its licenses and rights granted to TWIN immediately upon written
notice to the other Parties, if such material breach is not
26
<PAGE>
capable of cure. If either Licensor terminates its license grants under this
Section 15.2, (x) the Agreement shall be deemed terminated with respect to such
Licensor and all rights and obligations of such Licensor hereunder shall be
terminated simultaneously (except as provided in Section 15.6) and (y) the other
Licensor shall also have the right to terminate its licenses and rights granted
to TWIN effective upon delivery of written notice thereof to the other Parties
within sixty (60) days of the affected Licensor's notice of termination, and the
effect of such other Licensor's termination of its licenses shall be as set
forth in the immediately preceding subsection (x).
15.3 Termination on Material Breach of a Licensor. If either Licensor
--------------------------------------------
("Defaulting Licensor") materially breaches any material provision of this
Agreement (excluding Section 13.2(v)) and (i) fails to cure such breach within
thirty (30) days of written notice describing the breach in reasonable detail
("Default Notice"), or (ii) fails to make reasonably diligent efforts to begin
to cure any such breach if a cure cannot be accomplished within thirty (30) days
and to cure such breach within ninety (90) days of the Default Notice, then
(a) TWIN shall have the right to: (i) commence the dispute
resolution procedures set forth in Section 16.5 ("Arbitration") and/or seek
remedies under Section 11.6 ("Injunctive Relief"), as applicable; and/or (ii)
terminate the Defaulting Licensor's licenses by delivering written notice
thereof to the Licensors; and/or (iii) purchase (or permit its designee to
purchase) the Defaulting Licensor's equity interest in TWIN at its fair market
value (taking into consideration the effect of the breach) less a discount of
twenty-five percent (25%) by delivering written notice to the other Parties of
such election within thirty (30) days of such failure to cure and otherwise in
accordance with the procedures and provisions of Section 2.5 (but for such
purposes TWIN shall be deemed to be the purchasing stockholder) of the
Stockholders Agreement; and
(b) The other non-defaulting Licensor shall have the right to: (i)
if TWIN elected to terminate the Defaulting Licensor's licenses pursuant to
Section 15.3 (a)(ii), convert its own licenses from exclusive to non-exclusive;
and/or (ii) if TWIN did not elect to purchase the Defaulting Licensor's equity
interest pursuant to Section 15.3 (a)(iii), purchase (or permit its designee to
purchase) the Defaulting Licensor's equity interest in TWIN at its fair market
value (taking into consideration the effect of the breach) less a discount of
twenty-five percent (25%) by delivering written notice to the other Parties of
such election within thirty (30) days of such failure to cure and otherwise in
accordance with the procedures and provisions of Section 2.5 (a) of the
Stockholders Agreement.
15.4 Termination of Licenses on Cessation of TWIN Business Operations.
----------------------------------------------------------------
Upon any of the following events:
(a) the filing by TWIN of a petition in bankruptcy; (b) any
adjudication that TWIN is bankrupt or insolvent; (c) the filing by TWIN of any
legal action or document seeking reorganization, readjustment or arrangement of
TWIN's business under any law relating to bankruptcy or insolvency; (c) the
appointment of a receiver or bankruptcy trustee for all or substantially all of
the property of TWIN; (d) the making by TWIN of any general assignment for the
benefit of creditors; (e) the institution of any proceedings for the liquidation
or winding up of TWIN's business or for the termination of its corporate
charter, provided, in the event such
27
<PAGE>
proceedings are involuntary, the proceedings are not dismissed within ninety
(90) days; or (f) the cessation of normal business operations of TWIN, all
licenses from Licensors to TWIN hereunder shall immediately and automatically
terminate and Licensors shall be immediately released from their non-compete
obligations (if any remain) set forth in Section 7.1 ("Non-compete
Obligations").
15.5 Termination of Licenses on Cessation of Licensor Business Operations.
--------------------------------------------------------------------
Upon any of the following events:
(a) the institution of any proceedings for the liquidation or
winding up of a Licensor's business or for the termination of its corporate
charter, provided, in the event such proceedings are involuntary, the
proceedings are not dismissed within ninety (90) days; or (b) the cessation of
normal business operations of a Licensor, TWIN shall have the right, at its sole
discretion and option, to purchase the defaulting Licensor's equity interest in
TWIN at its fair market value, in accordance with the procedures and provisions
of Section 2.5 (but for such purposes TWIN shall be deemed to be the purchasing
stockholder) of the Stockholders Agreement. If TWIN does not provide notice to
the other Parties of its election to so purchase such equity interest within
thirty (30) days of the occurrence of the applicable event described in the
immediately preceding subsections (a) and (b), then the non-defaulting Licensor
shall have the right, at its sole discretion and option, to purchase the
defaulting Licensor's equity interest in TWIN at its fair market value, in
accordance with the procedures and provisions of Section 2.5 of the Stockholders
Agreement.
15.6 Effect of Termination.
---------------------
(a) Except as otherwise provided in this Section 15.6, all rights
and obligations of the Parties hereunder shall cease upon termination of this
Agreement. The definitions and the following sections and subsections shall
survive any termination of this Agreement on the dissolution of TWIN or
termination of any license granted hereunder automatically or by any Party:
Sections 8.2 ("Support Fees") (to the extent any amounts are owed to TW
hereunder), 8.7 ("Audit") (for three (3) years following termination), 10
("Intellectual Property Rights"), 11 ("Confidentiality"), 12.1 ("TW
Obligation"), 12.2 ("IN Obligation"), 12.3 ("Condition to Obligations"),
subsections (v), (vi), (viii) and (ix) of 13.1 ("Representations and Warranties
of TW"), subsections (v) and (vi) of 13.2 ("Representations and Warranties of
IN"), 13.4 ("No Warranty of Validity"), 13.5 ("Sole Remedy"), 14 ("Disclaimer;
Limitation of Liability"), 15 ("Term and Termination"), and 16
("Miscellaneous").
(b) Upon termination of this Agreement due to the dissolution,
liquidation, winding up, or other event described in Section 15.4, (i) all
licenses granted pursuant to this Agreement prior to its termination shall
terminate, provided that with respect to any outstanding sublicenses, the
Licensors shall cooperate and negotiate in good faith in an equitable manner to
allocate between them by transfer or assignment the sublicenses and any income
or revenues arising therefrom, (ii) all rights and licenses assigned to TWIN
pursuant to Section 7.2(a) ("Assignment of NTN Licenses"), if any, shall
immediately and automatically revert to IN and TWIN shall cooperate fully with
IN in transitioning such rights, licenses and associated matters and materials
back to IN, (iii) the Parties shall cooperate and negotiate in good faith in an
equitable manner to allocate between them the TWIN Technology, TWIN Derivative
Works, and
28
<PAGE>
TWIN Proprietary Rights, (iv) if applicable, TWIN shall cooperate with each
Licensor in transitioning back to such Licensor the responsibility to police,
protect and enforce such Licensor's Proprietary Rights in the Territory, and (v)
each Party shall return or destroy all Confidential Information of the other
Parties in its possession or control, including all copies thereof, whether
tangible or in electronic form or otherwise.
16. MISCELLANEOUS.
16.1 Force Majeure. No Party shall be liable for failure to perform, in
-------------
whole or in material part, its obligations under this Agreement if such failure
caused by any event or condition not existing as of the date of this Agreement
and not reasonably within the control of the affected Party, including, without
limitation, by fire, flood, typhoon, earthquake, explosion, strikes, labor
troubles or other industrial disturbances, unavoidable accidents, war (declared
or undeclared), acts of terrorism, sabotage, embargoes, blockage, acts of
Governmental Authorities, riots, insurrections, or any other cause beyond the
control of the Parties; provided that the affected Party promptly notifies the
other Parties of the occurrence of the event of force majeure and takes all
reasonable steps necessary to resume performance of its obligations so
interfered with.
16.2 Assignment. Neither this Agreement nor any of the rights and
----------
obligations created hereunder may be assigned, transferred, pledged, or
otherwise encumbered or disposed of, in whole or in part, whether voluntarily or
by operation of law, or otherwise, by any Party without the prior written
consent of the other Parties. This Agreement shall inure to the benefit of and
be binding upon the Parties' permitted successors and assigns.
16.3 Notices. All notices and communications required, permitted or made
-------
hereunder or in connection herewith shall be in writing and shall be mailed by
first class, registered or certified mail (and if overseas, by airmail), postage
prepaid, or otherwise delivered by hand or by messenger, or by recognized
courier service (with written receipt confirming delivery), addressed:
(a) If to IN, to: Interactive Network, Inc.
1161 Old County Road
Belmont, California 94002
with a copy to: Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105-2482, U.S.A.
Attn: Robert Townsend
(b) If to TW, to: Two Way TV Ltd.
Beaumont House
Kensington Village
Avonmore Road
London, England W148TS
29
<PAGE>
with a copy to: Orrick, Herrington & Sutcliffe LLP
400 Sansome Street
San Francisco, California 94111-3143, U.S.A.
Attn: Greg Bibbes
(c) If to TWIN: TWIN Entertainment Inc.
50 Francisco Street, Suite 490
San Francisco, CA 94111, U.S.A.
with a copy to: Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105-2482, U.S.A.
Attn: Robert Townsend
Each such notice or other communication shall for all purposes hereunder be
treated as effective or as having been given as follows: (i) if delivered in
person, when delivered; (ii) if sent by mail or airmail, at the earlier of its
receipt or at 5 p.m., local time of the recipient, on the seventh day after
deposit in a regularly maintained receptacle for the deposition of mail or
airmail, as the case may be; and (iii) if sent by recognized courier service, on
the date shown in the written confirmation of delivery issued by such delivery
service. Any Party may change the address and/or addressee(s) to whom notice
must be given by giving appropriate written notice at least seven (7) days prior
to the date the change becomes effective.
16.4 Export Control. Without in any way limiting the provisions of this
--------------
Agreement, each of the Parties hereto agrees that no products, items,
commodities or technical data or information obtained from a Party hereto nor
any direct product of such technical data or information is intended to or shall
be exported or reexported, directly or indirectly, to any destination restricted
or prohibited by Applicable Law without necessary authorization by the
Governmental Authorities, including (without limitation) the United States
Bureau of Export Administration (the "BEA") or other Governmental Authorities of
the United States, Canada or England with jurisdiction with respect to export
matters.
16.5 Arbitration.
-----------
(a) Except as set forth below, any disputes arising among the Parties
or between any two Parties in connection with this Agreement shall be settled by
the affected Parties amicably through good faith discussions upon the written
request of any Party. In the event that any such dispute cannot be resolved
through such discussions within a period of sixty (60) days after delivery of
such notice, the dispute shall be finally resolved exclusively by confidential
arbitration pursuant to the rules of the American Arbitration Association in San
Francisco, California, U.S.A., or such other location agreed between or among
the disputing Parties; provided, however, that the arbitrators shall be
empowered to hold hearings at other locations within or without the United
States. The appointing authority shall nominate all three arbitrators. Any Party
shall have the right (but not the obligation) to join an already constituted
arbitration proceeding subject to such Party's agreement concerning the members
of the already constituted panel of arbitrators. The arbitrators shall not have
the power to impose any
30
<PAGE>
obligation on any of the Parties, or take any other action, which could not be
imposed or taken by a federal or state court sitting in the State of California.
The judgment upon award of the arbitrators shall be final and binding and may be
enforced in any court of competent jurisdiction in the United States or England
and Wales, and each of the Parties hereto unconditionally submits to the
jurisdiction of such court for the purpose of any proceeding seeking such
enforcement. The fees and expenses of the arbitrators shall be paid by the
Parties to the dispute in equal shares, unless the arbitrators determine that
the conduct of any Party (with regard to the subject matter of the dispute
and/or the arbitration proceedings) warrants divergence from this rule, in which
event an appropriate costs order may be made. Subject only to the provision of
Applicable Law and Section 11.6 ("Right to Special Relief"), the procedure
described in this Section 16.5 shall be the exclusive means of resolving
disputes involving TW and arising under this Agreement.
(b) Confidential Resolution. All papers, documents or evidence,
-----------------------
whether written or oral, filed with or presented to the panel of arbitrators
shall be deemed by the Parties and by the arbitrators to be Confidential
Information. No Party or arbitrator shall disclose in whole or in part to any
other person any Confidential Information submitted in connection with the
arbitration proceedings, except to the extent reasonably necessary to assist
counsel in the arbitration or preparation for arbitration of the dispute.
Confidential Information may be disclosed (i) to attorneys, (ii) to Parties, and
(iii) to outside experts requested by any Party's counsel to furnish technical
or expert services or to give testimony at the arbitration proceedings, subject,
in the case of such experts, to execution of a legally binding written statement
that such expert is fully familiar with the terms of this section, that such
expert agrees to comply with the confidentiality terms of this section, and that
such expert will not use any Confidential Information disclosed to such expert
for personal or business advantage.
16.6 Entire Agreement. This Agreement and the Associated Agreements, and
----------------
the attachments and exhibits hereto and thereto, embody the entire agreement and
understanding between and among the Parties with respect to the subject matter
hereof, superseding all previous and contemporaneous communications,
representations, agreements and understandings, whether written or oral,
including without limitation that certain Heads of Terms between IN and TW to
Form a Joint Venture. No Party has relied upon any representation or warranty of
any other Party except as expressly set forth herein and in the Associated
Agreements.
16.7 Modification. This Agreement may not be modified or amended, in whole
------------
or part, except by a writing executed by duly authorized representatives of all
Parties.
16.8 Announcement. The Parties may announce the existence of the Parties'
------------
relationship and this Agreement only at a time and in a form to be mutually
determined, except for any such disclosure required by law, governmental
authorities or stock exchanges. No Party shall unreasonably withhold its
consent to a time proposed by any other Party.
16.9 Severability. If any term or provision of this Agreement shall be
------------
determined to be invalid or unenforceable under Applicable Law, such provision
shall be deemed severed from this Agreement, and a reasonable valid provision to
be mutually agreed upon shall be substituted. In the event that no reasonable
valid provision can be so substituted, the remaining provisions of this
Agreement shall remain in full force and effect, and shall be construed and
interpreted in a
31
<PAGE>
manner that corresponds as far as possible with the intentions of the Parties as
expressed in this Agreement.
16.10 No Waiver. Except to the extent that a Party hereto may have
---------
otherwise agreed in writing, no waiver by that Party of any condition of this
Agreement or breach by any other Party of any of its obligations or
representations hereunder shall be deemed to be a waiver of any other condition
or subsequent or prior breach of the same or any other obligation or
representation by any other Party, nor shall any forbearance by the first Party
to seek a remedy for any noncompliance or breach by any other Party be deemed to
be a waiver by the first Party of its rights and remedies with respect to such
noncompliance or breach.
16.11 Nature of Rights. Each Party shall have the rights licensed under
----------------
this Agreement to any other Party's technology and the related Proprietary
Rights when created, developed or invented regardless of whether physically
delivered to such Party. All rights and licenses granted under or pursuant to
this Agreement by a Party to another Party are, for purposes of Section 365(n)
of the U.S. Bankruptcy Code (the "Bankruptcy Code"), licenses of "Intellectual
property" within the scope of Section 101 of the Bankruptcy Code.
16.12 Governing Law. The validity, construction, performance and
-------------
enforceability of this Agreement shall be governed in all respects by the laws
of the State of California, U.S.A., without regard to its conflicts of laws
principles. The Parties exclude the application of the United Nations
Convention on Contracts for the International Sale of Goods.
16.13 No Agency or Partnership. This Agreement shall not constitute an
------------------------
appointment of any Party as the legal representative or agent of any other
Party, nor shall any Party have any fight or authority to assume, create or
incur in any manner any obligation or other liability of any kind, express or
implied, against, in the name or on behalf of, any other Party. Nothing herein
or in the transactions contemplated by this Agreement shall be construed as, or
deemed to be, the formation of a partnership, association, joint venture, or
similar entity by or among the Parties hereto.
16.14 Heading. The section and other headings contained in this Agreement
-------
are for convenience of reference only and shall not be deemed to be a part of
this Agreement or to affect the meaning or interpretation of this Agreement.
16.15 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, and all of which shall be deemed to
constitute one and the same instrument.
16.16 No Third Party Beneficiaries. The Parties intend and agree that no
----------------------------
other Person, entity or other party shall be considered a third-party
beneficiary of this Agreement. Nothing contained in this Agreement shall be
construed to create rights for any third party beneficiary.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed in triplicate by their duly authorized representatives on the date set
forth above.
32
<PAGE>
INTERACTIVE NETWORK, INC. TWO WAY TV LTD.
/s/ Bruce W. Bauer /s/ Piers Wilson
- --------------------------------------------- ---------------------------
By: Bruce W. Bauer By: Piers Wilson
Title: President and Chief Executive Officer Title: Finance Director
TWIN ENTERTAINMENT INC.
/s/ Bruce W. Bauer
- ---------------------------------------------
By: Bruce W. Bauer
Title: President
/s/ Piers Wilson
- ---------------------------------------------
By: Piers Wilson
Title: Secretary and Treasurer
33
<PAGE>
EXHIBIT A
DESCRIPTION OF THE IN PATENTS
United States
- -------------
Patent Number Filed Granted Application Number
- ------------- ----- ------- ------------------
US4592546 Apr 26, 1984 June 3, 1986 US1984000604145
Game of skill playable by remote participants in conjunction with a live event
US5013038 Dec 8, 1989 May 7, 1991 US1989000448001
Method of evaluating data relating to a common subject
US5083800 June 7, 1990 Jan 28, 1992 US1990000535309
Game of skill or chance playable by several participants remote from each other
in conjunction with a common event
US5120076 Apr 25, 1991 June 9, 1992 US1991000692816
Method of evaluating data relating to a common subject
US5643088 May 31, 1995 July 1, 1997 US1995000454925
Game of skill or chance playable by remote participants in conjunction with a
common game event including inserted interactive advertising
US5813913 May 30, 1995 Sep 29, 1998 US1995000453403
Game of skill playable by remote participants in conjunction with a common game
event where participants are grouped as to skill level
Canada
- ------
Patent Number Filed Granted Application Number
- ------------- ----- ------- ------------------
507982 Apr 30, 1986 Oct 2, 1990 1274903
Game of skill playable by remote participants in conjunction with a live event
June 8, 1990 Pending 2018597
Game of skill or chance playable by several participants remote from each other
in conjunction with a common event
<PAGE>
EXHIBIT B
TWIN BUSINESS
"TWIN Business" shall mean developing, marketing, supplying, operating and
licensing certain digital (and analog) interactive and other related services,
products and technology in the Territory.
<PAGE>
EXHIBIT D
DESCRIPTION OF CURRENT TW TECHNOLOGY
This description of Current TW Technology is for descriptive purposes only.
TW makes no representations or warranties with respect to TW Technology other
than as specifically set forth in Section 13 of this Agreement.
Introduction
The Two Way TV System allows the delivery of a platform and network
independent interactive entertainment service. The service is initially targeted
at Set-Top Boxes (STBs) in customer's homes, but is equally applicable in many
other environments.
The system described in this document is the second iteration of the Two
Way TV System. The first version was used to support a substantial field trial
with several thousand customers over a period of three years.
The `Two Way TV Service' is the entire package provided by Two Way TV. The
`Two Way TV System' is the technology components provided by Two Way TV that
allow the service to be operated
The Two Way TV service is based on extensible technology that is capable of
delivering simultaneous service across multiple networks.
The system is divided into distinct layers, as illustrated below:
[DIAGRAM APPEARS HERE]
<TABLE>
<S> <C> <C>
---------------------------- ---------------
Control and Management Tools Two Way TV
---------------------------- System
Two Way TV CCS Components
---------------------------- ---------------
---------------------------- ---------------
Service
Provider
---------------------------- ---------------
---------------------------- ---------------
Two Way TV Engine Two Way TV
---------------------------- System
Two Way TV Applications Components
---------------------------- ---------------
</TABLE>
The Two Way TV system includes components either side of the service
provider's infrastructure. The different layers within the system are used to
provide as much abstraction as possible to ensure that introduction of support
for new platforms can be achieved as quickly as possible.
The abstraction layers allow all internal components within the CCS system
that manage the delivery of data and return path data processing to operate on a
known data also ensure that new platforms can leverage the functionality
available to existing platforms.
<PAGE>
The diagram below expands on the initial layers, providing more detail in
each. Each of the separate modular components illustrated below are discussed
later in this document.
[DIAGRAM APPEARS HERE]
As can be seen from the diagram, the system is divided into three main
areas, Central Systems, the Broadcast Network, and the STB (or client). The
Central Systems and STB areas are provided by the Two Way TV system. In the
majority of deployments the Broadcast Network will be the responsibility of the
service provider.
The main components of both the CCS and the engine in the STB (or client)
are described in the following sections.
Central Computer System (C.C.S.)
The Two Way TV Central Systems (CCS) deliver the Two Way TV service to the
supported infrastructures. The software is developed and deployed on Sun Solaris
UltraSPARC(TM) workstations.
The CCS system is a collection of collaborating services that combine to
provide the Two Way TV functionality required in a given installation. This
results in a system that can be tailored to specific requirements and commercial
arrangements.
Standard Service Set
The following services are the key services included in a standard CCS
system. All services can be enabled or disable for a given CCS configuration,
although is does not make sense to disable certain services, such as messaging!
Services can be easily added to the CCS
<PAGE>
system. Currently, development versions of the system support far more services
than are presented here.
CCS Core
This service is responsible for bringing up the system and subsequent
monitoring of other active services. This also provides the functionality to
start and stop services at run-time.
Messaging Service
This service provides the messaging functionality used by the CCS to
communicate with all external clients (Two Way TV Tools, return path data
etc.).
Schedule Service
This provides a central scheduling facility within the CCS. This can be
used to schedule CCS events, and control messages can be scheduled to automate
CCS operation.
Storage Service(s)
These provide all of the permanent storage facilities required by the CCS.
Broadcast Service
Provides all data broadcast functionality within the CCS. This service
includes the broadcast system interfaces for all supported platforms. This is
not defined as a core service as the CCS system may not be used for broadcast
applications in certain configurations.
Broadcast Game Service
Provides Enhanced TV and Games Lounge style functionality. The service
handles application broadcast, real-time data transmission, game synching, real-
time management and control of the game and all other aspects of broadcast game
play.
Return Path Service
This service provides standard return path processing, vote processing,
score processing and an active scoring algorithm using the Two Way TV patented
score gathering technique.
Chat Service
This service provides a chat engine that can be accessed using the CCS
messaging system. This allows applications/games to access chat functionality,
as well as stand-alone chat applications to be built.
Broadcast System Interfaces
The CCS system produces data for broadcast in an abstract form. It is the
job of the broadcast system interface to convert this data into an appropriate
form for the target platform.
<PAGE>
This may involve, for example, using different methods of data transmission
for different types of components, using a broadcast carousel for application
components such as executable code, bitmaps fonts etc., and using a separate
out-of-band communications channel for the applications real-time data.
Additionally the broadcast system interface may convert, manipulate, or process
the application components and/or real-time data.
The CCS itself provides a messaging API for external clients. The same API
is used internally by CCS components such as return path handling and
application control services. Not only does this allow application developers to
define the data transmitted to their application but also allows them to define
the format of return path data and the processing that takes place on that data.
Scalability and Robustness
The growth of the Two Way TV service will impact the performance
requirements of the CCS system. This is a factor of how many different services
are offered, the number of different infrastructures being supported, and the
number of subscribers. The number of services and infrastructures being
supported affects the transmission section of the CCS and the number of
subscribers increasing affects the return path sub-systems. The impact of
increased subscribers will only be substantial if applications requiring
feedback from all subscribers are used.
The architecture of the system allows new infrastructures to be supported
easy and with no disruption to the rest of the system. This allows for rapid
implementation and test times.
The CCS has been designed from the ground up to be a multi-threaded
distributed system. Entire sub-systems can be hosted on different systems if
necessary with very little effort. The multi-threaded nature of the system also
means significant performance improvements can be achieved by simply adding
processors to the hosting workstation.
Given the broadcast nature of the Two Way TV system it is critical that the
central systems are robust. This can be measured in a number of ways. The system
must itself have integrity to ensure that operation is uninterrupted during
operational periods. In addition to this features must be provided to ensure
that known failure modes can be handled. Operating system crashes, both Sun and
Windows NT will affect the operation of the system. Currently a crash of the
operating system hosting the control tools would have no effect on the operation
of the system.
Protection is built into the CCS program itself to provide best efforts to
handle a rogue sub-system by detecting abnormal behaviour and shutting down the
sub-system responsible.
CCS Toolset
The CCS comes complete with a set of Windows NT(TM) based tools. These
provide an easy to use front-end interface to the Two Way TV CCS system:
<PAGE>
Mission Control
This is the main CCS control tool. It allows initiation and the subsequent
management of Two Way TV applications. The tool clearly displays the state of
running applications, and allows the user to adjust the timing of the
application. The application can also be paused, terminated early, and the like.
CCT Tool
This is the primary real-time content creation tool. It allows custom
templates to be created for each Two Way TV application.
Authoring Tools
Two Way TV have developed application authoring tools for each supported
target platform. These provide a more productive and time-efficient route to
authoring than the standard facilities provided with the target platforms.
LIPS Tools
These are a set of Windows NT(TM) based applications which are used to
support real-time applications. These tools are usually application specific and
are geared towards a live broadcast environment where operators require a simple
to use interface reducing the risk of transmission errors. Typically a live tool
will include a database of possible live data and the operator will simply
select the correct data to send at the appropriate time.
In addition to these a universal tool is provided that provide generic live
application support which is useful for initial prototypes.
Two Way TV Engine
Many set top box execution environments do not provide the functionality
necessary to support Two Way TV applications. These applications require very
specific yet simple functionality. As a minimum, Two Way TV applications
require:
. Reliable, Live broadcast message protocols
. Video/Time Synchronisation (including an accurate set top clock)
. Fairness
. Security
. Efficient Return Path Use
Some of the above requirements are met by systems compliant with the ATVEF
specification for enhanced TV content. Underlying standards such as DVB or ATSC
provide access to the underlying networks.
<PAGE>
On platforms where one or more of these do not exist, the Two Way TV Engine
may provide them.
The Two Way TV Engine can be used in both one-way broadcast and two way
video systems, and is designed to be compatible with all international standards
for both analog and digital video systems.
Overview
The Two Way TV Engine is a native code plug-in, which provides access to
Two Way TV services delivered on the underlying network. In the context of the
Engine, native code may mean low level set top specific code or high-level
application code; implementation depends on platform capability.
The Engine can also provide access to commonly used services and building
blocks utilised by Two Way TV applications and interactive services.
The objective of the Engine is to provide a common set of capabilities to
application developers, which hide the native implementations of message queues
and underlying network protocols. It does not inhibit access to desirable
features found on some platforms and networks. It is important that application
developers may make use of technologies provided by a set top box without
becoming bogged down with implementation issues.
It is important that the handling of Two Way TV service specific messages,
particularly real time messages is carried out as efficiently as possible. By
providing a core Engine to handle this, it removes the responsibility from the
application developer and ensures a reliable fast and efficient core on which to
base applications. Furthermore, changes to the underlying protocols do not
warrant code changes or recompiling of Two Way TV applications.
The handling of Two Way TV service specific messages within a well defined
core Engine allows the use of a common messaging protocol across different
platforms. This enables one head end Central Computer System (CCS) to drive
services across multiple platforms and networks.
<PAGE>
Engine Reference Architecture
The Two Way TV Engine Reference Architecture is a high level view of a
generic set top box environment. The architecture demonstrates the physical
implementation of the Two Way TV Engine in relation to other set top box
software components and existing digital TV standards.
In the Reference Architecture, the Two Way TV Engine bridges the gap
between the functionality specified by existing environments (such as OpenTV,
PowerTV, ATVEF) and the functionality required for Two Way TV.
ATVEF Based Engine
The Reference Architecture may be based on an ATVEF compliant receiver. The
ATVEF specification for enhanced television programming uses existing Internet
technologies. It delivers enhanced TV programming over both analog and digital
video systems using terrestrial, cable, satellite and Internet networks.
. ATVEF mandates support for the following standard specifications:
. HTML 4.0 (Frameset Document Type Definition)
. CSS 1
. ECMAScript
. DOM 0
<PAGE>
With the inclusion of ATVEF Triggers (All forms of ATVEF transport involve
data delivery and triggers), most of the Two Way TV Engine may be coded as
client JavaScript delivered within applications.
Functional Elements
The functional elements of the Two Way TV Engine may be broken down into
the following components:
. High Level Engine API
. Live message Handling
. Two Way TV Live Message Protocol
. Timing and Synchronisation
. Return Path Management
. Low Level Abstraction Layer
These core components of the Engine offer a common API to the application
developer. This API may be in the form of direct function calls or through an
event model, depending on target platform.
High Level Engine API
This module provides a standardised API to the application developer.
Depending on target platform, this API may be direct function calls, an event
model or a combination of the two. In the Reference Architecture, based on an
ATVEF compliant receiver, the API is based on a JavaScript event model.
The primary purpose of this API is to simplify access to the Two Way TV
Engine and the underlying environments API.
Live Message Handling
This module provides a reliable timed delivery of messages to the
application. The messages are delivered to this module using the Two Way TV Live
Message Protocol. The messages passed to the application by this module are
guaranteed to be in order and on time. Some messages handled by this module may
not be passed all the way to the application, but are used to control behaviour
of the Engine itself.
Two Way TV Live Message Protocol
The Two Way TV Live Message Protocol is a multi-layered specification,
which includes definitions for application, system and transport level
protocols. Only those layers that are not provided by the underlying set top and
network are required. In most cases, a DVB or ATSC
<PAGE>
broadcast bitstream is used to carry the Two Way TV data. Two Way TV system and
transport layers may be used in lieu of system provided transports such as ATVEF
(type A or type B) or DVB carousels (DSM-CC).
Optionally, the Two Way TV Message Protocol also provides a definition for
physical layer transports though this is normally provided by the underlying
network in the form of DVB or ATSC compliant bit streams within the broadcast.
The Two Way TV Message Protocol does not limit what content can be sent,
but rather provides a common set of capabilities so that content developers can
author content once for delivery to multiple platforms.
Return Path Handler
This module handles the complex issues arising through the use of the
return path feature found on many set top boxes. Network bandwidth and head end
capacity issues make this an important part of the Two Way TV Engine. The Return
Path Handler is controlled by both the Two Way TV application and by messages
from the Head End delivered through the Live Message Handlers.
Timing and Synchronisation
This module controls the execution of Two Way TV applications and services
relative to a common clock. Timing and synchronisation of applications is
controlled by messages broadcast from the Head End by the Central Computer
System (CCS).
Low Level Abstraction Layer
This module is present to allow an element of re-use within the code which
implements the core Engine. The Low Level Abstraction Layer may not necessarily
be present in all implementations. Alongside the abstraction of Operating System
services, its key contribution to the Engine is the provision of debugging and
development support macros and functions.
<PAGE>
<TABLE>
<CAPTION>
Title Two Way TV Reference Country Applicant Application Number
- -----------------------------------------------
<S> <C> <C> <C> <C>
Method and apparatus for sampling remote data Active Scoring Algorithm CA Two Way TV Limited 2279890
sources Handset Multiplexing CA Two Way TV Limited 2252074
Method and apparatus for transmitting data LIPS CA Two Way TV Limited 2231946
Interactive predictive game control Multiple Architectures CA Two Way TV Limited 2279069
Delivering interactive applications Status Flag CA Two Way TV Limited
Broadcasting interactive applications Time Stamping CA Two Way TV Limited 2252021
Method and apparatus for input of data Tokens CA Two Way TV Limited 2225317
Interactive communication system Variable Priority CA Two Way TV Limited 2229772
Method and apparatus for transmitting data
Method and apparatus for sampling remote data Active Scoring Algorithm USA Two Way TV Limited 09/376244
sources Handset Interface USA Two Way TV Limited 08/672591
Game playing system Handset Multiplexing USA Two Way TV Limited 09/203967
Method and apparatus for transmitting data LIPS USA Two Way TV Limited 09/064118
Interactive predictive game control Multiple Architectures USA Two Way TV Limited 09/366064
Delivering interactive applications Status Flag USA Two Way TV Limited
Status Flag Time Stamping USA Two Way TV Limited 09/203458
Method and apparatus for input of data Tokens USA Two Way TV Limited 09/019892
Interactive communication system Variable Priority USA Two Way TV Limited 09/039202
Method and apparatus for transmitting data
- ----------------------------------------------------------------------------------------------------------------------------------
US and CA pending National Phase patent applications
Interactive television broadcast system Automatic capture of Two Way TV Limited 99303717.5
Interactive applications viewing figures Two Way TV Limited 98309944.1
Interactive applications Delayed program start Two Way TV Limited 99303495.5
Security
- ---------------------------------------------------------------------------------------------------------------------------------
Licensed Technology
Input device for inputting positional Puck (X-Y Sensor) CA David Woodfield 2241506
information Puck (X-Y Sensor) USA David Woodfield 09/004675
Input device for inputting positional Square wave sensor David Woodfield PCT/GB98/03731
information Multichannel Game US & CA David Woodfield
Square wave sensor (pending National Phase)
Method and apparatus for generating a display Awaiting Details
signal
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Title Application Grant Grant
Date Date Number
- -----------------------------------------------
<S> <C> <C> <C>
Method and apparatus for sampling remote data 10-Aug-99
sources 25-Nov-98
Method and apparatus for transmitting data 22-Apr-98
Interactive predictive game control 28-Jul-99
Delivering interactive applications Oct-99
Broadcasting interactive applications 18-Nov-98
Method and apparatus for input of data 30-Jan-98
Interactive communication system 18-Mar-98
Method and apparatus for transmitting data
Method and apparatus for sampling remote data 18-Aug-99
sources 14-Oct-94 18-May-99 5905523
Game playing system 2-Dec-98
Method and apparatus for transmitting data 21-Apr-98
Interactive predictive game control 2-Aug-99
Delivering interactive applications Oct-99
Status Flag 2-Dec-98
Method and apparatus for input of data 6-Feb-98
Interactive communication system 13-Mar-98
Method and apparatus for transmitting data
- ---------------------------------------------------------------------------------------------------------------------
US and CA pending National Phase patent applications
Interactive television broadcast system 12-May-99
Interactive applications 4-Dec-98
Interactive applications 4-May-99
- ---------------------------------------------------------------------------------------------------------------------
Licensed Technology
Input device for inputting positional 22-Jun-98 17-Aug-99 Awaiting
information 8-Jan-98 Details
Input device for inputting positional 18-Dec-99
information
Square wave sensor (pending National Phase)
Method and apparatus for generating a display
signal
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Required Consents:
The following are the agreements in effect as of the Effective Date pursuant to
which third parties have licensed certain technology and/or proprietary rights
to TW which are incorporated in the Current TW Technology and which TW may
sublicense to TWIN as part of the TW Technology subject to such third parties'
prior written consent, not to be unreasonably withheld. TW agrees to make its
best efforts to obtain such consents as soon as practicable after the Effective
Date and to promptly thereafter provide a copy of each such consent.
License Agreement between David Woodfield and TW dated 2 April 1998.
<PAGE>
EXHIBIT F
---------
SUPPORT SERVICES
Initial Transition Services
- ---------------------------
TW shall provide sufficient training to TWIN personnel in order to provide such
personnel with the necessary understanding of the Current TW Technology and
future TW Technology to enable TWIN to exploit the Current TW Technology and
future TW Technology as contemplated by the Agreement and TWIN's initial
business plan.
The training shall be provided at the facilities of either TW or TWIN and at the
times as are mutually agreed upon by TW and TWIN. The parties expect that such
initial training services (the "Initial Transition") shall continue for a period
of six (6) months from the Effective Date, or six (6) months from the time that
TWIN has retained appropriately skilled personnel (as reasonably determined by
TWIN) to receive the training, whichever occurs last. It is understood that
there may be need for additional training of new personnel or updating of
training other than that required in connection with the delivery of new
technology, upgrades, enhancements, or modifications. If such need occurs and
TWIN seeks to receive such additional training from TW, TWIN may deliver said
personnel to the TW training facility and receive that training at no added
costs to TWIN other than as set forth in the next sentence. In the case of such
additional training (i.e. that not included in the delivery of new technology,
upgrades, enhancements, or modifications), all expenses incurred by TWIN are the
obligation of TWIN. If TWIN prefers to have TW deliver the training on-site as
designated by TWIN, then all costs, including those reasonable out-of-pocket
costs (but not salaries, allocated overhead, fees for personnel's time, and like
costs) incurred by TW to meet that obligation are to be paid for by TWIN.
During the course of the Initial Transition it is acknowledged that TWIN shall
create and maintain an adequate staff so as to operate and manage TWIN's
business and the technology delivered after the Initial Transition. After the
Initial Transition TW will provide on-going Support Services as described below.
On-going Support Services
- -------------------------
TW shall provide and deliver future TW Technology and associated Proprietary
Rights to TWIN in accordance with Section 4.1 ("TW Delivery") of this Agreement.
TW shall provide TWIN with on-going technical training and support services in
connection with the TW Technology licensed to TWIN under the Agreement. Such
support shall include, without limitation, maintenance and bug fixes to TW
Technology and appropriate further training of TWIN personnel with respect to
upgraded or improved TW Technology.
TW shall have no obligation to provide support with respect to any TWIN
modifications to TW Source Code except as provided in Section 4.1(b) ("Source
Code") of this Agreement.
<PAGE>
TW shall use commercially reasonable efforts to acquire or recruit the necessary
resources and personnel to satisfy TWIN's reasonable requirements for support.
After the Initial Transition period TW and TWIN will discuss and agree in good
faith upon and generate in writing appropriate service level agreements and
escalation procedures for on-going support services.
General
- -------
The Support services shall be provided in consideration of the fees described in
Section 8.2 ("Support Fees") of the Agreement.
Notwithstanding the above, if at any time after the Initial Transition period
any member of TW's senior management team is requested to travel to the United
States at TWIN's direct request, then TWIN shall pay for the reasonable travel
and accommodation costs incurred by TW with respect to such visit. This will not
include, however, situations where the travel is necessary because of
deficiencies in the TW Technology, or as a result of problems in the quality, or
responsiveness, of TW support. In such instance the costs are the obligation of
TW.
In addition, TWIN may request TW to provide staff on secondment to TWIN. If TW
can reasonably meet this request, such staff shall be assigned to TWIN and TWIN
shall reimburse TW for all salary and related direct costs for such employees or
contractors during the period of their secondment unless the staffing was
necessary because of deficiencies in the TW Technology, or the failure of TW to
properly and punctually meet the TW required support role, in which case the
costs are the obligation of TW and TW shall supply whatever staffing is required
to immediately (defined as within a reasonable time based upon the priority of
the deficiency or failure to perform the support role by TW) correct the
problem.
TW shall perform all of its Support services hereunder in a commercially
reasonable manner.
TW and TWIN shall each use their best efforts to cooperate with each other with
respect to the Support services.
Without limiting the general obligations above the table below outlines the
Parties' intended general split of responsibilities between TWIN and TW with
respect to TW Technology:
<TABLE>
<CAPTION>
TW Responsibility TWIN Responsibility
- --------------------------------------------------------------------------------------
<S> <C>
- --------------------------------------------------------------------------------------
Provision of documentation for current and Creation and maintenance of a TWIN
future technology technology group, comprising
appropriately skilled individuals
- --------------------------------------------------------------------------------------
Provision of new, improved and upgraded TWIN to provide its own technical
technology support team, to be trained by TW
- --------------------------------------------------------------------------------------
Provision of training to appropriately Produce localization and
qualified TWIN staff customizations of games and
technology for the U.S. market
- --------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
24hr support for emergency or operationally
critical issues
- --------------------------------------------------------------------------------------
Timely support of technology delivered to Documented requests for modifications
TWIN and code modifications requested by and improvements to TW Technology
TWIN
- --------------------------------------------------------------------------------------
</TABLE>
Documentation
- --------------
TW will deliver documentation for all technology delivered to TWIN. This
documentation shall include, but not be limited to, a description of each
component or module of the products, source code, and a complete set of API's
(Application Programming Interfaces) for each component or module. The API's
will be complete and detailed enough so that a reasonably skilled software
programmer would be able to write a replacement component or module and have it
interface and communicate with all the other necessary parts of the system,
without any undue difficulty.
Response Time
- -------------
TW will respond immediately (defined as within a reasonable time based upon the
priority of the deficiency or failure to perform the support role by TW) with
support to TWIN if a problem occurs which significantly affects the performance
of services to TWIN's customers or partners, and where TWIN personnel cannot
reasonably solve such problem in a timely manner. TW agrees that such problems
can occur without prior warning, and consequently cannot expect TWIN to give
advance notice thereof. TW will make its best efforts to solve the problem,
even to the extent of sending personnel to the TWIN facility, if necessary.
If TWIN requests an improvement, extension, or modification to the TW Technology
which is not practical for TWIN to implement, TW agrees to make such
modifications in a timely fashion and at a cost at no more than its standard
rate. The schedule will be worked out in good faith between TW and TWIN and
will be based upon a high priority requirement, if so deemed by TWIN.
<PAGE>
EXHIBIT B
INTERACTIVE NETWORK, INC.
1999 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel, to provide additional
incentive to Employees, Directors and Consultants and to promote the success
of the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of the Committees appointed
to administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
(c) "Applicable Laws" means the legal requirements relating to the
administration of stock option plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the
rules of any foreign jurisdiction applicable to Awards granted to residents
therein.
(d) "Award" means the grant of an Option under the Plan.
(e) "Award Agreement" means the written agreement evidencing the grant
of an Award executed by the Company and the Grantee, including any amendments
thereto.
(f) "Board" means the Board of Directors of the Company.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means any committee appointed by the Board to
administer the Plan.
(i) "Common Stock" means the common stock of the Company.
(j) "Company" means Interactive Network, Inc.
(k) "Consultant" means any person (other than an Employee or a
Director, solely with respect to rendering services in such person's capacity
as a Director) who is engaged by the Company or any Related Entity to render
consulting or advisory services to the Company or such Related Entity.
(l) "Continuous Service" means that the provision of services to the
Company or a Related Entity in any capacity of Employee, Director or
Consultant, is not interrupted or terminated. Continuous Service shall not be
considered interrupted in the case of (i) any approved leave of absence, (ii)
transfers between locations of the Company or among the Company, any Related
Entity, or any successor, in any capacity of Employee, Director or Consultant,
or (iii) any change in status as long as the individual remains in the service
of the Company or a Related Entity in any capacity of Employee, Director or
Consultant (except as otherwise provided in the Award Agreement). An approved
leave of absence shall include sick leave, military leave, or any other
authorized personal leave. For purposes of Incentive Stock Options, no such
leave may exceed ninety (90) days, unless reemployment upon expiration of such
leave is guaranteed by statute or contract.
(m) "Corporate Transaction" means any of the following transactions:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is
to change the state in which the Company is incorporated;
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company (including the capital stock of the Company's
subsidiary corporations) in connection with the complete liquidation or
dissolution of the Company;
B-1
<PAGE>
(iii) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger; or
(iv) an acquisition by any person or related group of persons (other
than the Company or by a Company-sponsored employee benefit plan) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities (whether or not in a
transaction also constituting a Change in Control), but excluding any such
transaction that the Administrator determines shall not be a Corporate
Transaction.
(n) "Covered Employee" means an Employee who is a "covered employee"
under Section 162(m)(3) of the Code.
(o) "Director" means a member of the Board or the board of directors
of any Related Entity.
(p) "Disability" means that a Grantee is permanently unable to carry
out the responsibilities and functions of the position held by the Grantee by
reason of any medically determinable physical or mental impairment. A Grantee
will not be considered to have incurred a Disability unless he or she
furnishes proof of such impairment sufficient to satisfy the Administrator in
its discretion.
(q) "Employee" means any person, including an Officer or Director, who
is an employee of the Company or any Related Entity. The payment of a
director's fee by the Company or a Related Entity shall not be sufficient to
constitute "employment" by the Company.
(r) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(s) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) Where there exists a public market for the Common Stock, the
Fair Market Value shall be (A) the closing price for a Share for the last
market trading day prior to the time of the determination (or, if no closing
price was reported on that date, on the last trading date on which a closing
price was reported) on the stock exchange determined by the Administrator to
be the primary market for the Common Stock or the Nasdaq National Market,
whichever is applicable or (B) if the Common Stock is not traded on any such
exchange or national market system, the average of the closing bid and asked
prices of a Share on the Nasdaq Small Cap Market for the day prior to the time
of the determination (or, if no such prices were reported on that date, on the
last date on which such prices were reported), in each case, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable; or
(ii) In the absence of an established market for the Common Stock of
the type described in (i), above, the Fair Market Value thereof shall be
determined by the Administrator in good faith.
(t) "Grantee" means an Employee, Director or Consultant who receives
an Award pursuant to an Award Agreement under the Plan.
(u) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(v) "Non-Qualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(w) "Officer" means a person who is an officer of the Company or a
Related Entity within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.
B-2
<PAGE>
(x) "Option" means an option to purchase Shares pursuant to an Award
Agreement granted under the Plan.
(y) "Performance--Based Compensation" means compensation qualifying as
"performance-based compensation" under Section 162(m) of the Code.
(z) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(aa) "Plan" means this 1999 Stock Option Plan.
(bb) "Post-Termination Exercise Period" means the period specified in
the Award Agreement of not more than three (3) months commencing on the date of
termination of the Grantee's Continuous Service, or such longer period as may
be applicable upon death or Disability.
(cc) "Related Entity" means any Parent, Subsidiary and any business,
corporation, partnership, limited liability company or other entity in which
the Company, a Parent or a Subsidiary holds a substantial ownership interest,
directly or indirectly.
(dd) "Related Entity Disposition" means the sale, distribution or other
disposition by the Company, a Parent or a Subsidiary of all or substantially
all of the interests of the Company, a Parent or a Subsidiary in any Related
Entity effected by a sale, merger or consolidation or other transaction
involving that Related Entity or the sale of all or substantially all of the
assets of that Related Entity, other than any such Related Entity Disposition
to the Company, a Parent or a Subsidiary.
(ee) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act
or any successor thereto.
(ff) "Share" means a share of the Common Stock.
(gg) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan.
(a) Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be issued pursuant to all Awards is three
million six hundred fifty thousand (3,650,000) Shares increased by any Shares
that are represented by Awards under the Company's 1988 Stock Option Plan which
are forfeited, expire or are cancelled without delivery of Shares or which
result in the forfeiture of Shares back to the Company. Notwithstanding the
foregoing, subject to the provisions of Section 10, below, the maximum
aggregate number of Shares available for grant of Incentive Stock Options is
three million six hundred fifty thousand (3,650,000) Shares. The Shares to be
issued pursuant to Awards may be authorized, but unissued, or reacquired Common
Stock.
(b) Any Shares covered by an Award (or portion of an Award) which is
forfeited or canceled, expires or is settled in cash, shall be deemed not to
have been issued for purposes of determining the maximum aggregate number of
Shares which may be issued under the Plan. If any unissued Shares are retained
by the Company upon exercise of an Award in order to satisfy the exercise price
for such Award or any withholding taxes due with respect to such Award, such
retained Shares subject to such Award shall become available for future
issuance under the Plan (unless the Plan has terminated). Shares that actually
have been issued under the Plan pursuant to an Award shall not be returned to
the Plan and shall not become available for future issuance under the Plan,
except that if unvested Shares are forfeited, or repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
B-3
<PAGE>
4. Administration of the Plan.
(a) Plan Administrator.
(i) Administration with Respect to Directors and Officers. With
respect to grants of Awards to Directors or Employees who are also Officers or
Directors of the Company, the Plan shall be administered by (A) the Board or
(B) a Committee designated by the Board, which Committee shall be constituted
in such a manner as to satisfy the Applicable Laws and to permit such grants
and related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee
shall continue to serve in its designated capacity until otherwise directed by
the Board.
(ii) Administration With Respect to Consultants and Other Employees.
With respect to grants of Awards to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A)
the Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board.
(iii) Administration With Respect to Covered Employees.
Notwithstanding the foregoing, grants of Awards to any Covered Employee
intended to qualify as Performance-Based Compensation shall be made only by a
Committee (or subcommittee of a Committee) which is comprised solely of two or
more Directors eligible to serve on a committee making Awards qualifying as
Performance-Based Compensation. In the case of such Awards granted to Covered
Employees, references to the "Administrator" or to a "Committee" shall be
deemed to be references to such Committee or subcommittee.
(iv) Administration Errors. In the event an Award is granted in a
manner inconsistent with the provisions of this subsection (a), such Award
shall be presumptively valid as of its grant date to the extent permitted by
the Applicable Laws.
(b) Powers of the Administrator. Subject to Applicable Laws and the
provisions of the Plan (including any other powers given to the Administrator
hereunder), and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:
(i) to select the Employees, Directors and Consultants to whom
Awards may be granted from time to time hereunder;
(ii) to determine whether and to what extent Awards are granted
hereunder;
(iii) to determine the number of Shares to be covered by each Award
granted hereunder;
(iv) to approve forms of Award Agreements for use under the Plan;
(v) to determine the terms and conditions of any Award granted
hereunder;
(vi) to amend the terms of any outstanding Award granted under the
Plan, provided that any amendment that would adversely affect the Grantee's
rights under an outstanding Award shall not be made without the Grantee's
written consent;
(vii) to construe and interpret the terms of the Plan and Awards
granted pursuant to the Plan, including without limitation, any notice of
Award or Award Agreement, granted pursuant to the Plan;
(viii) to establish additional terms, conditions, rules or
procedures to accommodate the rules or laws of applicable foreign
jurisdictions and to afford Grantees favorable treatment under such laws;
provided, however, that no Award shall be granted under any such additional
terms, conditions, rules or procedures with terms or conditions which are
inconsistent with the provisions of the Plan; and
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(ix) to take such other action, not inconsistent with the terms of
the Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions, determinations
and interpretations of the Administrator shall be conclusive and binding on all
persons.
5. Eligibility. Non-Qualified Stock Options may be granted to Employees,
Directors and Consultants. Incentive Stock Options may be granted only to
Employees of the Company, a Parent or a Subsidiary. An Employee, Director or
Consultant who has been granted an Award may, if otherwise eligible, be granted
additional Awards. Awards may be granted to such Employees, Directors or
Consultants who are residing in foreign jurisdictions as the Administrator may
determine from time to time.
6. Terms and Conditions of Awards.
(a) Designation of Award. Each Option shall be designated as either an
Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non-Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.
(b) Individual Award Limit. The maximum number of Shares with respect
to which Awards may be granted to any Employee in any fiscal year of the
Company shall be one million (1,000,000) Shares. The foregoing limitation shall
be adjusted proportionately in connection with any change in the Company's
capitalization pursuant to Section 10, below. To the extent required by Section
162(m) of the Code or the regulations thereunder, in applying the foregoing
limitation with respect to an Employee, if any Award is canceled, the canceled
Award shall continue to count against the maximum number of Shares with respect
to which Awards may be granted to the Employee. For this purpose, the repricing
of an Award shall be treated as the cancellation of the existing Award and the
grant of a new Award.
(c) Acquisitions and Other Transactions. The Administrator may issue
Awards under the Plan in settlement, assumption or substitution for,
outstanding awards or obligations to grant future awards in connection with the
Company or a Related Entity acquiring another entity, an interest in another
entity or an additional interest in a Related Entity whether by merger, stock
purchase, asset purchase or other form of transaction.
(d) Separate Programs. The Administrator may establish one or more
separate programs under the Plan for the purpose of issuing particular forms of
Awards to one or more classes of Grantees on such terms and conditions as
determined by the Administrator from time to time.
(e) Term of Award. The term of each Award shall be the term stated in
the Award Agreement, provided, however, that the term of an Award shall be no
more than ten (10) years from the date of grant thereof. However, in the case
of an Incentive Stock Option granted to a Grantee who, at the time the Option
is granted, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
term of the Incentive Stock Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the Award Agreement.
(f) Non-Transferability of Awards. Awards may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Grantee, only by the Grantee.
(g) Time of Granting Awards. The date of grant of an Award shall for
all purposes be the date on which the Administrator makes the determination to
grant such Award, or such other date as is determined by
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the Administrator. Notice of the grant determination shall be given to each
Employee, Director or Consultant to whom an Award is so granted within a
reasonable time after the date of such grant.
7. Award Exercise Price, Consideration and Taxes.
(a) Exercise Price. The exercise price for an Award shall be as
follows:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be not less than one hundred ten
percent (110%) of the Fair Market Value per Share on the date of grant; or
(B) granted to any Employee other than an Employee described in
the preceding paragraph, the per Share exercise price shall be not less than
one hundred percent (100%) of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Non-Qualified Stock Option, the per Share
exercise price shall be not less than one hundred percent (100%) of the Fair
Market Value per Share on the date of grant.
(iii) Notwithstanding the foregoing provisions of this Section 7(a),
in the case of an Award issued pursuant to Section 6(c), above, the exercise or
purchase price for the Award shall be determined in accordance with the
principles of Section 424(a) of the Code.
(b) Consideration. Subject to Applicable Laws, the consideration to be
paid for the Shares to be issued upon exercise of an Award including the method
of payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant). The
Administrator is authorized to accept as consideration for Shares issued under
the Plan the following, provided that the portion of the consideration equal to
the par value of the Shares must be paid in cash or other legal consideration
permitted by the Delaware General Corporation Law:
(i) cash;
(ii) check;
(iii) delivery of Grantee's promissory note with such recourse,
interest, security, and redemption provisions as the Administrator determines
as appropriate;
(iv) surrender of Shares or delivery of a properly executed form of
attestation of ownership of Shares as the Administrator may require (including
withholding of Shares otherwise deliverable upon exercise of the Award) which
have a Fair Market Value on the date of surrender or attestation equal to the
aggregate exercise price of the Shares as to which said Award shall be
exercised (but only to the extent that such exercise of the Award would not
result in an accounting compensation charge with respect to the Shares used to
pay the exercise price);
(v) payment through a broker-dealer sale and remittance procedure
pursuant to which the Grantee (A) shall provide written instructions to a
Company designated brokerage firm to effect the immediate sale of some or all
of the purchased Shares and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased Shares and (B) shall provide written
directives to the Company to deliver the certificates for the purchased Shares
directly to such brokerage firm in order to complete the sale transaction; or
(vi) any combination of the foregoing methods of payment.
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(c) Taxes. No Shares shall be delivered under the Plan to any Grantee
or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares or the
disqualifying disposition of Shares received on exercise of an Incentive Stock
Option. Upon exercise of an Award, the Company shall withhold or collect from
Grantee an amount sufficient to satisfy such tax obligations.
8. Exercise of Award.
(a) Procedure for Exercise; Rights as a Stockholder.
(i) Any Award granted hereunder shall be exercisable at such times
and under such conditions as determined by the Administrator under the terms of
the Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Award by the person entitled to exercise the Award and full payment for the
Shares with respect to which the Award is exercised, including, to the extent
selected, use of the broker-dealer sale and remittance procedure to pay the
purchase price as provided in Section 7(b)(v). Until the issuance (as evidenced
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder
shall exist with respect to Shares subject to an Award, notwithstanding the
exercise of an Option. The Company shall issue (or cause to be issued) such
stock certificate promptly upon exercise of the Award. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 10, below.
(b) Exercise of Award Following Termination of Continuous Service. In
the event of termination of a Grantee's Continuous Service for any reason other
than Disability or death, such Grantee may, but only during the Post-
Termination Exercise Period (but in no event later than the expiration date of
the term of such Award as set forth in the Award Agreement), exercise the Award
to the extent that the Grantee was entitled to exercise it at the date of such
termination. In the event of a Grantee's change of status from Employee to
Consultant, an Employee's Incentive Stock Option shall convert automatically to
a Non-Qualified Stock Option on the day three (3) months and one day following
such change of status. To the extent that the Grantee is not entitled to
exercise the Award at the date of termination, or if the Grantee does not
exercise such Award to the extent so entitled within the Post-Termination
Exercise Period, the Award shall terminate.
(c) Disability of Grantee. In the event of termination of a Grantee's
Continuous Service as a result of his or her Disability, Grantee may, but only
within twelve (12) months from the date of such termination (and in no event
later than the expiration date of the term of such Award as set forth in the
Award Agreement), exercise the Award to the extent that the Grantee was
otherwise entitled to exercise it at the date of such termination; provided,
however, that if such Disability is not a "disability" as such term is defined
in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such
Incentive Stock Option shall automatically convert to a Non-Qualified Stock
Option on the day three (3) months and one day following such termination. To
the extent that the Grantee is not entitled to exercise the Award at the date
of termination, or if Grantee does not exercise such Award to the extent so
entitled within the time specified herein, the Award shall terminate.
(d) Death of Grantee. In the event of a termination of the Grantee's
Continuous Service as a result of his or her death, or in the event of the
death of the Grantee during the Post-Termination Exercise Period or during the
twelve (12) month period following the Grantee's Termination of Continuous
Service as a result of his or her Disability, the Grantee's estate or a person
who acquired the right to exercise the Award by bequest or inheritance may
exercise the Award, but only to the extent that the Grantee was entitled to
exercise the Award as of the date of termination, within twelve (12) months
from the date of death (but in no event later than the expiration of the term
of such Award as set forth in the Award Agreement). To the extent that, at the
time of death, the Grantee was not entitled to exercise the Award, or if the
Grantee's estate or a person who
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acquired the right to exercise the Award by bequest or inheritance does not
exercise such Award to the extent so entitled within the time specified herein,
the Award shall terminate.
9. Conditions Upon Issuance of Shares.
(a) Shares shall not be issued pursuant to the exercise of an Award
unless the exercise of such Award and the issuance and delivery of such Shares
pursuant thereto shall comply with all Applicable Laws, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) As a condition to the exercise of an Award, the Company may require
the person exercising such Award to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or
which have been returned to the Plan, the exercise price of each such
outstanding Award, as well as any other terms that the Administrator determines
require adjustment shall be proportionately adjusted for (i) any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Shares or
similar transaction affecting the Shares, (ii) any other increase or decrease
in the number of issued Shares effected without receipt of consideration by the
Company, or (iii) as the Administrator may determine in its discretion, any
other transaction with respect to Common Stock to which Section 424(a) of the
Code applies or similar transaction; provided, however that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator and its determination shall be final, binding and conclusive.
Except as the Administrator determines, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason hereof shall be made with
respect to, the number or price of Shares subject to an Award.
11. Corporate Transactions/Related Entity Dispositions. Except as may be
provided in an Award Agreement:
(a) Effective upon the consummation of a Corporate Transaction, all
outstanding Awards under the Plan shall terminate. However, all such Awards
shall not terminate if they are, in connection with the Corporate Transaction,
assumed by the successor corporation or Parent thereof.
(b) Effective upon the consummation of a Related Entity Disposition,
for purposes of the Plan and all Awards, the Continuous Service of each Grantee
who is at the time engaged primarily in service to the Related Entity involved
in such Related Entity Disposition shall be deemed to terminate and each Award
of such Grantee which is at the time outstanding under the Plan shall be
exercisable in accordance with the terms of the Award Agreement evidencing such
Award. However, such Continuous Service shall be not to deemed to terminate if
such Award is, in connection with the Related Entity Disposition, assumed by
the successor entity or its parent.
12. Effective Date and Term of Plan. The Plan shall become effective upon
the earlier to occur of its adoption by the Board or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated. Subject to Section 17, below, and Applicable
Laws, Awards may be granted under the Plan upon its becoming effective.
13. Amendment, Suspension or Termination of the Plan.
(a) The Board may at any time amend, suspend or terminate the Plan. To
the extent necessary to comply with Applicable Laws, the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
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(b) No Award may be granted during any suspension of the Plan or after
termination of the Plan.
(c) Any amendment, suspension or termination of the Plan (including
termination of the Plan under Section 12, above) shall not affect Awards
already granted, and such Awards shall remain in full force and effect as if
the Plan had not been amended, suspended or terminated, unless mutually agreed
otherwise between the Grantee and the Administrator, which agreement must be in
writing and signed by the Grantee and the Company.
14. Reservation of Shares.
(a) The Company, during the term of the Plan, will at all times reserve
and keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
(b) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares
hereunder, shall relieve the Company of any liability in respect of the failure
to issue or sell such Shares as to which such requisite authority shall not
have been obtained.
15. No Effect on Terms of Employment/Consulting Relationship. The Plan shall
not confer upon any Grantee any right with respect to the Grantee's Continuous
Service, nor shall it interfere in any way with his or her right or the
Company's right to terminate the Grantee's Continuous Service at any time, with
or without cause.
16. No Effect on Retirement and Other Benefit Plans. Except as specifically
provided in a retirement or other benefit plan of the Company or a Related
Entity, Awards shall not be deemed compensation for purposes of computing
benefits or contributions under any retirement plan of the Company or a Related
Entity, and shall not affect any benefits under any other benefit plan of any
kind or any benefit plan subsequently instituted under which the availability
or amount of benefits is related to level of compensation. The Plan is not a
"Retirement Plan" or "Welfare Plan" under the Employee Retirement Income
Security Act of 1974, as amended.
17. Stockholder Approval. The grant of Incentive Stock Options under the
Plan shall be subject to approval by the stockholders of the Company within
twelve (12) months before or after the date the Plan is adopted excluding
Incentive Stock Options issued in substitution for outstanding Incentive Stock
Options pursuant to Section 424(a) of the Code. Such stockholder approval shall
be obtained in the degree and manner required under Applicable Laws. The
Administrator may grant Incentive Stock Options under the Plan prior to
approval by the stockholders, but until such approval is obtained, no such
Incentive Stock Option shall be exercisable. In the event that stockholder
approval is not obtained within the twelve (12) month period provided above,
all Incentive Stock Options previously granted under the Plan shall be
exercisable as Non-Qualified Stock Options.
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EXHIBIT C
May 26, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for Interactive Network, Inc. and,
under the date of March 15, 1999, we reported on the consolidated balance sheets
of Interactive Network, Inc. and subsidiaries as of December 31, 1998 and 1997
and the related consolidated statements of operations, shareholders deficit and
cash flows for each of the years in the three year period ended December 31,
1998. On May 20, 1999, we resigned. We have read Interactive Network, Inc's
statements included under item 4 of its Form 8-K dated May 26, 1999 and we agree
with such statements, except that we are not in a position to agree or disagree
with Interactive Network, Inc's statements regarding (a) the Company's
determination that it is in the best interest of the company that the former
independent accountant be replaced with an accountant more suitable to the
Company's current needs and, (b) the resolution of contingencies subsequent to
March 15, 1999.
This letter should not be regarded as in any way updating the aforementioned
report or representing that we performed any procedures subsequent to the date
of such report.
Very truly yours,
KPMG LLP
