-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WA67S/8pY9RfbWmK50ZEuhy7sp8MzLRW/N6jlKdZNfhzK/RFtxI9F3FgHRHoVfc/ yX3sGbaunfWgZxPqooqo9Q== 0000912057-00-020438.txt : 20000501 0000912057-00-020438.hdr.sgml : 20000501 ACCESSION NUMBER: 0000912057-00-020438 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 31 FILED AS OF DATE: 20000428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITALCONVERGENCE COM INC CENTRAL INDEX KEY: 0001083392 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752791929 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-35906 FILM NUMBER: 613658 BUSINESS ADDRESS: STREET 1: 9101 N CENTRAL EXPRESSWAY STREET 2: STE 600 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2148612850 MAIL ADDRESS: STREET 1: 9101 N CENTRAL EXPRESSWAY STREET 2: STE 600 CITY: DALLAS STATE: TX ZIP: 75231 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ DIGITALCONVERGENCE.:COM INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 7373 75-2791929 (State or Other Jurisdiction (Primary Standard (I.R.S. Employer of Industrial Identification No.) Incorporation or Organization) Classification Code Number)
PATRICK V. STARK EXECUTIVE VICE PRESIDENT 9101 N. CENTRAL EXPRESSWAY DIGITALCONVERGENCE.:COM INC. 6TH FLOOR 9101 N. CENTRAL EXPRESSWAY DALLAS, TEXAS 75231 6TH FLOOR (214) 292-6000 DALLAS, TEXAS 75231 (Address, Including Zip Code, and Telephone Number, (214) 292-6000 including (Name, Address, Including Zip Code, and Telephone Number, Area Code, of Registrant's Principal Executive Offices) Including Area Code, of Agent For Service)
------------------------------ COPIES OF ALL COMMUNICATIONS TO: MARK EARLY DENNIS J. FRIEDMAN P. GREGORY HIDALGO CLAUDE S. SERFILIPPI VINSON & ELKINS L.L.P. CHADBOURNE & PARKE LLP 2001 ROSS AVENUE, SUITE 3700 30 ROCKEFELLER PLAZA DALLAS, TEXAS 75201 NEW YORK, NEW YORK 10112 TELEPHONE: (214) 220-7700 TELEPHONE: (212) 408-5100 FACSIMILE: (214) 220-7716 FACSIMILE: (212) 541-5369
------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 426(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE Common Stock, $0.01 par value......... $100,000,000 $26,400
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [inside front cover page of the prospectus] The prospectus has been Internet Enhanced. The inside cover of this prospectus will contain photographs of consumer products and excerpts from selected magazines and newspapers, including exposed bar codes. Potential investors will be able to access the related website either by using our :Cue:C.A.T. device to swipe the code or by typing the related URL address. EXPLANATORY NOTE This registration statement contains two forms of prospectus: one (the "U.S. Prospectus") to be used in connection with an offering in the U.S. and Canada (the "U.S. Offering") of Common Stock of DigitalConvergence.:Com Inc. (the "Company") (which includes Common Stock subject to the U.S. Underwriters' over-allotment option) and one (the "International Prospectus") to be used in connection with a concurrent international offering outside the U.S. and Canada (together with the U.S. Offering, the "Offerings") of Common Stock of the Company (which includes Common Stock subject to the International Managers' over-allotment option). The U.S. Prospectus and the International Prospectus will be identical in all respects except for the front cover and back cover pages of the prospectuses and the information under the caption "Underwriting." The form of the U.S. Prospectus is included herein and is followed by those pages to be used in the International Prospectus that differ from those in the U.S. Prospectus. Each of the pages to be used in the International Prospectus included herein is labeled "Alternative Page for International Prospectus." Final forms of such prospectuses will be filed with the Securities and Exchange Commission pursuant to Rule 424(b). SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED , 2000 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SHARES [LOGO] COMMON STOCK ------------------ This is DigitalConvergence.:Com Inc.'s initial public offering of common stock. DigitalConvergence.:Com Inc. is selling all of the shares in this offering. The U.S. underwriters are offering shares in the U.S. and Canada and the international managers are offering shares outside the U.S. and Canada. We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will be quoted on the Nasdaq National Market under the symbol "DGTL." INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS. ---------------------
PER SHARE TOTAL --------- ----- Public offering price.................................... $ $ Underwriting discount.................................... $ $ Proceeds, before expenses, to DigitalConvergence.:Com Inc........................................................ $ $
The U.S. underwriters may also purchase up to an additional shares from DigitalConvergence.:Com Inc. at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The international managers may similarly purchase up to an additional shares from DigitalConvergence.:Com Inc. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery on or about , 2000. ------------------------ JOINT BOOK-RUNNING MANAGERS MERRILL LYNCH & CO. ING BARINGS ---------------- BANC OF AMERICA SECURITIES LLC BEAR, STEARNS & CO. INC. ---------------- The date of this prospectus is , 2000 TABLE OF CONTENTS
PAGE -------- Summary..................................................... 1 Risk Factors................................................ 9 Forward-Looking Statements.................................. 22 Use of Proceeds............................................. 23 Dividend Policy............................................. 24 Capitalization.............................................. 25 Dilution.................................................... 26 Selected Consolidated Financial Data........................ 28 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 29 Business.................................................... 37 Management.................................................. 54 Certain Relationships and Related Transactions.............. 61 Security Ownership of Principal Stockholders and Management................................................ 66 Description of Capital Stock................................ 68 Shares Eligible for Future Sale............................. 74 Certain U.S. Federal Tax Considerations for Non-United States Holders of Common Stock............................ 76 Underwriting................................................ 79 Legal Matters............................................... 83 Experts..................................................... 83 Where You Can Find More Information......................... 83 Index to Financial Statements............................... F-1
------------------------ You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date. ii SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "DIGITALCONVERGENCE.:COM," "DIGITALCONVERGENCE," "DIGITAL," "US," "WE" OR "OUR" REFER TO DIGITALCONVERGENCE.:COM INC.-TM- AND ITS SUBSIDIARIES AND THE TERM "YOU" REFERS TO A PROSPECTIVE INVESTOR. UNLESS WE INDICATE OTHERWISE, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTIONS GRANTED TO THE U.S. UNDERWRITERS AND INTERNATIONAL MANAGERS, ASSUMES THE CONVERSION INTO COMMON STOCK OF EACH OUTSTANDING SHARE OF OUR PREFERRED STOCK AND GIVES EFFECT TO A FOR ONE STOCK SPLIT OF OUR OUTSTANDING SHARES OF COMMON STOCK TO BE COMPLETED PRIOR TO THE COMPLETION OF THIS OFFERING. DIGITALCONVERGENCE.:COM INC. We are a company whose technology allows media companies, manufacturers and virtually all organizations to instantly and easily link their products with web pages deep within their websites. Until we release our technology, we believe that it is not possible for these companies to realize the full value of their Internet efforts, because their websites have to be entered through their front pages, often making access to a desired web page time-consuming and difficult. Our :C.R.Q.-TM- software will send an Internet user's web browser to a specific web page in response to our proprietary digital signal called a ":Cue-SM-" transmitted by a television broadcast. Our :C.R.Q. software will also send an Internet user's web browser to a specific web page when an Internet user utilizes our :Cue:C.A.T.-TM- device to scan our proprietary codes called "Print :Cues" on print media or to scan existing bar codes on consumer products. We believe that our technology will empower media companies and corporate advertisers to enhance their content and to transform television broadcasts or other electronic media, print media or items bearing Print :Cues or bar codes into powerful new advertising, promotional or e-commerce opportunities. Our technology will be free to the public and will allow Internet users to quickly and easily obtain relevant information and conduct e-commerce activities by eliminating the input of lengthy website addresses and time-intensive web navigation. We intend to initiate a nationwide roll-out of our technology in September 2000 and plan to distribute, free to the public, at least 50 million CD-ROMs containing our :C.R.Q. software and 50 million :Cue:C.A.T. devices by the end of 2001. To assist in the promotion, marketing and deployment of our technology, we have established several strategic media, advertising and distribution partnerships. We expect that our strategic partners will provide promotional support and distribution capabilities to help build consumer awareness and adoption of our technology and products. Our media partners include National Broadcasting Company, Inc., Belo Corp., Forbes Inc., The Milwaukee Journal and Wired Magazine. These partners have agreed to implement our technology in television and cable networks, local television broadcasts and print publications. Forbes Inc., The Milwaukee Journal and Wired Magazine have also agreed to distribute our products to their subscribers. We expect that these relationships, taken together, will provide us with broad media exposure in six of the top ten U.S. media markets and a number of smaller markets, for total coverage of approximately 40% of U.S. households. In addition, we are in discussions with broadcast media companies covering approximately an additional 20% of U.S. households to also implement our technology in their television broadcasts. Additionally, we have partnered with Tandy Corporation to produce our :Cue:C.A.T. devices and make them available, free to consumers, in over 7,000 RadioShack retail outlets throughout the U.S. In addition, Tandy has invested in us. Other companies that have made investments in us include Young & Rubicam, Inc., Belo Corp., The Coca-Cola Company, The E.W. Scripps Company and Spielberg/Katz Associates, LLC. 1 MARKET OPPORTUNITY Companies are investing billions of dollars in the development, execution and promotion of Internet strategies. The growth in both the number of Internet users and the volume of e-commerce creates significant challenges and opportunities for businesses across multiple industries. We believe that our technology will provide powerful solutions for a number of these companies and will provide a means to create new revenue opportunities. To quickly establish our technology on a broad scale, we have targeted the following significant opportunities: - BROADCAST AND CABLE MEDIA. In 1998, $47 billion was spent on television advertising and $91 billion on goods and services purchased through direct response television programming. - PRINT MEDIA. In 1998, the following amounts were spent in the following print media segments: - $87 billion on goods purchased from print catalogs; - $40 billion on direct mail advertising; - $44 billion on newspaper display and classified advertising; and - $14 billion on advertising in trade and consumer magazines. - CODED CONSUMER PRODUCTS. There are tens of millions of active bar codes that are widely used in labeling consumer products in the U.S. Until now, no widely-adopted technology has emerged that allows a manufacturer to leverage these codes to link to relevant sites on the Internet. While the growth of the Internet has attracted Internet users at an unprecedented pace, the volume of online information has made it increasingly difficult for users to navigate the Internet effectively and efficiently. Major corporate websites contain many layers of web pages, which often make finding relevant information a frustrating and time-consuming experience. As websites continue to proliferate and grow in size and complexity, we believe that users will increasingly need a quicker, more direct link to their intended destinations. Search engines will continue to have useful applications on the Internet, but we believe that users want a more precise tool that takes them directly to a specific web page deep within a website. THE DIGITALCONVERGENCE.:COM SOLUTION We believe that our technology will provide the solution to the desire of broadcasters, publishers, merchants and advertisers for a simple, cost-effective means of leveraging the Internet across all forms of traditional media. In addition, our technology also addresses the needs of Internet users for a more satisfying Internet experience. Elements of our solution include Internet Enhanced-TM- broadcasting, print and coded products, and our Virtual Network, an "L"-shaped area containing banner advertisements and related information that will appear on the border of the user's web browser when using our technology. INTERNET ENHANCED BROADCASTING A broadcast can be linked to a website, or Internet Enhanced, by simply embedding a :Cue in the broadcast. Unlike current television content and advertisements in which a website address is briefly displayed on the television screen, Internet Enhanced programming will load the web page on a user's web browser for immediate access or store the web page address for later use. With our technology, viewers will no longer need to recall and manually enter a website address. By embedding :Cues in programming, our technology provides broadcasters and advertisers with a powerful new tool to supplement existing content and advertisements, which we believe will drive viewers to selected websites, increase advertising revenue and generate additional e-commerce opportunities. Accordingly, our technology will offer a platform for broadcasters to enhance content and advertisers to deliver immediate buying opportunities to their target consumers. As a result, we believe broadcasters will be able to command premium rates for Internet Enhanced advertisements. 2 For example, our technology could be used in the following ways: - A local television station differentiates its newscast with Internet Enhanced weather reporting. While reporting the weather, the station broadcasts a :Cue that directs the viewer's web browser to the broadcaster's web page that includes detailed forecast information for each city and town in the viewing area. - An automobile company inserts a :Cue in a television advertisement, which launches an Internet user's web browser to a web page designated by the company. This enables the automobile company to provide more detailed information on its web page than can be presented in the advertisement, including specific information on an automobile's features and pricing, local dealerships and immediate e-commerce opportunities. We intend to generate our broadcast revenue from: - fees from the sale of advertising :Cues to broadcast networks, cable networks and local television stations; - a fixed fee per sale completed by home shopping networks as a result of using our :Cues; and - fees from annual licenses to cable networks for the use of :Cues in content. INTERNET ENHANCED PRINT Our :Cue:C.A.T. device will enable an Internet user to scan our Print :Cues to link the user to a particular web page designated by the publisher or corporate advertiser. With the swipe of a :Cue:C.A.T. device, users will be immediately directed to more detailed information impractical to include in print copy. Through the use of Internet Enhanced print content, publishers will be able to drive readers deep in their websites for more detailed information. In addition, print advertisers will have the ability to create Internet Enhanced advertisements that place the consumer one swipe away from an e-commerce opportunity. For example, a computer company can insert a Print :Cue in a newspaper or magazine advertisement, which launches an Internet user's web browser to a web page designated by the company. Internet Enhanced print advertising provides the user with immediate access to more specific information on the computer's features, pricing and special promotions and provides the computer company with immediate e-commerce opportunities. We intend to generate our print revenue from: - fees from licenses to publishers for the use of Print :Cues for content enhancement purposes; - fees from the sale of any advertising Print :Cues in almost any print media, including newspapers and magazines; - a fixed fee per sale completed by catalog shoppers as a result of using our Print :Cues; and - commissions on increased revenues resulting from the use of Print :Cues in classified ads. INTERNET ENHANCED PRODUCTS AND OTHER :CUE:C.A.T. APPLICATIONS We are completing a massive database that links existing bar codes, including UPC, ISBN, EAN and other codes, to websites, thereby enabling manufacturers to utilize their existing product codes for advertising and other marketing purposes. Our technology will enable a user of the :Cue:C.A.T. device to scan the bar code on a product, linking the user to a specified web page. For example, a prescription drug bottle from a pharmacy can include a bar code that directs the recipient's web browser to the drug manufacturer's website containing information regarding the illness for which the drug was prescribed, side effects of the drug, and additional products that may be useful in treating the illness. Because our :Cue:C.A.T. technology scans substantially all bar codes and will not require consumer 3 goods manufacturers to alter labels in any way, our solution is an inexpensive and unobtrusive way of turning an existing label into a powerful new marketing tool. In addition, our Print :Cues can be placed on credit cards and other physical objects that are not normally assigned bar codes. In sum, our technology allows any product to become Internet Enhanced. We intend to generate our enhanced product revenue from: - annual fees for bar codes on consumer products that are Internet Enhanced; - fees per Print :Cue sold to publishers of free-standing inserts and direct mail, and sold to manufacturers for use in product manuals; and - annual fees for Print :Cues used on credit card statements. THE VIRTUAL NETWORK Each time our :C.R.Q. software or :Cue:C.A.T. device directs a user's web browser to a specific web page, an "L"-shaped area called the "Virtual Network" will appear on the border of the user's Internet web browser. The Virtual Network will be populated with banner advertisements and a series of tabs that, when clicked, will display information related to the website being viewed. The Virtual Network is only visible when an individual is using our technology. Banner advertisements and tabs will be customized to each user's profile, displaying information and promotional offers designed to appeal to the individual's interests. We believe that our Virtual Network, through modest usage of our :C.R.Q. and :Cue:C.A.T. technology, will generate a significant number of ad impressions and click-throughs to our advertisers' websites. We intend to generate revenues from the sale of sponsorships and banner advertisements on our Virtual Network. STRATEGY Our objective is to establish our technology as the primary means for television and cable networks, local television broadcasters, newspaper, magazine and catalog publishers, other mass media companies, as well as corporate advertisers, to link their broadcasts, publications and products to the Internet. To achieve this objective, we have adopted the following strategies: - leverage media relationships in order to support adoption and sustain our first mover advantage; - execute a nationwide roll-out of our :C.R.Q. and :Cue:C.A.T. technology; - establish our technology as the "system standard" on personal computers; - develop multiple revenue streams from multi-billion dollar advertising markets; - develop sophisticated research and data-mining capabilities as a value-added service to customers; and - pursue international markets. RECENT DEVELOPMENTS PREFERRED STOCK FINANCINGS In April 2000, we issued 5,929,364 shares of Series B preferred stock and 5,372,593 shares of Series C preferred stock to various investors, including Belo Corp., The Coca-Cola Company, The E.W. Scripps Company, Spielberg/Katz Associates, LLC, Tandy Corporation and Young & Rubicam, Inc., for aggregate consideration of $98.3 million. All outstanding shares of our preferred stock will be automatically converted into our common stock upon completion of this offering. 4 In April 2000, we issued two warrants to an affiliate of National Broadcasting Company, Inc. to purchase 3,752,445 shares and 4,505,165 shares, respectively, of our common stock at per share exercise prices of $5.00 and $10.54, respectively. We are required to issue additional warrants to National Broadcasting Company, Inc.'s affiliate with a per share exercise price of $10.54, depending on the number of shares we reserve for issuance under our 1999 Stock Option Plan. The warrants will terminate in April 2005. OTHER INFORMATION We were incorporated in Delaware in September 1998 and began operations in January 1999. Our executive offices are located at 9101 N. Central Expressway, 6th Floor, Dallas, Texas 75231, and our telephone number is (214) 292-6000. Information contained on any website to which you are directed by this prospectus does not constitute part of this prospectus. 5 THE OFFERING Common stock offered by DigitalConvergence.:Com U.S. offering................................ shares International offering....................... shares Total...................................... shares Common stock outstanding after the offering.... shares(1) Use of proceeds................................ We estimate that our net proceeds from this offering without exercise of over-allotment options will be approximately $ million. We intend to use these net proceeds: - to pay expenses related to the manufacture and distribution of our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices; - to market and promote the adoption of our technology by Internet users; - to purchase additional network server and support equipment; - to repay outstanding indebtedness; and - for general corporate purposes, including operating expenses, working capital and other capital expenditures. See "Use of Proceeds." Risk Factors................................... See "Risk Factors" and other information included in this prospectus for a discussion of factors that you should carefully consider before deciding to invest in our common stock. Proposed Nasdaq National Market symbol......... DGTL
- ------------------------ (1) Includes: - 61,113,150 shares of common stock outstanding immediately before completion of this offering; and - 21,360,537 shares of common stock that will be issued upon conversion of our preferred stock upon completion of this offering. Excludes: - 9,245,200 shares of common stock issuable upon the exercise of stock options granted by us, with exercise prices ranging from $3.31 to $9.37 per share and a weighted average exercise price of $4.17 per share, of which stock options to purchase up to shares of common stock are exercisable or will become exercisable within 60 days after the date of this prospectus; and - 8,382,350 shares of common stock issuable upon the exercise of warrants issued by us, with exercise prices ranging from $5.00 to $10.54 per share and a weighted average exercise price of $7.98 per share, of which all warrants are immediately exercisable. 6 SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes the consolidated statements of operations and consolidated balance sheet data for our business. In January 1999, we acquired from Infotainment Telepictures, Inc., our predecessor company for accounting purposes (the "Predecessor"), our television show NET TALK LIVE! THE INTERNET TALK SHOW and certain proprietary technology rights. We have included in this prospectus the financial statements and the notes related thereto of the Predecessor. The historical results presented below are not necessarily indicative of the results to be expected for any future period. For a more detailed explanation of this financial data, see "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto appearing elsewhere in this prospectus. The unaudited pro forma consolidated balance sheet data gives effect to the issuance of 48 shares of our Series A preferred stock in January 2000 for cash consideration of $151,200 and the issuance of 5,929,364 shares of our Series B preferred stock and 5,372,593 shares of our Series C preferred stock in April 2000, for cash consideration of $98.3 million and also gives effect to the use of proceeds therefrom. The unaudited pro forma, as adjusted, consolidated balance sheet data gives further effect to the following: - the automatic conversion of all of our preferred stock into 21,360,537 shares of common stock upon completion of this offering; and - the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share after deducting the estimated underwriting discounts and commissions and our estimated offering expenses and the application of the net proceeds as set forth under "Use of Proceeds." For an explanation of the number of shares used to compute net loss per share, see Note 2 of the notes to our consolidated financial statements and Note 2 of the Predecessor financial statements, each appearing elsewhere in this prospectus. PREDECESSOR FINANCIAL DATA YEAR ENDED DECEMBER 31, YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1995 1996 1997 1998 1999 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net revenues............................... $ 97 $ 109 $ 690 $ 1,636 $ 1,543 Operating expenses: Production and media costs............... 78 137 591 939 1,012 Selling, general and administrative...... 48 91 284 671 3,921 Depreciation and amortization............ -- 17 41 55 106 Research and development................. -- -- -- 36 410 ----------- ----------- ----------- ----------- ----------- Total operating expenses............... 126 245 916 1,701 5,449 ----------- ----------- ----------- ----------- ----------- Operating loss............................. (29) (136) (226) (65) (3,906) Interest income............................ -- -- -- -- 660 Interest expense........................... (3) (14) (17) (24) (731) ----------- ----------- ----------- ----------- ----------- Net loss................................... $ (32) $ (150) $ (243) $ (89) $ (3,977) =========== =========== =========== =========== =========== Basic and diluted weighted average common shares outstanding....................... 25,000 25,000 25,000 25,000 59,507,271 Basic and diluted net loss per common share.................................... $ (1.30) $ (6.02) $ (9.72) $ (3.54) $ (0.07) =========== =========== =========== =========== ===========
7
AS OF DECEMBER 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- --------- ----------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 45,540 $138,378 Total assets................................................ 46,518 139,356 Long-term liabilities....................................... 9,145 3,521 Convertible preferred stock subject to redemption........... 47,888 146,350 Total stockholders' equity (deficit)........................ (11,246) (11,246)
8 RISK FACTORS THE VALUE OF AN INVESTMENT IN DIGITALCONVERGENCE.:COM WILL BE SUBJECT TO THE SIGNIFICANT RISKS INHERENT IN OUR BUSINESS. YOU SHOULD CONSIDER CAREFULLY THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE YOU DECIDE TO PURCHASE ANY SHARES OF OUR COMMON STOCK. IF ANY EVENT DESCRIBED BELOW OCCURS, WE COULD BE ADVERSELY AFFECTED IN A MATERIAL WAY. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE, PERHAPS SIGNIFICANTLY. OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND PROSPECTS. We have a limited operating history on which to base an evaluation of our business and prospects. We were formed in September 1998 and did not begin operations until January 1999. To date, our principal source of revenues has been our television show NET TALK LIVE! THE INTERNET TALK SHOW. We have not yet commercially released our :C.R.Q. and :Cue:C.A.T. technology, which we expect to be our principal source of revenues in the future. Consequently, there is little historical financial or other information on which to evaluate our business and prospects. Accordingly, you must consider our prospects in light of the risks, expenses and difficulties frequently encountered by early stage companies in new and rapidly evolving markets. WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL IN IMPLEMENTING OUR BUSINESS STRATEGY. Our business model is new. We cannot be certain that our business model will be successful or that we can achieve or sustain revenue growth or generate any profits. This business model is unproven and depends upon our ability to, among other things: - effectively distribute our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to millions of individual Internet users; - generate acceptance of our :C.R.Q. and :Cue:C.A.T. technology by the broadcast industry, print and media companies, leading consumer companies, manufacturers, the marketing and advertising industries and individual Internet users; - gain advertiser acceptance of our Virtual Network; - maintain our current relationships with our broadcast, publishing, manufacturing, retail and marketing partners and enter into agreements with many additional distribution and promotional partners; and - generate significant revenues through usage fees, licensing fees and advertising fees. INTERNET USERS MAY NOT ADOPT OUR TECHNOLOGY. To use our technology, Internet users must download or install our :C.R.Q. software, register as a user of our technology, connect an audio cable from the television to the computer and plug the :Cue:C.A.T. device into the computer. Internet users may be unwilling to make these efforts because of their comfort with existing habits, because of general reticence about technology or the Internet, because they find the process confusing, burdensome or time-consuming or for other reasons. OUR FAILURE TO GAIN BROAD MARKET ACCEPTANCE WOULD RESULT IN OUR BEING UNABLE TO MARKET AND SELL OUR SERVICES SUCCESSFULLY. The market for technology allowing the convergence of the Internet with virtually any form of media or product is new and rapidly evolving. As is typical for any new, rapidly developing market, demand and market acceptance for newly introduced technology, products and services are subject to a high level of uncertainty and risk. The market for our technology may develop more slowly than 9 expected or become saturated with competitors, or our technology may not achieve or sustain mass media, market or public acceptance. In order to gain broad market acceptance, we must, among other things: - successfully implement and execute our business and marketing strategy, including the commercial release of our :C.R.Q. and :Cue:C.A.T. technology; - develop, maintain and enhance our brand recognition; - continue to develop and upgrade our technology, systems, products and services; - respond quickly and effectively to competitive developments; - generate sufficient revenue to achieve and maintain profitability; - maintain existing and establish new strategic partnerships; and - attract, retain and motivate qualified personnel. We cannot assure you that we will be successful in doing any of the foregoing or that our technology will gain broad market acceptance. Some or all of our targeted customers, which include broadcasters, publishers, manufacturers, merchants and direct marketers, may choose not to use our technology because Internet users do not adopt our technology, because the cost of implementing an Internet strategy utilizing our technology exceeds its perceived or actual benefits or for other reasons that we may not have anticipated. OUR FUTURE OPERATING RESULTS ARE UNCERTAIN AND WE ANTICIPATE SIGNIFICANT FUTURE LOSSES AND NEGATIVE CASH FLOW. To implement our business strategy, we plan to incur substantial costs to produce and distribute, free to the public, at least 50 million :C.R.Q. CD-ROMs and 50 million :Cue:C.A.T. devices by the end of 2001. These costs will be incurred before we derive significant revenues from this increased spending. Therefore, we expect significant operating and net losses and negative cash flow for the foreseeable future. We do not have sufficient cash to indefinitely sustain these operating losses. Further, we will need to generate significant revenues if we are to achieve and then maintain profitability. We cannot assure you that we will be able to do this. Our limited operating history and the rapidly evolving nature of our industry also make forecasting quarterly results difficult. Even if we do achieve profitability, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in the future. WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS. We will require substantial additional working capital to fund our business and the deployment of our :C.R.Q. and :Cue:C.A.T. technology and, therefore, will need to raise significant additional funds in the future. We cannot be certain that additional financing will be available to us on favorable terms when required or at all. If we raise additional funds through the issuance of equity-related or debt securities, these securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience additional dilution. WE NEED TO DEPLOY OUR TECHNOLOGY RAPIDLY SO THAT IT BECOMES THE MARKET STANDARD. We believe that we must establish the DigitalConvergence.:Com brand and our :C.R.Q. and :Cue:C.A.T. products as the leading brand names in our targeted markets in order for our technology to be widely adopted by Internet users, mass media sources and advertisers. Such acceptance will be essential to generate revenues from licensing and :Cue fees. Brand recognition will become increasingly important as more companies, some with well-established brands, offer competing products and 10 services. We expect that we will need to substantially increase our spending on programs and marketing in order to create and perpetuate strong brand loyalty and to ensure that our technology becomes the market standard. We cannot be certain that our efforts will be successful. WE ARE DEPENDENT ON THE EFFECTIVE AND RELIABLE PERFORMANCE OF OUR :C.R.Q. AND :CUE:C.A.T. TECHNOLOGY. The successful implementation and reliability of our :C.R.Q. and :Cue:C.A.T. technology on a commercial basis are crucial to our success. Our technology will not have been tested on a wide-scale basis prior to our launch date in September 2000. Technology and products as complex as ours frequently contain errors and defects, especially when first introduced to the market. Any errors or defects discovered in our :C.R.Q. or :Cue:C.A.T. technology after our launch date could: - result in our failure to achieve mass media, market or public acceptance; - divert development resources; - injure our reputation; - cause customer and Internet user dissatisfaction; - result in cancellation of strategic partnership, licensing and advertising agreements; and - result in legal actions by customers against us. Any delays caused by technological glitches in our :C.R.Q. or :Cue:C.A.T. technology could be detrimental to the implementation of our business model and our overall success. WE RELY ON OUR STRATEGIC PARTNERS TO DEPLOY AND PROMOTE OUR TECHNOLOGY. Development of our brand will depend largely on the success of our strategic partners in providing a high quality interactive Internet experience for Internet users and enhancing the Internet content and advertising value to Internet users, which cannot be assured. We expect our strategic partners to devote significant resources to the promotion and marketing of our technology, which is important to promote Internet user adoption and acceptance of our technology. However, most of our strategic partners are not contractually obligated to do so. To the extent that our strategic partners do not promote and market our technology or are ineffective in doing so, our efforts to gain broad market acceptance by Internet users will be materially adversely affected. WE MAY ENCOUNTER DIFFICULTIES IN ESTABLISHING OR MAINTAINING STRATEGIC RELATIONSHIPS. We intend to expand our operations and market presence by entering into significant additional agreements, investments, joint ventures or other strategic relationships with third parties, such as our agreements with National Broadcasting Company, Inc., Belo Corp., Tandy Corporation, Forbes Inc., Wired Magazine and The Milwaukee Journal. Each relationship will involve risks commonly encountered in such relationships, which include, among others: - the difficulty of implementing the relationship; - the potential disruption of our ongoing business; - the potential inability of our management to maximize our financial and strategic position in the relationship; - additional operating losses and expenses associated with implementing the terms of the relationship; - the maintenance of uniform standards, controls and policies; and - the possible impairment of relationships with existing partners, employees or customers. 11 We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with these relationships or that we will be able to enter into any additional relationships on terms and conditions favorable to us. OUR DEPENDENCE ON TANDY CORPORATION FOR THE PRODUCTION OF OUR :CUE:C.A.T. DEVICES COULD ADVERSELY AFFECT US. Tandy Corporation has agreed to act as a product sourcing manager for the production of our :Cue:C.A.T. devices until December 31, 2001, and then for successive one year terms if the agreement is not terminated by either party. The agreement can be terminated by either party at any time upon 90 days prior notice. Tandy currently utilizes two manufacturing facilities in Asia with which it has manufacturing subcontracts for the production of our :Cue:C.A.T. devices. Any manufacturing disruption caused by the termination of our agreement with Tandy, the termination of Tandy's subcontracts with the two manufacturing facilities or other factors would impair our ability to timely distribute a large quantity of :Cue:C.A.T. devices to the public, which in turn would impair our ability to implement our business strategy. In addition, if our agreement with Tandy is terminated for any reason, we may be unable to negotiate another manufacturing agreement for our :Cue:C.A.T. devices on terms acceptable to us or at all. Our dependence on Tandy to manage the production of our :Cue:C.A.T. devices also exposes us to additional risks, including the following: - reduced control over delivery schedules; - inadequate quality assurance by Tandy or its manufacturing subcontractors; - inadequate production capacity during periods of excess demand; and - misappropriation of our technology. THE VIRTUAL NETWORK MAY NOT BE ACCEPTED AS AN ADVERTISING MEDIUM. Many of our customers will likely have only limited experience with the Internet as an advertising and promotion medium and neither those customers nor their advertising agencies will likely have devoted a significant portion of their advertising budgets to Internet-based advertising and promotion in the past. In order for us to generate substantial revenue from our Virtual Network, advertisers and advertising agencies must direct a greater portion of their budgets to the Internet and, specifically, to the use of our Virtual Network. There can be no assurance that advertisers or advertising agencies will be persuaded to allocate increased portions of their budgets to Internet-based advertising, or, if so persuaded, that they will find Internet-based advertising on our Virtual Network to be effective. Acceptance of the Internet and our Virtual Network by advertisers and advertising agencies also depends to a large extent on growth in the number of Internet users, on the development of a large base of users of our technology having demographic characteristics attractive to advertisers and on the acceptance of new methods of conducting business and exchanging information. WE ARE DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS AND OTHERS MAY INFRINGE UPON THOSE RIGHTS. Our success is dependent on the protection of our internally developed technology, applications and products and on the goodwill associated with our trademarks, trade names, service marks and other proprietary rights. We rely on patent, trademark, trade secret and copyright laws, as well as confidentiality procedures and licensing arrangements, to protect the proprietary technology that we have developed, but we can give no assurance that such laws or procedures will provide sufficient protection to us or that others will not develop technologies that are similar or superior to ours. These risks are particularly heightened in foreign countries, in which effective patent, trademark, copyright and trade secret protection may not be available. 12 We currently hold three United States patents for our technology and have filed over 50 patent applications, both in the United States and internationally, with respect to other aspects of our business. However, there can be no assurance that our applications will be granted, that any current or future patents will not be challenged, invalidated or circumvented, or that the rights granted will provide a competitive advantage for us. Specifically, for a variety of reasons, our patent applications may be rejected by a country's patent office and never issue into a patent. Even if some of our patent applications issue into patents, the legal protection provided by these patents may not be sufficient to protect the technology described in the patent. Further, most foreign countries do not give the same patent protection to patentable inventions as does the United States. The laws of these foreign countries may place a higher burden on us to prove that our invention is patentable and may restrict the types of inventions that can be patented. For example, software based inventions may not be patentable in foreign countries. The laws may also restrict the scope of protection given to a particular invention and the legal rights and remedies available to patent holders. These laws also make it expensive for us to obtain a patent in the first place because the cost of translating a patent application into a country's native language and paying maintenance fees to keep the patent enforceable are generally greater than similar costs in the United States. As a result, obtaining patent protection for our inventions internationally is generally more difficult and costly than it is in the United States and often results in less protection than is available in the United States. We typically enter into confidentiality and non-disclosure agreements with our employees and strategic partners in an attempt to control access to our proprietary technology and information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products and technology without authorization or to develop similar technology independently through reverse engineering or other means. While we have filed applications for registration for several of our trademarks in the United States and internationally, there can be no assurance that the trademarks described in these applications will ever become registered trademarks. A country's trademark office can reject a trademark application for any number of reasons. A rejection can prevent our mark from being registered, or require us to seek registration of the mark in association with only some of the products and services originally desired. In addition, while a trademark application is pending, most countries provide for some period of time during which a third party can challenge the registration of the mark. A third party challenge would delay the registration of the mark, and defending the mark against a challenge would be costly. In addition, registering a trademark in a foreign country is often more difficult and expensive than registering the same mark in the United States. Further, if the mark is registered, the legal rights and remedies available to us in these foreign countries vary greatly from country to country, and, generally, are less than corresponding rights and remedies available in the United States. While we attempt to ensure that the quality of our trademarks and brands are maintained by the licensees of our trademark and brands, we cannot assure you that the licensees will not take actions that would adversely affect the value of our proprietary rights or reputation. Policing unauthorized use of our proprietary technology and other intellectual property rights could entail significant expense and could be difficult or impossible, particularly given the global nature of the Internet and that the laws of other countries may afford us little or no effective protection of our intellectual property. In addition, third parties may bring claims of copyright or trademark infringement against us or claim that our use of certain technology violates a patent. Furthermore, litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Any claims of infringement, with or without merit, could: - be time consuming to defend; - result in costly litigation; 13 - divert management's attention; - require us to enter into costly royalty or licensing arrangements; and - prevent us from using or distributing our technology or products. We license some technology from third parties, including operating systems and the financial and reporting systems for our business. There can be no assurance that these third-party technology licenses will continue to be available to us on commercially reasonable terms. The loss of this technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost. OUR RIGHT TO KEEP INFORMATION COLLECTED IN OUR DATABASES MAY BE CHALLENGED IN THE FUTURE. We intend to use our :C.R.Q. and :Cue:C.A.T. technology to develop and maintain a substantial database of consumer demographic information that our customers can use with our permission to conduct advertising campaigns. In particular, we intend to require each user of our technology to provide basic individual information in order to register and activate our :C.R.Q. software application. Under our privacy policy, individual user information will not be made available to outside parties and will be used internally by us only if a user gives express permission for such use. Some summary demographic data, however, may be made available to outside parties. Privacy concerns may cause users to resist providing the personal data necessary to support this profiling capability. More importantly, even the perception of security and privacy concerns, whether or not valid, may inhibit Internet user acceptance of our technology and products. Furthermore, users may bring lawsuits against us seeking to prohibit us from collecting this data. Even if without merit, lawsuits could impair Internet user acceptance of our technology and products. In addition, legal requirements may heighten these concerns if businesses must notify Internet users that the data captured after visiting certain websites may be used by marketing entities to direct product promotion and advertising to that user. We are not aware of any such laws currently in effect in the United States. Other countries and political entities, such as the European Economic Community, have adopted these types of laws. We cannot predict how the international roll-out of our technology will be affected by these types of laws. SECURITY BREACHES COULD CAUSE INTERRUPTIONS, DELAYS OR CESSATION OF THE SERVICES WE PROVIDE. We must protect our computer systems and network from physical break-ins, security breaches and other disruptions. Computer break-ins could jeopardize the security of information stored in and transmitted through our computer systems and network, which could adversely affect our ability to retain or attract customers and users, damage our reputation and subject us to litigation. Although we continue to implement security technology and establish operational procedures to prevent break-ins, damage and failures, these security measures may fail. Our insurance coverage may be insufficient to cover losses that may result from these events. WE ARE DEPENDENT ON KEY PERSONNEL. Our future success depends, in significant part, upon the continued service of our key technical, sales and senior management personnel, particularly J. Jovan Philyaw, our Chairman and Chief Executive Officer, and Michael N. Garin, our President and Chief Operating Officer. Mr. Garin has entered into an employment agreement with us. Mr. Philyaw does not have an employment agreement with us. See "Management--Employment Agreements." The loss of the services of one or more of our key personnel could have a material adverse effect on us. 14 WE MUST ATTRACT AND RETAIN ADDITIONAL PERSONNEL. Our future success depends on our ability to attract and retain highly qualified technical, sales and marketing, customer support, financial and accounting, and managerial personnel. If our technology is widely adopted, we will need to hire many additional personnel for all facets of our business. Competition for personnel in the Internet industry is intense, and there can be no assurance that we will be able to retain our key personnel or that we can attract, assimilate or retain other highly qualified personnel in the future. We expect to experience difficulty in hiring and retaining candidates with appropriate qualifications. Our failure to successfully hire and retain candidates with appropriate qualifications could have a material adverse effect on us. WE MAY BE UNABLE TO MANAGE OUR GROWTH. If our technology gains broad market acceptance, we expect to experience rapid and significant growth of our operations, including the number of our employees, especially sales and marketing personnel, the geographic scope of our activities and our service offerings. Any failure to manage growth effectively could harm our business. We may also experience difficulties meeting the public's demand for our technology and products. We cannot assure you that our systems, procedures or controls will be adequate to support the anticipated growth in our operations. THE INTEGRATION OF ANY FUTURE ACQUISITIONS MAY BE DIFFICULT AND DISRUPTIVE. Although we may seek to grow our business through strategic acquisitions from time to time in the future, we have no immediate plans or current agreements to acquire any companies or businesses. If we acquire companies in the future, however, these acquisitions will be subject to numerous risks commonly encountered in completing and integrating acquisitions, including: - diversion of management's attention from other business concerns, including the implementation of our business strategy; - potential disruption of our ongoing business; - difficulties associated with assimilating technologies, products, personnel and operations; - the assumption of known or unknown liabilities in the acquisition; and - loss of key personnel of the acquired company or business. We may not successfully overcome these risks or any other problems encountered in connection with any future acquisitions. CAPACITY CONSTRAINTS OF OR SYSTEM FAILURES BY OUR NETWORK INFRASTRUCTURE OR OF OTHER INTERNET BROWSERS' INFRASTRUCTURE MAY LEAD TO SYSTEM DISRUPTIONS. The satisfactory performance, reliability and availability of our servers and network infrastructure and users' web browsers are critical to attracting and retaining users and maintaining relationships with our customers. System interruptions that result in the unavailability of our software or slower response times for users would reduce the number of Internet sites delivered through the use of our technology and reduce the attractiveness of our products. Although we intend to expand our network infrastructure, any unexpected increase in traffic on our infrastructure may require us to further expand and adapt new network infrastructure. If we are unable to add additional hardware to accommodate increased traffic on our infrastructure, an unanticipated system disruption could result, slowing response times. In addition, any disruption to our infrastructure resulting from a natural disaster or other event could result in an interruption in our service and impair our reputation. There can be no assurance that we will be able to expand our network infrastructure on a timely basis to meet increased demand or protect our network infrastructure from disruptions. 15 OUR CUSTOMERS MAY ENCOUNTER DIFFICULTIES DUE TO INCREASED INTERNET TRAFFIC ON THEIR WEBSITES. If our technology is widely adopted by Internet users, our customers may experience difficulties managing the Internet traffic on their own websites. They may find it necessary to invest substantial resources in improving their own network capacity in order to meet the increased demand. If our customers are unable or unwilling to adequately address the increase in user traffic on their websites, users may perceive our technology and products as ineffective and may decrease or stop using our technology. WE MAY FACE RISKS FROM THE EXPANSION OF OUR OPERATIONS INTERNATIONALLY. We intend to expand our operations into international markets. As a result, we will face risks from doing business on an international basis, including, among other things: - reduced protection for intellectual property rights in some countries; - licenses, tariffs and other barriers; - difficulties in staffing and managing foreign operations; - political and economic instability; - potentially adverse tax consequences; - compliance with a wide variety of complex foreign laws and treaties; and - variance and unexpected changes in local laws and regulations. We currently anticipate opening an office in London within the next several months and plan to establish additional facilities in other parts of the world. The expansion of our operations into international markets will require significant management attention and financial resources. We cannot be certain that our investments in establishing operations in other countries will produce desired levels of revenue or profitability. WE ARE DEPENDENT ON CONTINUED GROWTH IN THE USE OF THE INTERNET. Rapid growth in the use of and interest in the Internet is a recent phenomenon, and there can be no assurance that acceptance and use of the Internet will continue to develop or that a sufficient base of users will emerge to support our customers and thus our business. Our revenues will depend largely on the widespread acceptance and use of the Internet as a source of information and entertainment and as a vehicle for commerce in goods and services. Demand for recently introduced services and products integrating other communication mediums with the Internet is very uncertain and few proven services and products exist. To the extent that the Internet continues to experience an increase in users and frequency of use by consumers resulting in increased bandwidth demands, there can be no assurance that the infrastructure for the Internet will be able to support the demands placed upon it. The Internet may not be accepted as a viable commercial medium due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity or due to increased government regulation. Changes in the pricing or quality of, or insufficient availability of, telecommunications services to support the Internet could also result in higher prices to end users or slower response times and could adversely affect use of the Internet generally and of our Internet services particularly. If use of the Internet does not continue to grow or grows more slowly than expected, or if the Internet infrastructure does not effectively support the growth that may occur, our business would be materially adversely affected. 16 WE MAY NOT BE ABLE TO IMPROVE THE PERFORMANCE, FEATURES AND RELIABILITY OF OUR TECHNOLOGY, PRODUCTS AND SERVICES FAST ENOUGH OR AT ALL TO COMPETE EFFECTIVELY WITH NEW TECHNOLOGY. The market for our technology, products and services is characterized by rapid technological developments, frequent new product introductions and evolving industry standards. The emerging character of this technology and its rapid evolution will require that we continually improve the performance, features and reliability of our technology, products and services, particularly in response to competitive offerings. There can be no assurance that we will be successful in responding quickly, cost effectively and sufficiently to these developments. In addition, the widespread adoption of new Internet technologies or standards could require substantial expenditures by us to modify or adopt our technology, products and services and could fundamentally affect the character, viability and frequency of Internet-based advertising and commerce, either of which could have a material adverse effect on us. New technology or enhancements offered by us may contain design flaws or other defects that could require costly modifications or result in a loss of confidence in our technology by customers and users, either of which could have a material adverse effect on us. WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST RELATED TECHNOLOGY, AND COMPETITIVE PRESSURES COULD HAVE A NEGATIVE IMPACT ON US. We may be unable to compete successfully against related technology, and competitive pressures could have a negative impact on us. The market for Internet convergence technology is new and rapidly evolving, and we expect competition to intensify significantly in the future as companies further utilize the advantages of the Internet. We face competition in the Internet convergence market from existing companies with related technology, including, among others: - BarPoint.com, Inc.; - Code Corporation; - Digimarc Corp.; - FastFrog.com; - MicroCast, Inc.; - NeoMedia Technologies, Inc.; - WebTV Networks, Inc.; - Wink Communications, Inc.; and - WorldGate Communications, Inc. We expect competition to increase as current competitors increase the sophistication of their products and as new competitors enter the market. Some of our competitors have, and new potential competitors may have: - more experience deploying Internet convergence software and solutions; - larger technology staffs; - larger customer bases; - more established distribution channels; - greater brand recognition; and - greater financial, marketing and other resources than we have. 17 In addition, our competitors may be able to develop or offer superior technology, products or services that achieve greater market and public acceptance or that have significantly improved functionality as compared to our existing and future technology, products and services. In addition, as we develop new products and services, we may begin competing with companies with whom we have not previously competed. It is also possible that our competitors will form alliances that may enable them to rapidly increase their market share. FUTURE GOVERNMENT REGULATIONS OF THE INTERNET COULD DECREASE DEMAND FOR OUR PRODUCTS AND SERVICES OR INCREASE OUR COST OF CONDUCTING BUSINESS. Although there are currently few laws and regulations directly applicable to the Internet, a range of new laws and regulations have been proposed, and could be adopted, covering issues such as privacy, copyrights, obscene or indecent communications and the pricing, characteristics and quality of Internet products and services. In 1996, Congress enacted the Communications Decency Act, which, among other things, purported to impose criminal penalties on anyone who distributes "obscene" or "indecent" materials over the Internet. A number of states have adopted or proposed similar legislation. Although certain provisions of the Communications Decency Act have been held to be unconstitutional, the manner in which the act and similar existing or future federal and state laws will ultimately be interpreted and enforced and their effect on our operations cannot yet be fully determined. Such laws could subject us to substantial liability. For example, we do not and cannot practically screen the contents of the various Internet sites that are accessible with our :C.R.Q. and :Cue:C.A.T. technology. Restrictive laws or regulations could also dampen the growth of the Internet generally and decrease the acceptance of the Internet as an advertising medium, and could, thereby, have a material adverse effect on us. Application to the Internet of existing laws and regulations governing issues such as property ownership, libel and personal privacy is also subject to substantial uncertainty. The television industry is subject to extensive regulation at the federal, state and local levels. In addition, legislative and regulatory proposals under consideration by Congress and federal agencies may materially affect the industry and our ability to distribute our :C.R.Q. technology to television broadcasters. There can be no assurance that current or new government laws and regulations, or the application of existing laws and regulations, will not: - subject us to significant liabilities; - significantly dampen growth in Internet usage; - prevent us from distributing our technology; or - otherwise cause a material adverse effect on us. WE COULD FACE LIABILITY FOR THE CONTENT WE PUBLISH ON OUR WEBSITE OR BROADCAST ON NET TALK LIVE! THE INTERNET TALK SHOW. As a publisher, producer and distributor of content on our website and on NET TALK LIVE! THE INTERNET TALK SHOW, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials we publish, produce or distribute. In addition, because our technology facilitates the downloading of materials from third-parties' websites, there is a potential that claims will be made against us for defamation, negligence, copyright or trademark infringement, personal injury or other theories based on the nature and content of such materials. Such claims have been brought, and sometimes successfully pressed, against Internet service providers in the past. Our insurance may not be adequate to indemnify us for all liability that may be imposed on us. 18 NO PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS AND OUR STOCK PRICE MAY FLUCTUATE AFTER THIS OFFERING. AS A RESULT, INVESTORS IN OUR COMMON STOCK MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE. Prior to this offering, there has been no public market for our common stock. We will negotiate the initial public offering price with the underwriters. The initial public offering price may not be indicative of the price at which the common stock will trade following completion of this offering. The completion of this offering provides no assurance that an active trading market for our common stock will develop or, if developed, that it will be sustained. The market price of our common stock also could be subject to significant fluctuation and may be influenced by many factors, some of which are beyond our control, including: - variations in quarterly operating results; - changes in financial estimates by securities analysts; - announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - additions or departures of key personnel; - sales of common stock in the future; - fluctuations in stock market price and trading volume, which are particularly common among highly volatile securities of Internet companies; and - investor perceptions of us and the Internet industry. As a result, investors in our common stock may not be able to resell their shares at or above the initial offering price. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation. Securities litigation could result in substantial costs and divert our management's attention and resources, which could negatively impact us. THE MARKET FOR TECHNOLOGY STOCKS IS VOLATILE. The stock market in general, and the Nasdaq National Market and the market for Internet and technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of technology companies. These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our operating performance. The trading prices of the stocks of many technology companies are at or near historical highs and reflect price-earnings ratios substantially above historical levels. There can be no assurance that these trading prices and price-earnings ratios will be sustained. CERTAIN EXISTING STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK. Following the closing of this offering, our officers, directors and affiliated entities together will beneficially own approximately % of the outstanding shares of our common stock ( % if the underwriters' over-allotment options are exercised in full). As a result, these stockholders will be able to control all matters requiring stockholder approval and, thereby, our management and affairs. Matters that typically require stockholder approval include: - the election of directors; - mergers or consolidations; - the sale of all or substantially all our assets; 19 - the amendment of our charter; and - our dissolution. This concentration of ownership may delay, deter or prevent acts that would result in a change of control, which in turn could reduce the market price of our common stock. See "Security Ownership of Principal Stockholders and Management." FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. After this offering, we will have outstanding shares of common stock. Sales of a substantial number of shares of common stock in the public market following this offering could substantially decrease the market price of our common stock. All the shares sold in this offering will be freely tradeable, other than those shares sold in this offering to any of our affiliates. The remaining %, or shares, of our total outstanding shares will become available for resale in the public market in the near future. In addition, an affiliate of the National Broadcasting Company, Inc., the holders of shares of common stock that will be issued upon conversion of the outstanding shares of preferred stock upon completion of this offering and other holders of our common stock have the right to require us to register their shares for resale after 180 days following the date of this prospectus. As restrictions on resale end or upon registration of any such shares for resale, the market price could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. See "Shares Eligible for Future Sale." INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION. The initial public offering price is substantially higher than the pro forma book value per share of our common stock. Purchasers of common stock in this offering will experience immediate and substantial dilution in the pro forma net tangible book value of their stock of $ per share assuming an initial offering price for our common stock of $ per share. See "Dilution." OUR MANAGEMENT'S BROAD DISCRETION IN THE USE OF PROCEEDS OF THIS OFFERING INCREASES THE RISK THAT WE MAY NOT USE THEM EFFECTIVELY OR THAT WE MAY USE THEM IN WAYS IN WHICH OUR STOCKHOLDERS OR THE MARKET IN GENERAL MAY NOT AGREE. We currently plan to use the net proceeds of this offering: - to pay expenses related to the manufacture and distribution of our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices; - to market and promote the adoption of our technology by Internet users; - to purchase additional network server and support equipment; - to repay outstanding indebtedness; and - for general corporate purposes, including operating expenses, working capital and other capital expenditures. Depending on future events, we may determine at a later time to use our net proceeds for different purposes. We cannot assure you that, pending their use, the proceeds will be invested to yield a favorable return. See "Use of Proceeds." WE HAVE NOT PAID DIVIDENDS AND DO NOT ANTICIPATE PAYING ANY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE. We currently intend to retain any earnings for the future operation and development of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. 20 Any future dividends may be restricted by any loan agreements that we may enter into from time to time. See "Dividends." PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD DISCOURAGE A TAKEOVER THAT STOCKHOLDERS MAY CONSIDER FAVORABLE. Our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable because they: - authorize the issuance of "blank check" preferred stock; - provide for a classified board of directors with staggered, three-year terms; - prohibit cumulative voting in the election of directors; - limit the persons who may call special meetings of stockholders; - prohibit stockholder action by written consent; and - establish advance notice requirements for nominations for election to the board of directors or for proposing matters to be approved by stockholders at stockholder meetings. Certain provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with us. In addition, purchase rights distributed pursuant our stockholder rights plan will cause substantial dilution to any person or group that attempts to acquire us without conditioning the offer on our redemption of the rights. For a detailed description of the anti-takeover provisions in our charter documents, stockholder rights plan and those provisions of Delaware law, see "Description of Capital Stock." 21 FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including, among other things: - our ability to implement our technology on a commercial basis; - our ability to obtain additional capital to finance the implementation of our technology on a commercial basis; - acceptance and adoption of our technology by the mass media, the Internet convergence market and the public; - the effectiveness and reliability of our :C.R.Q. and :Cue:C.A.T. applications; - the promotion and marketing of our technology by our strategic partners; - our dependence on intellectual property rights; - rapid technology changes within our market; - our ability to compete with related and new technologies in the Internet convergence market; - our ability to effectively integrate the operations of any companies that we may acquire in the future; and - regulation of the Internet by the government. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. "See Risk Factors." 22 USE OF PROCEEDS We expect to receive approximately $ million in net proceeds from the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share (approximately $ if the underwriters' over-allotment options are exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses, which we expect to be approximately $ . We currently expect to use the net proceeds of this offering: - to pay expenses related to the manufacture and distribution of our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices; - to market and promote the adoption of our technology by Internet users; - to purchase additional network server and support equipment; - to repay outstanding indebtedness to Infotainment Telepictures, Inc.; and - for general corporate purposes, including operating expenses, working capital and other capital expenditures. Depending on future events, we may determine at a later time to use our net proceeds for different purposes, including future acquisitions of or investments in strategic businesses or technology. Pending these uses, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade instruments. Our promissory note payable to Infotainment Telepictures, Inc. bears interest at 6.0% per annum. This promissory note and related accrued and unpaid interest will become due and payable upon completion of this offering. As of the date of this prospectus, a principal balance of $3.5 million and accrued and unpaid interest of approximately $ was outstanding. We believe that, based on our current business plan and related assumptions, the net proceeds of this offering, cash on hand and cash expected to be generated by operations will be sufficient to fund our operations and capital requirements for approximately the next 12 months after completion of this offering. However, we may be required to seek additional sources of capital prior to such time if: - our operating assumptions change or prove to be inaccurate; - we accelerate or expand the implementation of our business strategy; or - we pursue future acquisitions of or investments in strategic businesses or technology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a further discussion of our current and future capital requirements and our belief regarding our ability to meet those requirements. 23 DIVIDEND POLICY We have not declared or paid any dividends on our common stock, and we do not anticipate declaring or paying any dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings to fund the development and growth of our business. The payment of any future dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, and other factors deemed relevant by our board of directors. 24 CAPITALIZATION The following table sets forth our cash and cash equivalents and capitalization as of December 31, 1999: - on an actual basis; - on a pro forma basis giving effect to the issuance of 48 shares of our Series A preferred stock in January 2000, for total cash consideration of $151,200, the issuance of 5,929,364 shares of our Series B preferred stock and 5,372,593 shares of our Series C preferred stock in April 2000, for total cash consideration of $41.7 million and $56.6 million, respectively, and also gives effect to the use of proceeds therefrom; and - on a pro forma basis as adjusted to reflect: - the automatic conversion of 11,317,923 shares of outstanding preferred stock into 21,360,537 shares of common stock upon completion of this offering; and - the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share after deducting the estimated underwriting discounts and commissions and our estimated offering expenses and the application of the net proceeds as set forth under "Use of Proceeds." None of the columns set forth below reflects the exercise of: - 9,245,200 shares of common stock issuable upon the exercise of stock options granted by us, with exercise prices ranging from $3.31 to $9.37 per share and a weighted average exercise price of $4.17 per share, of which stock options to purchase up to shares of common stock are exercisable or will become exercisable within 60 days after the date of this prospectus; and - 8,382,350 shares of common stock issuable upon the exercise of warrants issued by us, with exercise prices ranging from $5.00 to $10.54 per share and a weighted average exercise price of $7.98 per share, of which all warrants are immediately exercisable. You should read this table together with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and the notes thereto appearing elsewhere in this prospectus.
AS OF DECEMBER 31, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ---------- ----------- (IN THOUSANDS) Cash and cash equivalents................................... $ 45,540 $138,378 $ ======== ======== ======== Short-term and long-term debt............................... 9,152 3,529 Series A convertible preferred stock subject to redemption................................................ 47,888 48,039 Series B convertible preferred stock subject to redemption................................................ -- 41,683 Series C convertible preferred stock subject to redemption................................................ -- 56,627 Stockholders' equity (deficit): Common stock, $0.01 par value; 110,250,000 shares authorized, 61,113,150 shares issued and outstanding actual; 125,000,000 shares authorized, 61,113,150 shares issued and outstanding pro forma; shares authorized, shares issued and outstanding pro forma as adjusted....................... 611 611 Additional paid-in capital................................ 517 517 Excess of purchase price over Predecessor cost of net liabilities acquired.................................... (8,397) (8,397) Accumulated deficit....................................... (3,977) (3,977) -------- -------- -------- Total stockholders' equity (deficit).................... (11,246) (11,246) -------- -------- -------- Total capitalization................................ $ 45,794 $138,632 $ ======== ======== ========
25 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock then outstanding. Our net tangible book value at December 31, 1999, would have been $ million, or $ per share of common stock, after giving effect to the automatic conversion of 11,317,923 shares of outstanding preferred stock into 21,360,537 shares of common stock upon completion of this offering. After giving effect to the sale of the shares of common stock in this offering at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value at December 31, 1999, would have been $ million, or $ per share. This represents an immediate increase in the pro forma net tangible book value of $ per share to existing stockholders and an immediate and substantial dilution of $ per share to new investors purchasing common stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Net tangible book value per share at December 31, 1999.... $ [Increase] [Decrease] per share attributable to preferred stock conversion........................................ -------- Pro forma net tangible book value per share before this offering................................................ Increase per share attributable to new investors.......... -------- Pro forma net tangible book value per share after this offering.................................................. -------- Dilution in pro forma net tangible book value per share to new investors(1).......................................... $ ========
- ------------------------ (1) If the underwriters' over-allotment option is exercised in full, dilution per share to new investors will be $ . The following table summarizes on a pro forma basis as of December 31, 1999, the total number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $ per share and before deducting underwriting discounts and commissions and estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- -------- ----------- -------- ------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Existing stockholders............... % $ % $ Existing stockholders--conversion of preferred stock................... New investors....................... ----------- ------- ----------- ------ Total............................... 100.0% $ 100.0% =========== ======= =========== ======
The foregoing discussion and tables assume no exercise of outstanding stock options or warrants. As of the date of this prospectus, there were outstanding: - stock options granted by us to purchase 9,245,200 shares of common stock at a weighted average exercise price of $4.17 per share, of which stock options to purchase up to shares of 26 common stock are exercisable or will become exercisable within 60 days after the date of this prospectus; and - warrants issued by us to purchase 8,382,350 shares of common stock at a weighted average exercise price of $7.98 per share, of which all warrants are immediately exercisable. To the extent that any of these stock options or warrants are exercised, there will be further dilution to new investors. See "Capitalization" and Note 8 to our consolidated financial statements included elsewhere in this prospectus. 27 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of operations data for the year ended December 31, 1999, and the consolidated balance sheet data as of December 31, 1999, are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected statements of operations data for the years ended December 31, 1998 and 1997 and the balance sheet data as of December 31, 1998 are derived from the audited financial statements of the Predecessor, included elsewhere in this prospectus. The balance sheet data as of December 31, 1997 are derived from the audited financial statements of the Predecessor but are not included in this prospectus. The selected statement of operations data for the year ended December 31, 1995 and the balance sheet data as of December 31, 1995 and 1996 are derived from our unaudited financial statements that include, in our opinion, all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation of the financial condition at that date and results of operations for such period. The historical results presented below are not necessarily indicative of the results to be expected for any future period. The selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements, the Predecessor financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus.
PREDECESSOR FINANCIAL DATA YEAR ENDED DECEMBER 31, YEAR ENDED --------------------------------------------------------- DECEMBER 31, 1995 1996 1997 1998 1999 ------------ ------------ ------------ ------------ ------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net revenues........................................ $ 97 $ 109 $ 690 $ 1,636 $ 1,543 Operating expenses: Production and media costs........................ 78 137 591 939 1,012 Selling, general and administrative............... 48 91 284 671 3,921 Depreciation and amortization..................... -- 17 41 55 106 Research and development.......................... -- -- -- 36 410 ----------- ----------- ----------- ----------- ----------- Total operating expenses........................ 126 245 916 1,701 5,449 ----------- ----------- ----------- ----------- ----------- Operating loss...................................... (29) (136) (226) (65) (3,906) Interest income..................................... -- -- -- -- 660 Interest expense.................................... (3) (14) (17) (24) (731) ----------- ----------- ----------- ----------- ----------- Net loss............................................ $ (32) $ (150) $ (243) $ (89) $ (3,977) =========== =========== =========== =========== =========== Basic and diluted weighted average common shares outstanding....................................... 25,000 25,000 25,000 25,000 59,507,271 Basic and diluted net loss per common share......... $ (1.30) $ (6.02) $ (9.72) $ (3.54) $ (0.07) =========== =========== =========== =========== =========== PREDECESSOR FINANCIAL DATA AS OF DECEMBER 31, AS OF --------------------------------------------------------- DECEMBER 31, 1995 1996 1997 1998 1999 ------------ ------------ ------------ ------------ ------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................... $ 143 $ 87 $ -- $ 175 $ 45,540 Total assets........................................ 143 281 273 381 46,518 Accounts payable and accrued liabilities............ 2 11 41 85 722 Short-term borrowings, including current portion of long-term debt(1)................................. 173 312 227 651 10 Long-term liabilities............................... -- 1 3 3 9,145 Series A convertible preferred stock subject to redemption........................................ -- -- -- -- 47,888 Accumulated deficit................................. (32) (183) (426) (514) (3,977) Total stockholders' deficit......................... (32) (183) (426) (514) (11,246)
- ------------------------------ (1) As of December 31, 1995, 1996 and 1997, short-term borrowings consisted entirely of indebtedness to an officer of the Predecessor. As of December 31, 1998, short-term borrowings consisted of $197,919 of indebtedness to an officer of the Predecessor and $452,900 of advances from a stockholder of ours. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE PREDECESSOR FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. GENERAL We are a company whose technology allows media companies, manufacturers and virtually all organizations to instantly and easily link their products with web pages deep within their websites. Until we release our technology, we believe that it is not possible for these companies to realize the full value of their Internet efforts, because their websites have to be entered through their front pages, often making access to a desired web page time-consuming and difficult. Our :C.R.Q. software will send an Internet user's web browser to a specific web page in response to our proprietary digital signal called a ":Cue" transmitted by a television broadcast. Our :C.R.Q. software also will send an Internet user's web browser to a specific web page when an Internet user utilizes our :Cue:C.A.T. device to scan our proprietary codes called "Print :Cues" on print media or to scan existing bar codes on consumer products. We believe that our technology will empower media companies and corporate advertisers to enhance their content and to transform television broadcasts or other electronic media, print media or items bearing Print :Cues or bar codes into powerful new advertising, promotional or e-commerce opportunities. Our technology will be free to the public and will allow Internet users to quickly and easily obtain relevant information and conduct e-commerce activities by eliminating the input of lengthy website addresses and time-intensive web navigation. From our inception in September 1998 through the end of that year, we had no operating activity. In January 1999, we acquired from Infotainment Telepictures, Inc. the television show NET TALK LIVE! THE INTERNET TALK SHOW and certain proprietary technology rights in exchange for an unsecured promissory note with a principal amount of $8,000,000. Because of this transaction, we have included in this prospectus the financial statements of Infotainment Telepictures, Inc. as our predecessor for accounting purposes. For the year ended December 31, 1999, we generated limited revenues from our television show NET TALK LIVE! THE INTERNET TALK SHOW. Since our inception, we have conducted research, developed our Internet convergence technology and established sales and distribution outlets for our technology by educating potential partners in the media and consumer products industries about how to adopt and utilize our technology. We plan to achieve widespread distribution and adoption of our technology through the strategic partnerships that we have established with a major television network, local station groups, cable networks, publishers, merchants and direct marketers and additional strategic partnerships that we intend to establish. We intend to initiate a nationwide roll-out of our technology beginning in September 2000 and plan to distribute, free to the public, at least 50 million :C.R.Q. CD-ROMs and 50 million :Cue:C.A.T. devices by the end of 2001. Although the initial roll-out of our technology will be limited to the United States, we believe that there is a substantial market for our technology outside the United States. Our :C.R.Q. and :Cue:C.A.T. technology does not require foreign language translations or technical modifications to be compatible with specific broadcasting or recording technology used in foreign markets. Instead, international broadcasters, publishers, advertisers and merchants can place our :Cues in any type of electronic or printed medium and direct Internet users to websites using any language. We intend to expand our international presence aggressively by adding direct sales and marketing personnel and establishing strategic relationships with international partners to capitalize fully on international market opportunities. We have hired a president of our International Group and anticipate opening an office in London within the next several months. We intend to commence international deployment of our technology during 2001. 29 REVENUE SOURCES We have divided initial applications for our technology into four groups from which we expect to derive revenue: - broadcasting and electronic media; - print media, bar-coded products and other :Cue:C.A.T. applications; - Internet advertising; and - database research and marketing. Our initial pricing model for each application is described below. We will, however, periodically review our pricing model for each application, and we expect to make adjustments in our pricing model from time to time. BROADCASTING AND ELECTRONIC MEDIA. Our :C.R.Q. technology works with any television broadcast, cable programming, or other electronic media such as DVDs, videotapes and CD-ROMs, and will offer a range of benefits to broadcasters. With our :C.R.Q. technology, television and cable broadcasts become an instant and direct link to the Internet. Broadcasters will be able to offer more engaging interactive programming to their viewers and more valuable interactive ads to their corporate advertisers. We expect to derive our revenue from the following sources: - fees from the sale of advertising :Cues to broadcast networks, cable networks and local television stations; - a fixed fee per sale completed by home shopping networks as a result of using our :Cues; and - fees from annual licenses to cable networks for the use of :Cues in content. We intend to sell :Cues to networks and television stations, who will resell them to advertisers. We expect to limit the number of advertising :Cues that each broadcast network, cable network or local television station can sell for use in advertising spots each day and to charge a flat fee per :Cue. Revenues from the sale of advertising :Cues will be recognized upon notification that the :Cue has been transmitted. Revenues generated from the sale of :C.R.Q. licenses to cable operators will be recognized ratably over the respective contract period, which will generally be 18 months. PRINT MEDIA, BAR CODED PRODUCTS AND OTHER :CUE:C.A.T. APPLICATIONS. By inserting a Print :Cue in any print media or by linking existing bar codes for consumer products to websites, our technology enables virtually any consumer product or any printed media, including magazine articles, catalogs, print advertisements, newspapers, free-standing inserts, billing invoices, bank statements and newsletters, to become instantly interactive with the Internet. With the swipe of a :Cue:C.A.T. device over a Print :Cue or a bar code, a user can gain immediate access to in-depth information that was not previously included in the printed version or on the consumer product due to space limitations. We expect that publishers will be able to attain higher ad revenues due to increased traffic on the website and generate additional e-commerce opportunities for their advertisers. We also expect that manufacturers will be able to transform the billions of consumer products on retailers' shelves into powerful advertising, promotional and e-commerce opportunities. For most print applications, we intend to allow publishers to use Print :Cues at no cost for the first several months after launch, until we have achieved widespread distribution of our :Cue:C.A.T. devices to Internet users. We are completing a massive database that links existing UPC, ISBN, EAN and other bar codes found on consumer products to web pages. We plan to activate substantially all of these bar 30 codes when our :Cue:C.A.T. technology is launched and provide manufacturers with one free year in which to evaluate the results. We expect to derive our revenue from the following sources: - after the first few months, fees from licenses to magazine and newspaper publishers for the use of Print :Cues for content enhancement purposes; - after the first few months, fees from the sale of any advertising Print :Cues in any print media, including newspapers and magazines; - a fixed fee per sale completed by catalog shoppers as a result of using our Print :Cues; - annual fees for Print :Cues assigned by credit card issuers to their cardholders for tracking accounts online; - fees per Print :Cue sold to publishers of free-standing inserts and direct mail and sold to manufacturers for use in product manuals; - after the first anniversary of our launch date, annual fees for bar codes on consumer products that are Internet Enhanced; and - commissions on increased revenues resulting from the use of Print :Cues in classified ads. Revenues from the sale of advertising Print :Cues will be recognized upon notification from the respective publisher that the Print :Cues were incorporated into publications during the applicable publication period. Revenues generated from the sale of content Print :Cues will be on an annual license basis, regardless of the number of content Print :Cues used, and will be recognized ratably over the respective contract period, which is generally 12 months. Revenues generated from the licensing of bar codes will be based upon a fixed annual fee per bar code and will be recognized annually on a straight-line basis. INTERNET ADVERTISING. Each time our :C.R.Q. software launches a user's personal computer to a web page, our Virtual Network will border the user's Internet browser window. The Virtual Network will be populated with banner advertisements and a series of tabs that, when clicked, will display information related to that subject. We expect to sell up to eight banner ads along the Virtual Network's vertical frame. We expect to charge advertisers a fee and will remit 30% of the total advertising revenues to the agency that will sell the banner ads on our behalf as well as 10-15% to advertising agencies representing the corporate advertisers. Revenue from the sale of banner advertisements on the Virtual Network, net of commissions, will be recognized ratably over the period in which the advertisements are displayed. DATABASE RESEARCH AND MARKETING. We intend to require each user of our technology to provide basic individual information in order to register and activate our :C.R.Q. and :Cue:C.A.T. technology. Additionally, we plan to offer promotional and other incentives to encourage users to provide more detailed individual information. We plan to use this information to develop a substantial database of demographic information reflecting users' interests and preferences, and tracking Internet behavior related to :Cues and viewing patterns of Internet Enhanced content. This information will be used to better tailor our Virtual Network banner ads and special vendor offers to each user, as well as to generate summary demographic data reports for advertisers and merchants. These firms would use our reports and data collection expertise to tailor advertising campaigns, banner ads and website content to appeal to targeted consumer segments. Under our privacy policy, individual user information will not be made available to outside parties and will only be used internally by us with a user's express permission. Some summary demographic data will be provided to purchasers of :Cues free of charge. For more complex or detailed demographic data, we intend to charge advertisers a flat fee per month, plus a small charge per record. 31 EXPENSE COMPONENTS Costs associated with our business primarily include product costs, selling, general and administrative expenses, depreciation and amortization and research and development. Although we expect these costs to continue to increase over time, we expect each of them to decrease as a percentage of revenues as revenues increase after we roll out our :C.R.Q. and :Cue:C.A.T. technology. Product costs consist of the costs of manufacturing and distributing our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices. Our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices will be distributed free of charge to the public. In some cases, we expect that certain of the costs of manufacturing and/or distributing :C.R.Q. CD-ROMs and :Cue:C.A.T. devices will be borne or defrayed by our strategic partners and by advertisers who advertise directly on :Cue:C.A.T. devices. Costs incurred in manufacturing and distributing the :C.R.Q. CD-ROMs and :Cue:C.A.T. devices will be charged to expense as incurred. Selling, general and administrative expenses consist of: - payroll and related expenses for executive, sales and marketing and administrative personnel; - corporate facilities expenses; - professional services expenses; - maintenance costs for our database and network infrastructure; - marketing expenses; - travel expenses; and - other general corporate expenses. We expect that in support of the expected growth of our business and our operations as a public company, selling, general and administrative expenses will continue to increase for the foreseeable future. Depreciation and amortization expenses consist primarily of the amortization of goodwill associated with business acquisitions, as well as fixed asset depreciation. We anticipate larger depreciation and amortization expenses in the foreseeable future as we continue to expand our network infrastructure. For example, we anticipate using a portion of the net proceeds from this offering to purchase additional network server and support equipment to prepare for the anticipated launch of our technology in September 2000. Research and development expenses include costs incurred by us to develop, enhance, and develop new applications for our technology. These expenses consist primarily of salaries and benefits for our Technology Group, systems personnel and consultants. We intend to continue to enhance our technology and to develop new uses and other products that utilize our technology. Accordingly, we expect that our product research and development expenses will continue to increase for the foreseeable future. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 REVENUES: During the year ended December 31, 1999, we derived $1.5 million in revenue from the sale of advertisements and sponsorships on our show, NET TALK LIVE! THE INTERNET TALK SHOW. Two customers accounted for approximately 81% and 17% of our annual revenues, respectively. 32 OPERATING EXPENSES: PRODUCTION AND MEDIA COSTS. Production and media costs were $1.0 million, or 66%, of revenue for the year ended December 31, 1999. Production and media costs consist of the personnel and other costs associated with producing, editing and airing NET TALK LIVE! THE INTERNET TALK SHOW. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were comprised primarily of payroll and related expenses for executive and administrative personnel, facilities expenses, professional service expenses and other general corporate expenses. These expenses were $3.9 million, or 254%, of total revenues for the year ended December 31, 1999. Employee related costs were $2.0 million, or 51%, of the total selling, general and administrative expenses for the year. We significantly increased our employee expenses during the fourth quarter of the year when our employee base increased from approximately 22 at September 30, 1999 to 61 at December 31, 1999. Selling, general and administrative expenses also include $380,300 in legal fees primarily associated with the filing of patents and trademarks to enhance our intellectual property and $529,400 in travel costs primarily incurred in the second half of the year in connection with travel to meetings with potential customers and investors. DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $105,721, or 7%, of total revenues during the year ended December 31, 1999. We purchased $616,000 of property and equipment and capitalized software during the year ended December 31, 1999. The majority of these assets were purchased during the later portion of the year and did not have a full year of depreciation expense in the year ended December 31, 1999. RESEARCH AND DEVELOPMENT. Research and development costs during the year ended December 31, 1999 were $410,017. These costs primarily consist of payroll and related expenses associated with technology personnel for the development of our :C.R.Q. software and :Cue:C.A.T. device. OTHER INCOME (EXPENSE): INTEREST INCOME. Interest income of $660,498 was recorded during the year ended December 31, 1999. The income was earned from the investment of the proceeds net of fees and cash issuance costs of $48.3 million raised from the issuance of the Series A preferred stock. These proceeds were primarily received by us in October, November and December of 1999; therefore, only a few months of interest was earned on the proceeds. INTEREST EXPENSE. Interest expense of $731,355 was recorded during the year ended December 31, 1999. The interest primarily related to the $8.0 million promissory note issued to the Predecessor in January 1999 for the purchase of NET TALK LIVE! THE INTERNET TALK SHOW and certain proprietary technology rights. Additional interest expense related to $2.5 million of debentures issued by us in January 1999 to certain stockholders. RESULTS OF OPERATIONS-PREDECESSOR YEARS ENDED DECEMBER 31, 1997 AND 1998 REVENUES: The Predecessor's revenues increased 137% from $689,967 in 1997 to $1,636,422 in 1998. The increase was primarily related to $813,400 in additional sponsorships sold on the Predecessor's television show, NET TALK LIVE! THE INTERNET TALK SHOW, in 1998. Additionally, the Predecessor had $259,300 more revenue related to infomercial productions in 1998 than in 1997. 33 OPERATING EXPENSES: PRODUCTION AND MEDIA COSTS. Production and media costs increased $348,764, or 59%, from $590,704 in 1997 to $939,468 in 1998. This increase was primarily related to higher revenues recorded during the year ended December 31, 1998. As a percentage of revenues, production and media costs decreased from 86% in 1997 to 57% in 1998. The decrease in costs as a percentage of revenues was primarily related to the higher margin revenue recorded in 1998 related to the sale of sponsorships on the Predecessor's show, NET TALK LIVE! THE INTERNET TALK SHOW. There are very few incremental costs associated with the sale of advertising and sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW in comparison to the costs associated with the production of an infomercial. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 136% from $284,370 in 1997 to $670,953 in 1998. As a percentage of revenues these expenses were constant at 41%. The largest increase in selling, general and administrative expenses was related to employee-related costs which increased by $171,000 from 1997 to 1998. The increase in employee-related costs comprised 44% of the total increase in selling, general and administrative expenses for the years ended December 31, 1997 and 1998, and were largely related to supporting the growth of NET TALK LIVE! THE INTERNET TALK SHOW. Facilities expense, professional service expense and other general corporate expenses increased from 1997 to 1998 to support the growth of the Predecessor. DEPRECIATION AND AMORTIZATION. Depreciation expense increased $14,393 from $40,515 in 1997 to $54,908 in 1998 primarily due to the addition of certain studio and phone equipment related to the Predecessor's NET TALK LIVE! THE INTERNET TALK SHOW. RESEARCH AND DEVELOPMENT. Research and development costs incurred during the year ended December 31, 1998 were related to the Predecessor allocating certain personnel resources toward the development of certain technology designed to converge the radio, television and Internet mediums. OTHER INCOME (EXPENSE): INTEREST EXPENSE. Interest expense is primarily related to accrued interest on certain advances from an officer of the Predecessor. Additionally, during the fourth quarter of 1998, the Predecessor issued a note payable to one of our stockholders. The note was repaid in January 1999 in conjunction with our purchase of the Predecessor's assets. LIQUIDITY AND CAPITAL RESOURCES Our principal source of liquidity at December 31, 1999 included cash and cash equivalents of $45.5 million. Since inception, we have financed our cash requirements for investments in property and equipment and operations primarily through the sale of $2.5 million of debentures in January 1999 and the sale of $50.1 million of preferred stock in the fourth quarter of 1999. Working capital at December 31, 1999 was $45.0 million. At December 31, 1999, we had an accumulated deficit of $4.0 million. Our operating activities during the year ended December 31, 1999 utilized cash of $3.0 million. The net cash utilized during this period was to fund our growth in employee costs, infrastructure and operations, research and development and legal costs incurred in registering our intellectual property rights in the United States and abroad. Capital expenditures during 1999 consisted of purchases of equipment, furniture and software of $616,000. A source of cash for investing activities in 1999 included the cash acquired in the acquisition of entities under common control of $165,278. In January 1999, we issued a promissory note for $8.0 million to purchase substantially all of the assets of Infotainment Telepictures, Inc., consisting of rights, title and interest in certain intellectual 34 property and NET TALK LIVE! THE INTERNET TALK SHOW. We made voluntary principal payments of $1.5 million on this note in October 1999 and $3.0 million in principal and $584,137 in accrued interest in April 2000. We currently anticipate using a portion of the proceeds of this offering to repay the remaining balance of this promissory note. Net cash provided by financing activities during the year ended December 31, 1999 was $48.8 million. Net cash provided by financing activities primarily consisted of $2.5 million of cash proceeds from the issuance of debentures in January 1999, $48.3 million in cash proceeds, net of fees and cash issuance costs, from the issuance of Series A preferred stock in September 1999 including $252,000 cash received as a subscription for Series A preferred stock that was issued subsequent to year end. Although we currently have no material commitments for capital expenditures, we anticipate a significant increase in our capital expenditures and lease commitments during the year ending December 31, 2000, consistent with anticipated growth in operations, infrastructure and personnel during 2000. This will include approximately $20 million in anticipated expenditures on hardware and software to build the network infrastructure necessary to service anticipated Internet traffic during the first twelve months following our product launch in September 2000. Additionally, in fiscal 2000, we expect to spend approximately $1.4 million for costs associated with the build-out and furnishing of our new corporate offices. Also, during the second half of fiscal 2000 we expect to spend approximately $125.0 million to manufacture and distribute at least 20 million :C.R.Q. CD-ROMs and 12 million :Cue:C.A.T. devices by the end of 2000. In February 2000, we issued a letter of credit to Tandy Corporation for approximately $15.5 million as security for our payment obligations to Tandy Corporation for the manufacture of our :Cue:C.A.T. devices. In April 2000, we issued 5,929,364 shares of Series B preferred stock to various investors for aggregate consideration of approximately $41.7 million and 5,372,593 shares of Series C preferred stock to various investors for aggregate consideration of approximately $56.6 million. We have used $6.3 million of the proceeds to repay a portion of our outstanding indebtedness and intend to use the remaining proceeds to pay expenses related to the manufacture and distribution of our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices and for general corporate purposes. We currently anticipate that the net proceeds of this offering, together with cash on hand and cash expected to be generated from operations, will be sufficient to meet our anticipated needs for working capital and capital expenditures for approximately the next 12 months after the date of this prospectus. However, we may need to raise additional funds prior to the expiration of such period if, for example, we accelerate the rollout of our technology or pursue other acquisitions, or we pursue business or technology acquisitions or experience operating losses that exceed our current expectations. In any event, after such time we will need to raise significant additional capital. If we raise such funds through the issuance of equity, equity-related or debt securities, such securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience additional dilution. We cannot be certain that additional financing will be available to us on acceptable terms when required, or at all. NON-CASH CHARGES During the second quarter of the year ending December 31, 2000, we anticipate recording a one-time charge to earnings in the amount of $37.2 million to reflect the difference between the respective issuance price of $7.03 and $10.54 and the estimated fair market value of the Series B and C preferred stock, respectively, of $11.99, as determined by a contemporaneous independent appraisal. 35 During February and April 2000, we issued 1,128,000 and 595,000 stock options, respectively, to various employees at exercise prices ranging from $5.00 to $9.37 per option. The February options were issued at the fair market value of the common stock on the date of grant. The April options were issued below the fair market value on the dates of grant. We will recognize compensation expense for the difference between the fair market value at the dates of grant of $10.90 per share, as determined by a contemporaneous, independent appraisal, and the exercise price on the dates of grant. The compensation will be deferred and will be amortized ratably over the applicable vesting period for the April stock options. In April 2000, we issued two warrants to an affiliate of National Broadcasting Company, Inc. to purchase 3,752,445 and 4,505,165 shares, respectively, of common stock at per share exercise prices of $5.00 and $10.54, respectively. We valued the warrants using the Black-Scholes option-pricing model at $31.7 million and $31.4 million, respectively, based on the following assumptions: - volatility of 70.0%; - risk free interest rate of 6.5%; - expected life of five years; and - zero dividend yield. We recognized a one-time charge to earnings for the fair market value of these warrants on the date of grant. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133, which will be effective for us for the fiscal year and quarters beginning after June 15, 2000, requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. During June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT 133. The Statement defers the effective date of FAS 133 to fiscal 2001. We are evaluating FAS 133 but do not expect the potential effect of adopting the provisions of SFAS No. 133 to have a significant impact on our financial position, results of operations, and cash flows. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the Commission. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. We believe that SAB 101 will not have a material effect on our financial statements. 36 BUSINESS OVERVIEW We are a company whose technology allows media companies, manufacturers and virtually all organizations to instantly and easily link their products with web pages deep within websites. Until we release our technology, we believe that it is not possible for these companies to realize the full value of their Internet efforts, because their websites have to be entered through their front pages, often making access to a desired web page time-consuming and difficult. Our technology includes our :C.R.Q. software and our :Cue:C.A.T. device, which will enable a broadcast viewer or reader of print media to immediately access relevant information or conduct e-commerce activities on a web page deep within a website without inputting lengthy website addresses or conducting time-intensive website navigation. Our :C.R.Q. software will respond to a digital signal, referred to as a ":Cue," currently transmitted through an audio cable from any television or other electronic media source, and direct a user's personal computer to open any specified web page regardless of how deep the web page is within a website. Our :Cue:C.A.T., a hardware device similar in size to a computer mouse, will enable an Internet user to scan our proprietary codes in print media, referred to as "Print :Cues," or existing bar codes on consumer products to link the user to a designated web page. In addition, each time a user uses our technology to open a web page, our Virtual Network will border the user's browser. The Virtual Network will display banner advertisements with special vendor offers targeted to the preferences of each user and will also have a series of tabs that, when clicked, will display information related to the specified subject. Our :C.R.Q. and :Cue:C.A.T. technology and our Virtual Network will be available free to consumers. We believe that our technology will empower media companies and corporate advertisers to enhance their content and to transform television broadcasts or other electronic media, print media or items bearing Print :Cues or bar codes into powerful new advertising, promotional or e-commerce opportunities. We plan to achieve widespread distribution and adoption of our technology through our strategic partnerships with major television and cable networks, local station groups, magazine and newspaper publishers, merchants and direct marketers. We intend to initiate a nationwide roll-out of our technology in September 2000 and plan to distribute, free to the public, at least 50 million :C.R.Q. CD-ROMs and 50 million :Cue:C.A.T. devices by the end of 2001. MARKET OPPORTUNITY The Internet has emerged as a global medium for communications, information and commerce and is dramatically changing the competitive environment in which companies operate. Companies are investing billions of dollars in the development, execution and promotion of Internet strategies. The growth in both the number of Internet users and the volume of e-commerce creates significant challenges and opportunities for businesses across multiple industries. Currently, we believe that advertising for websites through traditional mass media is limited by an Internet user's ability to recall a website home page address and, once at the home page, to navigate the website through perhaps multiple web pages to reach the desired destination. The proliferation of websites, as well as of web pages within each corporate website, creates a fundamental challenge of facilitating interaction with Internet users. We believe that our technology provides powerful solutions for a number of these challenges as well as a means to take advantage of new opportunities. BROADCAST MEDIA Television is one of the most pervasive communications media in society today. According to Nielsen Media Research, there were approximately 99 million television households in the United States in August 1999. Television advertising is generally considered to be one of the most effective methods of building brand and general consumer awareness of products and services. McCann 37 Erickson, Inc., a market research firm, estimates that $47 billion was spent on television advertising in 1998. Approximately $91 billion of goods and services were purchased through direct response television programming and advertising in 1998 according to the Direct Marketing Association. Nevertheless, traditional television broadcasting, cable and direct broadcast satellite television systems do not provide an integrated means for viewers to respond to programs and advertisements without the addition of set-top boxes or other add-on technologies. Although television is pervasive and effective in reaching mass audiences, television programmers face several challenges. Advertisers are increasingly seeking highly targeted marketing programs that will generate measurable returns on investment. This trend toward targeted marketing is intensifying the pressure on television programmers to efficiently convert viewers into customers of its advertising clients. In addition, as the reach and popularity of television has grown, so too has the amount of programming available to viewers. As television becomes more fragmented and the competition for viewers increases, networks and other television programmers must find new ways to attract viewers and increase viewer loyalty. Viewer loyalty determines network ratings that ultimately determine advertising spot rates. We believe that broadcasters view the Internet as an ideal interactive medium through which they can provide consumers with greater content, appeal to individualized interests and create opportunities for commerce. Broadcasters are devoting increasing resources to website development, content and promotion. The reach of television and growth of the Internet create an opportunity for broadcasters to drive viewers either to their websites or to the websites of their advertising clients. According to 24/7 Media, in January 1999, there were 33 million U.S. households connected to the Internet, of which 23 million households had a computer in the same room as their television set. Furthermore, 18 million households, or 55% of all households connected to the Internet, use the Internet while watching television. PRINT MEDIA Print media permeate the consumer world in the form of newspapers, magazines, catalogs, coupons and direct mail and represent a larger share of total advertising and marketing expenditures than broadcast media. According to industry sources, advertising expenditures made in the following print media categories in the U.S. in 1998 were: - $87 billion on goods purchased from print catalogs; - $40 billion on direct mail advertising; - $44 billion on newspaper display and classified advertising; and - $14 billion on advertising in trade and consumer magazines. Traditional publishers are experiencing competitive pressures from the electronic distribution of information and content. Information in print is static and often out of date by the time it reaches the reader; as a result, consumers increasingly access the Internet for more timely or relevant information. We believe that publishers are concerned about the growing competitive threat posed by web-based classified advertising. Classified advertising accounted for approximately 40% of all advertising revenues for newspaper publishers in 1998. Publishers are investing heavily in Internet strategies to leverage content, create cross-selling synergies, maintain readership and develop new revenue streams. CONSUMER PRODUCTS The use of bar codes on consumer products is widespread. These codes appear on everything from food and other consumer products to drivers' licenses and prescription drug containers. Currently, there are over 40 different bar code topologies in commercial use, including UPC, ISBN and EAN. There 38 are tens of millions of active bar codes in use. Currently, these bar codes are used primarily to track inventory, assist in quality control, track product pricing and perform other internal corporate tasks. To date, no technology has been widely adopted that connects the millions of bar codes to the Internet. USER WEB EXPERIENCE While the growth of the Internet has attracted Internet users at an unprecedented pace, the volume of online information has made it increasingly difficult for users to navigate the Internet effectively and efficiently. The total number of websites on the Internet grew 79% in 1999 to 3.6 million sites. Internet users currently rely on Internet search engines or directories of websites and web pages to locate information and make online purchases. Search engines typically require users to construct keyword or complex search strings that often result in hundreds or thousands of matches. In addition, we believe that these methods often result in incomplete searches. The difficulty of online navigation does not end when the desired website is found. Once there, users often face the difficult task of searching an overwhelming amount of information. Major corporate websites contain many layers of web pages, which often make finding relevant information a frustrating and time-consuming experience. As websites continue to proliferate and grow in size and complexity, we believe that users will increasingly need a quicker, more direct link to their intended destinations. Search engines will continue to have useful applications on the Internet, but we believe that users want a more precise tool that takes them directly to a specific web page deep within a website. THE DIGITALCONVERGENCE.:COM SOLUTION Our technology enables companies to implement new Internet strategies that enhance content, improve the targeting and overall effectiveness of advertising and generate new revenue sources. Our technology enables users of virtually any form of media or product to interact instantly and easily with the Internet to obtain relevant information or conduct e-commerce activities. We believe that our technology will provide the solution to the desire of broadcasters, publishers, merchants and advertisers for a simple, cost-effective means of leveraging the Internet across all forms of traditional media. INTERNET ENHANCED BROADCASTING Our :C.R.Q. software responds to a :Cue from any television or other mass media source and directs a user's personal computer to open any specified web page within a website. A broadcast can be Internet Enhanced by simply embedding a :Cue in the broadcast. Unlike current television content and advertisements in which a website address is briefly displayed on the television screen, Internet Enhanced programming will load the web page on a user's web browser for immediate access or store the web page address for later use. With our technology, viewers will no longer need to recall and manually enter a website address. Broadcasters can now offer Internet Enhanced interactive programming to their viewers and more valuable interactive ads to their advertisers and advertising agencies. For example, news programming can become instantly interactive, allowing local stations to enhance their content, capture Internet advertising revenues and use their scale and promotional muscle to become significant local portals. Our :C.R.Q. technology is designed to make television programming more appealing to all viewers and particularly to younger demographic groups which are highly attractive to advertisers and difficult to reach. In an era of declining audience ratings and shares, we believe that we offer broadcasters the means to increase revenue dramatically. By placing :Cues in their television spots, advertisers can aggregate large viewing audiences, direct them to specific web pages containing content designed to reinforce their branding, and offer specific 39 promotions and e-commerce opportunities. Accordingly, our technology will offer a platform for broadcasters to enhance content and advertisers to deliver immediate buying opportunities to their target consumers. As a result, we believe broadcasters will be able to demand premium rates for Internet Enhanced advertisements. Our technology allows users to take advantage of enhanced content and e-commerce opportunities without interrupting or overlaying the original broadcast. These opportunities are experienced on the personal computer, allowing viewers or groups of viewers to continue watching the broadcast without disruption. INTERNET ENHANCED PRINT Our :Cue:C.A.T. device will enable an Internet user to scan our Print :Cues to link the user to a particular web page designated by the publisher or corporate advertiser. A print advertisement can be Internet Enhanced simply by printing a Print :Cue on the advertisement, which, with a swipe of a :Cue:C.A.T. device, can immediately direct the reader to in-depth information impractical to include in the printed version. In this way, publishers gain a powerful new tool to supplement existing printed content and drive traffic deep in their websites, thereby increasing advertising revenue on the website and generating additional e-commerce opportunities. Print advertisers, like their broadcast counterparts, now have the ability to create ads that place the consumer one swipe away from an e-commerce transaction. We believe that newspapers, in particular, are concerned about the growing competitive threat posed by web-based classified advertising and will now be able to offer Internet Enhanced classifieds. For example, a Print :Cue placed in a classified ad can take a reader directly to a web page showing photographs of a house, car or boat advertised for sale or a job application form for an advertised employment opportunity. INTERNET ENHANCED PRODUCTS AND OTHER :CUE:C.A.T. APPLICATIONS We are completing a massive database that links existing bar codes, including UPC, ISBN, EAN and other codes, to websites, thereby enabling manufacturers to utilize their existing product codes for advertising and other marketing purposes. Our technology can transform any off-the-shelf product into an interactive advertisement. For example, 15 billion soda cans on store shelves around the world can be transformed into 15 billion interactive advertising, promotional and e-commerce opportunities. Because our :Cue:C.A.T. technology scans substantially all bar codes and will not require consumer goods manufacturers to alter labels in any way, our solution is an inexpensive and unobtrusive way of turning an existing label into a powerful new marketing tool. Manufacturers will be able to offer alternative ideas for consumption of their products and brand their other products on websites we link to their Internet Enhanced bar codes. Most importantly, manufacturers will be able to update the content on the website to ensure that their customers are never exposed to stale information or expired promotional offers. Our technology can be easily applied to a wide range of other products, such as prescription drug labels, bank statements, insurance and brokerage statements, credit cards or instruction manuals. KEY ADVANTAGES We believe that our technology solution represents a revolutionary approach to marketing. Our solution provides the following key advantages: - POWERFUL MEANS TO ENABLE MASS MEDIA TO LEVERAGE THE INTERNET. Our technology allows television broadcasters, television and cable networks, newspaper, magazine and catalog publishers and other mass media companies to provide Internet Enhanced programming and advertising. Broadcasters and publishers do not need to make extensive technology build-outs or investments 40 in order to use our :C.R.Q. or :Cue:C.A.T. technology. We believe that our :C.R.Q. technology can greatly increase the effectiveness of advertising in an era of declining market shares and ratings for television broadcasters and many cable networks. Newspaper and magazine publishers and direct marketers can deploy :Cue:C.A.T. devices to enhance the power of advertisements, catalogs and articles to drive online direct sales. Broadcasters, publishers, merchants and advertisers can use our technology and our associated database and related services to monitor, measure and analyze, on a real time basis, the number of confirmed advertising deliveries for each broadcast of an advertisement and to refine advertising campaigns quickly to target consumers more effectively. - ATTRACTIVE TECHNOLOGY FOR INTERNET USERS. Our technology offers Internet users numerous benefits and complements rather than modifies Internet user behavior. We plan to make our technology widely available and to distribute it free to the public. Users can download our :C.R.Q. software or install a :C.R.Q. CD-ROM or :Cue:C.A.T. device onto a computer easily and quickly. Once installed, our :C.R.Q. technology links a television viewer to the Internet instantly upon transmission of an audio :Cue, and a :Cue:C.A.T. device links a user to the Internet instantly upon the simple swipe of the :Cue:C.A.T. device over an Internet Enhanced bar code or Print :Cue on a newspaper, magazine, catalog, prescription drug container, credit card statement, consumer product or other print advertising medium. Users have full control over their use of our technology and therefore view only the Internet-based information and advertising that interests them. Internet users will benefit from our technology because it enables them to execute easier, highly targeted Internet searches and navigation, and allows them to experience Internet Enhanced television and print media experiences and improved e-commerce opportunities. Furthermore, we believe that our relationships with broadcasters, publishers, manufacturers and other licensees of our technology will create applications that appeal to Internet users and will increase the adoption and usage of our products. - COMPELLING OPPORTUNITY FOR MERCHANTS. We provide merchants with an innovative and efficient means to achieve their Internet objectives. Our technology empowers merchants to instantly link virtually any type of media or product to the merchants' websites at no cost to the public. We have designed our :C.R.Q. software to empower merchants to utilize a single :Cue to direct users to a web page deep within a website depending on the particular Internet user's individual profile. Our technology takes users directly to a transaction page without the trouble of clicking through numerous links or needlessly searching through a website. STRATEGY Our objective is to establish our technology as the primary means for television and cable networks, local television broadcasters, newspaper, magazine and catalog publishers, other mass media companies, as well as corporate advertisers, to link their their broadcasts, publications and products to the Internet. To achieve this objective, we have adopted the following strategies: LEVERAGE MEDIA RELATIONSHIPS IN ORDER TO SUPPORT ADOPTION AND SUSTAIN OUR FIRST MOVER ADVANTAGE In order to build awareness of our brand and support adoption of our products, we have established strategic relationships with several well-established broadcasting and print media companies, including National Broadcasting Company, Inc., Belo Corp., Forbes Inc., The Milwaukee Journal and Wired Magazine. We expect that these relationships, taken together, will provide us with broad media exposure in six of the top ten U.S. media markets and a number of smaller markets, for total coverage of approximately 40% of U.S. households. In addition, we are in discussions with broadcast media companies covering approximately an additional 20% of U.S. households. By coordinating our distribution strategy with the promotional, advertising and content support of our media partners, we believe we will be able to attain widespread consumer awareness of our brand and quickly build 41 interest in our technology. Once consumers are introduced to our technology, we believe they will quickly adopt the technology due to the ease with which it allows users to access relevant, but difficult to find, websites. As consumer and media partner usage increases, we believe that the familiarity and ubiquity of our technology will deter consumers and media partners from adopting competing products. We intend to continue to pursue strategic relationships with companies that can help us establish awareness of our brand and provide further penetration of our selected media markets. As we continue discussions with additional partners, we intend to convey to them the unique opportunities that our technology brings to traditional media companies. Specifically, we intend to highlight that our technology: - allows advertisers to direct large numbers of viewers from television broadcasts and print media directly to specific web pages; and - provides incremental revenue opportunities through the sale of Internet Enhanced advertising. EXECUTE A NATIONWIDE ROLL-OUT OF OUR :C.R.Q. AND :CUE:C.A.T. TECHNOLOGY We intend to widely distribute our products at no cost to consumers. To meet this goal, we have entered into strategic relationships to assist in distributing :C.R.Q. CD-ROMs and :Cue:C.A.T. devices. We have entered into an agreement with Tandy Corporation in which Tandy has agreed to manufacture and distribute our products through its over 7,000 owned or franchised RadioShack retail outlets. Additionally, we have established a distribution arrangement with Forbes Inc. in which Forbes has agreed to mail our :C.R.Q. and :Cue:C.A.T. products to its approximately 750,000 subscribers. We have entered into similar agreements with The Milwaukee Journal and Wired Magazine to distribute our products to their subscribers. We intend to aggressively pursue additional strategic partnerships that will assist us in executing the nationwide roll-out of our :C.R.Q. and :Cue:C.A.T. technology. ESTABLISH OUR TECHNOLOGY AS THE "SYSTEM STANDARD" ON PERSONAL COMPUTERS We intend to establish "system standard" strategic relationships with major computer manufacturers pursuant to which the manufacturers will agree to pre-install our :C.R.Q. software on, and to include a :Cue:C.A.T. device with, each personal computer sold. We believe that bundling our products with new personal computers will expose a greater number of consumers to our technology and will solidify our position as the market standard. DEVELOP MULTIPLE REVENUE STREAMS FROM MULTI-BILLION DOLLAR ADVERTISING MARKETS Initially we intend to generate revenue through usage fees paid by our print and television partners. Our technology is also well-suited for other applications, including radio broadcasting, wireless communications and other applications. In addition, we intend to derive revenue from banner advertisements on our Virtual Network. As adoption of our :C.R.Q. and :Cue:C.A.T. technology grows, we believe other practical applications of our technology will emerge. DEVELOP SOPHISTICATED RESEARCH AND DATA-MINING CAPABILITIES AS A VALUE-ADDED SERVICE TO CUSTOMERS We intend to require each user of our technology to provide basic individual information to register and activate our :C.R.Q. and :Cue:C.A.T. technology. In addition, we will be able to track how many people viewed or interacted with an advertiser's website as a result of a :Cue. We plan to use this type of information to develop a substantial database reflecting users' demographic information, interests and preferences and Internet activity to generate summary data reports for advertisers and merchants. These firms would use our reports and data mining capabilities to tailor advertising campaigns, banner ads and website content to appeal to targeted consumer segments. Under our 42 privacy policy, we will not make individual user information available to outside parties and will use the information internally only with a user's express permission. PURSUE INTERNATIONAL MARKETS We believe that there is a substantial market for our technology outside the United States. Our :C.R.Q. and :Cue:C.A.T. technology does not require foreign language translations or technical modifications to be compatible with specific broadcasting or recording technology used in foreign markets. Instead, international broadcasters, publishers, advertisers and merchants can place :Cues in any type of electronic or print medium and direct users to websites using any language. We intend to expand our international presence aggressively by adding sales and marketing personnel and establishing strategic relationships with international partners to capitalize fully on international market opportunities. We have hired a president for our International Group and anticipate opening an office in London within the next several months. We intend to commence international deployment of our technology during 2001. RECENT DEVELOPMENTS PREFERRED STOCK FINANCINGS. In April 2000, we issued 5,929,364 shares of Series B preferred stock and 5,372,593 shares of Series C preferred stock to various investors, including Belo Corp., The Coca-Cola Company, The E.W. Scripps Company, Spielberg/Katz Associates, LLC, Tandy Corporation and Young & Rubicam, Inc., for aggregate consideration of approximately $98.3 million. All outstanding shares of our preferred stock will be automatically converted into our common stock upon completion of this offering. We will recognize a one-time expense in the amount of $37.2 million to reflect the difference between the issuance price of $7.03 per share for the Series B preferred stock and $10.54 per share for the Series C preferred stock and the estimated fair market value of the Series B and C preferred stock of $11.99 per share, as determined by a contemporaneous, independent appraisal. In April 2000, we issued two warrants to an affiliate of National Broadcasting Company, Inc. to purchase 3,752,445 shares and 4,505,165 shares, of our common stock at per share exercise prices of $5.00 and $10.54, respectively. We are required to issue additional warrants to National Broadcasting Company, Inc.'s affiliate with a per share exercise price of $10.54, depending on the number of shares we reserve for issuance under our 1999 Stock Option Plan. The warrants will terminate in April 2005. We valued the warrants using the Black-Scholes option pricing model at $31.7 million and $31.4 million, respectively. We recognized a one-time charge to earnings for the fair market value of these warrants on the date of grant. PRODUCTS AND SERVICES Our products and services consist of four integrated components: - :C.R.Q., our software application; - :Cue:C.A.T. device, a hardware device similar in size to a computer mouse; - our Virtual Network, an advertising application that borders the Internet user's browser window; and - the aggregation, analysis and marketing of targeted consumer demographic data collected through use of our :C.R.Q. and :Cue:C.A.T. technology and our Virtual Network. :C.R.Q. Our patented :C.R.Q. software will respond to an audio signal, or :Cue, from any television or other mass media source and direct a user's personal computer to open any specified web page within a website, regardless of how deep the web page is within that website. Our :C.R.Q. software will be available for downloading onto a personal computer from our websites, our strategic partners' websites 43 and promotional CD-ROMs. When initially downloading :C.R.Q. software, a consumer will be required to register as a user and will be offered incentives to provide additional personal preference and demographic data. Depending on the amount of information a user provides, a :Cue will direct a user's personal computer to a designated web page of particular interest to that user. Our :C.R.Q. software will listen for the :Cue, which television viewers will hear as a low level tone one-third of a second in duration. An audio cable connecting the television and the computer will transmit the signal to the computer. We have also designed a wireless version of our :C.R.Q. technology in which a wireless transmitter and receiver replace the audio cable, allowing wireless transmission. We expect to make our wireless version of our :C.R.Q. software available for sale to consumers in September 2000. A user may use our :C.R.Q. technology in several ways. For example, if the user selects the active mode, the :C.R.Q. technology will immediately launch the computer's web browser to retrieve the targeted web page. A user may also choose to collect :Cues in a passive mode similar to receiving e-mail messages and then automatically launch the web browser at a later time chosen by the user. Our :C.R.Q. software is compatible with all available web browsers. :Cues can be embedded in any type of video or audio media, including television broadcasts, CD-ROMs, DVDs and video tapes, to create Internet Enhanced broadcasts and commercial advertisements. Through our :C.R.Q. technology, television and cable broadcasts become an instant and direct link and gateway to the Internet. The following are examples of Internet Enhanced commercial advertising, content and event promotion: - COMMERCIAL ADVERTISING. A television commercial for a particular automobile model will contain a :Cue that directs the viewer's web browser to that model's specific web page within the manufacturer's website. The web page will include detailed information concerning that model's features and pricing, dealerships and related Internet sites. - CONTENT. A local television station may differentiate its newscast with Internet Enhanced weather reporting. While reporting the weather, the station will broadcast a :Cue that directs the viewer's web browser to the broadcaster's web page that includes detailed forecast information for each city and town in the viewing area. - EVENT PROMOTION. A television broadcast of a major league baseball game will contain a :Cue that directs the viewer's web browser to the team's website. The web page may contain information such as players' statistics and functionality to purchase tickets and memorabilia. :CUE:C.A.T. Our :Cue:C.A.T. device, a hardware device similar in size to a computer mouse, enables an Internet user to scan bar codes and Print :Cues included on products and in printed material to link users to a particular website designated by the manufacturer or publisher. The swipe of a :Cue:C.A.T. device over a Print :Cue or bar code will direct a user to in-depth information impractical to include in print copy. To install a :Cue:C.A.T. device, a user simply installs our :C.R.Q. software and plugs the :Cue:C.A.T. device into his personal computer. Our :Cue:C.A.T. device reads substantially all known existing bar code topologies as well as our proprietary codes that we generate to create Internet Enhanced print media and products. Through our :Cue:C.A.T. technology, publishers gain a powerful new tool to supplement existing printed content. In turn, publishers will be able to attain higher advertising revenue on their websites and potentially generate additional e-commerce opportunities. Marketers will be able to transform the billions of consumer products on retailers' shelves into powerful advertising, promotional and e-commerce opportunities. Examples of the use of :Cue:C.A.T. devices include the following: - A newspaper advertisement for a department store's clothing sale will include a Print :Cue that directs readers' web browsers to the department store's web page featuring photographs of a complete line of clothing products and ordering information. 44 - A book by a noted author will include a Print :Cue that directs readers to the author's web page within the publisher's website that features summaries of the author's other books and ordering information. - An advertisement for a shampoo or the shampoo bottle itself will include a bar code that directs the recipient's web browser to the advertiser's web page containing an interactive form to request a free sample or provide a coupon for the next purchase. - A prescription drug bottle from a pharmacy will include a bar code that directs the recipient's web browser to the drug manufacturer's web page containing information regarding the illness for which the drug was prescribed, side effects of the drug, and additional products that may be useful in treating the illness. - A credit card statement will include a bar code that directs the card holder's web browser to the credit card company's web page where the card holder can file a complaint with the credit card company regarding erroneous charges or other types of disputes. Additionally, the bar code could direct the card holder's web browser to the credit card company's web page containing e-commerce possibilities or transaction history. THE VIRTUAL NETWORK Each time our :C.R.Q. software or :Cue:C.A.T. device launches a user's web browser to a specific web page, an "L"-shaped area called the "Virtual Network" will appear on the border of the user's Internet web browser window. The Virtual Network will be populated with banner advertisements and a series of tabs that, when clicked, will display information related to that subject. The Virtual Network is only visible when an individual is using our technology. Banner advertisements and tabs will be customized to each user's profile, displaying information and promotional offers designed to strongly appeal to the individual's interests. The Virtual Network will reach mass audiences, allowing advertisers to offer complementary products via banner advertisements and providing us with an additional channel to sell sponsorships and banner advertisements. We believe that with modest usage of our :C.R.Q. and :Cue:C.A.T. technology, the number of original ad impressions we would generate would exceed those of the largest websites currently in operation. DATABASE RESEARCH AND MARKETING We intend to require each user of our technology to provide basic individual information in order to register and activate our :C.R.Q. technology. Additionally, we plan to offer promotional and other incentives to encourage users to provide more detailed individual information. We plan to use this information to develop a substantial database of demographic information reflecting users' interests and preferences, tracking of Internet behavior related to :Cues, and viewing patterns of Internet Enhanced content. This information will be used to better tailor our Virtual Network banner ads and special vendor offers to each user, as well as to generate summary demographic data reports for advertisers and merchants. These firms would use our reports and data mining expertise to tailor advertising campaigns, banner ads and website content to appeal to targeted consumers. Under our privacy policy, we will not make personal user information available to outside parties and will only use the information internally with a user's express permission. We will provide some summary demographic data to purchasers of :Cues free of charge. For more complex or detailed demographic data, we intend to charge advertisers a flat fee per month, plus a small charge per record. 45 TECHNOLOGY INFRASTRUCTURE SERVER NETWORK We will use a network of approximately 25 servers to be housed in several colocation facilities located throughout the United States. Currently, we have an agreement with Exodus Communications to house our servers in its facilities. We selected each of these facilities for its strategic location, network availability and ability to meet the demands of a 24 hours a day, 7 days a week environment. We are currently in discussions with a number of other web hosting services companies, and we expect to finalize an agreement with them prior to the effective date of this prospectus, at which time we intend to complete the build-out of our entire server network. In addition, we designed our system and network architecture specifically to handle large numbers of simultaneous hits to our customers' website servers that will result from the widespread use of our :C.R.Q. technology. Our large number of strategically located servers, combined with ISP caching, provides several levels of redundancy to prevent traffic bottlenecks and extreme loads on our customers' website servers. As an additional precaution, we plan to enter into agreements with content streaming companies that will help our clients and us deliver content to Internet users more efficiently. HARDWARE AND SOFTWARE INFRASTRUCTURE We use Compaq Nonstop-TM- Himalaya-Registered Trademark- servers that offer availability 24 hours a day, 365 days a year. These servers have the flexibility to scale systems and solutions as desired and provide open access to our :C.R.Q. application software. Our software has been constructed in a highly scalable, easily upgradable and low-maintenance manner. Developing our software with Microsoft's Visual Studio-Registered Trademark- C++ offers greater design and maintenance flexibility and the abundance of trained personnel available in the marketplace. PROCESS After our :C.R.Q. software on a user's computer identifies a :Cue from a media source, the :Cue is then sent to our server network where it is translated into a URL. This translation process includes both a direct tie in and a lookup for a more specific website address based on demographic information. Once the URL is determined, it is transferred back to the Internet user's computer operating system where the appropriate registered program will launch and connect to the specified URL. Our technology not only allows the URLs to launch web browsers to web pages, but it also allows the URLs to launch other applications. MARKETING AND PROMOTION We have designed our marketing and promotion strategy to attain widespread adoption of our technology by Internet users and to establish strong partnerships with major networks, local station groups, cable networks, publishers, merchants and direct marketers. We expect to employ multiple channels to achieve our goals, including: USER ADOPTION - MASS DISTRIBUTION. We intend to initiate a nationwide roll-out of our technology in the United States beginning in September 2000 and plan to distribute free to the public at least 50 million :C.R.Q. CD-ROMs and 50 million :Cue:C.A.T. devices by the end of 2001. We intend to distribute our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices without charge to the public through the over 7,000 RadioShack retail outlets nationwide, through our strategic partners and through our websites. For example, Forbes Inc. has agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its approximately 750,000 subscribers prior to mailing its September 2000 issue of BEST 46 OF THE WEB magazine. Also, Wired Magazine has agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its approximately 375,000 subscribers, and The Milwaukee Journal has agreed to mail :Cue:C.A.T. devices to subscribers of the Milwaukee Journal Sentinel. - LEVERAGE STRATEGIC RELATIONSHIPS. We have established strategic relationships with a major television network, local station groups, cable networks, publishers and direct marketers. We expect our strategic partners to promote our technology to consumers by marketing their programming and printed materials as being Internet Enhanced in order to increase viewership and readership. We also anticipate that our strategic partners will aggressively market our technology to their advertisers in an effort to increase advertising revenues. To assist our strategic partners in their efforts, we have limited the number of audio :Cues that will be broadcast in any particular market in order to create demand and enhance the value of these :Cues. - TRADITIONAL ADVERTISING. We intend to begin a program of print, radio and television advertising to create public awareness of our technology. We will produce television commercials which will be placed in media by our strategic partners, affiliate kits given to our licensees, and an infomercial which we will produce and place in appropriate media. We intend to utilize NET TALK LIVE! THE INTERNET TALK SHOW, which reaches approximately 550 million homes per week, to develop public interest and knowledge of our :C.R.Q. and :Cue:C.A.T. technology. - PROMOTIONS. We intend to engage in commercial giveaways sponsored both by us and local sponsors and to institute :C.R.Q. Club, an organization of Internet users who utilize our technology. We anticipate that :C.R.Q. Club members will receive free gifts from some of our strategic partners and that membership will encourage consumer loyalty to us. COMMERCIAL ADOPTION AND MAINTENANCE - LEVERAGE SENIOR MANAGEMENT RELATIONSHIPS. We have an experienced management team that has many established relationships with broadcasters, publishers, manufacturers and direct marketers. We intend to leverage these relationships to encourage the adoption of our technology, as well as to establish additional strategic partnerships. See "Management--Directors and Executive Officers." - SALES TEAM. In order to assist our strategic partners in executing a successful launch strategy and to ensure Internet user acceptance, we are building a diverse and highly skilled executive team to manage the sales and implementation of our technology by various media-related companies. The media team consists of executives from the broadcasting, cable, print and advertising disciplines. In addition to guiding the implementation of production procedures and the integration of our technology into existing business practices, our team will provide insight and guidance regarding local events and roll-outs to maximize Internet user acceptance. We expect to form five media teams to oversee the sales process for broadcast and cable networks, local television stations, newspapers and magazines, studios and production companies and advertising agencies. Each team will consist initially of a primary manager, as well as up to four account executives, depending on the needs of our customers. - STRATEGIC ACCOUNT MANAGEMENT TEAM. We are forming a team to manage the accounts of our customers. We are employing people with substantial experience in each market targeted by us, including television broadcasting, print media, direct marketing and cable networks, to assist our customers in developing compelling content for their websites. Each of our customers will be assigned to a strategic account manager. Currently, we have two strategic account managers and we expect to hire an additional twelve to fifteen strategic account managers over the next 18 months. 47 - INTERACTIVE DATABASE. We are completing a massive database that links existing UPC, ISBN, EAN and other codes to web pages, thereby enabling manufacturers to utilize their existing product codes for advertising purposes. We intend to activate substantially all of these bar codes when our :Cue:C.A.T. technology is launched and will provide manufacturers with one free year in which to evaluate the results. At the end of the first year, we intend to provide manufacturers with the results to demonstrate the effectiveness of our technology. - TRADE SHOWS. In order to maintain a high level of visibility among media partners and corporate clients, we expect to participate in three to four trade events per year, such as the National Association of Television Programming Executives conference. STRATEGIC RELATIONSHIPS We believe that our strategic relationships provide us with significant opportunities to gain market acceptance for our technology. We maintain strategic relationships with, among others, the following companies: BELO CORP. We entered into an agreement with Belo Corp. on September 29, 1999, under which we granted Belo Corp.'s newspapers and television stations an exclusive license to deploy our technology for local programming in their markets. Belo Corp. currently operates 18 television stations in 16 markets reaching 14% of the total U.S. television audience and owns 7 newspapers in 7 markets. FORBES INC. We entered into an agreement with Forbes Inc. on January 13, 2000, to launch Internet Enhanced content and advertising in its September 2000 issue of BEST OF THE WEB magazine. Forbes Inc. has agreed to promote this issue as the first Internet Enhanced business magazine and thereafter to Internet Enhance FORBES magazines for a one-year period. Forbes Inc. has also agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its approximately 750,000 subscribers prior to mailing its September 2000 issue of BEST OF THE WEB magazine. The term of the agreement ends on August 31, 2001. NATIONAL BROADCASTING COMPANY, INC. We entered into an agreement with National Broadcasting Company, Inc. on April 18, 2000, to license our :C.R.Q. software to National Broadcasting Company, Inc. and certain of its affiliates for a term ending on March 1, 2002. As part of the agreement, we granted National Broadcasting Company, Inc.'s owned and operated television stations the exclusive right to use :Cues in local programs, except in the Dallas market where Belo Corp. has exclusive rights to use our :C.R.Q. software. The term of the agreement ends 18 months after our launch date. TANDY CORPORATION. We entered into an agreement effective on December 6, 1999, with our stockholder Tandy Corporation to act as a product sourcing manager for the production of our :Cue:C.A.T. devices. Our principal retail distribution channel for :Cue:C.A.T. devices will be Tandy's owned or franchised RadioShack retail outlets. As our manufacturing and distribution partner, Tandy offers substantial advertising strength, a 25,000 person sales force, which will be trained to conduct :Cue:C.A.T. device demonstrations, and over 7,000 owned or franchised RadioShack retail outlets located within five minutes of approximately 94% of the U.S. population. The term of the agreement ends on December 31, 2001, and will automatically renew for successive one-year terms unless it is terminated by either party. The agreement can be terminated by either party at any time upon 90 days prior notice. WIRED MAGAZINE. We entered into an agreement on February 16, 2000, with Wired Magazine to launch Internet Enhanced content and advertising in three consecutive issues commencing with its October 2000 issue. Wired Magazine has agreed to promote the October 2000 issue as Internet Enhanced and has also agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its approximately 48 375,000 subscribers prior to mailing the October 2000 issue. The term of the agreement ends on December 31, 2000. THE MILWAUKEE JOURNAL. We entered into an agreement on February 8, 2000, with Journal Sentinel Incorporated, an affiliate of The Milwaukee Journal, granting Journal Sentinel Incorporated the non-exclusive right to acquire Print :Cues for use within its various publications. Journal Sentinel Incorporated, Inc. has also agreed to mail :Cue:C.A.T. devices to the subscribers of The Milwaukee Journal Sentinel. We also entered into an agreement on February 8, 2000, with Journal Broadcast Group, Inc., an affiliate of The Milwaukee Journal, granting Journal Broadcast Group, Inc. the non-exclusive right to acquire :Cues for use within television programs and station promotions in the Milwaukee, Wisconsin area. The terms of these agreements end 18 months after our launch date. YOUNG & RUBICAM. By letter agreement, dated September 29, 1999, with Young & Rubicam, Inc., a principal stockholder of ours, we granted Young & Rubicam an exclusive right to resell our :C.R.Q. software and :Cue:C.A.T. devices in the United States for the period of six months after the public launch of this technology in the United States. The economic terms of this right are to be negotiated in good faith by Young & Rubicam and us. In addition, we granted to Young & Rubicam an exclusive right for a period of six months from a date to be mutually determined by Young & Rubicam and us to resell this technology outside the United States. The terms of this right are to be negotiated in good faith by Young & Rubicam and us. We also agreed that, on economic terms to be negotiated by Young & Rubicam and us, Young & Rubicam will act as our marketing and sales agent with respect to the deployment of our technology to our advertising customers or clients. By a separate letter agreement, also dated September 29, 1999, we granted Young & Rubicam a right of first refusal on our marketing and communication assignments to third parties, provided that Young & Rubicam possesses core competency to handle these assignments. The terms of each assignment are to be negotiated by Young & Rubicam and us. In addition, we granted Young & Rubicam a right to receive a percentage of revenues paid to us by clients or licensees of Young & Rubicam. This percentage will equate to a "finders" or referral fee customary for blanket licensing agreements or a commission or mark-up on the Internet Enhancement of individual advertisements that is customary in the broadcast or entertainment industries. We also agreed to recommend Young & Rubicam as our preferred provider of marketing and communications services in response to inquiries from our potential licensees or customers or from those of Young & Rubicam. The rights described in this paragraph will no longer exist when Young & Rubicam ceases to own Series A preferred stock, or at least 50% of the common stock into which Young & Rubicam's Series A preferred stock is converted upon completion of this offering. MANUFACTURING AND DISTRIBUTION Tandy Corporation has agreed to act as a product sourcing manager for the production of our :Cue:C.A.T. devices until December 31, 2001, and then for successive one-year terms if the agreement is not terminated by either Tandy or us. Tandy currently utilizes two manufacturing facilities in Asia, with which it has manufacturing subcontracts, for our manufacturing needs. Tandy has advised us that they have the capacity to devote additional manufacturing facilities to manufacture our :Cue:C.A.T. devices. Our :C.R.Q. CD-ROMs will be manufactured in at least four locations in the United States. Our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices will be distributed without charge to consumers. In some cases, we expect that the costs of manufacturing and/or distributing :C.R.Q. CD-ROMs and :Cue:C.A.T. devices will be borne or defrayed by our strategic partners and by advertisers who advertise directly on :Cue:C.A.T. devices. Our principal retail distribution channel for :Cue:C.A.T. devices and :C.R.Q. CD-ROMs will be Tandy's over 7,000 owned or franchised RadioShack retail outlets nationwide. We will also distribute :Cue:C.A.T. devices and :C.R.Q. software directly to consumers, principally through promotions by our 49 strategic partners and other advertisers and merchants. For example, Forbes Inc. has agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its approximately 750,000 subscribers prior to mailing its September 2000 issue of BEST OF THE WEB magazine. We are in discussions with an OEM manufacturer to bundle our :C.R.Q. software application and :Cue:C.A.T. devices with new personal computers. We intend to initiate a nationwide roll-out of our technology beginning in September 2000 and plan to distribute free to consumers at least 20 million :C.R.Q. CD-ROMs and 12 million :Cue:C.A.T. devices by the end of 2000. By the end of 2001, we plan to distribute free to consumers at least an additional 30 million :C.R.Q. CD-ROMs and 38 million :Cue:C.A.T. devices. PATENTS AND PROPRIETARY RIGHTS We rely on a combination of patent, trademark, trade secret, and copyright laws and contractual agreements to protect our proprietary technology and intellectual property rights, and our success and ability to compete are substantially dependent upon our internally developed technology and know-how. We currently own U.S. Patent No. 5,907,793, entitled "Telephone-based Interactive Broadcast or Cable Radio or Television Methods and Apparatus," U.S. Patent No. 5,925,865, entitled "Automated Check Verification and Tracking System" and U.S. Patent No. 5,594,226, entitled "Automated Check Verification and Tracking System Using Bar Code Information." In addition, we have filed approximately 50 other patent applications in the United States, and these patent applications are currently pending in the United States Patent and Trademark Office (the "USPTO"). We have also filed foreign counterpart applications for some of our pending U.S. applications. Some of these foreign applications have been filed as PCT patent applications, while others have been filed with the European Patent Office. Additional patent applications have been filed in South Korea, Japan and Taiwan. To date, we have filed approximately ten foreign patent applications. Generally, under the laws of most, if not all, of the countries where we have filed patent applications, a pending patent application affords very little, if any, legal protection to the invention described in the application, as legal protection to the invention described in the patent application only arises after a particular country's patent office approves the patent application and allows the application to issue into a patent. There can be no assurance that our pending patent applications will ever issue into enforceable patents. Also, once a patent application issues into a patent, there can be no assurance that our patent rights will afford any significant degree of protection or provide us with a competitive advantage. In particular, there can be no assurance that any such patents will not be challenged, invalidated or circumvented in the future. Failure to maintain the protection afforded by our patents may have a material adverse effect on our future revenues and ability to become profitable. Further, there can be no assurance that our patents will ultimately be found to be valid or enforceable, or that our patent rights will deter others from developing substantially equivalent or competitive products. In addition, it may be necessary for us to undertake infringement actions against others. The defense and prosecution of patent litigation is costly and involves substantial commitments of management time. Adverse determinations in patent proceedings to which we are a party could subject us to significant liabilities to third parties and require us to seek licenses from third parties. Although patent and intellectual property disputes are often settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, there can be no assurance that necessary licenses would be available to us on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products in one or more markets and would have a material adverse effect on us. We also seek to protect our proprietary technology, in part, through confidentiality and non-disclosure agreements with employees, consultants and other parties. Our confidentiality agreements with our employees and consultants also contain industry standard provisions requiring such individuals 50 to assign to us without additional consideration any inventions conceived or reduced to practice by them while employed or retained by us, subject to customary exceptions. There can be no assurance that our confidentiality and non-disclosure agreements with employees, consultants and others will not be breached, that we would have adequate remedies for any breach or that our trade secrets will not otherwise become known to or independently developed by competitors. We have filed applications for registration with the USPTO for several of the trademarks we use or plan to use in our business. Some of the marks we are attempting to register with the USPTO include DigitalConvergence-TM-, DigitalConvergence.Com-TM- and the :C-TM- symbol. We are attempting to register these marks in association with various products and services provided by us. In addition, we have filed applications to register these marks mentioned above, as well as other marks, in the European Community and Japan. We plan on pursuing the trademark registration applications we have already filed and filing additional applications as we develop new trademarks. Although we have filed trademark applications for these marks, we have not received official word that any of the trademarks described in the various applications will ultimately become our registered trademarks. While our trademark applications are being reviewed by the various countries' trademark offices, many events and circumstances could arise that would prevent a given mark from ultimately being registered or from being registered in association with all of the products and services described in the original trademark application. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of our brand is maintained by such licensees, there can be no assurance that such licensees will not take actions that would materially adversely affect the value of our proprietary rights or reputation. We also rely on certain technology that we license from third parties, including the suppliers of the operating systems and financial and reporting system for our business. There can be no assurance that these third-party technology licenses will continue to be available to us on commercially reasonable terms. The loss of such technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could materially adversely affect our business, results of operations and financial condition. We hold the Internet domain name "digitalconvergence.com." Under current domain name registration practices, no one else can obtain an identical domain name, but they can obtain a similar name, or the identical name with a country designation. The relationship between regulations governing domain names and the laws protecting trademarks and similar proprietary rights is evolving. Domain names are regulated by Internet regulatory bodies, while trademarks are enforceable under local national law. In addition, the regulation of domain names in the United States and in foreign countries is subject to change. There are plans to establish additional top-level domains, appoint additional domain name registrars and modify the requirements for holding domain names in countries in which we conduct business, and we could be unable to prevent third-parties from acquiring domain names that infringe or otherwise decrease the value of our domain names or trademarks. Like other technology-based businesses, we face the risk that we will be unable to protect our patents and other intellectual property and proprietary rights, and the risk that we will be found to have infringed the proprietary rights of others. For an expanded discussion of these risks, see "Risk Factors." GOVERNMENT REGULATION We are subject to varying degrees of federal, state, and local regulation, as well as U.S. and state statutes and common law. The Federal Communications Commission has established regulations, that, among other things, set installation and equipment standards for communications systems. Additionally, 51 the television industry is subject to extensive regulation at the federal, state and local levels. Legislative and regulatory proposals under consideration by Congress and federal agencies may materially affect that industry and our ability to obtain distribution of our :C.R.Q. and :Cue:C.A.T. technology to television broadcasters. As a result of the increasing popularity and use of the Internet, the Internet is receiving increasing legislative scrutiny. Applicability to the Internet of existing laws and regulations governing issues such as intellectual property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and consumer privacy is uncertain. For example, in 1996 Congress enacted the Communications Decency Act, which, among other things, purported to impose criminal penalties on anyone who distributes "obscene" or "indecent" materials over the Internet. A number of states have adopted or proposed similar legislation. Although certain provisions of the act have been held to be unconstitutional, the manner in which the act and similar existing or future federal and state laws will ultimately be interpreted and enforced and their effect on our operations cannot yet be fully determined. Such laws could subject us to substantial liability. Restrictive laws or regulations could also dampen the growth of the Internet generally and decrease the acceptance of the Internet as an advertising medium, and could, thereby, have a material adverse effect on us. In addition, it is possible that laws and regulations may be modified or adopted at the federal, state and local levels related to issues such as consumer privacy, defamation, network access, pricing, taxation, content regulation, characteristics and quality of products and services, advertising and intellectual property ownership and infringement. The application of modified or new legislation or regulations to our products and services could expose us to liability, increase our cost of doing business, and adversely affect consumer or advertiser acceptance of our product. In sum, new or modified legislation or regulation could have a material adverse effect on us. To the extent that we do business in foreign countries or otherwise fall within the jurisdiction of foreign countries, we could become subject to foreign regulation and laws. Certain countries, such as some of the members of the European Community, have passed Internet privacy and consumer protection laws which are stricter than those in the United States. The application of foreign legislation or regulations to our products and services could expose us to liability, increase our cost of doing business, and adversely affect consumer or advertiser acceptance of our product. To our knowledge, there are currently no investigations, inquiries, citations, fines or allegations of violations or noncompliance against us pending before any government agencies or third parties. Whether noncompliance may be discovered at some future time is unknown. Although the likelihood of this risk is currently unknown, if noncompliance were to be found, it could result in civil or criminal penalties, including monetary fines and injunctions, as well as negative publicity. Such penalties could have a material adverse effect on us. COMPETITION We believe that our technology is unique and innovative. As a result, we believe that we currently have no direct competition because of the low cost and ease of use of our technology and our use of two devices rather than multi-tasking on a television. However, we have identified several related technologies in the area of media convergence. In broadcasting and electronic media, interactive set-top box companies, including WebTV Networks, Inc., Wink Communications, Inc., WorldGate Communications, Inc. and MicroCast, Inc., attempt to link television programming and the Internet. We believe that our technology should be perceived as complementary and not competitive to these products and services because it can be used in conjunction with set-top boxes. However, we also believe that our "two-device" solution is more likely to be widely accepted by the public than a "one-box" solution because our solution does not require the public to change habits or make additional monetary investments. Viewers can continue to receive one-way information via the passive, public 52 medium of their televisions, while using their personal computer to establish interactive one-on-one relationships with advertisers and content providers. In print media, companies such as BarPoint.com, Inc., Digimarc Corp., FastFrog.com, NeoMedia Technologies, Inc. and Code Corporation have created technology enabling users to use scanners to access relevant web pages. We believe that these technologies will not compete effectively with our technology for a number of reasons, including our superior product features, our low manufacturing costs and deployment to the public without charge. We expect that competition will increase as other established and emerging companies enter the Internet convergence market and as new products and technologies are introduced. Increased competition may result in price reductions and loss of market share, either of which could materially adversely affect us. See "Risk Factors--Competition." FACILITIES We lease 38,000 square feet in Dallas, 3,120 square feet in Addison, Texas, and occupy approximately 5,500 square feet in New York. We believe that our current facilities are adequate to meet our needs for the foreseeable future. EMPLOYEES As of March 31, 2000, we had 94 full-time employees and 28 part-time/temporary employees. Of our full-time employees, 30 are in sales and marketing, 23 are in research and development and 41 are in general and administrative positions. Most of our part-time/temporary employees assist us in matching bar codes to websites. We consider our employee relations to be good. LEGAL PROCEEDINGS We are a co-defendant, with Infotainment Telepictures, Inc. in a lawsuit pending in state court in Dallas, Texas. The plaintiff, Nissi Cosmetics, Inc., alleges that Infotainment Telepictures breached a 1997 contract for the creation of two websites, two infomercials, and two direct response spots for the advertising and marketing of certain of Nissi Cosmetics' body color, or self-tanning, products. Nissi Cosmetics also alleges we were the "alter ego" of Infotainment Telepictures in committing the alleged breaches. Nissi Cosmetics seeks recovery of $585,000 paid to defendants, and unspecified damages for "lost profits." We filed a general denial and intend to vigorously defend the matter. Under the terms of our asset purchase agreement with Infotainment Telepictures, Infotainment has agreed to indemnify us for any costs, expenses, liabilities or other losses we may incur in connection with this matter. From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this prospectus, we are not aware of any legal proceedings pending or threatened that we expect would have a material adverse effect on us. 53 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to our executive officers and directors as of March 31, 2000:
NAME AGE POSITION - ---- -------- ----------------------------------------------------- J. Jovan Philyaw............... 35 Chairman of the Board and Chief Executive Officer Michael N. Garin............... 53 President, Chief Operating Officer and Director Patrick V. Stark............... 45 Executive Vice President and Director Scott P. Carlin................ 44 President of the Media Group Gregory D. Lerman.............. 54 President of the Interactive Group Douglas L. Davis............... 33 President of the Technology Group Stuart B. Graber............... 46 President of the International Group Donald E. Welsh................ 56 President of the Publishing Group William S. Leftwich............ 50 Vice President, Chief Financial Officer and Secretary Blaine L. Thacker.............. 56 Chief Strategy Officer Jeffrey A. Glickman............ 48 President of DigitalDemographics.:Com Inc. John G. Huncke................. 47 Executive Vice President of the Media Group William O. Hunt................ 66 Director Michael H. Jordan.............. 63 Director Jack A. Turpin................. 69 Director
J. Jovan Philyaw founded us in September 1998. Prior to founding us, Mr. Philyaw created NET TALK LIVE! THE INTERNET TALK SHOW in September 1996 and served as its Executive Producer and host from September 1996 to February 2000. Since December of 1997, Mr. Philyaw has served as the President and Chief Executive Officer of Infotainment Telepictures, Inc., the predecessor company that produced NET TALK LIVE! THE INTERNET TALK SHOW, before we acquired these predecessor rights. Mr. Philyaw served as Executive Vice President and Chief Marketing Officer of Internet America, an Internet service provider, from September 1995 to September 1996. Michael N. Garin joined us as our President and Chief Operating Officer in August 1999. From 1989 to 1999, Mr. Garin served as the global head of Media and Communications for Furman Selz and ING Barings LLC after ING Barings acquired Furman Selz in October 1997. Mr. Garin also served on the management committee and board of directors of Furman Selz from 1993 to 1997. Mr. Garin holds a masters degree in Philosophy and Arts from the New School of Social Research, New York, and an A.B. in Economics from Harvard College. Patrick V. Stark joined us as our Executive Vice President on December 31, 1999. Mr. Stark became one of our directors in September 1998. Mr. Stark was a shareholder/director at the law firm of Kane, Russell, Coleman & Logan, P.C. in Dallas, Texas, from January 1992 until he joined us. Mr. Stark holds a law degree from Georgetown University Law Center and a B.A. in Spanish from Arizona State University. Scott P. Carlin joined us as the President of our Media Group in August 1999. From June 1995 until he joined us, he served as Executive Vice President of Warner Bros. Domestic Television Distribution and Executive Vice President, Telepictures Distribution. From March 1991 to June 1995, Mr. Carlin served as Senior Vice President, Sales, Warner Bros. Domestic Television Distribution. Mr. Carlin holds a B.A. in communications from the University of Colorado. Gregory D. Lerman joined us as the President of our Interactive Group in August 1999. Prior to joining us, Mr. Lerman served as President of E-Commerce for Paxson Communications, which owns and operates television broadcast stations, from February 1999 to October 1999 and Executive Vice President and General Manager of Valuevision International, an integrated direct marketing company, 54 from January 1998 to February 1999. From January 1997 to September 1997, Mr. Lerman served as President and Chief Operating Officer of Kent and Spiegel Direct, a television direct marketing firm. Within one year after Mr. Lerman left Kent and Spiegel Direct, the company filed for bankruptcy. From January 1995 to December 1996, Mr. Lerman was retired. From October 1989 to December 1994, he served as Executive Vice President of Fingerhut Companies, Inc., a catalog direct marketer. Mr. Lerman holds a B.A. in history from the University of Minnesota. Douglas L. Davis joined us as the President of our Technology Group in December 1999. Prior to joining us, he was employed by Internet America, an Internet service provider, where he served as Executive Vice President and Chief Operating Officer from July 1996 to December 1999 and as Chief Technology Officer from January 1996 to July 1996. Mr. Davis was head of research and development at Internet America from November 1995 to January 1996. From July 1990 to November 1995, Mr. Davis was a Director of Computer Operations for the School of Engineering and Applied Science of Southern Methodist University. Stuart B. Graber joined us as the President of our International Group in December 1999. Mr. Graber served as Chief Executive of Music Choice Europe, a digital audio company part-owned by Time Warner, British Sky Broadcasting, Sony and EMI, from October 1993 to December 1999. Mr. Graber holds a masters degree in international communications from Brooklyn College and a B.A. in journalism, broadcasting and administration from the University of Maryland. Donald E. Welsh joined us as the President of our Publishing Group in January 2000. Prior to joining us, Mr. Welsh, who has been in publishing for thirty years, was Chairman of Group XXVII Communications from August 1997 to December 1999. From March 1995 to March 1997, he was Executive Vice President of Marvel Publications. From March 1990 to March 1996, he served as chairman of the Welsh Publishing Group. Mr. Welsh holds an A.B. from Columbia University and a J.D. from Cleveland Marshall School of Law. William S. Leftwich joined us as our Vice President, Chief Financial Officer and Secretary in May 1999. From March 1995 to May 1999, he served as Chief Financial Officer for ViewCast.com (formerly MultiMedia Access Corporation), a company that develops and sells streaming video products and desktop video conferencing products. From January 1993 to March 1995, he served as Chief Financial Officer of Integrated Security Systems, Inc., a provider of fully integrated building security systems. Mr. Leftwich holds a B.B.A. in Accounting from Texas A&M University and is a certified public accountant. Blaine L. Thacker joined us as our Chief Strategy Officer in October 1999. Prior to joining us, Mr. Thacker served as Executive Vice President of Sterling Communications, Inc., an international systems integration firm, from August 1998 to September 1999. Prior to that, Mr. Thacker was the Vice President of Sales and Marketing for Digital Network Access, an Internet service provider, from September 1997 to August 1998. He served as President of Choice Com, Inc., a competitive local exchange carrier, from March 1997 until August 1997 after acting as British Telecom's Vice President of Global Sales for its Information Technology outsourcing business from May 1993 until January 1997. Mr. Thacker has over 30 years of executive level experience with companies such at AT&T, General Electric, and Oracle. He holds an M.B.A. from Western New England College and a B.B.A. in marketing and finance from the University of Oklahoma. Jeffrey A. Glickman joined us as the President of DigitalDemographics.:Com Inc., our subsidiary that collects and sells demographic data, in December 1999. Prior to joining us, Mr. Glickman served as President of World Class Marketing, a database marketer, from March 1995 to December 1999. Mr. Glickman holds a Ph.D. in reproductive endocrinology from the University of Western Ontario, an M.Sc. in embryology from McGill University and a B.S. in marine biology from McGill University. John G. Huncke joined us as the Executive Vice President of our Media Group in January 2000. Prior to joining us, Mr. Huncke served as General Counsel of Universal Pictures from June 1998 to 55 December 1999. From January 1995 to June 1998, Mr. Huncke served as General Counsel and Chief Operating Officer of Polygram Television, a television production and distribution company. From January 1987 to January 1995, Mr. Huncke served as Executive Vice President and General Counsel for ITC Entertainment Group, a motion picture production and distribution company. Mr. Huncke holds a J.D. from the University of Southern California and a B.S. from the University of Notre Dame. William O. Hunt has served as one of our directors since January 1999. Mr. Hunt has served as Chairman of the Board of Internet America since May 1995. Mr. Hunt has also served as Chairman of the Board of Intellicall Inc., a company that provides telephone network switching and other services, since 1992. Mr. Hunt served as President and Chief Executive Officer of Intellicall from December 1992 to May 1998. Mr. Hunt also currently holds directorships in Andrew Corporation, American Homestar Corporation and Mobility Electronics, Inc. Mr. Hunt holds an M.B.A. and a B.B.A. from the University of North Texas. Michael H. Jordan has served as one of our directors since August 1999. Mr. Jordan has served as Chairman of Luminant Worldwide Corporation, a leading provider of Internet and electronic commerce professional services, since September 1999. He also serves as Chairman and Chief Executive Officer of EOriginal Inc., an electronic commerce company that provides secure documents. Mr. Jordan retired in December 1998 as Chairman and Chief Executive Officer of CBS Corporation (formerly Westinghouse Electric Corporation), positions he had held since June 1993. Mr. Jordan is also a member of the Boards of Directors of Aetna Inc., Dell Computer Corp. and Marketwatch.com. Mr. Jordan is a member of the President's Export Council; is the Chairman of the U.S.-Japan Business Council; is the Chairman of The College Fund/UNCF; and is the Chairman of the Policy Board of the Americans for the Arts. Jack A. Turpin has served as one of our directors since January 1999. Mr. Turpin founded Hall-Mark Electronics Corporation, an electronics distribution firm, in 1962 and served as its Chairman of the Board until its sale in 1993. Mr. Turpin holds a B.S. in electrical engineering from Rice University. Pursuant to an amendment to our certificate of incorporation that will become effective upon consummation of the offering, our Board of Directors will be classified into three classes of directors, denoted as Class I, Class II and Class III. Messrs. Hunt and Garin will be Class I directors, Messrs. Turpin and Stark will be Class II directors, and Messrs. Philyaw and Jordan will be Class III directors. The term of the Class I directors will expire at the 2001 annual meeting of our stockholders, the term of the Class II directors will expire at the 2002 annual meeting of our stockholders and the term of the Class III directors will expire at the 2003 annual meeting of our stockholders. BOARD COMPENSATION Directors who are also our officers, employees or affiliates do not receive compensation for their services as directors. Each non-employee director is entitled to an award of stock options to purchase 15,000 shares of our common stock, when he becomes a non-employee director, at an exercise price equal to the fair market value of our common stock on the date of grant. Additionally, each non-employee director in office following each annual stockholders' meeting is entitled to an award of stock options to purchase 8,000 shares of common stock at an exercise price equal to the fair market value of our common stock on the date of grant. In each case, the stock options granted to the non-employee directors are fully vested on the date of grant. Directors are entitled to reimbursement of their reasonable out-of-pocket expenses in connection with their travel to and attendance at meetings of the board of directors or committees thereof. 56 INDEMNIFICATION OF DIRECTORS We have entered into agreements to indemnify our directors and officers. Under these agreements, we are obligated to indemnify our directors and officers to the fullest extent permitted under Delaware General Corporate Law for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by them in any action or proceeding arising out of their services as a director or officer. We believe that these agreements are necessary to attract and retain qualified directors and officers. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth certain information concerning the compensation of our chief executive officer and our other most highly paid executives serving in such capacity at the end of 1999 whose total annual salary and bonus exceeded $100,000 in 1999. These three individuals are referred to in this prospectus as our "Named Executive Officers." SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION ---------------------------------- ------------ OTHER SECURITIES ANNUAL UNDERLYING ALL OTHER SALARY BONUS COMPENSATION OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION ($) ($) ($) (#) ($) - --------------------------- -------- -------- ------------ ------------ ------------ J. Jovan Philyaw ........................ $230,500 $150,000 $ -- $ -- $ -- Chief Executive Officer and Chairman of the Board Michael N. Garin ........................ 100,000 -- -- 2,677,500 -- President and Chief Operating Officer Scott P. Carlin ......................... 62,500 150,000 -- 1,102,500 18,900(1) President--Media Group
- ------------------------ (1) This number represents reimbursement of Mr. Carlin for moving expenses. The following table provides information regarding stock options granted to our Named Executive Officers during 1999. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------------------- GRANT DATE PERCENT OF VALUE TOTAL OPTIONS ------------ NUMBER OF GRANTED TO EXERCISE PRICE GRANT DATE SECURITIES UNDERLYING EMPLOYEES IN OR BASE PRICE EXPIRATION PRESENT NAME OPTIONS GRANTED (#) FISCAL YEAR ($/SHARE) DATE VALUE ($)(1) - ---- --------------------- ------------- -------------- ---------- ------------ J. Jovan Philyaw............. -- -- $ -- -- $ -- Michael N. Garin............. 157,500(2) 2.0% 3.31 8/2/09 123,323 2,520,000(3) 33.2% 3.31 8/16/09 1,973,160 Scott P. Carlin.............. 1,102,500(3) 14.5% 3.31 8/16/09 863,258
- ------------------------ (1) The present value of each grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 0% for all years; expected volatility of 0.10%; risk-free interest rate of 5.40% to 6.10%; and expected life of five years. 57 (2) 25% of the stock options became exercisable on August 2, 1999, the date of grant, and 25% of the stock options will become exercisable on each anniversary of the date of grant until they become fully exercisable. (3) 25% of the stock options became exercisable on August 16, 1999, the date of grant, and 25% of the stock options will become exercisable on each anniversary of the date of grant until they become fully exercisable. The following table provides summary information with respect to stock options held by our Named Executive Officers as of December 31, 1999. The value of unexercised in-the-money options is based on an assumed initial public offering price of $ , less the exercise price payable for the shares. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF THE UNEXERCISED UNDERLYING OPTIONS IN-THE-MONEY OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($) SHARES ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- --------------- ------------ ----------- ------------- ----------- ------------- J. Jovan Philyaw...... -- $ -- -- -- $ $ Michael N. Garin...... -- -- 669,375 2,008,125 Scott P. Carlin....... -- -- 275,625 826,875
COMMITTEES OF THE BOARD Our board of directors has established an audit committee and a compensation committee. Our board has no nominating committee or other committee performing similar functions at this time. AUDIT COMMITTEE. The audit committee is comprised of Messrs. Hunt, Jordan and Turpin. The audit committee reports on its activities to the board of directors and is responsible for reviewing: - the scope and timing of the audit and non-audit services performed by our independent accountants; - the appropriateness of our accounting policies; - the adequacy of our financial controls; and - the reliability of the financial information we report to the public. COMPENSATION COMMITTEE. The compensation committee is comprised of Messrs. Hunt, Jordan and Turpin. The primary functions of the compensation committee are to: - provide a general review of our compensation and benefit plans to determine if they meet corporate objectives; - evaluate and make recommendations regarding our chief executive officer's compensation; and - review our chief executive officer's recommendations regarding the: - compensation of all of our other officers; - granting of awards under our benefit plans; and - adoption of, and changes to, our major compensation policies and practices. 58 EMPLOYMENT AGREEMENTS MICHAEL N. GARIN. On August 16, 1999, we entered into a three-year employment agreement with Michael N. Garin which provides that he will serve as our President and Chief Operating Officer. The employment agreement provides for annual compensation of $400,000, which amount will be increased upon completion of this offering to an amount commensurate to that paid by comparable companies at comparable stages of development. Mr. Garin's employment agreement provides for an annual bonus at the discretion of the board. In addition, the employment agreement provides that Mr. Garin is eligible to participate in all benefit programs for which employees and/or senior executives are generally eligible. Under his employment agreement, we may terminate Mr. Garin's services for cause or without cause. If Mr. Garin is terminated without cause or if we breach the employment agreement, Mr. Garin will be entitled to receive his base salary for the remainder of his term of employment in a lump sum payment. The employment agreement also contains confidentiality provisions. SCOTT P. CARLIN. On August 16, 1999, we entered into an employment agreement with Scott P. Carlin which, as amended, provides that he will serve as President of our Media Group for three years. We paid Mr. Carlin a $150,000 signing bonus. Mr. Carlin's employment agreement provides for annual compensation of $250,000, which amount will be increased to a level negotiated in good faith upon completion of this offering. Mr. Carlin's employment agreement provides for an annual bonus at the discretion of the board. In addition, his employment agreement provides that he is eligible to participate in all benefit programs for which employees and/or senior executives are generally eligible. Under his employment agreement, we may terminate Mr. Carlin's services for cause or without cause. If Mr. Carlin is terminated without cause or if we breach the employment agreement, Mr. Carlin will be entitled to receive his base salary for the remainder of his term of employment in a lump sum payment. Mr. Carlin's employment agreement also contains confidentiality provisions. STOCK OPTION PLAN We adopted our 1999 Stock Option Plan on September 1, 1999. A total of 12,375,000 shares of common stock are authorized for issuance under the plan, as amended. The plan provides for grants of incentive stock options to our employees, including officers and employee-directors, and for grants of nonstatutory stock options to our employees, consultants and nonemployee directors. The purposes of the plan are: - to attract and retain the best available personnel for positions of substantial responsibility; - to provide additional incentive to our employees and consultants; and - to promote the success of our business. Our compensation committee administers the plan. Our compensation committee will designate the individuals to receive the options, the number of shares subject to options, and the terms and conditions of each option. While our compensation committee determines the terms of options granted under the plan, the term of any incentive stock option cannot exceed ten years from the date of grant and any incentive stock option granted to an employee who possesses more than ten percent of the total combined voting power of all classes of our shares within the meaning of Section 422(b)(6) of the Internal Revenue Code cannot be exercisable after the expiration of five years from the date of grant. While the compensation committee determines the exercise price of options granted under the plan, an option's exercise price cannot be less than the fair market value of a share of common stock on the date the option is granted, subject to adjustments. Further, the exercise price of any incentive stock option granted to an employee who possesses more than ten percent of the total combined voting power of all classes of our shares within the meaning of Section 422(b)(6) of the Internal Revenue 59 Code must be at least 110% of the fair market value of the underlying share at the time the option is granted. The exercise price of options granted under the plan will be paid in full in a manner prescribed by our compensation committee. EMPLOYEE STOCK PURCHASE PLAN We adopted our Employee Stock Purchase Plan in April 2000. A total of 1,000,000 shares of common stock are authorized for issuance under the plan. The plan provides for the grant of stock options to certain eligible employees. The purpose of the plan is to provide eligible employees with an incentive to advance the interests of the company by providing an opportunity to purchase stock of the company at a favorable price. The plan is administered by our compensation committee. Any eligible employee may elect to participate in the plan by authorizing our compensation committee to make payroll deductions to pay the exercise price of an option at such time and in such manner as prescribed by our compensation committee. Such payroll deduction may be a specific amount or a designated percentage to be determined by the employee, but such specific amount may not be less than an amount established by us and such designated percentage may not exceed an amount of eligible compensation established by us from which the deduction is made. In no event will an employee be granted an option under the plan that would permit him to purchase stock with a fair market value in excess of $25,000, or to purchase more than 10,000 shares, in a period established by us. There will be two six-month offering periods in each calendar year. The date of grant and the date of exercise for the first option period is January 1 and June 30, respectively, and the date of grant and date of exercise for the second option period is July 1 and December 31, respectively. The first offering period of the plan will commence on the date we close this offering, and will conclude on December 31, 2000. The exercise price of options granted under the plan is an amount equal to the lesser of 85% of the fair market value of the stock on the date of exercise or on the date of grant. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Currently, Messrs. Hunt, Jordan and Turpin are members of our compensation committee. Mr. Hunt is the general partner of B&G Partnership, Ltd. and BCG Partnership, Ltd., which are both our stockholders. Mr. Turpin is the sole managing director of JAT FIVE, LTD., one of our stockholders. See "Certain Relationships and Related Transactions." 60 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PREFERRED STOCK FINANCINGS The following information summarizes private placement transactions in which we sold shares of preferred stock to our directors and 5% stockholders and persons and entities associated with our directors and those stockholders. Each share of Series A preferred stock will convert into 630 shares of common stock and each share of Series B and Series C preferred stock will convert into one share of common stock upon completion of this offering. SERIES A FINANCING. From September 29, 1999 to January 14, 2000, we issued 15,966 shares of Series A preferred stock to various investors, including Young & Rubicam, Inc., Belo Enterprises, Inc., DING.com LLC and ING Capital LLC, for aggregate consideration of approximately $50.3 million, or $3,150 per share. A trust of our President of the Publishing Group, Donald E. Welsh, invested $200,000 in our Series A preferred stock through DING.com LLC. In addition, the spouse of our president, Michael N. Garin, invested $500,000 in our Series A preferred stock through DING.com LLC. SERIES B FINANCING. In April 2000, we issued 5,929,364 shares of Series B preferred stock to various investors, including Belo Corp., Young & Rubicam, Inc., The Coca-Cola Company, The E.W. Scripps Company, Spielberg/Katz Associates, LLC and Tandy Corporation, for aggregate consideration of approximately $41.7 million, or $7.03 per share. SERIES C FINANCING. In April 2000, we issued 5,372,593 shares of Series C preferred stock to various investors, including Belo Corp., Young & Rubicam, Inc., The Coca-Cola Company, The E.W. Scripps Company and Tandy Corporation, for aggregate consideration of approximately $56.6 million, or $10.54 per share. The following table summarizes the private placement transactions in which we sold preferred stock to our directors and 5% beneficial stockholders and persons and entities affiliated with our directors and those stockholders.
NUMBER OF SHARES OF --------------------------------- DIRECTORS, 5% BENEFICIAL SERIES A SERIES B SERIES C STOCKHOLDERS AND AFFILIATED ENTITIES PREFERRED PREFERRED PREFERRED - ------------------------------------ --------- --------- --------- Belo Corp................................................... 3,970 1,422,474 1,897,532 Young & Rubicam, Inc........................................ 6,350 380,986 508,222
WARRANTS We issued a warrant, dated September 29, 1999, to Belo Enterprises, Inc., an affiliate of Belo Corp., to purchase 124,740 shares of our common stock at an exercise price of $5.00 per share. The warrants will terminate on September 29, 2004. See "Business--Strategic Relationships." We issued two warrants in April 2000, to an affiliate of National Broadcasting Company, Inc., our strategic partner, to purchase 3,752,445 shares and 4,505,165 shares, respectively, of our common stock at per share exercise prices of $5.00 and $10.54, respectively. We are required to issue additional warrants to National Broadcasting Company, Inc.'s affiliate with a per share exercise price of $10.54, depending on the number of shares we reserve for issuance under our 1999 Stock Option Plan. The warrants will terminate in April 2005. See "Business--Strategic Relationships." STOCK PURCHASE AGREEMENT We entered into a stock purchase agreement, dated September 29, 1999, under which we sold the Series A preferred stock. Under the stock purchase agreement, we agreed: - to provide periodically financial and other information to the holders; 61 - not to engage in certain transactions without the prior consent of the holders of at least two-thirds of the outstanding shares of Series A preferred stock; - as long as at least 1,900 shares of Series A preferred stock remain outstanding, at any time that Michael Jordan is not our director, to nominate to our board of directors one nominee designated by the majority of the holders of such shares of our Series A preferred stock; and - to give each investor in our Series A preferred stock preemptive rights for new issuances of any shares of our capital stock, excluding issuances of common stock in this offering (these investors waived this right in connection with the issuance of the Series B preferred stock and Series C preferred stock). These provisions in the stock purchase agreement were terminated in April 2000. STOCKHOLDERS AGREEMENTS We entered into an agreement among stockholders, dated January 28, 1999, with J. Jovan Philyaw, our Chairman of the Board and Chief Executive Officer; JAT III, L.L.C.; B&G Partnership, Ltd.; and BCG Partnership, Ltd. William Hunt, our director, is the general partner of B&G Partnership, Ltd. and BCG Partnership, Ltd. Jack A. Turpin, also our director, is the sole managing director of JAT III, L.L.C. This agreement was terminated on September 29, 1999. We entered into an amended and restated stockholders agreement, dated April 25, 2000, with J. Jovan Philyaw, Michael N. Garin, our President and Chief Operating Officer, Patrick V. Stark, our Executive Vice President, an affiliate of the National Broadcasting Company, Inc., B&G Partnership, Ltd., BCG Partnership, Ltd., JAT FIVE, LTD., for whom Jack A. Turpin is the sole managing director, Young & Rubicam, Inc., Belo Enterprises, Inc. and A.H. Belo Foundation, affiliates of Belo Corp., and each of the other holders of preferred stock. The stockholders agreement contains: - a right of first refusal, exercisable by the stockholders who are parties to the stockholders agreement and then us, to purchase any of our securities proposed to be transferred by Messrs. Philyaw, Garin or Stark and the right of those other stockholders to participate on a pro rata basis in any transfer of securities by Messrs. Philyaw, Garin or Stark; - our agreement to nominate a representative of the preferred stock holders to our board of directors if, at any time, Michael Jordan is not our director and at least 3,791,900 shares of our preferred stock remain outstanding; - our agreement to provide financial and other information to the holders; - our agreement not to engage in certain transactions without the prior consent of the holders of at least two-thirds of each class of preferred stock; and - preemptive rights for each preferred stockholder for new issuances of shares of our capital stock, excluding issuances of common stock in this offering. This agreement will automatically terminate upon the completion of this offering. REGISTRATION RIGHTS AGREEMENTS We entered into a registration rights agreement, dated January 28, 1999, with JAT III, L.L.C., B&G Partnership, Ltd. and BCG Partnership, Ltd. This agreement was terminated on September 29, 1999. An affiliate of the National Broadcasting Company, Inc. and holders of our preferred stock and other stockholders, including B&G Partnership, Ltd., BCG Partnership, Ltd., JAT FIVE, LTD., Belo Enterprises, Inc., Young & Rubicam, Inc. and A.H. Belo Foundation are entitled under an amended 62 and restated agreement with us, dated April 25, 2000, to the following registration rights for the shares of common stock held by them or issuable upon conversion of our preferred stock or upon exercise of outstanding warrants to purchase our common stock: - at any time after 180 days from the date of completion of this offering, the holders of these registrable securities, other than the affiliate of the National Broadcasting Company, Inc., may require, on three occasions only, that we use our best efforts to register for public resale at least ten percent of the aggregate amount of registrable securities that were outstanding on April 25, 2000; - at any time after 180 days from the date of completion of this offering, the affiliate of the National Broadcasting Company, Inc. may require, on up to three occasions only, that we use our best efforts to register for public resale at least 15% of the aggregate amount of common stock issuable upon full exercise of the affiliate of the National Broadcasting Company, Inc.'s warrants; - until the tenth anniversary of this offering, if we register any common stock, either for our own account or for the account of other security holders, the holders of registrable securities are entitled to include their shares of common stock in the registration, subject to the ability of the underwriters to limit the number of shares included in the offering in view of market conditions; and - the holders of registrable securities with a fair market value of not less than $10,000,000 may require us to use our best efforts to register the securities on a Form S-3 registration statement or any successor form after we become eligible to use the form. In most cases, we will bear all registration expenses other than underwriting discounts and commissions. All demand registration rights terminate when a holder is entitled to sell all of its registrable securities under Rule 144(k) under the Securities Act. BELO CORP. AGREEMENT By letter agreement dated September 29, 1999, with Belo Corp., a strategic partner and principal beneficial stockholder, we have granted Belo Corp.'s newspapers and television stations an exclusive license to deploy our technology in their markets. We intend to enter into licensing agreements with each of Belo Corp.'s newspapers and television stations under which we will be paid a licensing fee, the amount of which will be negotiated in good faith, provided that each newspaper and television station will be entitled to the lowest licensing fee paid to us by other newspapers or televisions stations having comparable circulation levels or broadcasting in comparable markets. Belo Corp. has agreed to advertise our technology in its newspapers and on its television stations. YOUNG & RUBICAM, INC. AGREEMENT By letter agreement dated September 29, 1999, with Young & Rubicam, Inc., a principal stockholder of ours, we granted Young & Rubicam an exclusive right to resell our :C.R.Q. software and :Cue:C.A.T. devices in the United States for the period of six months after the public launch of this technology in the United States. The economic terms of this right are to be negotiated in good faith by Young & Rubicam and us. In addition, we granted to Young & Rubicam an exclusive right for a period of six months from a date to be mutually determined by Young & Rubicam and us to resell this technology outside the United States. The terms of this right are to be negotiated in good faith by Young & Rubicam and us. We also agreed that, on economic terms to be negotiated by Young & Rubicam and us, Young & Rubicam will act as our marketing and sales agent with respect to the deployment of our technology to our advertising customers or clients. 63 By a separate letter agreement, also dated September 29, 1999, we granted Young & Rubicam a right of first refusal on our marketing and communication assignments to third parties, provided that Young & Rubicam possesses core competency to handle these assignments. The terms of each assignment are to be negotiated by Young & Rubicam and us. In addition, we granted Young & Rubicam a right to receive a percentage of revenues paid to us by clients or licensees of Young & Rubicam. This percentage will equate to a "finders" or referral fee customary for blanket licensing agreements or a commission or mark-up on the Internet Enhancement of individual advertisements that is customary in the broadcast or entertainment industries. We also agreed to recommend Young & Rubicam as our preferred provider of marketing and communications services in response to inquiries from our potential licensees or customers or from those of Young & Rubicam. The rights described in this paragraph will no longer exist when Young & Rubicam ceases to own Series A preferred stock, or at least 50% of the common stock into which Young & Rubicam's Series A preferred stock is converted upon completion of this offering. ISSUANCE OF COMMON STOCK AND DEBENTURES On January 28, 1999, we sold 15,750,000 shares of common stock for a cash purchase price of $2,500 and issued 8.0% Debentures, Series 1999A with an aggregate principal amount of $2,500,000. In particular, we sold: - 3,150,000 shares of common stock and $500,000 in aggregate principal amount of the debentures to B&G Partnership, Ltd.; - 3,150,000 shares of common stock and $500,000 in aggregate principal amount of the debentures to BCG Partnership, Ltd.; and - 9,450,000 shares of common stock and $1,500,000 in aggregate principal amount of the debentures to JAT III, L.L.C. These shares have been transferred to JAT FIVE, LTD., an affiliate of JAT III, L.L.C. No interest payments are required to be paid on the debentures through the second anniversary of their issuance unless otherwise determined by our board of directors. Any unpaid interest will then be added to the principal amount of the debentures. Any remaining principal balance and any accrued and unpaid interest will be due and payable in full upon completion of this offering. In April 2000, we fully paid the principal amount and all accrued interest on each of the debentures. EMPLOYEE STOCKHOLDERS AGREEMENT We entered into a stockholders agreement, dated January 29, 1999, with various stockholders, including William S. Leftwich, our Chief Financial Officer. This agreement provides that the parties to the agreement, should they desire to sell their stock, shall first offer the stock to us. This agreement will automatically terminate upon the completion of this offering. OTHER TRANSACTIONS On January 4, 1999, we completed the acquisition of the rights to produce our television show NET TALK LIVE! THE INTERNET TALK SHOW and certain proprietary technology rights from Infotainment Telepictures, Inc. for a promissory note with a principal amount of $8,000,000. We also assumed certain liabilities in connection with this acquisition, including post-closing liabilities associated with the Nissi Cosmetics litigation. Infotainment Telepictures, Inc. has agreed to indemnify us for any costs, expenses, liabilities or other losses we may incur in connection with the Nissi Cosmetics litigation. See "Business--Legal Proceedings." J. Jovan Philyaw was the President and Chief Executive Officer of Infotainment Telepictures, Inc., a company owned by his father. The promissory note bears interest at 6.0% per annum. No interest payments are required to be made through the second anniversary of the 64 note. Any unpaid interest will then be added to the principal amount of the note. Any remaining principal balance and any accrued and unpaid interest will be due and payable in full upon completion of this offering. See "Use of Proceeds." We paid $1,500,000 and $3,000,000 of the principal amount of the note in 1999 and 2000, respectively. We paid $584,137 in accrued interest on the note in 2000. In connection with our acquisition of Infotainment Telepictures, Inc. in January 1999, we assumed a loan payable to Jack A. Turpin in the principal amount of $452,900, plus accrued and unpaid interest of $6,819. In January 2000, Mr. Turpin loaned us an additional $147,090 for operating capital expenditures. We repaid the principal amount of the loans, plus $10,770 in interest, in January 2000. We entered into a stock purchase agreement, dated May 17, 1999, with William S. Leftwich under which Mr. Leftwich purchased 472,500 shares of our common stock. We have the right, subject to limitations, to repurchase Mr. Leftwich's shares purchased under the agreement if he ceases for any reason to be employed by us. Each of our executive officers and employees has entered into a proprietary rights and information agreement regarding the ownership of inventions developed in his or her capacity as our employee and the confidentiality of our proprietary information. Each of our directors has entered into a nondisclosure agreement. Patrick V. Stark was a shareholder/director of the law firm of Kane, Russell, Coleman & Logan, P.C. until December 31, 1999 and became of counsel as of January 1, 2000. During 1999 and during the first quarter of 2000, we paid Kane, Russell, Coleman & Logan, P.C. $135,000 and $21,000, respectively, for legal services. We have entered into indemnification agreements with each of our executive officers and directors. 65 SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT The following table sets forth information with respect to the beneficial ownership of our common stock as of , 2000, after giving effect to the automatic conversion of 11,317,923 shares of outstanding preferred stock into 21,360,537 shares of common stock upon completion of this offering and as adjusted to reflect the sale of the common stock in this offering by: - each security holder known by us to own beneficially more than 5% of our common stock; - each of our directors; - each of our executive officers; and - all directors and executive officers as a group. We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. Unless otherwise indicated, the persons or entities included in this table have sole voting and investment power with respect to all the shares of common stock beneficially owned by them, subject to applicable community property laws. The number of shares beneficially owned by a person includes shares of common stock that are subject to stock options or warrants that are either currently exercisable or exercisable within 60 days after , 2000. These shares are also deemed outstanding for the purpose of computing the percentage of outstanding shares owned by the person. These shares are not deemed outstanding, however, for the purpose of computing the percentage ownership of any other person.
PERCENT OF COMMON STOCK BENEFICIALLY OWNED SHARES OF COMMON STOCK ---------------------------------------- NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE THE OFFERING AFTER THE OFFERING - ------------------------ ---------------------- ------------------- ------------------ Belo Corp.(1)........................... 5,945,847 % % JAT FIVE, LTD.(2)....................... 9,765,000 % % National Broadcasting Company, Inc.(3)............................... 8,257,610 % % Young & Rubicam, Inc.(4)................ 4,889,708 % % J. Jovan Philyaw........................ 40,950,000 % % Michael N. Garin(5)..................... 1,438,750 % % Patrick V. Stark(6)..................... 730,000 * * Gregory D. Lerman(7).................... 551,250 * * Scott P. Carlin(7)...................... 551,250 * * Douglas L. Davis(7)..................... 117,810 * * Stuart B. Graber(7)..................... 157,500 * * Donald E. Welsh(8)...................... 7,112 * * William S. Leftwich..................... 472,500 * * Blaine L. Thacker....................... -- * * Jeffrey A. Glickman..................... -- * * John G. Huncke.......................... -- * * William O. Hunt(9)...................... 6,615,000 % % Michael H. Jordan(7).................... 78,750 * * Jack A. Turpin(10)...................... 9,765,000 % % All directors and executive officers as a group (15 persons).................. 61,434,922 % %
- ------------------------ * Less than one percent (1%). (1) Consists of (i) 5,267,773 shares issuable upon conversion of the shares of our preferred stock held of record by Belo Enterprises, Inc., (ii) 553,334 shares issuable upon conversion of the shares of 66 our preferred stock held of record by A.H. Belo Foundation and (iii) 124,740 shares issuable upon exercise of outstanding warrants held by Belo Enterprises, Inc. Belo Enterprises, Inc. and A.H. Belo Foundation are both indirect wholly-owned subsidiaries of Belo Corp. The address of Belo Corp. is Silverside Carr Executive Center, 501 Silverside Road, Suite 401, Wilmington, Delaware 19809. (2) Address: 8201 Preston Road, Suite 310, Dallas, Texas 75225. (3) Consists solely of shares issuable upon exercise of outstanding warrants held by an affiliate of the National Broadcasting Company, Inc. National Broadcasting Company, Inc.'s address is 30 Rockefeller Plaza, 46th Floor, New York, New York 10112. (4) Address: 285 Madison Avenue, New York, New York 10017. (5) Consists solely of shares issuable upon exercise of stock options that have already vested or will vest within 60 days. This number does not include shares of common stock which may be attributable to Torunn Garin, the wife of Mr. Garin, due to her passive investment in DING.com LLC, a stockholder of ours. Mr. Garin disclaims beneficial ownership of these shares. See "Certain Relationships and Related Transactions". (6) Includes 257,500 shares issuable upon exercise of stock options that have already vested or will vest within 60 days. (7) Consists solely of shares issuable upon exercise of stock options that have already vested or will vest within 60 days. (8) Consists solely of shares issuable upon conversion of 7,112 shares of Series B preferred stock owned by Bourne Welsh, the wife of Mr. Welsh. This number does not include shares of common stock which may be attributable to Mr. Welsh, due to his trust's passive investment in DING.com LLC, a stockholder of ours. Mr. Welsh disclaims beneficial ownership of these shares. (9) Consists of 3,150,000 shares held of record by B&G Partnership, Ltd. and 3,465,000 shares held of record by BCG Partnership, Ltd. Mr. Hunt is the general partner of each of these partnerships. Mr. Hunt disclaims beneficial ownership of these shares. (10) Consists of 9,765,000 shares held of record by JAT FIVE, LTD. Mr. Turpin serves as the sole managing director of this entity. Mr. Turpin disclaims beneficial ownership of these shares. 67 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of shares of common stock, par value $0.01 per share, and 27,000,000 shares of preferred stock, par value $0.01 per share. 16,000 shares of preferred stock are designated as Series A preferred stock, 12,100,000 shares of preferred stock are designated as Series B preferred stock, and 3,300,000 shares of preferred stock are designated as Series C preferred stock. As of the date of this prospectus, (i) shares of common stock were issued and outstanding, (ii) 15,966 shares of Series A preferred stock were issued and outstanding, (iii) 5,929,364 shares of Series B preferred stock were issued and outstanding, and (iv) 5,372,593 shares of Series C preferred stock were issued and outstanding. In addition, (i) shares of common stock were reserved for issuance under our stock option plan, (ii) shares of common stock were reserved for issuance under our stock purchase plan, (iii) shares of common stock were reserved for issuance upon exercise of outstanding warrants, and (iv) 21,360,537 shares of common stock were reserved for issuance upon conversion of all outstanding shares of preferred stock. All of our outstanding shares of preferred stock will be converted automatically into common stock upon completion of this offering. The following description of our capital stock and certain provisions of our certificate of incorporation and bylaws are summaries and are qualified by reference to our certificate of incorporation and bylaws, copies of which have been filed with the SEC as exhibits to the registration statement of which this prospectus is a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of the offering in accordance with the terms of the certificate of incorporation. COMMON STOCK Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive proportionately any dividends that may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to receive proportionately any of our assets remaining after the payment of liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. Our outstanding shares of common stock are, and the shares offered by us in this offering will be, when issued and paid for, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of preferred stock will be converted into 21,360,537 shares of common stock and automatically returned to our authorized, unissued and undesignated shares of preferred stock. Thereafter, our board of directors will have the authority, without further action by the stockholders, to issue up to 27,000,000 shares of preferred stock in one or more series and to designate the rights, preferences, privileges and restrictions of each series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock or delaying or preventing our change in control without further action by the stockholders. We have no present plans to issue any shares of preferred stock after the completion of this offering. 68 WARRANTS As of the date of this prospectus, there were outstanding warrants to purchase shares of our common stock at a weighted average exercise price of $ per share. See "Certain Relationships and Related Transactions." REGISTRATION RIGHTS An affiliate of the National Broadcasting Company, Inc., holders of our preferred stock and other stockholders are entitled under an agreement with us to the following registration rights for the shares of common stock held by them or issuable upon conversion of our preferred stock or upon exercise of outstanding warrants to purchase our common stock: - at any time after 180 days from the date of this offering, the holders of these registrable securities, other than the affiliate of the National Broadcasting Company, Inc., may require, on three occasions only, that we use our best efforts to register for public resale at least ten percent of the aggregate amount of registrable securities that were outstanding on April 25, 2000; - at any time after 180 days from the date of this offering, National Broadcasting Company, Inc.'s affiliate may require, on up to three occasions only, that we use our best efforts to register for public resale at least 15% of the aggregate amount of common stock issuable upon full exercise of its warrants; - until the tenth anniversary of this offering, if we register any common stock, either for our own account or for the account of other security holders, the holders of registrable securities are entitled to include their shares of common stock in such registration, subject to the ability of the underwriters to limit the number of shares included in the offering in view of market conditions; and - the holders of registrable securities with a fair market value of not less than $10,000,000 may require us to use our best efforts to register the securities on a Form S-3 registration statement or any successor form after we become eligible to use such form. In most cases, we will bear all registration expenses other than underwriting discounts and selling commissions. All demand registration rights terminate at such time as a holder is entitled to sell all of its registrable securities under Rule 144(k) under the Securities Act. DESCRIPTION OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS CLASSIFIED BOARD OF DIRECTORS Our bylaws provide that the board of directors shall be divided into three classes of two or three directors each, with each class elected for three-year terms expiring in successive years. Section 141 of the Delaware General Corporation Law provides that, in the case of a corporation having a staggered board, holders of a majority of the shares then entitled to vote in an election of directors may remove a director only for cause. Our certificate of incorporation defines "cause" as (i) a final conviction of a felony involving moral turpitude or (ii) willful misconduct that is materially and demonstrably injurious economically to us. No act, or failure to act, by a director will be considered "willful" unless committed in bad faith and without a reasonable belief that the act or failure to act was in the best interest of us or any of our affiliates. "Cause" will not exist unless and until we have delivered to the director a written notice of the act or failure to act that constitutes "cause" and the director has not cured the act or omission within 90 days after the delivery of the notice. The effect of this may be to restrict the ability of stockholders to remove directors from our board of directors. Our certificate of incorporation also allows the board of directors to fix the number of directors in the bylaws. 69 STOCKHOLDER MEETINGS AND PROPOSALS Our bylaws provide that special meetings of stockholders generally can be called only by the chairman of the board, the chief executive officer, the president or our board of directors. There are advance notice procedures for the nomination, other than by or at the direction of the board of directors, of candidates for election as directors as well as for other stockholder proposals to be considered at annual stockholder meetings. In general, notice of intent to nominate a director or raise business at annual meetings must be received by us not less than 90 nor more than 120 days before the meeting. The notice must contain certain information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. These provisions may preclude a nomination for the election of directors or preclude the conduct of business at a particular annual meeting if the proper procedures are not followed. Furthermore, these provisions may discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the company, even if the conduct of the solicitation or attempt might be beneficial to us and our stockholders. STOCKHOLDER ACTION Our certificate of incorporation does not allow stockholders to act by written consent without a meeting. Our certificate of incorporation requires the affirmative vote of the holders of not less than eighty percent of our shares entitled to vote in an election of directors to amend or repeal this prohibition of stockholder action by written consent. The effect of this provision is to restrict stockholders' ability to circumvent the notice requirements relating to an annual meeting. Our certificate of incorporation and bylaws do allow stockholders to amend our bylaws. BUSINESS COMBINATION UNDER DELAWARE LAW We are subject to Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless: - the board of directors approved the transaction in which the stockholder became an interested stockholder prior to the date the interested stockholder attained that status; - upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers; or - on or subsequent to the date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the holders of at least 66 2/3% of our outstanding voting stock which is not owned by the interested stockholder. A "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS Our certificate of incorporation provides that no director will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to us or our stockholders; 70 - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of laws; - for unlawful payment of a dividend or unlawful stock purchase or stock redemption; and - for any transaction from which the director derived an improper personal benefit. The effect of these provisions is to eliminate our rights and the rights of our stockholders, through stockholder derivative suits on our behalf, to recover monetary damages against a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior, except in the situations described above. STOCKHOLDER RIGHTS PLAN We anticipate that, immediately upon completion of this offering, our board of directors will declare, pursuant to a rights agreement, a dividend distribution of one common share purchase right for each outstanding share of our common stock. Each right will entitle the registered holder to purchase from us one thousandth of a share of our Series A Junior Participating Preferred Stock, par value $.01 per share, at a price per share to be determined by our board with the advice of our financial advisor about the long-term prospects for our value, subject to adjustment. Each thousandth of a junior preferred share will be economically equivalent to one share of our common stock. The purchase price is expected to be significantly higher than the trading price of our common stock. Therefore, the dividend will have no initial value and no impact on our financial statements. The following summary of the rights does not purport to be complete and is qualified in its entirety by reference to the rights agreement, which is an exhibit to the registration statement of which this prospectus is a part. Initially, the rights will be attached to all certificates representing shares of our common stock then outstanding, and no separate certificates representing the rights will be distributed. Subject to extension by a majority of our continuing directors (as defined in the rights agreement) acting on our behalf, the rights will separate from our common stock upon the distribution date, which is defined as the earlier of (a) ten days following a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of our common stock (any of the foregoing persons being an acquiring person), or (b) ten business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 15% or more of such outstanding shares of our common stock. Until the distribution date, (i) the rights will be evidenced by our common stock certificates and will be transferred with and only with our common stock certificates, (ii) all certificates representing shares of our common stock will contain a notation incorporating the rights agreement by reference and (iii) the surrender for transfer of any certificate for our common stock outstanding will also constitute the transfer of the rights associated with our common stock represented by that certificate. As soon as practicable after the distribution date, separate certificates evidencing the rights will be mailed to holders of record of our common stock. The rights are not exercisable until the distribution date and will expire ten years after consummation of this offering, unless earlier redeemed by us. In the event that, at any time following the distribution date, (a) we are the surviving corporation in a merger or combination with an acquiring person and our shares of common stock shall remain outstanding and not be changed or exchanged, (b) a person becomes the beneficial owner of 15% or more of the then outstanding shares of our common stock, or (c) an acquiring person engages in one or more "self-dealing" transactions as set forth in the rights agreement, each holder of a right will thereafter have the right to receive, upon exercise, junior preferred shares (or, in certain circumstances, our common stock, cash, property or other securities of ours) having a value equal to two times the 71 exercise price of the right. For example, at an exercise price of $100.00 per right, each right not owned by an acquiring person following an event described above would entitle its holder to purchase from us $200.00 worth of junior preferred shares (or in certain circumstances, our common stock, cash, property or other securities of ours) for $100.00. Assuming that our common stock had a current market price per share of $20.00 at that time, the holder of each valid right would be entitled to purchase ten one-thousandths of junior preferred shares for $100.00. Notwithstanding the foregoing, following the occurrence of any of the events set forth in this paragaph, all rights that are, or (under certain circumstances specified in the rights agreement) were, beneficially owned by an acquiring person will be null and void. However, rights are not exercisable following the occurrence of any of the events set forth above until such time as the rights are no longer redeemable by us as set forth below. In the event that, at any time following the date that a person has become an acquiring person (a shares acquisition date), (a) we are acquired in a merger or other combination transaction in which we are not the surviving entity, (b) we consolidate with or merge with or into any other person pursuant to which we are the surviving entity but all or a part of the shares of our common stock are changed into or exchanged for stock of another person or cash or other property or (c) 50% or more of our assets or earning power is sold or transferred, each holder of a right (except rights that previously have been voided as described above) shall thereafter have the right to receive, upon exercise, common stock or other securities of the acquiring company having a value equal to two times the exercise price of the right. The purchase price payable and the number of junior preferred shares or other securities or property issuable upon exercise of the rights are subject to adjustment from time to time to prevent dilution (a) in the event of a stock dividend on, or a subdivision, combination or reclassification of, our common stock, (b) upon the grant to holders of our common stock of certain rights or warrants to subscribe for our common stock or convertible securities at less than the current per-share market price of our common stock or (c) upon the distribution to holders of our common stock of evidences of indebtedness or assets of ours (excluding regular periodic cash dividends at a rate approved by the majority of continuing directors of ours or dividends payable in our common stock) or of subscription rights or warrants (other than those referred to above). With certain exceptions, no adjustment to the purchase price will be required until cumulative adjustments require an adjustment of at least one percent to the purchase price. Upon the exercise of a right, we will not be required to issue fractional junior preferred shares or fractional shares of our common stock (other than fractions in multiples of one-thousandth of a junior preferred share) and, in lieu thereof, an adjustment in cash may be made based on the market price of the junior preferred shares or our common stock on the last trading date prior to the date of exercise. At any time until 15 business days following the shares acquisition date, we may redeem the rights in whole, but not in part, at a price of $.01 per right, payable in cash. Immediately upon the action of our board of directors ordering redemption of the rights, the rights will terminate and the only right of the holders of rights will be to receive the $.01 redemption price. Until a right is exercised, the holder thereof, as such, will have no rights as a stockholder of ours, including, without limitation, the right to vote or to receive dividends. While the distribution of the rights will not be taxable to stockholders or to us, stockholders may, depending upon the circumstances, recognize taxable income in the event that any of the rights are exercised for our common stock (or other consideration) or for common stock or other securities of the acquiring company as set forth above. Any of the provisions of the rights agreement, other than those provisions relating to the principal economic terms of the rights, may be amended by our board of directors before the distribution date, and no stockholder approval will be sought for noneconomic amendments to the rights agreement except as required by law or by the rules of any national securities exchange or trading system on which 72 our common stock is then listed. After the distribution date, the provisions of the rights agreement may be amended by our board of directors to cure any ambiguity, to make changes that do not adversely affect the interests of holders of rights (excluding the interests of any acquiring person) or to shorten or lengthen any time period under the rights agreement; provided, however, that no amendment to adjust the time period governing redemption may be made when the rights are not redeemable. The rights have certain anti-takeover effects. The rights will cause substantial dilution to any person or group that attempts to acquire us without conditioning the offer on our redemption of the rights. The rights should not interfere with any merger or other business combination approved by our board of directors because the board of directors may, at its option, at any time before the close of business on the earlier of the 15th day following the shares acquisition date or ten years after the adoption of the rights agreement, redeem all, but not less than all, of the then outstanding rights at $.01 per right. LISTING We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "DGTL." TRANSFER AGENT AND REGISTRAR The transfer agent for our common stock is ChaseMellon Shareholder Services, LLC. 73 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the market price of our common stock. After this offering is completed, the number of shares available for future sale into the public markets will be subject to legal and contractual restrictions, some of which are described below. The lapsing of these restrictions will permit sales of substantial amounts of our common stock in the public market or could create the perception that these sales could occur, which could adversely affect the market price for our common stock. These factors could also make it more difficult to raise funds through future offerings of common stock. After this offering, shares of common stock will be outstanding ( shares if the U.S. underwriters and international managers exercise their over-allotment options in full). Of these shares, - the shares sold in this offering, plus any shares issued upon exercise of the U.S. underwriters' and international managers' over-allotment options, will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act; and - the remaining shares of common stock that will be outstanding after this offering will be "restricted securities" within the meaning of Rule 144 of the Securities Act. Upon the closing of this offering, we intend to file one or more registration statements under the Securities Act to register the shares of common stock to be issued under our 1999 Stock Option Plan and our Employee Stock Purchase Plan and, as a result, all shares of common stock acquired upon exercise of stock options granted under our stock option plan or stock purchase plan will also be freely tradable under the Securities Act unless purchased by our affiliates. Restricted securities generally may be sold only if they are registered under the Securities Act or are sold pursuant to an exemption from registration, such as the exemptions provided by Rules 144 and 701 under the Securities Act, which are summarized below. Subject to the lock-up agreements described below, shares held by our affiliates that are not restricted securities may be sold subject to compliance with Rule 144 of the Securities Act without regard to the prescribed holding period under Rule 144. Our executive officers and directors and certain existing stockholders have agreed, with exceptions, not to sell or transfer any common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, these persons have agreed not to directly or indirectly: - offer, pledge, sell or contract to sell any common stock; - sell any option or contract to purchase any common stock; - purchase any option or contract to sell any common stock; - grant any option, right or warrant for the sale of any common stock; - lend or otherwise dispose of or transfer any common stock; - request or demand that we file a registration statement related to the common stock; or - enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise. This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. 74 Following the lock-up period, the number of shares of common stock that will become eligible for sale in the public market under Rule 144 under the Securities Act will be as follows: - Beginning 180 days after the date of this prospectus, approximately shares will be eligible for sale; and - At various times thereafter upon the expiration of the applicable holding periods, approximately shares will become eligible for sale. Some of our stockholders have the right to require us to register shares of common stock for resale in some circumstances. See "Description of Capital Stock--Registration Rights." In general, under Rule 144 as currently in effect, any person or persons whose shares are aggregated, including an affiliate, who has beneficially owned restricted securities for a period of at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: - one percent of the then outstanding shares of common stock, which will equal approximately shares immediately after this offering; or - the average weekly trading volume in the common stock on the Nasdaq National Market during the four calendar weeks preceding the date on which the notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to provisions relating to notice and manner of sale and the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares for at least two years, including the holding period of any prior owner other than an "affiliate," is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 under the Securities Act may be relied upon for the resale of our common stock originally issued by us before the date of this prospectus to our employees, directors, officers, consultants or advisers under written compensatory benefit plans, including our 1999 Stock Option Plan, or contracts relating to the compensation of such persons. Shares of our common stock issued in reliance on Rule 701 are "restricted securities" and, beginning 90 days after the date of this prospectus, may be sold by non-affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with the one-year holding period, in each case subject to the lock-up agreements. 75 CERTAIN U.S. FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS OF COMMON STOCK The following is a summary of the material United States federal income and estate tax consequences of the ownership and disposition of common stock generally applicable to non-United States holders. Subject to the discussion below under "Estate Tax," a non-United States holder is any beneficial owner of common stock that, for United States federal income tax purposes, is a non-resident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust as such terms are defined in the Internal Revenue Code of 1986, as amended. This discussion is based on the Internal Revenue Code, existing, proposed and temporary regulations promulgated thereunder, and administrative and judicial interpretations, all as of the date of this prospectus, and all of which are subject to change either retroactively or prospectively. This discussion does not address all aspects of United States federal income and estate taxation that may be relevant to non-United States holders in light of their particular circumstances and does not address any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction or the application of any particular tax treaty. Further, it does not consider non-United States holders subject to special tax treatment under the United States federal income tax laws including banks, insurance companies, dealers in securities and holders of securities held as a part of a "straddle," "hedge" or "conversion transaction." PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL INCOME AND OTHER TAX CONSEQUENCES, AND THE NON-UNITED STATES TAX CONSEQUENCES, OF OWNING AND DISPOSING OF COMMON STOCK. DIVIDENDS Subject to the discussion below (including the discussion of backup withholding), any dividend paid to a non-United States holder generally will be subject to United States withholding tax at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by any applicable tax treaty. For purposes of determining whether tax is required to be withheld under United States Treasury Regulations currently in effect we ordinarily will presume that dividends paid to a holder with an address in a foreign country are paid to a resident of such country absent knowledge that such presumption is not warranted. Under such regulations, dividends paid to a holder with an address within the United States generally will be presumed to be paid to a holder who is not a non-United States holder and will not be subject to the 30% (or lower treaty rate) withholding tax, unless we have actual knowledge that the holder is a non-United States holder. Under final United States Treasury Regulations, scheduled to become effective January 1, 2001, however, a non-United States holder who wishes to claim the benefit of an applicable treaty rate would be required to satisfy applicable certification and other requirements, which would include the requirement that the non-United States holder file with us a United States Internal Revenue Service Form W-8 which provides the holder's name and address. In the case of a non-United States holder that is a foreign partnership, the certification requirements would generally be applied to the partners of the partnership. Dividends received by a non-United States holder that are effectively connected with a United States trade or business conducted by such non-United States holder (or, if a tax treaty applies, that are attributable to a permanent establishment in the United States maintained by such non-United States holder) are exempt from withholding tax if the non-United States holder files an IRS Form W-8ECI (or, prior to January 1, 2001, an IRS Form 4224) with the payor. However, such effectively connected dividends are subject to regular United States federal income tax. Effectively connected dividends received by a corporate non-United States holder may be subject to an additional "branch profits tax" at a rate of 30% (or such lower rate as may be specified by an applicable tax treaty) of such corporate non-United States holder's effectively connected earnings and profits for the taxable year, subject to certain adjustments. 76 A non-United States holder eligible for a reduced rate of United States withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. GAIN ON DISPOSITION OF COMMON STOCK A non-United States holder generally will not be subject to United States federal income tax with respect to gain realized upon the sale or other disposition of common stock unless: (1) such gain is effectively connected with a United States trade or business of the non-United States holder (or, if a tax treaty applies, attributable to a permanent establishment in the United States maintained by such non-United States holder); (2) the non-United States holder is an individual who holds the common stock as a capital asset, is present in the United States for a period or periods aggregating 183 days or more during the taxable year in which such sale or disposition occurs, and certain other conditions are met; (3) the non-United States holder is an individual subject to tax pursuant to the provisions of United States tax law applicable to certain United States expatriates; or (4) we are or have been a "United States real property holding corporation" for United States federal income tax purposes at any time within the shorter of the five-year period preceding such disposition of such holder's common stock and such holder's holding period and certain other conditions are met. We believe that we are not and have never been, and we do not believe that we will become, a "United States real property holding corporation" for United States federal income tax purposes. BACKUP WITHHOLDING AND INFORMATION REPORTING Generally, we must report to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the recipient. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient's country of residence. For payments made before January 1, 2001, backup withholding generally will not apply to dividends paid to holders at an address outside the United States (unless we have knowledge that the holder is a United States person). Unless we have actual knowledge that a holder is a non-United States holder, dividends paid during such period to a holder at an address within the United States may be subject to backup withholding at a rate of 31% if the holder (1) is not a corporation or other "exempt recipient" as defined in Treasury Regulations and (2) fails to provide a correct taxpayer identification number and other information to us. For payments made after December 31, 2000, non-United States holder that is not an "exempt recipient" generally will be subject to backup withholding at a rate of 31%, rather than withholding at a 30% rate or lower treaty rate discussed above, unless such non-United States holder certifies as to its foreign status (which certification may be made on IRS Form W-8). Proceeds from the disposition of common stock by a non-United States holder effected by or through a United States office of a broker will be subject to information reporting and to backup withholding at a rate of 31% of the gross proceeds unless such non-United States holder certifies under penalties of perjury as to, among other things, its address and status as a non-United States holder or otherwise establishes an exemption. Generally, United States information reporting and backup withholding will not apply to a payment of disposition proceeds if the transaction is effected outside the United States by or through a non-United States office of a broker. However, if such broker is, for United States federal income tax purposes, a United States person, a "controlled foreign corporation," a foreign person who derives 50% or more of its gross income for certain periods from the conduct of a United States trade or business, or, for payments after December 31, 2000, a partnership with certain connections to the United States, information reporting (but not backup withholding) will apply unless (1) such broker has documentary evidence in its files that the holder is a non-United States holder and certain other conditions are met or (2) the holder otherwise establishes an exemption. Under final 77 United States Treasury Regulations, effective January 1, 2001, a non-United States holder generally would not be subject to backup withholding if the beneficial owner certifies to such owner's foreign status on a valid Form W-8 filed with us. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If backup withholding results in an overpayment of United States income taxes, a refund may be obtained, provided the required documents are filed with the IRS. ESTATE TAX An individual non-United States holder who is treated as the owner of common stock at the time of such individual's death or has made certain lifetime transfers of an interest in common stock will be required to include the value of such common stock in such individual's gross estate for United States federal estate tax purposes and may be subject to United States federal estate tax, unless an applicable tax treaty provides otherwise. For United States federal estate tax purposes, a "non-United States holder" is an individual who is neither a citizen nor a domiciliary of the United States. Whether an individual is considered a "domiciliary" of the United States for estate tax purposes is generally determined on the basis of all of the facts and circumstances. 78 UNDERWRITING GENERAL We are offering our shares in the U.S. and Canada through the U.S. underwriters and elsewhere through the international managers. Merrill Lynch, Pierce, Fenner & Smith Incorporated, ING Barings LLC, Banc of America Securities LLC and Bear, Stearns & Co. Inc. are acting as U.S. representatives of the U.S. underwriters named below. Subject to the terms and conditions described in a U.S. purchase agreement among us and the U.S. underwriters, and concurrently with the sale of shares to the international managers, we have agreed to sell to the U.S. underwriters, and the U.S. underwriters severally have agreed to purchase from us, the number of shares listed opposite their names below.
NUMBER OF U.S. UNDERWRITER SHARES ---------------- ----------- Merrill Lynch, Pierce, Fenner & Smith Incorporated...................................... ING Barings LLC............................................. Banc of America Securities LLC.............................. Bear, Stearns & Co. Inc..................................... ----------- Total..................................................... ===========
We have also entered into an international purchase agreement with the international managers, for whom Merrill Lynch International, ING Barings Limited, as agent for ING Bank, N.V., London Branch, Bank of America International Limited and Bear, Stearns International Limited are acting as lead managers, for sale of the shares outside the U.S. and Canada. Subject to the terms and conditions in the international purchase agreement, and concurrently with the sale of shares to the U.S. underwriters pursuant to the U.S. purchase agreement, we have agreed to sell to the international managers, and the international managers severally have agreed to purchase from us, shares. The initial public offering price per share and the total underwriting discount per share are identical under the U.S. purchase agreement and the international purchase agreement. The U.S. underwriters and the international managers have agreed to purchase all of the shares sold under the U.S. and international purchase agreements if any of these shares are purchased. If an underwriter defaults, the U.S. and international purchase agreements provide that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreements may be terminated. The closings for the sale of shares to be purchased by the U.S. underwriters and the international managers are conditioned on one another. We have agreed to indemnify the U.S. underwriters and the international managers against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the U.S. underwriters and international managers may be required to make in respect of those liabilities. The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreements, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Merrill Lynch will be facilitating Internet distribution for this offering to certain of its Internet subscription customers. Merrill Lynch intends to allocate a limited number of shares for sale to its 79 online brokerage customers. An electronic prospectus is available on the website maintained by Merrill Lynch. Other than the prospectus in electronic format, the information on the Merrill Lynch website relating to this offering is not a part of this prospectus. COMMISSIONS AND DISCOUNTS The U.S. representatives have advised us that the U.S. underwriters propose initially to offer the shares to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The U.S. underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The following table shows the public offering price, underwriting discount and proceeds before expenses to us. The information assumes either no exercise or full exercise by the U.S. underwriters and the international managers of their over-allotment options.
PER SHARE WITHOUT OPTIONS WITH OPTIONS --------- --------------- ------------ Public offering price................................... $ $ $ Underwriting discount................................... $ $ $ Proceeds, before expenses, to DigitalConvergence.:Com... $ $ $
The total expenses of the offering, not including the underwriting discount, are estimated at $ and are payable by us. OVER-ALLOTMENT OPTIONS We have granted an option to the U.S. underwriters to purchase up to additional shares at the public offering price less the underwriting discount. The U.S. underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any over-allotments. If the U.S. underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreements, to purchase a number of additional shares proportionate to that U.S. underwriter's initial amount reflected in the above table. We have also granted an option to the international managers, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares to cover any over-allotments on terms similar to those granted to the U.S. underwriters. INTERSYNDICATE AGREEMENT The U.S. underwriters and the international managers have entered into an intersyndicate agreement that provides for the coordination of their activities. Under the intersyndicate agreement, the U.S. underwriters and the international managers may sell shares to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell shares will not offer to sell or sell shares to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, except in the case of transactions under the intersyndicate agreement. Similarly, the international managers and any dealer to whom they sell shares will not offer to sell or sell shares to U.S. persons or Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions under the intersyndicate agreement. 80 RESERVED SHARES At our request, the underwriters have reserved for sale, at the initial public offering price, approximately % of the shares offered by this prospectus for sale to some of our employees and persons having business relationships with us. If these persons purchase reserved shares, the number of shares available for sale to the general public will be reduced accordingly. Any reserved shares that are not orally confirmed for purchase within one business day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. NO SALES OF SIMILAR SECURITIES We and our executive officers and directors and certain existing stockholders have agreed, with exceptions, not to sell or transfer any common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, we and these other persons have agreed not to directly or indirectly - offer, pledge, sell or contract to sell any common stock, - sell any option or contract to purchase any common stock, - purchase any option or contract to sell any common stock, - grant any option, right or warrant for the sale of any common stock, - lend or otherwise dispose of or transfer any common stock, - request or demand that we file a registration statement related to the common stock, or - enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise. This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. QUOTATION ON THE NASDAQ NATIONAL MARKET We expect the shares to be approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "DGTL." Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among us and the U.S. representatives and lead managers. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are - the valuation multiples of publicly traded companies that the U.S. representatives and the lead managers believe to be comparable to us, - our financial information, - the history of, and the prospects for, our company and the industry in which we compete, - an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues, - the present state of our development, and 81 - the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price. The underwriters do not expect to sell more than 5% of the shares being offered in this offering to accounts over which they exercise discretionary authority. PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of the shares is completed, SEC rules may limit underwriters from bidding for and purchasing our common stock. However, the U.S. representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price. If the underwriters create a short position in the common stock in connection with the offering, i.e., if they sell more shares than are listed on the cover of this prospectus, the U.S. representatives may reduce that short position by purchasing shares in the open market. The U.S. representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of such purchases. The U.S. representatives may also impose a penalty bid on underwriters and selling group members. This means that if the U.S. representatives purchase shares in the open market to reduce the underwriter's short position or to stabilize the price of such shares, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. The imposition of a penalty bid may also affect the price of the shares in that it discourages resales of those shares. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters makes any representation that U.S. representatives or the lead managers will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. OTHER RELATIONSHIPS ING Barings LLC has performed investment banking and financial advisory services for us in the past for which it has received customary fees and may, in the future, perform similar services for us and receive additional compensation from us for those services. In connection with our private placement of Series A preferred stock in September 1999, ING Barings LLC received a placement fee of approximately $1.7 million in December 1999 for acting as placement agent. In addition, ING Barings LLC and DING.com LLC, an entity affiliated with ING Barings, purchased 1,587 and 2,875 shares of Series A preferred stock, respectively, in our Series A financing for a purchase price of $4,999,050 and $9,056,250, respectively. The shares held by ING Barings LLC and DING.com LLC will convert automatically into 999,810 and 1,811,250 shares of our common stock, respectively, upon completion of this offering. 82 LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Vinson & Elkins L.L.P., Dallas, Texas. Vinson & Elkins L.L.P. owns 39,118 shares of our Series B preferred stock. In addition, Jeffrey A. Chapman, a partner of Vinson & Elkins L.L.P., owns 5,040 shares of our common stock and 3,556 shares of our Series B preferred stock. Various legal matters in connection with the common stock offered by this prospectus will be passed upon for the underwriters by Chadbourne & Parke LLP. EXPERTS The consolidated financial statements of DigitalConvergence.:Com Inc. as of December 31, 1999 and for the year then ended included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Infotainment Telepictures, Inc. as of December 31, 1998 and for the years ended December 31, 1998 and 1997 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form S-1 with the Securities and Exchange Commission for the common stock we are offering by this prospectus. This prospectus is a part of that registration statement. As allowed by SEC rules, this prospectus does not include all of the information contained in the registration statement or the exhibits to the registration statement. You should refer to the registration statement and its exhibits for additional information. When we complete this offering, we will be required to file annual, quarterly and special reports, proxy statements and other information with the SEC. You can obtain our SEC filings, including the registration statement, over the Internet at the SEC's website at HTTP://WWW.SEC.GOV. You may also read and copy any document we file with the SEC at its public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0300 for further information on the operation of the public reference facilities. Our filings are also expected to be available at the office of the Nasdaq National Market. For further information on obtaining copies of our public filings at the Nasdaq National Market, you should call (212) 656-5060. 83 INDEX TO FINANCIAL STATEMENTS
PAGE NO. -------- DIGITALCONVERGENCE.:COM INC. Report of Independent Accountants........................... F-2 Consolidated Balance Sheet as of December 31, 1999.......... F-3 Consolidated Statement of Operations for the year ended December 31, 1999......................................... F-4 Consolidated Statement of Stockholders' Deficit for the year ended December 31, 1999................................... F-5 Consolidated Statement of Cash Flows for the year ended December 31, 1999......................................... F-6 Notes to Consolidated Financial Statements.................. F-7 INFOTAINMENT TELEPICTURES, INC. (PREDECESSOR) Report of Independent Accountants........................... F-21 Balance Sheet as of December 31, 1998....................... F-22 Statements of Operations for the years ended December 31, 1997 and 1998............................................. F-23 Statements of Changes in Stockholder's Deficit for the years ended December 31, 1997 and 1998.......................... F-24 Statements of Cash Flows for the years ended December 31, 1997 and 1998............................................. F-25 Notes to Financial Statements............................... F-26
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of DigitalConvergence.:Com Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of operations, stockholders' deficit and cash flows present fairly, in all material respects, the financial position of DigitalConvergence.:Com Inc. (the "Company") at December 31, 1999, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Dallas, Texas April 27, 2000 F-2 DIGITALCONVERGENCE.:COM INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999
PRO FORMA DECEMBER 31, DECEMBER 31, 1999 1999 ------------ ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 45,539,823 Accounts receivable....................................... 31,847 Prepaid expenses and other................................ 90,482 ------------ Total current assets.................................. 45,662,152 Property and equipment, net................................. 469,991 Intangibles, net............................................ 79,365 Other assets................................................ 306,859 ------------ Total assets.......................................... $ 46,518,367 ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 357,818 Accrued liabilities....................................... 363,998 Current portion of capital lease obligations.............. 9,780 ------------ Total current liabilities............................. 731,596 ------------ Long-term debt to related parties (net of unamortized discount of $515,871)..................................... 8,484,129 Accrued interest on long-term debt.......................... 639,541 Capital lease obligation.................................... 18,911 Other liabilities........................................... 2,475 Series A convertible preferred stock subject to redemption................................................ 47,887,725 -- Stockholders' equity (deficit): Common stock, $.01 par value, 110,250,000 shares authorized; 61,113,150 shares issued and outstanding; 71,141,490 shares issued and outstanding pro forma...... 611,132 711,415 Additional paid-in capital................................ 517,325 48,304,767 Excess of purchase price over Predecessor cost of net liabilities acquired................................................ (8,397,389) (8,397,389) Accumulated deficit....................................... (3,977,078) (3,977,078) ------------ ----------- Total stockholders' equity (deficit).................. (11,246,010) 36,641,715 ------------ ----------- Total liabilities and stockholders' equity (deficit)......................................... $ 46,518,367 $46,518,367 ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 DIGITALCONVERGENCE.:COM INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
YEAR ENDED DECEMBER 31, 1999 ------------ Revenues.................................................... $ 1,542,800 ----------- Costs and expenses: Production and media costs................................ 1,012,407 General and administrative expenses....................... 3,920,876 Depreciation and amortization............................. 105,721 Research and development costs............................ 410,017 ----------- Total operating expenses................................ 5,449,021 ----------- Operating loss.......................................... (3,906,221) Other income (expense): Interest income........................................... 660,498 Interest expense.......................................... (731,355) ----------- Total other expense..................................... (70,857) ----------- Net loss.............................................. $(3,977,078) =========== Basic and diluted weighted average common shares outstanding............................................... 59,507,271 =========== Basic and diluted net loss per common share................. $ (0.07) =========== Pro forma basic and diluted weighted average common shares outstanding (unaudited)................................... 69,535,611 =========== Pro forma basic and diluted net loss per common share (unaudited)............................................... $ (0.06) =========== Supplemental pro forma basic and diluted weighted average common shares outstanding (unaudited)..................... =========== Supplemental pro forma basic and diluted net loss per common share (unaudited)......................................... ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 DIGITALCONVERGENCE.:COM INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1999
COMMON STOCK ------------------------------------ EXCESS OF PURCHASE NUMBER COMMON STOCK ADDITIONAL PRICE OVER PREDECESSOR ACCUMULATED OF SUBSCRIPTION PAID-IN COST OF NET DEFICIT/RETAINED SHARES AMOUNT RECEIVABLE CAPITAL LIABILITIES ACQUIRED EARNINGS ---------- -------- ------------ ----------- ---------------------- ---------------- Balances as of December 31, 1998......................... 41,422,500 $414,225 (1,000) $ (413,225) -- $ -- Issuance of common stock..... 19,690,650 196,907 -- 407,053 -- -- Purchase of assets on January 4 (see Note 1)............... -- -- -- -- (8,397,389) -- Cash received on common stock subscription............... -- -- 1,000 -- -- -- Employee compensation (see Note 8)............... -- -- -- 132,188 -- -- Warrants issued in connection with preferred stock issuance (see Note 6)............... -- -- -- 391,309 -- -- Net loss..................... -- -- -- -- (3,977,078) ---------- -------- ------- ----------- ----------- ----------- Balances as of December 31, 1999............ 61,113,150 $611,132 $ -- $ 517,325 (8,397,389) $(3,977,078) ========== ======== ======= =========== =========== =========== TOTAL ------------ Balances as of December 31, 1998......................... $ -- Issuance of common stock..... 603,960 Purchase of assets on January 4 (see Note 1)............... (8,397,389) Cash received on common stock subscription............... 1,000 Employee compensation (see Note 8)............... 132,188 Warrants issued in connection with preferred stock issuance (see Note 6)............... 391,309 Net loss..................... (3,977,078) ------------ Balances as of December 31, 1999............ $(11,246,010) ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 DIGITALCONVERGENCE.:COM INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999
YEAR ENDED DECEMBER 31, 1999 ------------ Cash flows from operating activities: Net loss.................................................. $(3,977,078) Adjustments to reconcile net loss to net cash used in operating activities: Deferred revenue from acquisition (see Note 1)........ (156,000) Depreciation and amortization......................... 105,721 Accretion of discount on long-term debt to related parties (see Note 5)................................ 84,963 Noncash compensation expense (see Note 8)............. 132,188 Changes in operating assets and liabilities: Accounts receivable................................. (31,847) Prepaid expenses.................................... (65,283) Other assets........................................ (304,259) Accounts payable.................................... 357,818 Accrued expense..................................... 886,264 ----------- Net cash used in operating activities............. (2,967,513) ----------- Cash flows from investing activities: Purchases of property and equipment....................... (397,277) Cash acquired in acquisition of entities under common control................................................. 165,278 Purchase of intangibles................................... (80,246) ----------- Net cash used in investing activities............. (312,245) ----------- Cash flows from financing activities: Proceeds from long-term debt from related party (see Note 5)...................................................... 2,500,000 Payment of long-term debt to related party (see Note 5)... (1,500,000) Proceeds from sale of common and preferred stock, net of costs and placement fees................................ 48,283,161 Proceeds from stockholder................................. 147,090 Repayments to stockholder................................. (610,670) ----------- Net cash provided by financing activities......... 48,819,581 ----------- Net increase in cash and cash equivalents................... 45,539,823 Cash and cash equivalents at beginning of year.............. -- ----------- Cash and cash equivalents at end of year.................... $45,539,823 =========== Supplemental disclosure of cash flows: Cash paid during the year for interest.................... $ -- =========== Cash paid during the year for income taxes................ $ -- =========== Non-cash investing activities: Predecessor net liabilities acquired, net of cash acquired............................................ $ 523,296 Non-cash financing activities: Issuance of promissory note to Predecessor............ $ 8,000,000 Issuance cost on Series A preferred stock (see Note 6).................................................. $ 391,309
The accompanying notes are an integral part of these consolidated financial statements. F-6 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND DESCRIPTION OF BUSINESS The Company was incorporated in the state of Delaware in September 1998 under the name of DigitalConvergence.:Com Inc. ("Digital" or "the Company") at which time the founder was issued 41,422,500 shares of common stock for $1,000. The accompanying financial statements include the consolidated accounts of Digital and its wholly owned subsidiary, DigitalDemographics.:Com Inc. (collectively, "the Company" or "Digital"). The Company had no operating activity until January 4, 1999 when the Company entered into an Asset Purchase Agreement (the "Purchase Agreement" or the "Acquisition") with Infotainment Telepictures, Inc. ("Infotainment" or the "Predecessor"). Pursuant to the Purchase Agreement, the Company purchased all of the rights, title and interest in and to the trade names, trademarks, designs, copyrights, patents pending, patents filed and other intellectual property, all of the rights in and to the radio and television show known as NET TALK LIVE! THE INTERNET TALK SHOW including, but not limited to, all prior and future programming, all trademarks, copyrights, creative materials, designs and other intellectual property, all rights, title and interest in and to the furniture, fixtures and equipment, and certain liabilities ("the Assets") from the Predecessor. The aggregate purchase price for the Assets was $8,000,000 in the form of a promissory note, bearing interest at the rate of 6% per annum ("Promissory Note"). As the owner of a majority of the Company's common stock on the date of the Acquisition was part of a control group that controlled Infotainment, the Acquisition was accounted for as an acquisition of entities under common control. Accordingly, the assets and liabilities acquired were recorded at the Predecessor's historical cost, and the excess of the purchase price was charged to additional paid in capital in the amount of $8,397,389. At inception, the Company's Certificate of Incorporation authorized 63,000,000 shares of common stock, par value $0.01, and 10,000 shares of preferred stock, par value $0.01. In September 1999, the Board of Directors approved an amendment to the Certificate of Incorporation to increase the number of authorized shares of common and preferred stock to 110,250,000 and 30,000, respectively. The Company has developed technology that can link almost any form of media or product instantly with the Internet. The Company's Internet convergence technology enables users to access relevant content and conduct e-commerce instantly without inputting lengthy website addresses or conducting time-intensive website navigation. To date, the Company has not launched the convergence technology; therefore, no revenues have been recorded from the technology. The Company intends to initiate a full-scale roll out of the technology beginning in September 2000. In May 1999, DigitalDemographics.:Com Inc. ("DigitalDemographics") was formed as a Delaware corporation. The Company purchased all of the 1,000 issued and outstanding shares of DigitalDemographics for $1,000 in May 1999. DigitalDemographics was established as a data mining company, but has had no operations to date. 2. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accounts of the Company and its consolidated subsidiary are included in the consolidated financial statements after elimination of significant intercompany accounts and transactions. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents. F-7 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements are amortized over the life of the underlying lease using the straight-line method. Expenditures for maintenance and repairs, as well as minor renewals, are charged to operations as incurred, while betterments and major renewals are capitalized. Any gain or loss resulting from the retirement or sale of an asset is credited or charged to operations. The Company evaluates long-lived assets to be held and used in the business, or to be disposed of, for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment is determined by comparing expected future cash flows (undiscounted and before interest) to the net book value of the assets. If impairment exists, the amount of impairment is measured as the difference between the net book value of the assets and the estimated fair value of the related assets. The Company believes that no impairment of property or equipment existed at December 31, 1999. CAPITALIZED SOFTWARE All costs incurred in the internal development of computer software, which will be provided free to Internet users, are expensed until a product design and a working model of the software have been tested and completed in accordance with Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED ("FAS 86"). Thereafter, any further development or production costs are capitalized until the software is placed into service. In the event unamortized software costs exceed the net realizable value of the software, the excess is expensed in the period the excess is determined. During the year ended December 31, 1999, no software costs were capitalized, as the Company did not incur significant development costs after the point at which a product design and working model of the software had been completed. At December 31, 1999, capitalized software is comprised of software purchased from third parties used in the operations of the Company and is reflected in "Intangibles" on the Balance Sheet. REVENUE RECOGNITION Revenue derived from the sale of advertising spots and sponsorships during NET TALK LIVE! THE INTERNET TALK SHOW is recognized upon broadcast of the show in which the advertisement or sponsorship is aired. In cases where payment is received prior to the airing of the advertisement or sponsorship, the Company defers recognition of the corresponding revenue until the advertisement or sponsorship has been aired. For the year ended December 31, 1999, two customers accounted for approximately 17% and 81% of the Company's revenues, respectively. CONCENTRATIONS OF CREDIT RISK The Company maintains cash balances exceeding federally insured limits in a money market fund. However, management believes the fund is of high credit quality and considers any exposure from concentrations of credit risk to be limited. The Company's revenue primarily relates to the sale of advertising spots and sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW. The Company performs ongoing credit evaluations of its customers' F-8 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) financial condition and, generally, requires no collateral from its customers. Credit losses have been within management's expectations and adequate allowance for any uncollectible trade receivables are maintained. INCOME TAXES The Company presents income taxes pursuant to Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("FAS 109"). FAS 109 uses an asset and liability approach to account for income taxes, wherein deferred taxes are provided for book and tax basis differences for assets and liabilities. In the event differences between the financial reporting basis and the tax basis of the Company's assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided for a portion or all of the deferred tax assets when there is sufficient uncertainty regarding the Company's ability to recognize the benefits of the assets in future years. ADVERTISING COSTS Advertising and promotion-related expenses are charged to operations in the period incurred. Advertising expense for the year ended December 31, 1999 was approximately $13,500. RESEARCH AND DEVELOPMENT Research and development costs are primarily costs incurred to develop, enhance and develop new applications for our technology. Research and development expenses are charged to operations in the period incurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of the Company's financial instruments reflected in the consolidated balance sheet at December 31, 1999 approximate their respective fair values. PRO FORMA SERIES A CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION (UNAUDITED) Effective upon the closing of this offering, the outstanding shares of Series A convertible preferred stock subject to redemption will automatically convert into approximately 10,028,340 shares of Common Stock. This conversion assumes the shares related to the preferred stock subscription will also convert into Common Stock as of December 31, 1999 (see Note 6). The pro forma effects of this transaction are unaudited and have been reflected in the accompanying pro forma balance sheet as of December 31, 1999. NET LOSS PER SHARE Basic net loss per share is computed based on the weighted average number of shares of common stock outstanding. Diluted net loss per share is computed based on the weighted average outstanding shares and the effect of dilutive potential common shares. For the year ended December 31, 1999, basic and diluted net loss per share are equal because the Company's potential common shares of 17,687,880 were anti-dilutive. F-9 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRO FORMA NET LOSS PER SHARE (UNAUDITED) Pro forma net loss per share for the year ended December 31, 1999 is computed using the weighted average number of common shares outstanding, including the conversion of the Company's Series A preferred stock into shares of the Company's Common Stock effective upon the closing of the Company's initial public offering, as if such conversion occurred on January 1, 1999. The resulting pro forma adjustment includes an increase in the weighted average shares used to compute the basic net loss per share by 10,028,340 shares. SUPPLEMENTAL PRO FORMA NET LOSS PER SHARE (UNAUDITED) Supplemental pro forma net loss per share for the year ended December 31, 1999 adjusts pro forma net loss per share to relect the assumed issuance of shares of Common Stock (based upon the expected initial offering price of $ per share) to fund the $3.5 million cash payment of debt plus accrued interest to the Predecessor. The resulting supplemental pro forma adjustment includes an increase in the weighted average shares used to compute the pro forma basic net loss per share by shares. STOCK SPLITS A 630-for-one stock split of the Company's common stock was effective on January 3, 2000. All references in the consolidated financial statements to common stock shares, share prices, per share amounts, options and warrants have been adjusted retroactively for this stock split. ACCOUNTING FOR STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("FAS 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. Pro forma disclosure of net loss based on the provisions of FAS 123 is presented in Note 8. For financial reporting purposes, the Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related Interpretations. COMPREHENSIVE INCOME In 1998, Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("FAS 130") was issued. FAS 130 requires separate financial statement disclosure of comprehensive income, which encompasses changes in net asset values derived from activity from both owner and non-owner sources. There were no items that qualify for treatment as components of comprehensive income for the year ended December 31, 1999. SEGMENT INFORMATION In 1998, Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("FAS 131") was issued. FAS 131 supercedes Statement of Financial Accounting Standards No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE,replacing the "industry" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing F-10 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) performance as the source of the Company's reportable segments. FAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of FAS 131 did not affect the results of operations or financial position of the Company. For the year ended December 31, 1999, management assessed the Company's performance and made operating decisions as one reportable segment. UNCERTAINTIES AND THE USE OF ESTIMATES AND ASSUMPTIONS The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133, which will be effective for us for the fiscal year and quarters beginning after June 15, 2000, requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. During June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT 133. The Statement defers the effective date of SFAS 133 to fiscal 2001. Management is evaluating SFAS 133 but does not expect the potential effect of adopting the provisions of SFAS No. 133 to have a significant impact on our financial position, results of operations, and cash flows. In December 1999, the Commission issued Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the Commission. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. Management believes that SAB 101 will not have a material effect on our financial statements. F-11 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY AND EQUIPMENT A summary of property and equipment at December 31, 1999 follows:
ESTIMATED LIFE --------- Computer and office equipment........................... $ 393,991 3 Years Studio and phone equipment.............................. 213,250 5 Years Furniture and fixtures.................................. 55,844 5 Years Leasehold improvements.................................. 24,577 Various --------- Gross property and equipment............................ 687,662 Less: accumulated depreciation.......................... (217,671) --------- Property and equipment, net............................. $ 469,991 =========
Assets recorded under capital leases, primarily consisting of computer equipment, are recorded at the lower of the present value of future minimum lease payments or the fair value of the assets. Total gross assets recorded under capital lease in 1999 amounted to $42,244, and accumulated amortization was $5,867. Amortization of assets under capital lease is included in depreciation and amortization expense. Future minimum lease payments and related interest are as follows:
YEAR ENDING DECEMBER 31, - ------------ 2000........................................................ $13,159 2001........................................................ 13,159 2002........................................................ 7,172 ------- Aggregate minimum lease payments............................ 33,490 Less: amount representing interest.......................... 4,799 Less: current portion....................................... 9,780 ------- Long-term capital lease obligation.......................... $18,911 =======
The interest rate of the capital lease is 12.59%. Interest expense on the capital lease for the year ended December 31, 1999 was $1,597. 4. ACCRUED LIABILITIES A summary of accrued liabilities follows:
DECEMBER 31, 1999 ------------ Accrued travel costs........................................ $ 87,820 Accrued legal costs......................................... 31,000 Accrued accounting costs.................................... 20,000 Accrued payroll and taxes................................... 110,456 Accrued franchise tax....................................... 75,752 Other accruals.............................................. 38,970 -------- $363,998 ========
F-12 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DEBT In January 1999, the Company issued a promissory note for $8,000,000, bearing interest at the rate of 6% per annum, as consideration for the Acquisition. Accrued interest thereon is payable on a quarterly basis beginning March 31, 2001. All or a portion of the promissory note will be repaid if certain events occur. In any event, all principal and interest amounts for the promissory note will be fully paid during 2002 and 2003, and the note will be paid in full by January 31, 2004. In October 1999, the Company voluntarily repaid $1,500,000 of the promissory note. Also in January 1999, the Company entered into a Common Stock and Debenture Purchase Agreement in which the Company issued 15,750,000 shares of common stock and $2,500,000 of the Company's 8.0% Debentures, Series 1999A (the "Debentures") for total proceeds of $2,502,500. The proceeds were allocated to the stock and the debenture based on their relative fair value. The portion of the proceeds allocated to the debenture amounted to $1,899,166 and resulted in a discount of $600,834, which reflects an effective interest rate of 15% and will be accreted over the life of the debenture using the effective interest method. The accrued interest on the Debentures will be paid on a quarterly basis beginning March 31, 2001. The unpaid accrued interest balance will be added to the principal balance beginning January 28, 2001, and the principal and interest will be paid on a quarterly basis beginning March 31, 2002 and ending December 31, 2003. If certain events occur, all or a portion of the Debentures will be repaid at an earlier date. Principal payments on the Company's debt in 2000, 2001, 2002, 2003 and 2004 are estimated to be $0, $0, $4,699,064, $4,699,064 and $0, respectively. 6. SERIES A CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION In September 1999, the Company's Board of Directors unanimously approved the issuance of Series A convertible preferred stock to certain outside investors pursuant to the Stock Purchase Agreement. In November 1999, 15,838 shares of the Series A preferred stock were issued to various investors for $3,150 per share for total gross proceeds in the amount of $49,889,700 subject to issuance costs of $2,253,975. In December 1999, the Company received $252,000 for 80 additional shares of Series A preferred stock at $3,150 per share. The cash received in December 1999 was classified as Series A preferred stock subscribed, as the share certificates were not issued by December 31, 1999. Following is a summary of the Series A convertible preferred stock subject to redemption issued by the Company as of December 31, 1999:
NUMBER OF SHARES DATE CASH RECEIPT SHARES ISSUED AND TOTAL CARRYING SERIES ISSUED DATE DESIGNATED OUTSTANDING PROCEEDS VALUE - --------------------- -------------- -------------- ---------- ----------- ----------- ----------- A November 1999 Various 27,000 15,838 $49,889,700 $47,635,725 A -- December 1999 -- -- 252,000 252,000 ----------- ----------- $50,141,700 $47,887,725 =========== ===========
The carrying value of the Series A preferred stock represents proceeds from the sale of the stock and proceeds from the preferred stock subscription of $252,000, net of issuance costs of $2,253,975. The Series A preferred stock subject to redemption has a par value of $0.01 per share and has a liquidation preference over the Company's common stock. In certain situations, including a change in control, the holders of this Series A preferred stock can deem the event a liquidation of the Company. F-13 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. SERIES A CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION (CONTINUED) As a result, these shares have been classified as temporary equity on the balance sheet. The holders of the Series A preferred stock are entitled to receive dividends when and if declared by the Company's Board of Directors and at any time that dividends are declared on the Company's common stock. Each share of Series A preferred stock is convertible, at the option of the holder, at any time on or after the date of issuance, into 630 shares of common stock at the Conversion Price, as defined in the Certificate of Designation of Series A preferred stock. The initial Conversion Price of these shares is equal to the issuance price of $3,150 per share. The shares convert automatically into common stock upon the election of the holders of at least two-thirds of the then outstanding Series A preferred stock or the closing of a firm commitment underwritten public offering which raises gross proceeds of at least $75,000,000, and whereby the aggregate value of the shares of common stock issuable on conversion of each share of Series A preferred stock is at least two times the conversion value. In connection with the issuance of the Series A preferred stock, the Company issued a warrant to purchase 124,740 shares of the Company's common stock to one of the investors as a finder's fee for attracting additional investors. The exercise price of the warrant is $5.00 per share and the warrant expires on September 29, 2004. The warrant is exercisable immediately. The Company valued the warrant using the Black-Scholes option-pricing model. The value of the warrant on the date of grant was $391,309 using the following assumptions: (1) volatility of 70%; (2) risk-free rate of interest of 5.79%; (3) fair market value of the common stock on date of grant of $5.00 per share; (4) expected life of five years; and (5) zero dividend yield. 7. STOCKHOLDERS' EQUITY (DEFICIT) In conjunction with the incorporation of the Company on September 25, 1998, the founder purchased 41,422,500 shares of common stock for $1,000. As discussed in Note 5 in January 1999, 15,750,000 shares of common stock, along with debentures, were issued to outside investors for $2,502,500 and $603,834 of the proceeds, were allocated to additional paid-in capital as a discount to debt. Additionally, in January 1999 certain employees and outside investors of the Company purchased 3,468,150 shares of common stock for $550.50. An officer of the Company purchased an additional 472,500 shares of common stock in May 1999 for $75. 8. STOCK-BASED COMPENSATON In August 1999, the Board of Directors of the Company approved the adoption of the Company's 1999 Stock Option Plan ("1999 Plan"). In September 1999, the stockholders of the Company approved the 1999 Plan. Under the 1999 Plan, the Company is authorized to grant options to purchase 9,450,000 shares of the Company's common stock to key employees of the Company or eligible non-employees, as defined by the 1999 Plan. Options granted under the 1999 Plan may be in the form of incentive stock options or nonqualified stock options. Options granted under the 1999 Plan generally expire ten years from date of grant. The Compensation Committee of the Board of Directors ("Committee") administers the 1999 Plan and determines the number and the terms of exercisability of options granted. The exercise price of the options granted under the 1999 Plan is fixed by the Committee on the date of grant of the options and equals at least one hundred percent of the fair market value of the Company's common stock on the date of grant. The options granted under the 1999 Plan may be fulfilled with authorized and unissued shares of common stock, issued shares of the Company's common stock held in treasury, or issued shares of common stock reacquired by the Company in each situation as the Committee may determine from time to time. F-14 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCK-BASED COMPENSATON (CONTINUED) As discussed in Note 2, the Company has adopted the disclosure only provisions of FAS 123 for options issued to employees. Had compensation cost for the option issuances to employees under the Company's 1999 Plan been determined based on the fair value provisions of FAS 123, the Company's net loss and net loss per share would have increased to the pro forma amounts indicated below:
PRO FORMA 1999 ----------- Net loss--as reported....................................... $(3,977,078) Net loss--pro forma......................................... $(5,377,568) Basic and diluted net loss per common share--as reported.... $ (0.07) Basic and diluted net loss per common share--pro forma...... $ (0.09)
The pro forma disclosures provided are not likely to be representative of the effects on reported net loss for future years due to future grants and the vesting requirements of the Company's stock options issued under the 1999 plan. The weighted average fair value for options granted to employees under the 1999 Plan was $0.96 in 1999. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: Dividend yield.............................................. -- Expected volatility......................................... 0.0% Risk-free rate of return.................................... 5.6% Expected life............................................... 5 Yrs.
The following table summarizes activity under the Company's 1999 Plan during the year ended December 31, 1999:
NUMBER OF WTD. AVG. OPTIONS EXER. PRICE --------- ----------- Options outstanding at beginning of year............... -- -- Options granted........................................ 7,585,200 $3.88 Options exercised...................................... -- -- Options canceled....................................... -- -- --------- ----- Options outstanding at end of year..................... 7,585,200 $3.88 --------- ----- Options exercisable at end of year..................... 1,575,000 $3.65 ========= =====
The following table summarizes information for stock options outstanding at December 31, 1999:
EXERCISE PRICE NUMBER OF OPTIONS WTD. AVG. REMAINING LIFE WTD. AVG. EXER. PRICE - -------------- ----------------- ------------------------ --------------------- $3.31 5,040,000 9.61 $3.31 $5.00 2,545,200 9.88 $5.00
9. INCOME TAXES Deferred taxes are provided for those items reported in different periods for income tax and financial reporting purposes. The net deferred tax asset has been fully reserved because realization is F-15 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) not considered more likely than not. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below:
DECEMBER 31, 1999 ------------ Deferred tax assets: Net operating loss carryforwards.......................... $ 1,575,000 Intangible assets......................................... 2,888,000 Other..................................................... 11,000 ----------- Gross deferred tax assets............................... 4,474,000 Deferred tax liabilities: Depreciation.............................................. 5,000 ----------- Net deferred tax assets..................................... 4,469,000 Valuation allowance......................................... (4,469,000) ----------- Deferred tax balance........................................ $ -- ===========
When realization of the deferred tax asset is more likely than not to occur, the benefit related to the asset purchase from Infotainment of approximately $2,888,000 will be credited to additional paid-in capital. The provision for income taxes is different than the amount computed using the applicable statutory federal income tax rate with the difference for each year summarized below:
DECEMBER 31, 1999 ------------ Federal tax benefit at statutory rate....................... (34)% State taxes, net of federal benefit......................... (3)% Permanent differences....................................... (2)% Adjustment due to increase in valuation allowance........... 35% --- Provision for income taxes.................................. 0% ===
As of December 31, 1999, the Company has available net operating loss carryforwards totaling approximately $4,261,000 which expire beginning in 2019. Utilization of net operating loss carryforwards may be limited by ownership changes which may have occured or could occur in the future. 10. COMMITMENTS AND CONTINGENCIES COMMITMENTS On November 18, 1999, the Company entered into a ten-year lease for its new corporate facilities located in Dallas, Texas commencing in 2000 and expiring in 2010. The Company may cancel the lease effective in the 84(th) month of the lease term in accordance with the lease provisions, subject to a cancellation fee, and renew the lease for two additional 5-year terms. Additionally, the Company is obligated by the end of the third year of the lease, if not elected earlier, to acquire additional space in the building for an additional rental expense of approximately F-16 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) $320,000 per year. The Company expects to spend approximately $1.5 million during 2000 in completing the build-out and improvements in the new corporate offices. In December 1999, the Company entered into a sub-lease agreement to provide for temporary office space in Dallas, Texas. Under the terms of the lease, the Company will pay $11,500 per month. The lease expires on November 30, 2000; provided, however, that the lease can be terminated upon 30 days written notice. In January 2000, the Company entered into a lease for additional temporary office space in Dallas, Texas. The lease expires in May 2000, unless terminated earlier under certain provisions to the lease agreement. The Company will pay approximately $57,700 under the lease during 2000. The Company has an additional noncancelable lease for other Dallas, Texas facilities that expires in 2001. Rent expense totaled $56,600 during the year ended December 31, 1999 related to this facility lease and various other equipment operating leases. Total future minimum payments under all operating leases are as follows:
YEAR ENDING DECEMBER 31, OPERATING LEASE - ------------ --------------- 2000........................................................ $ 839,593 2001........................................................ 842,500 2002........................................................ 877,800 2003........................................................ 1,213,000 2004........................................................ 1,213,000 Thereafter.................................................. 6,921,750 ----------- Total minimum lease payments................................ $11,907,643 ===========
In December 1999, the Company entered into a manufacturing and marketing agreement with Tandy Corporation ("Tandy") under which the Company granted Tandy a limited, royalty-free, nonexclusive, revocable worldwide license to (1) manufacture the Company's patented Cue:C.A.T. devices (2) market and sell Cue:C.A.T. devices and :C.R.Q. software, and (3) use Cue:C.A.T. and :C.R.Q. technology in Tandy's RadioShack.com web site in order to incorporate the Company's Intellectual Property into Tandy's Internet web site. Under the agreement, the Company is obligated to purchase at least 1,000,000 component parts from Tandy. During February 2000, the Company placed an order for 2,000,000 component parts and has issued a letter of credit to Tandy for approximately $15.5 million. Upon shipment of the product to the Company, the Company will pay Tandy $15.5 million in cash and cancel the underlying letter of credit. The manufacturing and marketing agreement is effective through December 31, 2001 with an automatic one year renewal absent proper nonrenewable notice. The Predecessor has agreed to indemnify the Company from any costs, expenses, liabilities or other losses in connection with lawsuits related to the Predecessor. CONTINGENCIES From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In the opinion of F-17 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) management, there are no pending claims of which the outcome is expected to result in a material adverse effect on the financial position, results of the operations or cash flows of the Company. On January 29, 1999, the Predecessor entered into individual agreements with certain independent contractors who had provided services to the Predecessor for the period from 1996 through early 1999. Certain of these contractors are now employees of the Company. According to the contract agreements, the Predecessor agreed to pay future cash bonuses to the individuals contingent upon the occurrence of (1) the finalization of an initial public offering whereby the Company raises a net amount of proceeds of at least $30 million and (2) the receipt of at least $8 million in cash collections by the Company prior to the date of an initial public offering which raises a net amount of proceeds of at least $30 million. As a result of the $1,500,000 voluntary repayment of the Promissory Note by the Company in October 1999, management of the Predecessor elected to prepay a certain percentage of these bonuses in the amount of approximately $132,000 even though the conditions of the bonus agreements had not been satisfied. The payments remain the property of the contractors regardless of whether the conditions of the bonus agreements are met. The Company accounted for these transactions as if they were a compensating plan adopted by the Company with an offsetting contribution to capital. As of the date of this report, the Predecessor remains liable for an additional $1,000,000, contingent upon the satisfaction of the stipulated conditions of the bonus agreements. 11. EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) defined contribution retirement plan ("401(k) Plan") covering all employees who have completed at least one month of service. The 401(k) Plan allows eligible employees to defer receipt of up to twenty percent of their annual compensation (not to exceed $10,000 per calendar year) and contribute such amounts to various investment funds. Eligible employees may elect to participate at the beginning of any quarter after their hire date. Employee contributions vest immediately. The Company makes matching contributions of twenty-five percent of the employees' annual contributions, not to exceed eight percent of the employee's annual pay. The Company's matching contributions vest on a pro rata basis over five years. During the year ended December 31, 1999, the Company contributed approximately $6,500 to the 401(k) Plan. 12. SUBSEQUENT EVENTS In January 2000, the Company issued 128 shares of Series A Convertible Preferred Stock to various investors for aggregate consideration of $403,000, of which $252,000 in cash was received prior to year-end. During February and April 2000, the Company issued 1,128,000 and 595,000 stock options, respectively, to various employees at strike prices ranging from $5.00 to $9.37 per option. The February options were issued at fair market value of the common stock on the date of grant, and the April options were issued below fair market value of the common stock on the dates of grant. The Company will recognize compensation expense related to the April options for the difference between the fair market value of the common stock at the date of grant and the respective strike prices, which will be amortized over the applicable vesting period. F-18 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SUBSEQUENT EVENTS (CONTINUED) In April 2000, the Company issued 5,929,364 shares of Series B Convertible Preferred Stock to various investors for aggregate consideration of approximately $41.7 million. The Series B Convertible Preferred Stock has a par value of $0.01 per share and has liquidation preference over the Company's common stock. The holders of the Series B Convertible Preferred Stock are entitled to receive dividends when and if declared by the Company's board of directors and at any time that dividends are declared on the Company's common stock. Each share of Series B Convertible Preferred Stock is convertible, at the option of the holder, at any time on or after the date of issuance, into one share of common stock upon the election of the holders of at least two-thirds of the then outstanding Series B Convertible Preferred Stock or the closing of a firm commitment underwritten public offering which raises gross proceeds of at least $75,000,000, and whereby the aggregate value of the Company on a pre-initial public offering basis is at least $750,000,000. In April 2000, the Company issued 5,372,593 shares of Series C Convertible Preferred Stock to various investors for aggregate consideration of approximately $56.6 million. The Series C Convertible Preferred Stock has a par value of $0.01 per share and has liquidation preference over the Company's common stock. The holders of the Series C Convertible Preferred Stock are entitled to receive dividends when and if declared by the Company's board of directors and at any time that dividends are declared on the Company's common stock. Each share of Series C Convertible Preferred Stock is convertible, at the option of the holder, at any time on or after the date of issuance, into one sharecommon stock upon the election of the holders of at least two-thirds of the then outstanding Series C Convertible Preferred Stock or the closing of a firm commitment underwritten public offering which raises gross proceeds of at least $75,000,000 and whereby the aggregate value of the Company on a pre-initial public offering basis is at least $750,000,000. During the second quarter of the year ended December 31, 2000, the Company recorded a one-time charge to earnings in the amount of $37.2 million to reflect the difference between the issuance price and the fair market value of the Series B and C preferred stock, as determined by a contemporaneous, independent appraisal. In April 2000, the Company issued two warrants to an affiliate of National Broadcasting Company, Inc. The first warrant is exercisable to purchase up to 3,752,445 shares of Common Stock at a per share exercise price of $5.00. The second warrant is exercisable to purchase up to 4,505,165 shares of Common Stock, plus an additional number of shares of Common Stock equal to 5% of any shares of Series B Preferred or Series C Preferred issued by the Company after the date of the Agreement., at a per share exercise price of $10.54. The exercise price for the first warrant is subject to adjustment if the aggregate market value of shares of Common Stock outstanding immediately after the closing of the Company's initial public offering is less than $350,000,000, determined utilizing the per share offering price in the Company's initial public offering. The exercise price for the second warrant is subject to reduction if the aggregate market value of shares of Common Stock outstanding immediately after the closing of the Company's initial public offering is less than $750,000,000, determined utilizing the per share offering price in the Company's initial public offering. The number of shares issuable upon the exercise of each warrant and the exercise of price of each warrant is subject to adjustment in the event of, among other things, a stock split, reclassification or merger, issuance of additional shares of Common Stock, issuance of options or convertible securities and payment of dividends or other distribution. Both of the warrants will expire in April 2005. F-19 DIGITALCONVERGENCE.:COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SUBSEQUENT EVENTS (CONTINUED) The Company valued the warrants using the Black-Scholes option-pricing model. The fair value of the first warrant on the date of grant was $31.7 million, and the fair value of the second warrant was $31.4 million using the following assumptions: 1) volatility of 70.0%, 2) risk-free rate of interest of 6.5%, 3) fair market value of the common stock on date of grant of per share, 4) expected life of five years and 5) zero dividend yield. The Company will recognize a one-time expense for the fair market value of the warrants. The Company adopted the Employee Stock Purchase Plan in April 2000. A total of 1,000,000 shares of common stock are authorized for issuance under the plan. The plan provides for the grant of stock options to certain eligible employees. The purpose of the plan is to provide eligible employees with an incentive to advance the interests of the Company by providing an opportunity to purchase stock of the Company at a favorable price. The plan is administered by the Company's Compensation Committee. In April 2000, the Company repaid $3,000,000 in principal and $584,137 in interest related to the promissory note. In addition, the Company repaid the $2,500,000 of debentures and all related accrued interest. F-20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Infotainment Telepictures, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, changes in stockholder's deficit, and cash flows present fairly, in all material respects, the financial position of Infotainment Telepictures, Inc. (the "Company") at December 31, 1998 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Dallas, Texas February 29, 2000, except as to Note 11 which is as of April 27, 2000 F-21 INFOTAINMENT TELEPICTURES, INC. BALANCE SHEET DECEMBER 31, 1998
1998 --------- ASSETS Current assets: Cash and cash equivalents................................. $ 174,953 Accounts receivable....................................... -- Deferred production costs................................. -- Prepaid expenses.......................................... 22,725 Deferred tax assets....................................... 2,846 --------- Total current assets.................................. 200,524 Property and equipment, net............................... 177,554 Other assets.............................................. 2,600 --------- Total assets.......................................... $ 380,678 ========= LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable and accrued expenses..................... $ 85,299 Deferred revenue.......................................... 156,000 Advances from officer..................................... 197,919 Notes payable............................................. 452,900 --------- Total current liabilities............................... 892,118 Deferred tax liability.................................... 2,846 --------- Total liabilities....................................... 894,964 Stockholder's deficit: Common stock, no par value, 25,000 shares authorized, issued and outstanding.................................. -- Accumulated deficit....................................... (514,286) --------- Total stockholder's deficit........................... (514,286) --------- Total liabilities and stockholder's deficit......... $ 380,678 =========
The accompanying notes are an integral part of these financial statements. F-22 INFOTAINMENT TELEPICTURES, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998 --------- ----------- Sales....................................................... $ 689,967 1,636,422 Cost and expenses: Production costs.......................................... 590,704 939,468 Selling, general and administrative....................... 284,370 670,953 Depreciation.............................................. 40,515 54,908 Research and development.................................. -- 35,771 --------- ----------- Operating loss.......................................... (225,622) (64,678) --------- ----------- Interest expense.......................................... 17,272 23,754 --------- ----------- Net loss................................................ $(242,894) $ (88,432) ========= =========== Weighted average shares outstanding......................... 25,000 25,000 ========= =========== Basic and diluted net loss per share........................ $ (9.72) $ (3.54) ========= ===========
The accompanying notes are an integral part of these financial statements. F-23 INFOTAINMENT TELEPICTURES, INC. STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
TOTAL COMMON ACCUMULATED STOCKHOLDER'S SHARES STOCK DEFICIT DEFICIT -------- -------- ----------- ------------- Balance at December 31, 1996........................ 25,000 -- (182,960) (182,960) Net loss............................................ -- (242,894) (242,894) ------ ------- --------- --------- Balance at December 31, 1997........................ 25,000 (425,854) (425,854) Net loss............................................ -- (88,432) (88,432) ------ ------- --------- --------- Balance at December 31, 1998........................ 25,000 $ -- $(514,286) $(514,286) ====== ======= ========= =========
The accompanying notes are an integral part of these financial statements. F-24 INFOTAINMENT TELEPICTURES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998 --------- --------- Cash flows from operating activities: Net loss.................................................. $(242,894) $ (88,432) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation.......................................... 40,515 54,908 Deferred revenue...................................... 288,200 (272,000) Barter transactions (see Note 2 and 7) (17,000) (2,400) Changes in operating assets and liabilities: Accounts receivable................................. (38,462) 63,300 Deferred production costs........................... (4,743) 51,505 Prepaid expenses.................................... -- (22,725) Other assets........................................ -- (2,600) Accounts payable and accrued expenses............... 29,648 44,536 --------- --------- Net cash used in operating activities............. 55,264 (173,908) --------- --------- Cash flows from investing activities: Purchase of property and equipment........................ (57,538) (74,681) --------- --------- Net cash used in investing activities............. (57,538) (74,681) --------- --------- Cash flows from financing activities: Borrowings on line of credit.............................. -- 587,900 Repayment of line of credit............................... -- (135,000) Advances from officer..................................... (84,928) (29,530) --------- --------- Net cash provided by financing activities......... (84,928) 423,370 --------- --------- Net increase in cash and cash equivalents................... (87,202) 174,781 Cash and cash equivalents at beginning of year.............. 87,374 172 --------- --------- Cash and cash equivalents at end of year.................... $ 172 $ 174,953 ========= ========= Supplemental disclosure of cash flows: Cash paid during the year for interest.................... $ -- $ 6,818 ========= ========= Cash paid during the year for income taxes................ $ -- $ -- ========= ========= For disclosure of non-cash transactions see Note 7.
The accompanying notes are an integral part of these financial statements. F-25 INFOTAINMENT TELEPICTURES, INC. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS The Company was incorporated in the state of Nevada in 1993 under the name "Gunn Industries." Since inception, the Company has been owned by a sole shareholder. By decision of the Board of Directors held on January 2, 1998, the name of the Company was changed to Infotainment Telepictures, Inc. ("Infotainment" or the "Company"). Infotainment is a media company focused on providing original radio, television and Internet programming relating to information technologies and the Internet and the production of infomercials for third parties for the sale of goods and services. The Company's properties include the radio and television program, NET TALK LIVE! THE INTERNET TALK SHOW, and the related Internet site. Revenues are derived from the sale of radio, television and Internet advertising and sponsorships on THE NET TALK LIVE! THE INTERNET TALK SHOW and revenue and royalties from the production of infomercials for third parties. In January 1999, substantially all of the Company's assets and liabilities were sold to DigitalConvergence.:Com Inc. ("Digital") (see Note 11). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments with maturities of three months or less at date of acquisition to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. The Company evaluates long-lived assets to be held and used in the business for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment is determined by comparing expected future cash flows (undiscounted and before interest) to the net book value of the assets. If impairment exists, the amount of impairment is measured as the difference between the net book value of the assets and the estimated fair value of the related assets. Based on its most recent analysis, the Company believes that no impairment of property or equipment existed at December 31, 1998. CONCENTRATION OF CREDIT RISK The Company's revenue and accounts receivable primarily relate to the sale of advertising spots and sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW and the production of infomercials. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Credit losses have been within management's expectations and adequate allowances for any uncollectible trade receivables are maintained. Substantially all of the Company's accounts receivable are derived from sales to one customer in each of the years ended December 31, 1997 and 1998. Historically, the Company has not incurred material credit related losses. F-26 INFOTAINMENT TELEPICTURES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT Research and development costs are primarily costs incurred to develop, enhance and develop new applications for our technology. Research and development costs are charged to expense in the period incurred. ADVERTISING COSTS Advertising and promotion-related expenses are charged to operations when incurred. Advertising expense for 1997 and 1998 was approximately $0 and $10,031, respectively. INCOME TAXES Deferred income taxes are recorded to reflect the future tax consequences of temporary differences between the tax and financial bases of assets and liabilities based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect the taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. REVENUE RECOGNITION Revenue derived from the sale of advertising spots and sponsorships during NET TALK LIVE! THE INTERNET TALK SHOW is recognized upon broadcast of the show in which the advertisement or sponsorship is aired. In cases where payment is received prior to the airing of the advertisement or sponsorship, the Company defers recognition of the corresponding revenue until the advertisement or sponsorship has been aired. Revenue derived from the production of infomercials is recognized when production is complete and the master is delivered to the customer, which is less than one year. Payments received in advance and costs incurred for production are deferred until completion of the related infomercial. Infomercial royalty revenue is recognized upon the sale of goods and/or services by the customer. BARTER TRANSACTIONS The Company trades advertisements and sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW and Internet site in exchange for goods and services. Barter transactions are recorded at the fair market value of the goods and services provided or received, whichever is lower. Barter revenues are recognized in the period the advertisement or sponsorship is aired. If a barter agreement extends over the end of any accounting period, an asset or a liability is recorded based on the fair value of the related goods or services earned or to be provided at such period end. Historically, the goods and services provided and received have been exchanged in the same 30-day period. Therefore, advertising and sponsorship revenues are generally offset by an equal amount of production costs and/or property and equipment. In January 2000, the Emerging Issues Task Force ("EITF") released Issue No. 99-17, "Accounting for Advertising Barter Transactions," which is effective for transactions occurring after January 20, 2000. Management does not expect adoption of the EITF to have a material impact on its operations and financial position. F-27 INFOTAINMENT TELEPICTURES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET LOSS PER SHARE Net loss per share is computed based on the weighted average number of shares of common stock outstanding and common equivalent shares. For the years ended December 31, 1997 and 1998, there were 25,000 shares of common stock issued and outstanding. Basic and diluted net loss per share are equal because the Company had no potentially dilutive shares outstanding during the years ended December 31, 1997 and 1998. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's cash and cash equivalents, accounts receivable, and accounts payable approximate their respective fair values. UNCERTAINTIES AND THE USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PROPERTY AND EQUIPMENT A summary of property and equipment follows:
DECEMBER 31, --------- 1998 --------- Computer equipment.......................................... $ 53,280 Production equipment........................................ 205,036 Phone equipment............................................. 8,214 Furniture and fixtures...................................... 23,856 --------- Property and equipment, gross............................... 290,386 Less accumulated depreciation............................... (112,832) --------- Property and equipment, net................................. $ 177,554 =========
F-28 INFOTAINMENT TELEPICTURES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES A summary of accounts payable and accrued expenses follows:
DECEMBER 31, ------------ 1998 ------------ Accounts payable............................................ $21,515 Federal taxes............................................... 63,327 Other accruals.............................................. 457 ------- $85,299 =======
5. NOTES PAYABLE During 1998, the Company borrowed $587,900 through a line of credit with an investor of Digital at an interest rate of 8.0%, of which $135,000 was repaid in the same year. The note was unsecured. The remaining amount of the borrowings were repaid in 1999 in connection with the sale of the Company's assets and liabilities to Digital (see Note 11). 6. INCOME TAXES Income tax expense on income before income taxes consists of:
DECEMBER 31, ------------------- 1997 1998 -------- -------- Current provision: Federal............................................... $ -- $ -- State................................................. -- -- Deferred provision...................................... (74,838) (22,848) Valuation allowance..................................... 74,838 22,848 -------- -------- Total income tax benefit................................ $ -- $ -- ======== ========
Reconciliations of the U.S. corporate income tax rate and the effective tax rate on loss before income taxes are summarized below:
DECEMBER 31, -------------------- 1997 1998 --------- -------- U.S. corporate tax rate 34% 34% Loss before taxes...................................... $(242,894) $(88,432) --------- -------- Tax benefit at statutory rates......................... $ (82,584) $(30,067) Tax effect of non income tax penalties................. 6,222 6,920 Tax effect of meals and entertainment.................. 1,524 299 Increase in valuation allowance........................ 74,838 22,848 --------- -------- Total income tax benefit............................... $ -- $ -- ========= ========
F-29 INFOTAINMENT TELEPICTURES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES (CONTINUED) The components of the deferred tax asset and liability as of December 31, 1998 are as follows.
1998 --------- ASSETS: Net operating losses........................................ $ 158,692 Other temporary differences................................. 2,489 Valuation allowance......................................... (158,335) --------- Deferred tax assets......................................... 2,846 ========= LIABILITIES: Differences between book and tax basis of property and equipment................................................. 2,846 ========= Deferred tax liability...................................... 2,846 --------- Net deferred tax asset (liability).......................... $ -- =========
The expiration date of the net operating losses is as follows:
EXPIRATION AMOUNT DATE -------- ---------- $ 32,480 2010 148,854 2011 225,563 2012 59,843 2019 -------- $466,740 ========
7. BARTER TRANSACTIONS During the periods presented, in exchange for advertisements and sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW, the Company has primarily received radio and television airtime to broadcast the show. For the years ended December 31, 1997 and 1998, barter transactions are summarized as follows:
DECEMBER 31, -------------------- 1997 1998 --------- -------- Revenues............................................... $ 293,275 $ 48,930 Expenses............................................... (276,275) (46,530) Property and equipment................................. (17,000) (2,400) --------- -------- Total.................................................. $ -- $ -- ========= ========
The decrease of barter transactions from 1997 and 1998 results from new broadcast contracts with other radio and television stations by which the Company generally pays cash to the stations for the value of the air time. F-30 INFOTAINMENT TELEPICTURES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. LEASES The Company has a noncancelable lease for facilities that expires in 2001. Future minimum lease payments under the lease are as follows:
YEAR ENDING OPERATING DECEMBER 31, LEASES - -------------------------------------------------- --------- 1999.............................................. $31,200 2000.............................................. 31,200 2001.............................................. 10,300 ------- Total minimum lease payments...................... $72,700 =======
Rental expense from operating leases amounted to $17,000, and $20,275 for the years ended December 31, 1997, and 1998, respectively. These expenses include $17,000, and $0, respectively resulting from a barter transaction (see Note 7). 9. MAJOR CUSTOMERS AND CONTRACTS CUSTOMERS For the year ended December 31, 1997, two customers accounted for approximately 28.0% and 63.1% of the Company's total revenues, respectively. For the year ended December 31, 1998, three customers, accounted for approximately 26.5%, 25.3% and 24.9% of the Company's total revenues, respectively. CONTRACTS In June 1997, the Company entered into a contract with Nissi Cosmetics, Inc. ("Nissi") to produce two infomercials, two direct response spots and two web sites for the advertising and marketing of a Nissi product. The Company received a flat fee for its services. In December 1997, the Company entered into a contract with Computer City, Inc. ("Computer City") for Computer City to become a broadcast sponsor of NET TALK LIVE! THE INTERNET TALK SHOW. This contract, which terminated after six months, provided for sponsorship of the show, including commercial spots within the show, as well as the linking and co-branding of the respective company's web sites and personal appearances by the cast members of the show. The Company received a per show fee for these services. In December 1997, the Company entered into a contract with GTE Internetworking for GTE Internetworking to become a broadcast sponsor of NET TALK LIVE! THE INTERNET TALK SHOW This one-year contract provided for sponsorship of the show, including commercial spots within the show, as well as the linking and co-branding of the respective company's web sites. The Company received a per show fee for these services. In December 1997, the Company entered into a contract with The Associates for The Associates to become a broadcast sponsor of NET TALK LIVE! THE INTERNET TALK SHOW. This sixteen-week contract provided for sponsorship of the show, including commercial spots within the show, and the development of a web site for The Associates' product. The Company received a per show fee for these services. F-31 INFOTAINMENT TELEPICTURES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. MAJOR CUSTOMERS AND CONTRACTS (CONTINUED) In December 1998, the Company entered into a contract with Microsoft Corporation ("Microsoft") to produce and air two commercial spots on its NET TALK LIVE! THE INTERNET TALK SHOW each week for a minimum of sixteen weeks, as a part of Microsoft's "watch and win" marketing campaign. For these services, the Company received a flat fee plus various production and modification fees. 10. RELATED PARTY TRANSACTIONS Included in current liabilities on the accompanying balance sheet is an advance from a director of the Company for $197,919 for the year ended December 31, 1998. 11. SUBSEQUENT EVENTS On January 4, 1999, the Company entered into an Asset Purchase Agreement (the "Agreement") pursuant to which the Company sold substantially all of its assets and certain liabilities to Digital. The transaction will be accounted for as a business acquisition of entities under common control. In accordance with the Agreement, the Company sold all of its rights, title and interest in and to the trade names, trademarks, designs, copyrights, patents pending, patents filed and other intellectual property, all of the Company's rights in and to the radio and television show known as NET TALK LIVE! THE INTERNET TALK SHOW including, but not limited to, all prior and future programming, all trademarks, copyrights, creative materials, designs and other intellectual property, and all of the Company's right, title and interest in and to the furniture, fixtures and equipment ("the Assets"). The aggregate purchase price for the Assets was $8,000,000, payable in the form of a promissory note, bearing interest at the rate of 6% per annum ("Promissory Note"). The promissory note and accrued interest thereon is payable on a quarterly basis to the Company beginning March 31, 2001. All or a portion of the Promissory Note will be repaid if certain events occur. In any event, all principal and interest amounts for the Promissory Note will be fully paid to the Company by January 31, 2004. During the month of October 1999, Digital repaid $1,500,000 of the promissory note. During the month of April 2000, Digital repaid $3,000,000 of principal and $584,137 of interest on the promissory note. On January 29, 1999, the Company entered into individual agreements with certain independent contractors who had provided services to the Company for the period from 1996 through early 1999. According to the contract agreements, the Company agrees to pay future cash bonuses to the individuals contingent upon the occurrence of two events including (1) the finalization of an initial public offering whereby Digital raises a net amount of proceeds of at least $30 million and (2) the receipt of at least $8 million in cash collections by Digital prior to the date of an initial public offering which raises a net amount of proceeds of at least $30 million. As a result of the $1,500,000 voluntary repayment of the promissory note by Digital in October 1999, management elected to prepay a certain percentage of these bonuses in the amount of approximately $132,000 even though the conditions of the bonus agreements had not been satisfied. The payments remain the property of the contractors regardless of whether the conditions of the bonus agreements are met. As of the date of this report, the Company remains liable for an additional $1,000,000, contingent upon the satisfaction of the stipulated conditions of the bonus agreements. F-32 INFOTAINMENT TELEPICTURES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. SUBSEQUENT EVENTS (CONTINUED) LEGAL PROCEEDINGS In September 1999, the Company became a co-defendant in a lawsuit pending in state court in Dallas, Texas. The plaintiff, Nissi Cosmetics, Inc., alleges that the Company breached a 1997 contract for the creation of two websites, two informercials, and two direct response spots for the advertising and marketing of certain of Nissi Cosmetics' body color, or self-tanning, products. Nissi Cosmetics seeks recovery of $585,000 paid to defendants, and unspecified damages for "lost profits." The Company filed a general denial and intends to vigorously defend the matter. In the opinion of management, the ultimate resolution of any such claims would not have a material adverse impact on the financial position of the Company. F-33 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Through and including , 2000 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. SHARES [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- MERRILL LYNCH & CO. ING BARINGS BANC OF AMERICA SECURITIES LLC BEAR, STEARNS & CO. INC. , 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED , 2000 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SHARES [LOGO] COMMON STOCK ------------------ This is DigitalConvergence.:Com Inc.'s initial public offering of common stock. DigitalConvergence.:Com Inc. is selling all of the shares in this offering. The international managers are offering shares outside the U.S. and Canada and the U.S. underwriters are offering shares in the U.S. and Canada. We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will be quoted on the Nasdaq National Market under the symbol "DGTL." INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE OF THIS PROSPECTUS. ---------------------
PER SHARE TOTAL --------- ----- Public offering price.................................. $ $ Underwriting discount.................................. $ $ Proceeds, before expenses, to DigitalConvergence.:Com Inc.................................................. $ $
The international managers may also purchase up to an additional shares from DigitalConvergence.:Com Inc. at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The U.S. underwriters may similarly purchase up to an aggregate of an additional shares from Digital Convergence.:Com Inc. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery on or about , 2000. -------------------- JOINT BOOK-RUNNING MANAGERS MERRILL LYNCH INTERNATIONAL ING BARINGS LIMITED -------------------- BANK OF AMERICA INTERNATIONAL LIMITED BEAR, STEARNS INTERNATIONAL LIMITED -------------------- The date of this prospectus is , 2000 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] UNDERWRITING GENERAL We are offering our shares outside the U.S. and Canada through the international managers and in the U.S. and Canada through the U.S. underwriters. Merrill Lynch International, ING Barings Limited, as agent for ING Bank, N.V., London Branch, Bank of America International Limited and Bear, Stearns International Limited are acting as lead managers of the international managers named below. Subject to the terms and conditions described in an international purchase agreement among us and the international managers, and concurrently with the sale of shares to the U.S. underwriters, we have agreed to sell to the international managers, and the international managers severally and not jointly have agreed to purchase from us, the number of shares listed opposite their names below.
NUMBER INTERNATIONAL MANAGER OF SHARES --------------------- ----------- Merrill Lynch International................................. ING Barings Limited, as agent for ING Bank, N.V., London Branch.................................................... Bank of America International Limited....................... Bear, Stearns International Limited......................... ----------- Total................................................... ===========
We have also entered into a U.S. purchase agreement with the U.S. underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, ING Barings LLC, Banc of America Securities LLC and Bear, Stearns & Co. Inc. are acting as U.S. representatives, for sale of the shares in the U.S. and Canada. Subject to the terms and conditions set forth in the U.S. purchase agreement, and concurrently with the sale of shares to the international managers pursuant to the international purchase agreement, we have agreed to sell to the U.S. underwriters, and the U.S. underwriters severally have agreed to purchase from us, shares. The initial public offering price per share and the total underwriting discount per share are identical under the international purchase agreement and the U.S. purchase agreement. The international managers and the U.S. underwriters have agreed to purchase all of the shares sold under the international and U.S. purchase agreements if any of these shares are purchased. If an underwriter defaults, the U.S. and international purchase agreements provide that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreements may be terminated. The closings for the sale of shares to be purchased by the international managers and the U.S. underwriters are conditioned on one another. We have agreed to indemnify the international managers and the U.S. underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the international managers and the U.S. underwriters may be required to make in respect of those liabilities. The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreements, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Merrill Lynch will be facilitating Internet distribution for this offering to certain of its Internet subscription customers. Merrill Lynch intends to allocate a limited number of shares for sale to its 1 online brokerage customers. An electronic prospectus is available on the website maintained by Merrill Lynch. Other than the prospectus in electronic format, the information on the Merrill Lynch website relating to this offering is not a part of this prospectus. COMMISSIONS AND DISCOUNTS The lead managers have advised us that the international managers propose initially to offer the shares to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The international managers may allow, and the dealers may re-allow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concessions and discount may be changed. The following table shows the public offering price, underwriting discount and proceeds before expenses to us. The information assumes either no exercise or full exercise by the international managers and the U.S. underwriters of their over-allotment options.
PER WITHOUT WITH SHARE OPTIONS OPTIONS ----------- ----------- ----------- Public offering price...................................... $ $ $ Underwriting discount...................................... $ $ $ Proceeds, before expenses, to us........................... $ $ $
The expenses of the offering, not including the underwriting discount, are estimated at $ and are payable by us. OVER-ALLOTMENT OPTIONS We have granted an option to the international managers to purchase up to additional shares at the public offering price less the underwriting discount. The international managers may exercise this option for 30 days from the date of this prospectus solely to cover any over-allotments. If the international managers exercise this option, each will be obligated, subject to conditions contained in the purchase agreements, to purchase a number of additional shares proportionate to that international manager's initial amount reflected in the above table. We have also granted an option to the U.S. underwriters, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares to cover any over-allotments on terms similar to those granted to the international managers. INTERSYNDICATE AGREEMENT The international managers and the U.S. underwriters have entered into an intersyndicate agreement that provides for the coordination of their activities. Under the intersyndicate agreement, the international managers and the U.S. underwriters may sell shares to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the intersyndicate agreement, the international managers and any dealer to whom they sell shares will not offer to sell or sell shares to U.S. or Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions under the intersyndicate agreement. Similarly, the U.S. underwriters and any dealer to whom they sell shares will not offer to sell or sell shares to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, except in the case of transactions under the intersyndicate agreement. 2 NO SALES OF SIMILAR SECURITIES We and our executive officers and directors and certain existing stockholders have agreed, with exceptions, not to sell or transfer any common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch, Pierce & Co. Specifically, we and these other individuals have agreed not to directly or indirectly - offer, pledge, sell or contract to sell any common stock, - sell any option or contract to purchase any common stock, - purchase any option or contract to sell any common stock, - grant any option, right or warrant for the sale of any common stock, - lend or otherwise dispose of or transfer any common stock, - request or demand that we file a registration statement related to the common stock, or - enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise. This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. QUOTATION ON THE NASDAQ NATIONAL MARKET We expect the shares to be approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "DGTL." Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among us and the U.S. representatives and lead managers. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are - the valuation multiples of publicly traded companies that the U.S. representatives and the lead managers believe to be comparable to us, - our financial information, - the history of, and the prospects for, our company and the industry in which we compete, - an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues, - the present state of our development, and - the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price. The underwriters do not expect to sell more than 5% of the shares being offered in this offering to accounts over which they exercise discretionary authority. 3 PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of the shares is completed, SEC rules may limit underwriters from bidding for and purchasing our common stock. However, the U.S. representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price. If the underwriters create a short position in the common stock in connection with the offering, i.e., if they sell more shares than are listed on the cover of this prospectus, the U.S. representatives may reduce that short position by purchasing shares in the open market. The U.S. representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of such purchases. The U.S. representatives may also impose a penalty bid on underwriters and selling group members. This means that if the U.S. representatives purchase shares in the open market to reduce the underwriter's short position or to stabilize the price of such shares, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. The imposition of a penalty bid may also affect the price of the shares in that it discourages resales of those shares. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters makes any representation that the U.S. representatives or lead managers will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. UK SELLING RESTRICTIONS Each international manager has agreed that - it has not offered or sold and will not offer or sell any shares of common stock to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; - it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the common stock in, from or otherwise involving the United Kingdom; and - it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of common stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order 1996 as amended by the Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order 1997 or is a person to whom such document may otherwise lawfully be issued or passed on. NO PUBLIC OFFERING OUTSIDE THE UNITED STATES No action has been or will be taken in any jurisdiction (except in the United States) that would permit a public offering of the shares of common stock, or the possession, circulation or distribution of this prospectus or any other material relating to us or shares of our common stock in any jurisdiction where action for that purpose is required. Accordingly, the shares of our common stock may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or 4 advertisements in connection with the shares of common stock may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such country or jurisdiction. Purchasers of the shares offered by this prospectus may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price on the cover page of this prospectus. OTHER RELATIONSHIPS ING Barings LLC has performed investment banking and financial advisory services for us in the past for which it has received customary fees and may, in the future, perform similar services for us and receive additional compensation from us for those services. In connection with our private placement of Series A preferred stock in September 1999, ING Barings LLC received a placement fee of approximately $1.7 million in December 1999 for acting as placement agent. In addition, ING Barings LLC and DING.com LLC, an entity affiliated with ING Barings, purchased 1,587 and 2,875 shares of Series A preferred stock, respectively, in our Series A financing for a purchase price of $4,999,050 and $9,056,250, respectively. The shares held by ING Barings LLC and DING.com LLC will convert automatically into 999,810 and 1,811,250 shares of our common stock, respectively, upon completion of this offering. 5 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Through and including , 2000 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. SHARES [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- MERRILL LYNCH INTERNATIONAL ING BARINGS LIMITED BANK OF AMERICA INTERNATIONAL LIMITED BEAR, STEARNS INTERNATIONAL LIMITED , 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by DigitalConvergence.:Com in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee........................................ $ 26,400 NASD filing fee............................................. 10,500 Nasdaq National Market Listing Fee.......................... * Printing and engraving costs................................ * Legal fees and expenses..................................... * Accounting fees and expenses................................ * Transfer Agent and Registrar fees........................... * Miscellaneous expenses...................................... * ---------------- Total..................................................... $ * ================
- ------------------------ * To be supplied by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law ("DGCL") provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees)), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees) actually and reasonably incurred in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or such other court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. The Company's Amended and Restated Certificate of Incorporation provides for the indemnification of directors to the fullest extent permitted by the DGCL. In addition, as permitted by II-1 the DGCL, the Amended and Restated Certificate of Incorporation provides that directors of the company shall have no personal liability to the company or its stockholders for monetary damages for breach of fiduciary duty as a director, except (1) for any breach of the director's duty of loyalty to the company or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (3) under Section 174 of the DGCL or (4) for any transaction from which a director derived an improper personal benefit. The Company's By-laws provides for the indemnification of all current and former directors and all current or former officers to the fullest extent permitted by the DGCL. DigitalConvergence.:Com has entered into indemnification agreements with its directors and executive officers, and intends to enter into indemnification agreements with any new directors and executive officers in the future. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following information relates to all securities issued or sold by DigitalConvergence.:Com in the last three years and not registered under the Securities Act. Each of the transactions described below was conducted in reliance upon the exemption from registration provided in Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Each of the certificates representing DigitalConvergence.:Com's securities issued in connection with such transaction contains a restrictive legend. The information provided in this Item takes into account a 630 for 1 stock split of the common stock effected on January 3, 2000 and a for one stock split of the common stock that will occur prior to the completion of this offering. On September 25, 1998, DigitalConvergence.:Com sold 41,422,500 shares of common stock of DigitalConvergence.:Com (the "Common Stock") to J. Jovan Philyaw for a purchase price of $1,000. On January 28, 1999, DigitalConvergence.:Com sold 3,150,000 shares of Common Stock to B&G Partnership, Ltd. for a purchase price of $500. On January 28, 1999, DigitalConvergence.:Com sold 3,150,000 shares of Common Stock to BCG Partnership, Ltd. for a purchase price of $500. On January 28, 1999, DigitalConvergence.:Com sold 9,450,000 shares of Common Stock to JAT III, L.L.C. for a purchase price of $1,500. On January 29, 1999, DigitalConvergence.:Com sold 315,000 shares of Common Stock to BCG Partnership, Ltd. for a purchase price of $50. On January 29, 1999, DigitalConvergence.:Com sold 315,000 shares of Common Stock to JAT III, L.L.C. for a purchase price of $50. On January 29, 1999, DigitalConvergence.:Com sold 850,500 shares of Common Stock to Dave Mathews for a purchase price of $135. On January 29, 1999, DigitalConvergence.:Com sold 567,000 shares of Common Stock to Brad Smith for a purchase price of $90. On January 29, 1999, DigitalConvergence.:Com sold 472,500 shares of Common Stock to Laura Lewis for a purchase price of $75. On January 29, 1999, DigitalConvergence.:Com sold 346,500 shares of Common Stock to Luis Vallecillo for a purchase price of $55. On January 29, 1999, DigitalConvergence.:Com sold 157,500 shares of Common Stock to Kurt Boxdorfer for a purchase price of $25. II-2 On January 29, 1999, DigitalConvergence.:Com sold 78,750 shares of Common Stock to Jeff Harris for a purchase price of $12.50. On January 29, 1999, DigitalConvergence.:Com sold 78,750 shares of Common Stock to Brandon Brown for a purchase price of $12.50. On January 29, 1999, DigitalConvergence.:Com sold 220,500 shares of Common Stock to Kozette Hedger for a purchase price of $35. On January 29, 1999, DigitalConvergence.:Com sold 47,250 shares of Common Stock to Georgia Foy for a purchase price of $7.50. On January 29, 1999, DigitalConvergence.:Com sold 18,900 shares of Common Stock to Mike Simeone for a purchase price of $3. On May 17, 1999, DigitalConvergence.:Com sold 472,500 shares of Common Stock to William Leftwich for a purchase price of $75. Between September 28, 1999 and January 14, 2000, DigitalConvergence.:Com sold 2,875 shares of Series A Convertible Preferred Stock (the "Series A Convertible Preferred Stock") to DING.com LLC for a purchase price of $9,056,250. On September 30, 1999, DigitalConvergence.:Com sold 3,970 shares of Series A Convertible Preferred Stock to Belo Enterprises, Inc. for a purchase price of $12,505,500. On October 1, 1999, DigitalConvergence.:Com sold 6,350 shares of Series A Convertible Preferred Stock of DigitalConvergence.:Com to Young & Rubicam Inc. for a purchase price of $20,002,500. On October 1, 1999, DigitalConvergence.:Com sold 1,587 shares of Series A Convertible Preferred Stock to ING Capital LLC for a purchase price of $4,999,050. On October 15, 1999, DigitalConvergence.:Com sold 318 shares of Series A Convertible Preferred Stock to Michael H. Anderson for a purchase price of $1,001,700. On October 18, 1999, DigitalConvergence.:Com sold 318 shares of Series A Convertible Preferred Stock to Ingram Capital, Inc. for a purchase price of $1,001,700. On October 29, 1999, DigitalConvergence.:Com sold 318 shares of Series A Convertible Preferred Stock to LJBB Investment Group LP for a purchase price of $1,001,700. On November 3, 1999, DigitalConvergence.:Com sold 16 shares of Series A Convertible Preferred Stock to Robert D. Hamman for a purchase price of $50,400. On November 3, 1999, DigitalConvergence.:Com sold 16 shares of Series A Convertible Preferred Stock to Robert D. Hamman as Trustee for the Robert D. Hamman CLU, Inc. Profit Sharing Plan for a purchase price of $50,400. On November 5, 1999, DigitalConvergence.:Com sold 198 shares of Series A Convertible Preferred Stock to Digital Investment Partners for a purchase price of $623,700. On April 25, 2000, DigitalConvergence.:Com sold 5,929,364 shares of Series B Convertible Preferred Stock to accredited investors, as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act, for an aggregate purchase price of $41.7 million. On April 25, 2000, DigitalConvergence.:Com sold 5,372,593 shares of Series C Convertible Preferred Stock to accredited investors, as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act, for an aggregate purchase price of $56.6 million. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- *1.1 -- Form of Underwriting Agreement +2.1.1 -- Asset Purchase Agreement, dated January 4, 1999, by and between DigitalConvergence.:Com and Infotainment Telepictures, Inc. +2.1.2 -- First Amendment to Asset Purchase Agreement, dated January 4, 1999, by and between DigitalConvergence.:Com and Infotainment Telepictures, Inc. *2.1.3 -- Second Amendment to Asset Purchase Agreement, dated April , 2000, by and between DigitalConvergence.:Com and Infotainment Telepictures, Inc. +3.1 -- Form of Second Amended and Restated Certificate of Incorporation +3.2 -- Form of Amended and Restated Bylaws *4.1 -- Form of Common Stock Certificate +4.2 -- Amended Certificate of Designation of Series A Convertible Preferred Stock +4.3 -- Certificate of Designation of Series B Convertible Preferred Stock +4.4 -- Certificate of Designation of Series C Convertible Preferred Stock *4.5 -- First Amended and Restated Registration Rights Agreement, dated April 25, 2000, by and among DigitalConvergence.:Com and the security holders named therein *4.6 -- First Amended and Restated Stockholders Agreement, dated April 25, 2000, by and among DigitalConvergence.:Com and the security holders named therein *5.1 -- Opinion of Vinson & Elkins L.L.P. +10.1 -- Employment Agreement, dated as of August 16, 1999, by and between DigitalConvergence.:Com and Michael N. Garin +10.2 -- Employment Agreement, dated as of August 16, 1999, by and between DigitalConvergence.:Com and Gregory D. Lerman +10.3.1 -- Employment Agreement, dated as of August 16, 1999, by and between DigitalConvergence.:Com and Scott P. Carlin +10.3.2 -- First Amendment to Employment Agreement, dated as of August 16, 1999, by and between DigitalConvergence.:Com and Scott P. Carlin +10.4 -- Employment Agreement, dated as of January 3, 2000, by and between DigitalConvergence.:Com and Donald E. Welsh +10.5 -- Employment Agreement, dated as of December 15, 1999, by and between DigitalConvergence.:Com and Douglas L. Davis +10.6 -- Employment Agreement, dated as of January 1, 2000, by and between DigitalConvergence.:Com and Patrick V. Stark *10.7 -- License Agreement, dated , 2000, by and between DigitalConvergence.:Com and Belo Corp. +10.8.1 -- Warrant Agreement, dated September 29, 1999, by and between DigitalConvergence.:Com and Belo Enterprises, Inc. +10.8.2 -- Warrant Certificate No. 1, dated September 29, 1999, for the purchase of DigitialConvergence.:Com common stock by Belo Enterprises, Inc. *10.9 -- Licensing Agreement, dated as of April 18, 2000, by and between DigitalConvergence.:Com Inc. and National Broadcasting Company, Inc. *10.10.1 -- Warrant Agreement, dated as of April 18, 2000, by and between DigitalConvergence.:Com and National Broadcasting Company, Inc. *10.10.2 -- Warrant Certificate No. 1, dated April 18, 2000, for the purchase of DigitalConvergence.:Com common stock by National Broadcasting Company, Inc. *10.11 -- Warrant Agreement, dated as of April 18, 2000, by and between DigitalConvergence.:Com Inc. and National Broadcasting Company, Inc. *10.12 -- Warrant Certificate No. 1, dated April 18, 2000, for the purchase of DigitalConvergence.:Com common stock by National Broadcasting Company, Inc.
II-4
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- +10.13 -- Promissory Note, dated January 4, 1999, by and between DigitalConvergence.:Com and Infotainment Telepictures, Inc. +10.14 -- Debenture, dated January 28, 1999, by and between DigitalConvergence.:Com and JAT III L.L.C. +10.15 -- Debenture, dated January 28, 1999, by and between DigitalConvergence.:Com and B&G Partnership, Ltd. +10.16 -- Debenture, dated January 28, 1999, by and between DigitalConvergence.:Com and BCG Partnership, Ltd. +10.17 -- Form of Indemnification Agreement for directors and officers of DigitalConvergence.:Com +10.18.1 -- DigitalConvergence.:Com Inc. 1999 Stock Option Plan *10.18.2 -- First Amendment to the DigitalConvergence.:Com Inc. 1999 Stock Option Plan *10.19 -- DigitalConvergence.:Com Inc. Employee Stock Purchase Plan +10.20 -- Stock Purchase Agreement, dated May 17, 1999, by and between DigitalConvergence.:Com and William S. Leftwich +10.21 -- Form of Proprietary Rights and Information Agreement +10.22 -- Manufacturing and Marketing Agreement, effective as of December 6, 1999, by and between DigitalConvergence.:Com and Tandy Corporation +10.23 -- Print Publishing Agreement, dated January 13, 2000, by and between DigitalConvergence.:Com and Forbes, Inc. +10.24 -- Print License Agreement, dated February 16, 2000, by and between DigitalConvergence.:Com and Wired Magazine *10.25 -- Print License Agreement, dated as of February 8, 2000, by and between DigitalConvergence.:Com and Journal Sentinel Incorporated *10.26 -- Broadcast Station Agreement, dated as of February 8, 2000, by and between DigitalConvergence.:Com and Journal Broadcast Group, Inc. +21.1 -- Subsidiaries of DigitalConvergence.:Com +23.1 -- Consent of PricewaterhouseCoopers LLP *23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1) +24.1 -- Power of Attorney (included in signature page) +27.1 -- Financial Data Schedule
- ------------------------ + Filed herewith * To be filed by amendment II-5 (b) FINANCIAL STATEMENT SCHEDULES The following reports of independent accountants and financial statement schedules are included in this Registration Statement: - Report of Independent Accountants on Financial Statement Schedule of DigitalConvergence.:Com Inc. - Report of Independent Accountants on Financial Statement Schedule of Infotainment Telepictures, Inc. - Valuation and Qualifying Accounts of DigitalConvergence.:Com Inc. for the year ended December 31, 1999 - Valuation and Qualifying Accounts of Infotainment Telepictures, Inc. for the years ended December 31, 1997 and 1998 ITEM 17. UNDERTAKINGS The Registrant hereby undertakes: (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) To provide to the underwriter(s) at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter(s) to permit prompt delivery to each purchaser. (c) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (d) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the day of April, 2000. DIGITALCONVERGENCE.:COM INC. By: /s/ MICHAEL N. GARIN ----------------------------------------- Michael N. Garin PRESIDENT AND CHIEF OPERATING OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael N. Garin, Patrick V. Stark and William S. Leftwich and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including pre- and post-effective amendments) to this Registration Statement and any additional registration statement pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ J. JOVAN PHILYAW ------------------------------------------- Chief Executive Officer and April 28, 2000 J. Jovan Philyaw Chairman of the Board /s/ MICHAEL N. GARIN ------------------------------------------- President, Chief Operating April 28, 2000 Michael N. Garin Officer and Director /s/ WILLIAM S. LEFTWICH ------------------------------------------- Chief Financial Officer April 28, 2000 William S. Leftwich /s/ PATRICK V. STARK ------------------------------------------- Director April 28, 2000 Patrick V. Stark /s/ MICHAEL H. JORDAN ------------------------------------------- Director April 28, 2000 Michael H. Jordan
II-7
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM O. HUNT ------------------------------------------- Director April 28, 2000 William O. Hunt /s/ JACK A. TURPIN ------------------------------------------- Director April 28, 2000 Jack A. Turpin
II-8 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of DigitalConvergence.:Com Inc. Our audits of the consolidated financial statements referred to in our report dated April 27, 2000 appearing in this Registration Statement on Form S-1 of DigitalConvergence.:Com Inc. also included an audit of the financial statement schedule listed in such Registration Statement. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Dallas, Texas April 27, 2000 S-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Infotainment Telepictures, Inc. Our audits of the consolidated financial statements referred to in our report dated February 29, 2000, except as to Note 11 which is as of April 27, 2000 appearing in this Registration Statement on Form S-1 of DigitalConvergence.:Com Inc. also included an audit of the financial statement schedules listed in such Registration Statement. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Dallas, Texas February 29, 2000 S-2 SCHEDULE II DIGITALCONVERGENCE.:COM INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD - -------------- ---------- ---------- ---------- ---------- December 31, 1999 Income tax valuation allowance.................... $ 158 $4,311 $ -- $4,469 ====== ====== ======= ======
(a) This schedule should be read in conjunction with the Digitalconvergence.:Com Inc. audited consolidated financial statements and related notes thereto. S-3 SCHEDULE II INFOTAINMENT TELEPICTURES, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD - ----------- ---------- ---------- ---------- ---------- 1997 Income tax valuation allowance.................... $ 61 $74 $-- $135 ==== === === ==== 1998 Income tax valuation allowance.................... $135 $23 $-- $158 ==== === === ====
(a) This schedule should be read in conjunction with the Infotainment Telepictures, Inc. audited financial statements and related notes thereto. S-4 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- *1.1 -- Form of Underwriting Agreement +2.1.1 -- Asset Purchase Agreement, dated January 4, 1999, by and between DigitalConvergence.:Com and Infotainment Telepictures, Inc. +2.1.2 -- First Amendment to Asset Purchase Agreement, dated January 4, 1999, by and between DigitalConvergence.:Com and Infotainment Telepictures, Inc. *2.1.3 -- Second Amendment to Asset Purchase Agreement, dated April , 2000, by and between DigitalConvergence.:Com and Infotainment Telepictures, Inc. +3.1 -- Form of Second Amended and Restated Certificate of Incorporation +3.2 -- Form of Amended and Restated Bylaws *4.1 -- Form of Common Stock Certificate +4.2 -- Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock +4.3 -- Certificate of Designation of Series B Convertible Preferred Stock +4.4 -- Certificate of Designation of Series C Convertible Preferred Stock *4.5 -- First Amended and Restated Registration Rights Agreement, dated April 25, 2000, by and among DigitalConvergence.:Com and the security holders named therein *4.6 -- First Amended and Restated Stockholders Agreement, dated April 25, 2000, by and among DigitalConvergence.:Com and the security holders named therein *5.1 -- Opinion of Vinson & Elkins L.L.P. +10.1 -- Employment Agreement, dated as of August 16, 1999, by and between DigitalConvergence.:Com and Michael N. Garin +10.2 -- Employment Agreement, dated as of August 16, 1999, by and between DigitalConvergence.:Com and Gregory D. Lerman +10.3.1 -- Employment Agreement, dated as of August 16, 1999, by and between DigitalConvergence.:Com and Scott P. Carlin +10.3.2 -- First Amendment to Employment Agreement, dated as of August 16, 1999, by and between DigitalConvergence.:Com and Scott P. Carlin +10.4 -- Employment Agreement, dated as of January 3, 2000, by and between DigitalConvergence.:Com and Donald E. Welsh +10.5 -- Employment Agreement, dated as of December 15, 1999, by and between DigitalConvergence.:Com and Douglas L. Davis +10.6 -- Employment Agreement, dated as of January 1, 2000, by and between DigitalConvergence.:Com and Patrick V. Stark *10.7 -- License Agreement, dated , 2000, by and between DigitalConvergence.:Com and Belo Corp. +10.8.1 -- Warrant Agreement, dated September 29, 1999, by and between DigitalConvergence.:Com and Belo Enterprises, Inc. +10.8.2 -- Warrant Certificate No. 1, dated September 29, 1999, for the purchase of DigitialConvergence.:Com common stock by Belo Enterprises, Inc. *10.9 -- Licensing Agreement, dated as of April 18, 2000, by and between DigitalConvergence.:Com Inc. and National Broadcasting Company, Inc. *10.10.1 -- Warrant Agreement, dated as of April 18, 2000, by and between DigitalConvergence.:Com and National Broadcasting Company, Inc. *10.10.2 -- Warrant Certificate No. 1, dated April 18, 2000, for the purchase of DigitalConvergence.:Com common stock by National Broadcasting Company, Inc. *10.11 -- Warrant Agreement, dated as of April 18, 2000, by and between DigitalConvergence.:Com Inc. and National Broadcasting Company, Inc. *10.12 -- Warrant Certificate No. 1, dated April 18, 2000, for the purchase of DigitalConvergence.:Com common stock by National Broadcasting Company, Inc. +10.13 -- Promissory Note, dated January 4, 1999, by and between DigitalConvergence.:Com and Infotainment Telepictures, Inc.
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- +10.14 -- Debenture, dated January 28, 1999, by and between DigitalConvergence.:Com and JAT III L.L.C. +10.15 -- Debenture, dated January 28, 1999, by and between DigitalConvergence.:Com and B&G Partnership, Ltd. +10.16 -- Debenture, dated January 28, 1999, by and between DigitalConvergence.:Com and BCG Partnership, Ltd. +10.17 -- Form of Indemnification Agreement for directors and officers of DigitalConvergence.:Com +10.18.1 -- DigitalConvergence.:Com Inc. 1999 Stock Option Plan *10.18.2 -- First Amendment to the DigitalConvergence.:Com Inc. 1999 Stock Option Plan *10.19 -- DigitalConvergence.:Com Inc. Employee Stock Purchase Plan +10.20 -- Stock Purchase Agreement, dated May 17, 1999, by and between DigitalConvergence.:Com and William S. Leftwich +10.21 -- Form of Proprietary Rights and Information Agreement +10.22 -- Manufacturing and Marketing Agreement, effective as of December 6, 1999, by and between DigitalConvergence.:Com and Tandy Corporation +10.23 -- Print Publishing Agreement, dated January 13, 2000, by and between DigitalConvergence.:Com and Forbes, Inc. +10.24 -- Print License Agreement, dated February 16, 2000, by and between DigitalConvergence.:Com and Wired Magazine *10.25 -- Print License Agreement, dated as of February 8, 2000, by and between DigitalConvergence.:Com and Journal Sentinel Incorporated *10.26 -- Broadcast Station Agreement, dated as of February 8, 2000, by and between DigitalConvergence.:Com and Journal Broadcast Group, Inc. +21.1 -- Subsidiaries of DigitalConvergence.:Com +23.1 -- Consent of PricewaterhouseCoopers LLP *23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1) +24.1 -- Power of Attorney (included in signature page) +27.1 -- Financial Data Schedule
- ------------------------ + Filed herewith * To be filed by amendment EX-2.1-1 2 EXHIBIT 2.1.1 ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT (the "Agreement") is entered into effective this 4th day of January, 1999 by and between Infotainment Telepictures, Inc., a Nevada corporation ("Seller"), and Digital Convergence.com Inc., a Delaware corporation ("Buyer"). WITNESSETH: WHEREAS, Seller owns all rights to produce that certain television show commonly known as "Net Talk Live!" (the "Business"); and WHEREAS, the parties hereto desire to enter into this Agreement for the purchase of the Business and all assets associated therewith; and NOW, THEREFORE, for and in consideration of the mutual understandings, promises and covenants contained herein (including the recitals set forth above), the parties hereto agree as follows: I. TERMS OF PURCHASE AND SALE; CLOSING. 1.1 PURCHASE AND SALE OF CERTAIN ASSETS OF SELLER. (i) Upon the basis of the representations and warranties and subject to the terms and conditions of this Agreement, Buyer agrees to purchase and acquire from Seller, and Seller agrees to sell, convey, transfer, assign, and deliver to Buyer, on or before the Closing Date (as defined in Section 1.6 hereof) the Assets, free and clear of any pledge, lien, claim or other encumbrance of any kind whatsoever, against receipt on the Closing Date and thereafter of the Purchase Price as specified in Section 1.3 hereof. (ii) The term "Assets" shall mean: (i) all of Seller's right, title and interest in and to the trade names, trade marks, designs and other Intellectual Property described on Schedule I hereto; (ii) all of Seller's right, title and interest in and to the furniture, fixtures and equipment ("FF&E") listed on Schedule II hereto; and (iii) all related goodwill with regard to any of the foregoing. (iii) It is the intention of the Buyer and Seller to convey all assets relating to the Business whether or not specifically designated herein. 1.2 EXCLUDED ASSETS. Buyer shall not purchase from Seller, and Seller shall not sell to Buyer, any assets which are not described on Section 1.1 (the "Excluded Assets"). 1.3 PURCHASE PRICE. The aggregate purchase price (the "Purchase Price") for the Assets shall be Eight Million dollars ($8,000,000) and shall be paid on the Closing Date by Buyer's execution and delivery of Buyer's promissory note (the "Promissory Note") in the original principal amount of Eight Million dollars ($8,000,000), bearing interest at the rate of six percentage (6 %) per annum and being in the form attached hereto as EXHIBIT "A" . 1.4 LIABILITIES ASSUMED. Buyer agrees to assume those liabilities set forth on Schedule III to this Agreement. Except for those liabilities expressly assumed, Buyer does not assume any obligation or liability of Seller. 1.5 INSTRUMENTS OF TRANSFER AND CONVEYANCE. (i) The sale, conveyance, transfer, assignment and delivery of the Assets, as herein provided, shall be effected by delivery by Seller on the Closing Date of hereto (i) an assignment of Intellectual Property in substantially the form attached hereto as EXHIBIT "B", (ii) a Bill of Sale in substantially the form attached hereto as EXHIBIT "C", and (iii) any such other bills of sale, endorsements, assignments, certificates, drafts, checks or other instruments of transfer and conveyance as Buyer shall reasonably deem necessary to vest in Buyer good and marketable title to the Assets. Such instruments of transfer and conveyance shall contain warranties as to marketable title and that such Assets are free and clear of all pledges, liens, options, security interests, mortgages, claims, charges or other encumbrances of any kind whatsoever. (ii) Seller agrees that it will from time to time after the Closing Date, upon the request of Buyer, promptly do, execute, acknowledge and deliver, and will cause to be done, executed, acknowledged and delivered, all such further instruments, certificates, assignments, transfers, conveyances, powers of attorney, assurances and other documents, as may be reasonably necessary or advisable to assure or confirm Buyer's free and clear title to and interest in, or to enable Buyer to deal with and dispose of, any of the Assets. 1.6 CLOSING. The closing hereunder (the "Closing") shall be held at the offices of Kane, Russell, Coleman & Logan, P.C., 3700 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75202 as of the effective date of this Agreement, or at such other time and place as the parties may agree upon (the "Closing Date"). At the Closing: (a) Seller will execute and deliver to Buyer the instruments of transfer and conveyance as are required pursuant to Section 1.5 above; (b) Buyer will execute and deliver to Seller an Assumption of Liabilities relating to any liabilities set forth in Section 1.4 above; and (c) each party will execute and deliver to the others such other agreements, certificates, assignments, consents and other documents as are required or specified in this Agreement or as may reasonably be requested by the other party to evidence compliance with the terms hereof. Simultaneously with the deliveries contemplated herein, Seller will use its best efforts 2 and take all such other action as may be reasonably necessary to put Buyer in possession and control of the Assets. II. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to Buyer as follows: 2.1 CORPORATE STATUS. Seller is a corporation duly organized, validly existing and in good standing under the laws of Nevada and has all necessary corporate power and authority to carry on its business as now conducted and to own or lease and operate its properties, and to execute, deliver and perform its obligations hereunder. 2.2 AUTHORITY FOR AGREEMENT. This Agreement constitutes the valid and legally binding obligation of Seller and the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of the board of directors and all shareholders (listed on Schedule IV) of Seller, will not conflict with or result in any violation of, or default under, any provisions of the charter or bylaws of Seller, will not conflict with or result in any violation of, or default with respect to, any mortgage, indenture, lease, agreement or other instrument affecting the Assets or to which Seller or its affiliates is a party, or by which Seller or its affiliates is bound, and will not require the consent or approval or notice to any person or any governmental agency. 2.3 PROPERTIES. Seller has good, valid and marketable title to the Assets subject to no liens, encumbrances, security interests or mortgages whatsoever. The legal and beneficial interests in the Assets are owned exclusively by Seller. 2.4 TAXES. Seller has paid all federal, state and local income, sales, use, value-added, payroll, franchise and withholding taxes due and owing as a result of the operation of the Business prior to the Closing. 2.5 LITIGATION. There is no pending or threatened litigation or governmental or administrative proceeding to which Seller is a party or by which the Business or the Assets may be adversely affected. 2.6 BROKERS, FINDERS, ETC. No broker, finder or other financial consultant has acted on behalf of Seller or its affiliates in connection with the transactions contemplated by this Agreement and all negotiations relative to this Agreement have been carried on directly without the intervention of any such third party. 3 III. REPRESENTATIONS AND WARRANTIES OF BUYER. 3.1 CORPORATE STATUS. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas. Buyer has full power and authority to execute and deliver this Agreement on Buyer's behalf, and to perform its obligations hereunder. 3.2 AUTHORITY FOR AGREEMENT. Buyer has all necessary power and authority to execute and deliver this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of Buyer. No notice, consent, approval, order or authorization of, or registration, declaration or filing with, any person or entities, or with any governmental authority is required in connection with the execution and delivery of this Agreement or the consummation by Buyer of the transactions contemplated hereby or thereby. 3.3 BROKERS. FINDERS, ETC. No broker, finder or other financial consultant has acted on behalf of Buyer or its affiliates in connection with the transactions contemplated by this Agreement and all negotiations relative to this Agreement have been carried on directly without the intervention of any such third party. IV. INDEMNIFICATION. 4.1 INDEMNIFICATION. Seller covenants and agrees to indemnify and hold Buyer harmless from and against any and all losses, liabilities, damages, demands, claims, suits, actions, judgments or causes of action, assessments, costs and expenses, including, without limitation, interest, penalties, attorneys' fees, any and all expenses incurred in investigating, preparing or defending against any litigation, commenced or threatened, in writing or any other claim, and any and all amounts paid in settlement of any claim asserted in writing or litigation (each a "Loss") asserted against, resulting to, imposed upon, or incurred or suffered by Buyer, directly or indirectly, as a result of or arising from the operation of Seller or Business prior to the Closing Date, other than as otherwise contemplated herein. To the extent Buyer suffers any Loss under this Section 4.1, or has identified a loss but has not quantified the dollar value thereof, Buyer may withhold and off-set any payments due to Seller under this Agreement or the Promissory Note to compensate (to the extent of any such payment due) Seller for any such Loss. V. MISCELLANEOUS PROVISIONS. 5.1 ENTIRE AGREEMENT. This Agreement, together with all the schedules and exhibits hereto, constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties, and there are no warranties, representations or other agreements between the parties in connection with the subject matter hereof except as specifically set forth herein. 4 5.2 AMENDMENT. This Agreement may be amended by the parties hereto at any time, but only by an instrument in writing duly executed and delivered on behalf of each of the parties hereto. 5.3 HEADINGS. The section headings are not to be considered part of this Agreement and are included solely for convenience and are not intended to be full or accurate descriptions of the contents thereof. References to Sections are to portions of this Agreement unless the context requires otherwise. 5.4 EXHIBITS, ETC. Exhibits and schedules referred to in this Agreement are in integral part of and are incorporated in this Agreement by reference. 5.5 ASSIGNMENT: SUCCESSORS AND ASSIGNS. All of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective transferees, successors and assigns. 5.6 NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or sent Federal Express or other reputable overnight courier, postage prepaid or by certified mail, return receipt requested: (i) if to Seller: Infotainment Telepictures, Inc. 4264 Kellway Circle Addison, Texas 75244 Attn: President (ii) if to the Buyer: Digital Convengence.com Inc. 4264 Kellway Circle Addison, Texas 75244 Attn: President 5.7 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 5.8 SEVERABILITY. The provisions of this Agreement are severable, and in the event that any one or more provisions are deemed illegal or unenforceable, the remaining provisions shall remain in full force and effect. 5.9 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5 IN WITNESS WHEREOF, the parties hereby have duly executed this Agreement as of the day and year first above written. SELLER INFOTAINMENT TELEPICTURES, INC. By: /s/ J. Jovan Philyaw ------------------------------ Its: President - Secretary ------------------------------ BUYER DIGITAL CONVERGENCE.COM INC. By: /s/ J. Jovan Philyaw ------------------------------ Its: President - Secretary ------------------------------ 6 EX-2.1-2 3 EXHIBIT 2.1.2 FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT The First Amendment to Asset Purchase Agreement (the "First Amendment") is entered into effective this 4th day of January, 1999 by and between Infotainment Telepictures, Inc., a Nevada corporation ("Seller"), and DigitalConvergence.com Inc., a Delaware corporation ("Buyer"). WHEREAS, Seller and Buyer have entered into that certain Asset Purchase Agreement dated of even date herewith (the "Base Agreement"), and WHEREAS, the parties hereto desire to enter into this First Amendment for the purpose of clarifying the parties' rights and obligations regarding certain assets and liabilities of the Seller. NOW THEREFORE, for and in consideration of mutual understanding, promises and covenants contained herein, the parties hereto agree as follows: 1. The term "Assets", as defined in Section 1.1(b), in addition to the assets contemplated in the Base Agreement, shall include all of Seller's rights in and to the various contractual relationships (the "Contract Rights") by and between Seller and Nissi Cosmetics, Inc. ("Nissi") entered into by Seller in connection with the direct marketing and promotion of Nissi's Baytan products; 2. Buyer and Seller hereby agree that the liabilities to be assumed by Buyer, as set forth in Schedule III to the Base Agreement and as contemplated in Section 1.4 of the Base Agreement, shall be limited to those liabilities incurred by Seller in its ordinary course of business on or prior to the Closing Date, and any such liabilities incurred by Seller from and after the Closing Date relating only to the Nissi Contract Rights; and 3. All provisions of the Base Agreement not otherwise modified herein shall remain in full force and effect. Executed as of the date first set forth above. INFOTAINMENT TELEPICTURES, INC. a Nevada corporation By: /s/ J. Jovan Philyaw ---------------------------------- Its: ---------------------------------- DIGITALCONVERGENCE.COM INC. By: /s/ J. Jovan Philyaw ---------------------------------- Its: C.E.O. ---------------------------------- EX-3.1 4 EXHIBIT 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF DIGITALCONVERGENCE.:COM INC. DigitalConvergence.:Com Inc. (the "Corporation") is a corporation organized and existing under and by virtue of the Delaware General Corporation Law. Pursuant to the provisions of Section 242 and Section 245 of the Delaware General Corporation Law, the Corporation adopts the following Second Amended and Restated Certificate of Incorporation (this "Certificate of Incorporation"). The original Certificate of Incorporation was filed with the Delaware Secretary of State on September 25, 1998, which original Certificate of Incorporation was amended by the Certificate of Amendment thereto filed with the Delaware Secretary of State on September 28, 1999, the Certificate of Designation of Series A Convertible Preferred Stock of DigitalConvergence.:Com Inc. thereto filed with the Delaware Secretary of State on September 30, 1999, the Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on December 15, 1999, the Amendment to the Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on April , 2000, the Certificate of Designation of Series B Preferred Stock of DigitalConvergence.:Com thereto filed with the Delaware Secretary of State on ___________, 2000, and the Certificate of Designation of Series C Preferred Stock of DigitalConvergence.:Com thereto filed with the Delaware Secretary of State on ___________, 2000 (as so amended, the "Original Certificate of Incorporation"). This Certificate of Incorporation (including, without limitation, EXHIBIT A, EXHIBIT B and EXHIBIT C hereto), which further amends and restates the Original Certificate of Incorporation, was duly adopted as of ___________, 2000 in accordance with the provisions of Sections 228, 242 and 245 of the Delaware General Corporation Law. The provisions of the Original Certificate of Incorporation are hereby further amended and restated to read in their entirety as follows: FIRST: The name of the Corporation is DigitalConvergence.:Com Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is 9 East Loockerman Street in the City of Dover, County of Kent. The name and address of its registered agent is National Registered Agents, Inc., 9 East Loockerman Street, Dover, Delaware 19901. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law. FOURTH: I. SHARES AUTHORIZED. The total number of shares of all classes of stock which the Corporation shall have authority to issue is __________ shares, of which __________ shares shall be common stock, par value $.01 per share (the "Common Stock"), and __________ shares shall be preferred stock, par value $.01 per share (the "Preferred Stock"). II. CONVERSION. Effective ____________, 2000 (the "Effective Date"), each share of Common Stock (the "Converted Common Stock") outstanding immediately prior thereto shall, without any action on the part of the holder thereof, be converted into, and deemed for all purposes to be, _________ shares of Common Stock. The executive officers of the Corporation or their designees shall use the Effective Date as the record date for determining the holders of record of the Converted Common Stock. The executive officers of the Corporation or their designees shall issue to such holders of record certificates, endorsed with such legends as are required or are appropriate, representing _________ shares of Common Stock for every one share of the Converted Common Stock as shall be registered on the Corporation's stock transfer records for such holder. The executive officers, or their designees, shall enter the fact of the issuance of the new certificates for Common Stock in the appropriate name or names of the holders of such shares on the Corporation's stock records and transfer books. III. DESIGNATIONS: The following are the powers, designations, preferences and rights, and the qualifications, limitations or restrictions thereof, of each class of stock of the Corporation: A. PREFERRED STOCK: The Preferred Stock may be issued in one or more series. The Board of Directors of the Corporation (the "Board of Directors") is hereby authorized to issue the shares of Preferred Stock in each series and to fix from time to time before issuance the number of shares to be included in any series and the designation, relative powers, preferences and rights and qualifications, limitations or restrictions of all shares of such series. The authority of the Board of Directors with respect to each series shall include, without limiting the generality of the foregoing, the determination of any or all of the following: 1. the number of shares of any series and the designations to distinguish the shares of such series from the shares of all other series; 2. the voting powers, if any, of such shares in the series and whether such voting powers are full or limited; 3. the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; 2 4. whether dividends, if any, shall be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; 5. the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; 6. the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Corporation or any other corporation, and price or prices or the rates of exchange applicable thereto; 7. the right, if any, to subscribe for or to purchase any securities of the Corporation or any other corporation; 8. the provisions, if any, of a sinking fund applicable to such series; and 9. any other relative, participating, optional or other special powers, preferences, rights, qualifications, limitations or restrictions thereof; all as shall be determined from time to time by the Board of Directors and as shall be stated in a resolution or resolutions providing for the issuance of such Preferred Stock (a "Preferred Stock Designation"). Holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. B. COMMON STOCK. The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof as set forth in one or more Preferred Stock Designations. FIFTH: From time to time the Corporation may issue its authorized shares for such consideration per share (not less than the par value thereof) as may be fixed by the Board of Directors. Shares so issued for which the consideration shall have been paid or delivered to the Corporation shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon, and the holders of such shares shall not be liable for any further payments in respect of such shares. No holder of any shares of any class or series shall as such holder have any preemptive right to subscribe for or purchase any other shares or securities of any class or series, whether now or hereafter authorized, which at any time may be offered for sale or sold by the Corporation. Each holder of record of the Common Stock of the Corporation shall be entitled to one vote for every share of Common Stock outstanding in his or its name on the books of the Corporation. 3 SIXTH: The number, classification and terms of the Board of Directors of the Corporation and the procedures to elect directors and to remove directors shall be as follows: 1. Except as otherwise fixed by or pursuant to the provisions of this Certificate of Incorporation relating to the rights of the holders of Preferred Stock to elect directors under specified circumstances, the number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the then authorized number of directors of the Corporation (as determined in accordance with the bylaws (the "Bylaws")). No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. No director need be a stockholder. 2. Subject to the rights of holders of any subsequently issued class or series of Preferred Stock, the directors of the Corporation shall be divided by the Board of Directors into three classes (the "Classified Directors") with the first class ("Class I"), second class ("Class II") and third class ("Class III") each to consist as nearly as practicable of an equal number of directors. The term of office of the Class I directors shall expire at the 2001 annual meeting of stockholders, the term of office of the Class II directors shall expire at the 2002 annual meeting of stockholders, and the term of office of the Class III directors shall expire at the 2003 annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, Classified Directors elected to succeed those Classified Directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. 3. The directors of the Corporation need not be elected by written ballot unless the bylaws otherwise provide. 4. A director of the Corporation may be removed only for cause. For purposes of removal of a director of the Corporation, "cause" shall mean (a) a final conviction of a felony involving moral turpitude or (b) willful misconduct that is materially and demonstrably injurious economically to the Corporation. For purposes of this definition of "cause," no act, or failure to act, by a director shall be considered "willful" unless committed in bad faith and without a reasonable belief that the act or failure to act was in the best interest of the Corporation or any Affiliate of the Corporation. "Cause" shall not exist unless and until the Corporation has delivered to the director a written notice of the act or failure to act that constitutes "cause" and such director shall not have cured such act or omission within 90 days after the delivery of such notice. As used in this Certificate of Incorporation, "Affiliate" has the meaning given such term under Rule 12b-2 of the Securities Exchange Act of 1934, as amended. SEVENTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: (1) To make, alter or repeal the Bylaws; 4 (2) To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation; (3) To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created; and (4) By a majority of the whole Board of Directors, to designate one or more committees, each committee to consist of two or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution creating the committee or in the Bylaws, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, that the Bylaws may provide that in the absence or disqualification of any member of such committee or committees the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. EIGHTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under Section 79 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. NINTH: Meetings of the stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statute) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws. Election of directors need not be by written ballot unless the Bylaws shall so provide. 5 TENTH: No action required to be taken or that may be taken at any meeting of holders of Common Stock may be taken without a meeting, and the power of holders of Common Stock to consent in writing, without a meeting, to the taking of any action is specifically denied. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law that might otherwise permit a lesser or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of not less than eighty percent of the shares of the Corporation then entitled to be voted in an election of directors, voting together as a single class, shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article Tenth. ELEVENTH: The Corporation is to have perpetual existence. TWELFTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders of the Corporation herein are granted subject to this reservation. THIRTEENTH: No contract or transaction between the Corporation and one or more of its directors, officers, or stockholders or between the Corporation and any Person (as hereinafter defined) in which one or more of its directors, officers, or stockholders are directors, officers, or stockholders, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee which authorizes the contract or transaction, or solely because his vote is counted for such purpose, if: (i) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (ii) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved, or ratified by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. "Person" as used herein means any corporation, partnership, limited liability company, association, firm, trust, joint venture, political subdivision or instrumentality. FOURTEENTH: The Corporation shall indemnify any Person who was, is, or is threatened to be made a party to a proceeding (as hereinafter defined) by reason of the fact that he (i) is or was a director or officer of the Corporation or (ii) while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint 6 venture, sole proprietorship, trust, employee benefit plan, or other enterprise, to the fullest extent permitted under the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended. Such right shall be a contract right and as such shall run to the benefit of any director or officer who is elected and accepts the position of director or officer of the Corporation or elects to continue to serve as a director or officer of the Corporation while this Article Fourteenth is in effect. Any repeal or amendment of this Article Fourteenth shall be prospective only and shall not limit the rights of any such director or officer or the obligations of the Corporation with respect to any claim arising from or related to the services of such director or officer in any of the foregoing capacities prior to any such repeal or amendment to this Article Fourteenth. Such right shall include the right to be paid by the Corporation expenses incurred in investigating or defending any such proceeding in advance of its final disposition to the maximum extent permitted under the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall also be entitled to be paid the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense is not permitted under the General Corporation Law of the State of Delaware, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or any committee thereof, independent legal counsel, or stockholders) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the Corporation (including its Board of Directors or any committee thereof, independent legal counsel, or stockholders) that such indemnification or advancement is not permissible shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. In the event of the death of any Person having a right of indemnification under the foregoing provisions, such right shall inure to the benefit of his or her heirs, executors, administrators, and personal representatives. The rights conferred above shall not be exclusive of any other right which any Person may have or hereafter acquire under any statute, bylaw, resolution of stockholders or directors, agreement, or otherwise. The Corporation may additionally indemnify any employee or agent of the Corporation to the fullest extent permitted by law. Without limiting the generality of the foregoing, to the extent permitted by then applicable law, the grant of mandatory indemnification pursuant to this Article Fourteenth shall extend to proceedings involving the negligence of such Person. As used herein, the term "proceeding" means any threatened, pending, or completion action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that could lead to such an action, suit, or proceeding. 7 FIFTEENTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware; or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or amendment of this Article Fifteenth by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation arising from an act or omission occurring prior to the time of such repeal or amendment. In addition to the circumstances in which a director of the Corporation is not personally liable as set forth in the foregoing provisions of this Article Fifteenth, a director shall not be liable to the Corporation or its stockholders to such further extent as permitted by any law hereafter enacted, including without limitation any subsequent amendment to the General Corporation Law of the State of Delaware. [Remainder of page intentionally left blank] 8 IN WITNESS WHEREOF, I have hereunto set my hand and seal, the ____ day of ________________, 2000. DIGITALCONVERGENCE.:COM INC. By:_______________________________________ Name:_____________________________________ Title:____________________________________ 9 EXHIBIT A AMENDED CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE PREFERRED STOCK OF DIGITALCONVERGENCE.:COM INC. See Exhibit 4.2. EXHIBIT B CERTIFICATE OF DESIGNATION OF SERIES B CONVERTIBLE PREFERRED STOCK OF DIGITALCONVERGENCE.:COM INC. See Exhibit 4.3. EXHIBIT C CERTIFICATE OF DESIGNATION OF SERIES C CONVERTIBLE PREFERRED STOCK OF DIGITALCONVERGENCE.:COM INC. See Exhibit 4.4. EX-3.2 5 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF DIGITALCONVERGENCE.:COM INC. These Bylaws are subject to, and governed by, the General Corporation Law of the State of Delaware (the "Delaware General Corporation Law") and the certificate of incorporation (as the same may be amended and restated from time to time) of DigitalConvergence.:Com Inc., a Delaware corporation (the "Corporation"). In the event of a direct conflict between the provisions of these Bylaws and the mandatory provisions of the Delaware General Corporation Law or the provisions of the certificate of incorporation of the Corporation, such provisions of the Delaware General Corporation Law or the certificate of incorporation of the Corporation, as the case may be, will be controlling. ARTICLE I OFFICES Section 1. DELAWARE OFFICE. The office of the Corporation within the State of Delaware shall be in the City of Dover, County of Kent. Section 2. OTHER OFFICES. The Corporation may also have an office or offices and keep the books and records of the Corporation, except as may otherwise be required by law, in such other place or places, either within or without the State of Delaware, as the Board of Directors of the Corporation (the "Board") may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. PLACE OF MEETINGS. All meetings of stockholders of the Corporation shall be held at the office of the Corporation in the State of Delaware or at such other place, within or without the State of Delaware, as may from time to time be fixed by the Board or specified or fixed in the respective notices or waivers of notice thereof. Section 2. ANNUAL MEETINGS. The annual meeting of stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held annually on such date and at such time as may be fixed by the Board. Except as otherwise permitted by law, no stockholder of the Corporation shall require the Board to call an annual meeting of stockholders of the Corporation. At such meeting, the stockholders shall elect directors and transact such other business as may properly be brought before the meeting. Section 3. SPECIAL MEETINGS. Special meetings of stockholders, unless otherwise provided by law, may be called at any time only by the Chairman of the Board, the Chief Executive Officer, the President, or the Board pursuant to a resolution adopted by a majority of the then authorized number of directors (as determined in accordance with Section 2 of Article III of these Bylaws). Section 4. NOTICE. Written or printed notice stating the place, day, and time of each meeting of the stockholders and, in case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chief Executive Officer, the President, the Secretary, or the officer or person(s) calling the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is to be sent by mail, it shall be directed to each stockholder at his address as it appears on the records of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. Section 5. NOTICE OF STOCKHOLDER BUSINESS AT ANNUAL MEETING. (a) At an annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting pursuant to the Corporation's notice of meeting, by or at the direction of a majority of the members of the Board, or by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Bylaw, who shall be entitled to vote at such meeting, and who complies with the notice procedures set forth in paragraph (b) of this Bylaw. (b) For business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a) of this Bylaw, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the first anniversary of the preceding year's annual meeting; PROVIDED, HOWEVER, that in the event that the date of the meeting is changed by more than thirty (30) days from such anniversary date, notice by the stockholder to be timely must be received no later than the close of business on the tenth day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure of the meeting date was made. A stockholder's notice to the Secretary with respect to business to be brought at an annual meeting shall set forth (1) the nature of the proposed business with reasonable particularity, including the exact text of any proposal to be presented for adoption, and the reasons for conducting that business at the annual meeting, (2) with respect to each such stockholder, that stockholder's name and address (as they appear on the records of the Corporation), business address and telephone number, residence address and telephone number, and the number of shares of each class of capital -2- stock of the Corporation beneficially owned by that stockholder and (3) any interest of the stockholder in the proposed business. (c) Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Bylaw. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Nothing in this Bylaw shall relieve a stockholder who proposes to conduct business at an annual meeting from complying with all applicable requirements, if any, of the Securities Exchange Act of 1934 (the "Exchange Act"), and the rules and regulations thereunder. Section 6. QUORUM. At each meeting of stockholders of the Corporation, the holders of a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote shall be present or represented by proxy to constitute a quorum for the transaction of business, except as otherwise provided by law. Section 7. ADJOURNMENTS. In the absence of a quorum at any meeting of stockholders or any adjournment or adjournments thereof, the chairman of the meeting or a majority in interest of those present or represented by proxy and entitled to vote may adjourn the meeting from time to tithe until a quorum shall be present or represented by proxy. At any such adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called if a quorum had been present or represented by proxy thereat. Section 8. ORDER OF BUSINESS. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. Section 9. VOTING. Except as otherwise provided in the Certificate of Incorporation, at each meeting of stockholders, every stockholder of the Corporation shall be entitled to one vote for every share of capital stock standing in his name on the stock records of the Corporation (i) at the time fixed pursuant to Section 6 of Article VII of these Bylaws as the record date for the determination of stockholders entitled to vote at such meeting, or (ii) if no such record date shall have been fixed, then at the close of business on the date next preceding the day on which notice thereof shall be given. At each meeting of stockholders, all matters (except in cases where a larger vote is required by law or by the certificate of incorporation of the Corporation or these Bylaws) shall be decided by a majority of the votes cast at such meeting by the holders of shares present or represented by proxy and entitled to vote thereon, a quorum being present. Section 10. INSPECTORS. For each election of directors by the stockholders and in any case in which it shall be advisable, in the opinion of the Board, that the voting upon any other matter shall be conducted by inspectors of election, the Board shall appoint two inspectors of election. If, for any -3- such election of directors or the voting upon any such other matter, any inspector appointed by the Board shall be unwilling or unable to serve, or if the Board shall fail to appoint inspectors, the chairman of the meeting shall appoint the necessary inspector or inspectors. The inspectors so appointed, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of inspectors with strict impartiality, and according to the best of their ability, and the oath so taken shall be subscribed by them. Such inspectors shall determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes or ballots, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes or ballots, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of election of directors. Inspectors need not be stockholders. Section 11. CERTAIN RULES OF PROCEDURE RELATING TO STOCKHOLDER MEETINGS. All stockholder meetings, annual or special, shall be governed in accordance with the following rules: (a) Only stockholders of record will be permitted to present motions from the floor at any meeting of stockholders. (b) The chairman of the meeting shall preside over and conduct the meeting in a fair and reasonable manner, and all questions of procedure or conduct of the meeting shall be decided solely by the chairman of the meeting. The chairman of the meeting shall have all power and authority vested in a presiding officer by law or practice to conduct an orderly meeting. Among other things, the chairman of the meeting shall have the power to adjourn or recess the meeting, to silence or expel persons to ensure the orderly conduct of the meeting, to declare motions or persons out of order, to prescribe rules of conduct and an agenda for the meeting, to impose reasonable time limits on questions and remarks by any stockholder, to limit the number of questions a stockholder may ask, to limit the nature of questions and comments to one subject matter at a time as dictated by any agenda for the meeting, to limit the number of speakers or persons addressing the chairman of the meeting or the meeting, to determine when the polls shall be closed, to limit the attendance at the meeting to stockholders of record, beneficial owners of stock who present letters from the record holders confirming their status as beneficial owners, and the proxies of such record and beneficial holders, and to limit the number of proxies a stockholder may name. Section 12. REQUESTS FOR STOCKHOLDER LIST AND CORPORATION RECORDS. Stockholders shall have those rights afforded under the General Corporation Law of the State of Delaware to inspect a list of stockholders and other related records and make copies or extracts therefrom. Such request shall be in writing in compliance with Section 220 of the General Corporation Law of the State of Delaware. In addition, any stockholder making such a request must agree that any information so inspected, copied or extracted by the stockholder shall be kept confidential, that any copies or -4- extracts of such information shall be returned to the Corporation and that such information shall only be used for the purpose stated in the request. Information so requested shall be made available for inspecting, copying or extracting at the principal executive offices of the Corporation. Each stockholder desiring a photostatic or other duplicate copies of any of such information requested shall make arrangements to provide such duplicating or other equipment necessary in the city where the Corporation's principal executive offices are located. Alternative arrangements with respect to this Section 12 may be permitted in the discretion of the Chief Executive Officer of the Corporation or by vote of the Board. ARTICLE III DIRECTORS Section 1. POWERS. The business of the Corporation shall be managed under the direction of the Board. The Board may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law or otherwise directed or required to be exercised or done by the stockholders. Section 2. NUMBER, ELECTION AND TERMS. The authorized number of directors may be determined from time to time by vote of a majority of the then authorized number of directors; provided however, that such number shall not be less than one or more than nine. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. Section 3. NOMINATION OF DIRECTOR CANDIDATES. (a) Only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible to serve as directors. Nominations of persons for election to the Board may be made at a meeting of stockholders (i) by or at the direction of the Board or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving notice provided for in this Bylaw, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Bylaw. (b) Nominations by stockholders shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation (i) in the case of an annual meeting, not less than ninety (90) days nor more than one hundred twenty (120) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is changed by more than thirty (30) days from such anniversary date, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, and (ii) in the case of a special meeting at which directors are to be elected, not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made. Such stockholder's notice shall set forth (1) as to -5- each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (2) as to the stockholder giving the notice (A) the name and address, as they appear on the Corporation's books, of such stockholder and (B) the class and number of shares of the Corporation which are beneficially owned by such stockholder and also which are owned of record by such stockholder; and (3) as to the beneficial owner, if any, on whose behalf the nomination is made, (A) the name and address of such person and (B) the class and number of shares of the Corporation which are beneficially owned by such person. At the request of the Board, any person nominated by the Board for election as a director shall furnish the Secretary of the Corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. Notwithstanding any of the notice provisions stated in this paragraph to the contrary, in the event that the number of directors to be elected to the Board is increased and there is no public disclosure naming all of the nominees for director or specifying the size of the increased Board made by the Corporation at least one hundred (100) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public disclosure is first made by the Corporation. (c) Notwithstanding anything in these Bylaws to the contrary, no person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Bylaw. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Nothing is this Bylaw shall relieve stockholders from complying with all applicable requirements, if any, of the Exchange Act, and the rules and regulations thereunder. Section 4. ELECTION. At each meeting of stockholders for the election of directors at which a quorum is present, the persons receiving a plurality of the votes cast shall be elected directors. Section 5. PLACE OF MEETINGS. Meetings of the Board shall be held at the Corporation's office in the State of Delaware or at such other place, within or without such state, as the Board may from time to time determine or as shall be specified or fixed in the notice or waiver of notice of any such meeting. Section 6. REGULAR MEETINGS. Regular meetings of the Board shall be held in accordance with a yearly meeting schedule as determined by the Board; or such meetings may be held on such -6- other days and at such other times as the Board may from time to time determine. Notice of regular meetings of the Board need not be given except as otherwise required by these Bylaws. Section 7. SPECIAL MEETINGS. Special meetings of the Board may be called by the Chief Executive Officer and shall be called by the Secretary at the request of any two of the other directors. Section 8. NOTICE OF MEETINGS. Notice of each special meeting of the Board (and of each regular meeting for which notice thereof shall be required), stating the time, place and purposes thereof; shall be mailed to each director, addressed to him at his residence or usual place of business, or shall be sent to him by telex, cable or telegram so addressed, or shall be given personally or by telephone, on twenty-four hours notice, or such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Section 9. QUORUM AND MANNER OF ACTS. The presence of at least a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business at any meeting of the Board or a committee thereof. If a quorum shall not be present at any meeting of the Board or a committee thereof, a majority of the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Except where a different vote is required by law the act of a majority of the directors present at any meeting at which a quorum shall be present shall be the act of the Board. Any action required or permitted to be taken by the Board may be taken without a meeting if all the directors consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the directors shall be filed with the minutes of the proceedings of the Board. Any one or more directors may participate in any meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting of the Board. Section 10. RESIGNATION. Any director may resign at any time by giving written notice to the Corporation; provided, however, that written notice to the Board, the Chairman of the Board, the Chief Executive Officer or the Secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Section 11. COMPENSATION OF DIRECTORS. The Board may provide for the payment to any of the directors of a specified amount for services as a director or member of a committee of the Board, or of a specified amount for attendance at each regular or special Board meeting or committee meeting, or of both, and all directors shall be reimbursed for expenses of attendance at any such meeting; PROVIDED, HOWEVER, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. -7- Section 12. VACANCIES, ADDITIONAL DIRECTORS AND REMOVAL FROM OFFICE. Vacancies in the Board resulting from death, resignation, retirement, disqualification, removal from office or other cause and newly-created directorships resulting from any increase in the authorized number of directors shall be filled by a majority vote of the remaining directors then in office, though less than a quorum, or by the sole remaining director, and each director so chosen shall receive the classification of the vacant directorship to which he or she has been appointed or, if it is a newly created directorship, shall receive the classification that at least a majority of the Board designates and shall hold office until the first meeting of stockholders held after his election for the purpose of electing directors of that classification and until his or her successor is elected and qualified or until his or her earlier death, resignation or removal from office. If there are no directors in office (or where holders of any class or classes or series thereof are entitled to elect one or more directors, there are no directors of such class in office), an election of directors may be held in the manner provided by statute. Any director may be removed, but only for "cause" as defined in the certificate of incorporation of the Corporation, by the holders of a majority of the shares then entitled to vote at an election of directors at any special meeting of stockholders duly called and held for such purpose. Section 13. ACTION WITHOUT MEETING. Unless otherwise restricted by the certificate of incorporation of the Corporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof as provided in Article IV of these Bylaws, may be taken without a meeting, if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. Section 14. CORPORATE GOVERNANCE. (a) Without the approval of the Board of the Corporation, the Corporation agrees that it will not undertake any of the following actions: (i) issue any additional shares of common stock of the Corporation or any additional instruments, options or rights entitling the holder thereof to acquire shares of common stock; (ii) merge, consolidate, reorganize or sell all or substantially all of the assets of the Corporation on a consolidated basis; (iii) fail to keep accurate books and records in accordance with generally accepted accounting principles; or (iv) approve any annual or long term strategic plan, annual operating budget or capital expenditure budget or policy. (b) The Board shall annually appoint an Audit Committee, Compensation Committee and such other committees as the Board determines necessary or advisable, the members -8- of which shall be appointed in accordance with the provisions of Article IV of these Bylaws. The Board shall establish and adopt a charter for each such committee. ARTICLE IV COMMITTEES OF THE BOARD Section 1. DESIGNATION, POWERS AND NAME. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, including, if they shall so determine, an Executive Committee, each such committee to consist of one or more of the directors of the Corporation. If an Audit Committee or a Compensation Committee is designated, each such committee shall consist of one or more directors of the Corporation who are not employees of the Corporation. The committee shall have and may exercise such of the powers of the Board in the management of the business and affairs of the Corporation as may be provided in such resolution; PROVIDED, HOWEVER, that no such committee shall have the power or authority in reference to amending the certificate of incorporation of the Corporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the Bylaws of the Corporation; and, provided further, that, unless the resolution establishing the committee expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. The committee may authorize the seal of the Corporation to be affixed to all papers which may require it. The Board may designate one or more directors as alternate member(s) of any committee, who may replace any absent or disqualified member at any meeting. Section 2. MINUTES. Each committee of directors shall keep regular minutes of its proceedings and report the same to the Board when required. Section 3. COMPENSATION. Members of special or standing committees may be allowed compensation for attending committee meetings, if the Board shall so determine. Section 4. ACTION BY CONSENT; PARTICIPATION BY TELEPHONE OR SIMILAR EQUIPMENT. Unless the Board shall otherwise provide, any action required or permitted to be taken by any committee may be taken without a meeting if all members of the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the committee shall be filed with the minutes of the proceedings of the committee. -9- Unless the Board shall otherwise provide, any one or more members of any such committee may participate in any meeting of the committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting of the committee. Section 5. CHANGES IN COMMITTEES; RESIGNATIONS; REMOVALS. The Board shall have power, by the affirmative vote of a majority of the authorized number of directors, at any time to change the members of, to fill vacancies in, and to discharge any committee of the Board. Any member of any such committee may resign at any time by giving notice to the Corporation, provided, however, that notice to the Board, the Chairman of the Board, the Chief Executive Officer, the Chairman of such committee or the Secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any member of any such committee may be removed at any time, either with or without cause by the affirmative vote of a majority of the authorized number of directors at any meeting of the Board called for that purpose. ARTICLE V OFFICERS Section 1. OFFICERS. The officers of the Corporation shall be a Chairman of the Board (if such office is created by resolution adopted by the Board), a Chief Executive Officer, a President, one or more Vice Presidents (any one or more of whom may be designated Executive Vice President or Senior Vice President), a Secretary and a Treasurer. The Board may appoint such other officers and agents, including Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined by the Board. Any two or more offices, other than the offices of President and Secretary, may be held by the same person. No officer shall execute, acknowledge, verify or countersign any instrument on behalf of the Corporation in more than one capacity, if such instrument is required by law, by these Bylaws or by any act of the Corporation to be executed, acknowledged, verified or countersigned by two or more officers. The Chairman of the Board shall be elected from among the directors. With the foregoing exceptions, none of the other officers need be a director, and none of the officers need be a stockholder of the Corporation unless otherwise required by the certificate of incorporation of the Corporation. Section 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be elected annually by the Board at its first regular meeting held after the annual meeting of stockholders or as soon thereafter as conveniently practicable. Each officer shall hold office until his successor shall have been elected or appointed and shall have qualified or until his death or the effective date of his resignation or removal, or until he shall cease to be a director in the case of the Chairman of the Board. -10- Section 3. REMOVAL AND RESIGNATION. Any officer or agent elected or appointed by the Board may be removed without cause by the affirmative vote of a majority of the Board whenever, in its judgment, the best interests of the Corporation shall be served thereby, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any officer may resign at any time by giving written notice to the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4. VACANCIES. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, may be filled by the Board for the unexpired portion of the term. Section 5. SALARIES. The salaries of all officers and agents of the Corporation shall be fixed by the Board or pursuant to its direction; and no officer shall be prevented from receiving such salary by reason of his also being a director. Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board (if such office is created by resolution adopted by the Board and who may also hold the office of President or other offices) shall have such duties as the Board may prescribe. In the Chairman's absence, such duties shall be attended to by the Chief Executive Officer. Section 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall preside at all meetings of the Board and at all meetings of the stockholders. The Chief Executive Officer shall, subject to the Board, have general executive charge, management, and control of the properties and operations of the Corporation in the ordinary course of its business, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. The Chief Executive Officer shall have the power to appoint and remove subordinate officers, agents and employees, including Assistant Secretaries and Assistant Treasurers, except that the President may not remove those elected or appointed by the Board. The Chief Executive Officer shall keep the Board and the Executive Committee (if any) fully informed and shall consult them concerning the business of the Corporation. The Chief Executive Officer may sign, with the Secretary or another officer of the Corporation thereunto authorized by the Board, certificates for shares of the Corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed. The Chief Executive Officer shall vote, or give a proxy to any other officer of the Corporation to vote, all shares of stock of any other corporation standing in the name of the Corporation. If the Board has not elected a Chairman of the Board or in the absence, inability to act or refusal to act of the Chairman of the Board, the Chief Executive Officer shall exercise all of the powers and discharge all of the duties of the Chairman of the Board. As between the Corporation and third parties, any action taken by the Chief Executive Officer in the performance of the duties of the Chairman of the Board shall be conclusive evidence that there is no Chairman of the Board or that the Chairman of the Board is absent or unable to act. -11- Section 8. PRESIDENT. The President shall perform such duties and exercise such powers as usually appertain to such title and such other duties as may be prescribed by the stockholders, the Board or the Executive Committee (if any) from time to time. In the absence of the Chief Executive Officer, or in the event of his inability or refusal to act, the President shall perform the duties and exercise the powers of the Chief Executive Officer. Section 9. VICE PRESIDENTS. In the absence of the President, or in the event of his inability or refusal to act, the Executive Vice President (or in the event there shall be no Vice President designated Executive Vice President, any Vice President designated by the Board) shall perform the duties and exercise the powers of the President. Any Vice President may sign, with the Secretary or Assistant Secretary, certificates for shares of the Corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed. The Vice Presidents shall perform such other duties as from time to time may be assigned to them by the Chairman of the Board (if any), the Chief Executive Officer, the President, the Board or the Executive Committee (if any). Section 10. SECRETARY. The Secretary shall (a) record the proceedings of the meetings of the stockholders, the Board and committees of directors in the permanent minute books of the Corporation kept for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law; (c) be custodian of the corporate records and of the seal of the Corporation, and see that the seal of the Corporation or a facsimile thereof is affixed to all certificates for shares of the Corporation prior to the issue thereof and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these Bylaws; (d) keep or cause to be kept a register of the post office address of each stockholder which shall be furnished by such stockholder; (e) sign with the Chairman of the Board (if any), the Chief Executive Officer, the President, or an Executive Vice President or Vice President, certificates for shares of the Corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed; (f) have general charge of the stock transfer books of the Corporation; and (g) in general, perform all duties normally incident to the office of Secretary and such other duties as from time to time may be assigned by the Chairman of the Board (if any), the Chief Executive Officer, the President, the Board or the Executive Committee (if any). Section 11. TREASURER. If required by the Board, the Treasurer shall give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board shall determine. The Treasurer shall (a) have charge and custody of and be responsible for all funds and securities of the Corporation; receive and give receipts for monies due and payable to the -12- Corporation from any source whatsoever and deposit all such monies in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Section 4 of Article VI of these Bylaws; (b) prepare, or cause to be prepared, for submission at each regular meeting of the Board, at each annual meeting of the stockholders, and at such other times as may be required by the Board, the Chairman of the Board (if any), the Chief Executive Officer, the President or the Executive Committee (if any), a statement of financial condition of the Corporation in such detail as may be required; (c) sign with the Chairman of the Board (if any), the Chief Executive Officer, the President, or an Executive Vice President or Vice President, certificates for shares of the Corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed; and (d) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Chairman of the Board (if any), the Chief Executive Officer, the President, the Board or the Executive Committee (if any). Section 12. ASSISTANT SECRETARY OR TREASURER. The Assistant Secretaries and Assistant Treasurers shall, in general, perform such duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the Chairman of the Board (if any), the President, the Board or the Executive Committee (if any). The Assistant Secretaries and Assistant Treasurers shall, in the absence of the Secretary or Treasurer, respectively, or in their respective inability or refusal to act, perform all functions and duties which such absent officers may delegate, but such delegation shall not relieve the absent officer from the responsibilities and liabilities of their office. The Assistant Secretaries may sign, with the Chairman of the Board (if any), the Chief Executive Officer, the President or Executive Vice President or Vice President, certificates for shares of the Corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by a resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed. The Assistant Treasurers shall respectively, if required by the Board, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board shall determine. ARTICLE VI CONTRACTS, CHECKS, LOANS, DEPOSITS, ETC. Section 1. CONTRACTS. The Board may authorize any officer or officers, agent or agents, in the name and on behalf of the Corporation, to enter into any contract or to execute and deliver any instrument, which authorization may be general or confined to specific instances; and, unless so authorized by the Board, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or for any amount. -13- Section 2. CHECKS, ETC. All checks, drafts, bills of exchange or other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed in the name and on behalf of the Corporation in such manner as shall from time to time be authorized by the Board, which authorization may be general or confined to specific instances. Section 3. LOANS. No loan shall be contracted on behalf of the Corporation, and no negotiable paper shall be issued in its name, unless authorized by the Board, which authorization may be general or confined to specific instances. All bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation issued for such loans shall be made, executed and delivered as the Board shall authorize. Section 4. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as may be selected by or in the manner designated by the Board. The Board or its designees may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as may be deemed expedient. ARTICLE VII CAPITAL STOCK Section 1. STOCK CERTIFICATES. Each stockholder shall be entitled to have, in such form as shall be approved by the Board, a certificate or certificates signed by the Chief Executive Officer or the President and by either the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary (except that, when any such certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or any employee, the signatures of any such officers may be facsimiles, engraved or printed), which may be sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed), certifying the number of shares of capital stock of the Corporation owned by such stockholder. In case any officer who has signed or whose facsimile signature has been placed upon any such certificate shall have ceased to be such officer before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. Section 2. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make or cause to have prepared or made, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept -14- at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 3. STOCK LEDGER. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 2 of this Article VII or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 4. TRANSFERS OF CAPITAL STOCK. Transfers of shares of capital stock of the Corporation shall be made only on the stock records of the Corporation by the holder of record thereof or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or the transfer agent thereof, and only on surrender of the certificate or certificates representing such shares, properly endorsed or accompanied by a duly executed stock transfer power. The Board may make such additional rules and regulations as it may deem expedient concerning the issue and transfer of certificates representing shares of the capital stock of the Corporation. Section 5. LOST CERTIFICATES. The Board may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 6. FIXING OF RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividends or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. Section 7. BENEFICIAL OWNERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. -15- ARTICLE VIII DIVIDENDS Section 1. DECLARATION. Dividends upon the capital stock of the Corporation, subject to the provisions of the certificate of incorporation of the Corporation, if any, may be declared by the Board at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of capital stock, subject to the provisions of the certificate of incorporation of the Corporation. Section 2. RESERVE. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board shall think conducive to the interests of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE IX SEAL The Corporation's seal shall be circular in form and shall include the name of the Corporation, the state and year of its incorporation, and the word "Seal." ARTICLE X WAIVER OF NOTICE Whenever any notice is required by law, the certificate of incorporation of the Corporation or these Bylaws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. -16- ARTICLE XI AMENDMENTS These Bylaws may be amended or supplemented in any respect at any time, either (a) at any meeting of stockholders, provided that any amendment or supplement proposed to be acted upon at any such meeting shall have been described or referred to in the notice of such meeting, or (b) at any meeting of the Board; provided that any amendment or supplement proposed to be acted upon at any such meeting shall have been described or referred to in the notice of such meeting or an announcement with respect thereto shall have been made at the last previous Board meeting, and further provided that no amendment or supplement adopted by the Board shall vary or conflict with any amendment or supplement adopted by the stockholders. [Remainder of page intentionally left blank] -17- I, the undersigned, being the Secretary of the Corporation DO HEREBY CERTIFY THAT the foregoing are the Bylaws of said Corporation, as adopted by the Board of said Corporation on the ______ day of ______________, 2000. ______________________________ William S. Leftwich, Secretary -18- EX-4.2 6 EXHIBIT 4.2 AMENDED CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE PREFERRED STOCK of DIGITALCONVERGENCE.:COM INC. Section 1. DESIGNATION AND AMOUNT; OTHER SERIES OF PREFERRED. (a) SERIES A PREFERRED. There shall be a series of the Corporation's Preferred Stock designated as "Series A Convertible Preferred Stock" (the "Series A Preferred") and the number of shares of such series shall be sixteen thousand (16,000). Each share of Series A Preferred is referred to herein as a "Share" and, collectively, the "Shares." Immediately after a Qualified Public Offering (as defined in Section 4(b) hereof), all authorized and unissued shares of Series A Preferred shall be returned to the status of authorized, unissued and undesignated shares of the Corporation's Preferred Stock, and all such shares shall no longer be governed by this Certificate of Designation. (b) OTHER SERIES OF PREFERRED. The Corporation has also designated a Series B Convertible Preferred Stock (the "Series B Preferred") and a Series C Convertible Preferred Stock (the "Series C Preferred"). Section 2. DIVIDENDS AND DISTRIBUTIONS. The holders of Shares of Series A Preferred shall be entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor. In the event that the Corporation declares or pays any dividends upon the common stock, par value $0.01 per share, of the Corporation (the "Common Stock") (whether payable in cash, securities or other property), the Corporation shall also declare and pay to the holders of the Series A Preferred at the same time that it declares and pays such dividends to the holders of the Common Stock, the dividends which would have been declared and paid with respect to the Common Stock issuable upon conversion of the Series A Preferred pursuant to Section 4 hereof had all of the outstanding Shares been so converted immediately prior to the record date for such dividend, or if no record date is fixed, the date as of which the record holders of Common Stock entitled to such dividends are to be determined. No dividend shall be paid on or declared and set apart for the Shares for any dividend period unless at the same time a like proportionate dividend for the same dividend period, determined on an as-converted basis, shall be paid on or declared and set apart for the shares of Series B Preferred and Series C Preferred. Section 3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a "Liquidation"), subject to the pari passu rights of the Series B Preferred and the Series C Preferred set forth in Section 3(d) below, distributions shall be made to the holders of Series A Preferred in respect of such Series A Preferred before any amount shall be paid to the holders of any other class or series of capital stock of the Corporation in the following manner: (a) SERIES A PREFERRED. The holders of the Series A Preferred shall be entitled to receive an amount equal to (i) the Conversion Value PLUS any declared but unpaid dividends and (ii) the holders of Series A Preferred shall be entitled to share ratably, on an "as if converted" basis, in all remaining assets and surplus funds along with the holders of Common Stock (and any other class of capital stock of the Corporation which has such "as if converted" status with respect to a Liquidation). (b) EVENTS DEEMED A LIQUIDATION. For purposes of this Section 3, the holders of a majority of the Shares may elect to have treated as a Liquidation the consolidation or merger of the Corporation with or into any other corporation or the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Corporation, or any other reorganization of the Corporation, unless the stockholders of the Corporation immediately prior to any such transaction are holders of a majority of the voting securities of the surviving or acquiring corporation immediately thereafter with comparable rights with respect to their respective classes of shares (and for purposes of this calculation equity securities which any stockholder or the Corporation owned immediately prior to such merger or consolidation as a stockholder of another party to the transaction shall be disregarded). (c) VALUATION OF SECURITIES AND PROPERTY. In the event the Corporation proposes to distribute assets other than cash in connection with any Liquidation, the value of the assets to be distributed to the holders of Shares of Series A Preferred shall be determined in good faith by the Board of Directors. Any securities not subject to contractual restrictions on free marketability shall be valued as follows: (i) if traded on a national securities exchange or the Nasdaq National Market System ("Nasdaq"), the value shall be deemed to be the average of the security's closing prices on such exchange or Nasdaq over the thirty (30) trading day period ending three (3) days prior to the distribution; (ii) if actively traded over-the-counter (other than Nasdaq), the value shall be deemed to be the average of the closing bid prices over the thirty (30) day period ending three (3) days prior to the distribution; or (iii) if there is no active public market, the value shall be the fair market value thereof as determined in good faith by the Board of Directors. The method of valuation of securities subject to contractual restrictions on free marketability shall be adjusted to make an appropriate discount from the market value determined as above in clauses (i), (ii) or (iii) to reflect the fair market value thereof as determined in good faith by the Board of Directors. The holders of at least 50% of the outstanding Series A Preferred shall have the right to challenge any determination by the Board of Directors of fair market value pursuant to this Section 3(c), in which case the determination of fair market value shall be made by an independent appraiser selected jointly by the Board of Directors and such holders, the cost of such appraisal to be borne equally by the Corporation and such holders. If the Board of Directors and such holders cannot agree on an independent appraiser, each shall select an independent appraiser and such two independent appraisers shall select one independent appraiser to make such determination. (d) PARI PASSU LIQUIDATION PRIORITY OF SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C PREFERRED. Notwithstanding any other term or provision hereof, the Series A Preferred, Series B Preferred and Series C Preferred shall rank on a pari passu basis in the event of any Liquidation. If the proceeds from a Liquidation are not sufficient to pay to the holders of the Series A Preferred, Series B Preferred and Series C Preferred the full preference amount set forth in paragraph 3(a)(i) of the respective Certificates of Designation for such shares, then such holders shall instead be entitled to receive the entire assets and funds of the Corporation legally available for distribution, which assets and funds shall be distributed ratably among the holders of the Series A Preferred, the Series B Preferred and the Series C Preferred in proportion to the full amount to which each holder would otherwise be entitled as set forth in paragraph 3(a)(i) of the respective Certificates of Designation for such shares. Section 4. CONVERSION. The holders of Series A Preferred have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Each Share of Series A Preferred shall initially be convertible, at the option of the holder thereof, at any time on or after the date of issuance thereof, into the number of fully paid and nonassessable shares of Common Stock which results from dividing the Conversion Price (as hereinafter specified) per share in effect at the time of conversion into the per share Conversion Value in effect at the time of conversion. The initial Conversion Price of the Series A Preferred shall be $3,150 per share, and the Conversion Value of the Series A Preferred shall be $3,150 per share. The initial Conversion Price of the Series A Preferred shall be subject to adjustment from time to time as provided in Section 4(d) hereof. The Conversion Value shall not be subject to adjustment (except in connection with a stock split, stock dividend, combination, recapitalization or other such adjustment). Upon conversion, all declared but unpaid dividends on the Series A Preferred so converted shall be paid in cash, to the extent permitted by applicable law (and if not then permitted by applicable law, at such time as the Corporation is permitted by applicable law to pay any such dividends). (b) AUTOMATIC CONVERSION. Each Share of Series A Preferred shall automatically be converted into shares of Common Stock upon (i) the election of the holders of at least two-thirds of the then outstanding Shares of Series A Preferred or (ii) the closing of a firm commitment underwritten public offering of Common Stock pursuant to an effective registration statement under the Securities Act of 1933 in which: (A) the gross proceeds equal or exceed $75,000,000 and (B) the aggregate market value of the Common Stock of the Corporation immediately prior to the closing of the underwritten public offering, but assuming the conversion of each then outstanding share of the Corporation's Preferred Stock (and determined utilizing the offering price in such underwriting), equals or exceeds $750,000,000 (a "Qualified Public Offering"). Upon conversion, all declared but unpaid dividends on the Series A Preferred shall be paid in cash, to the extent permitted by applicable law (and if not then permitted by applicable law, at such time as the Corporation is permitted by applicable law to pay any such dividends). (c) MECHANICS OF CONVERSION. Before any holder of Series A Preferred shall be entitled to convert the same into shares of Common Stock and to receive certificates therefor, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the principal office of the Corporation or of any transfer agent for the Series A Preferred, and shall give written notice to the Corporation at such office that such holder elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 4(b) hereof, the outstanding Shares of Series A Preferred shall be converted automatically without any further action by the holders of such Shares and whether or not the certificates representing such Shares are surrendered to the Corporation or its transfer agent; and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless and until the certificates evidencing such Shares of Series A Preferred are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall as soon as practicable after such delivery, or after such agreement and indemnification, issue and deliver at such office to such holder of Series A Preferred, a certificate or certificates for the number of shares of Common Stock to which he or she shall be entitled as aforesaid and a check payable to the holder in the amount of any declared but unpaid dividends payable pursuant to Section 2 hereof, if any. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Shares of Series A Preferred to be converted, or, in the case of automatic conversion, immediately prior to the occurrence of the event leading to such automatic conversion, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the Corporation fails to pay all such dividends within twenty (20) days of the date of conversion, the holder entitled to such dividends may elect to have the Corporation issue to such holder, in lieu of such cash payment, additional shares of Common Stock calculated by dividing the total amount payable on such date by the Conversion Value. (d) ADJUSTMENTS TO CONVERSION PRICE. (i) SPECIAL DEFINITIONS. For purposes of this Section 4(d), the following definitions shall apply: (1) "OPTIONS" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities, other than the warrants issued to National Broadcasting Company, Inc. pursuant to the Warrant Agreements, entered into in April of 2000. (2) "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Common Stock. (3) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable: (A) upon conversion of Shares or any other shares of the Corporation's Preferred Stock; (B) as a dividend or distribution on any shares of the Corporation's Preferred Stock, including the Shares; (C) in a transaction described in Section 4(d)(vi); (D) pursuant to any stock option plan, stock purchase plan, stock award plan or stock incentive plan of the Corporation in any amount less than fifteen percent (15%) of the fully diluted Common Stock and the Corporation's Preferred Stock on an as-converted basis; (E) the issuance of warrants to National Broadcasting Company, Inc. pursuant to the Warrant Agreements, both entered into in April of 2000, or shares of Common Stock issuable upon exercise thereof; (F) upon the exercise or conversion of warrants or options outstanding on the Original Issue Date; or (G) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (A), (B), (C), (D), (E), (F) or this clause (G). (4) "ORIGINAL ISSUE DATE" shall mean the date on which the first Share of Series A Preferred was issued. (ii) ADJUSTMENT OF CONVERSION PRICE RESULTING FROM ISSUANCE OF ADDITIONAL SHARES. No adjustment in the Conversion Price of the Series A Preferred shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price for the Series A Preferred in effect on the date of, and immediately prior to, such issue. (iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation at any time or from tim to time after the Original Issue Date shall issue any Options (other than Options under the Corporation's Stock Option Plan that upon exercise would not constitute Additional Shares of Common Stock) or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the exercise of such Options and conversion or exchange of such Convertible Securities shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (1) except as provided in Section 4(d)(iii)(2), no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (2) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Corporation, or change in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (other than under or by reason of provisions designed to protect against dilution), the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and (3) no readjustment pursuant to clause (2) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (A) the Conversion Price on the original adjustment date or (B) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(d)(iii)) without consideration or for a consideration per share less than the Conversion Price in effect on the date of and immediately prior to such issue, then and in each such event the Conversion Price of the Series A Preferred shall be reduced to a price (calculated to the nearest cent) determined by multiplying such Conversion Price of the Series A Preferred by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price of the Series A Preferred, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. (v) DETERMINATION OF CONSIDERATION. For purposes of this Section 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be00 computed as follows: (1) CASH AND PROPERTY: (A) insofar as it consists of cash, such consideration shall be computed at the aggregate amount of cash received by the Corporation; (B) insofar as it consists of property other than cash, such consideration shall be computed at the fair value thereof at the time of such issue, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, such consideration shall be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) OTHER ADJUSTMENTS. (1) SUBDIVISIONS, COMBINATIONS, OR OF COMMON STOCK. In the event the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by stock split, stock dividend, combination or like event, into a greater or lesser number of shares of Common Stock, the Conversion Price of the Series A Preferred in effect immediately prior to such subdivision, combination, consolidation or stock dividend shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted. (2) RECLASSIFICATIONS. In the case, at any time after the date hereof, of any capital reorganization or any reclassification of the stock of the Corporation (other than as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another person (other than a consolidation or merger (A) in which the Corporation is the continuing entity and which does not result in any change in the Common Stock or (B) which is treated as a Liquidation pursuant to Section 3(b) above), the Shares of Series A Preferred shall, after such reorganization, reclassification, consolidation or merger be convertible into the kind and number of shares of stock or other securities or property of the Corporation or otherwise to which such holder would have been entitled if immediately prior to such reorganization, reclassification, consolidation or merger such holder had converted his Shares of Series A Preferred into Common Stock. The provisions of this clause 4(d)(vi)(2) shall similarly apply to successive reorganizations, reclassifications, consolidations or mergers. (e) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price of the Series A Preferred pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, if any, (ii) the Conversion Price of the Series A Preferred at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series A Preferred. (f) STATUS OF CONVERTED STOCK. In case any Shares of Series A Preferred shall be converted pursuant to Section 4 hereof, the Shares so converted shall be returned to the status of authorized, unissued and undesignated shares of the Corporation's Preferred Stock, and all such shares shall no longer be governed by this Certificate of Designation. (g) FRACTIONAL SHARES. In lieu of any fractional shares in the aggregate to which the holder of Series A Preferred would otherwise be entitled upon conversion, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of one share of Common Stock as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (h) MISCELLANEOUS. (i) All calculations under this Section 4 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. (ii) The holders of at least 50% of the outstanding Series A Preferred shall have the right to challenge any determination by the Board of Directors of fair market value pursuant to this Section 4, in which case such determination of fair market value shall be made by an independent appraiser selected jointly by the Board of Directors and such holders, the cost of such appraisal to be borne equally by the Corporation and such holders. If the Board of Directors and such holders cannot agree on an independent appraiser, each shall select an independent appraiser and such two independent appraisers shall select one independent appraiser to make such determination. (iii) No adjustment in the Conversion Price of the Series A Preferred will be made if such adjustment would result in a change in such Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in such Conversion Price. (i) NO IMPAIRMENT. The Corporation will not through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all action as may be necessary or appropriate in order to protect the conversion rights of the holders of Series A Preferred against impairment. (j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Shares of Series A Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Shares of Series A Preferred. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Shares of Series A Preferred, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Section 5. VOTING RIGHTS. (a) GENERAL. Except as otherwise required by law, by Section 5(b) hereof or by Section 8 hereof, the holder of each Share of Series A Preferred will be entitled to vote on all matters with the Common Stock as a single class, and not as a separate class or series. Each Share of Series A Preferred will entitle the holder to the number of votes per share equal to the full number of shares of Common Stock into which each Share of Series A Preferred is convertible on the record date for such vote. The holders of Series A Preferred shall receive notice of and shall be entitled to attend in person or by proxy any meeting of the holders of Common Stock. (b) VOTING FOR DIRECTORS. The holders of the Series A Preferred shall otherwise also be entitled to vote in the election of directors pursuant to the terms of Section 5(a) above. In addition, for so long as at least 3,791,900 shares of the Corporation's Preferred Stock remain outstanding, at any time when Michael Jordan is not a director of the Corporation, the holders of at least a majority of the shares of the Corporation's Preferred Stock, voting as a single class, shall be entitled to nominate and elect one (1) director. Any vacancy on the Board occurring because of the death, resignation or removal of Michael Jordan or a director elected by the holders of the Corporation's Preferred Stock, shall be filled by the vote or written consent of the holders of a majority of the shares of the Corporation's Preferred Stock. A director nominated and elected by the holders of the Corporation's Preferred Stock may be removed from the Board with or without cause by the vote or consent of the holders of the outstanding class with voting power entitled to elect him or her in accordance with the Delaware General Corporation Law. Section 6. NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series A Preferred, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the anticipated amount and character of such dividend, distribution or right. Section 7. NOTICES. Any notice required by the provisions of this Certificate to be given to the holders of Series A Preferred shall be deemed given when deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of the Corporation. Section 8. APPROVAL OF CERTAIN TRANSACTIONS WHILE ANY SERIES A PREFERRED IS OUTSTANDING. So long as not less than 1,900 Shares of Series A Preferred are outstanding, the Corporation shall not, without first obtaining the written approval of the holders of at least two-thirds of the Series A Preferred then outstanding, voting as a separate class, take any action that: (a) amends, alters or repeals the Corporation's Bylaws or Amended and Restated Certificate of Incorporation so as to adversely affect the preferences, special rights or other powers of Shares of Series A Preferred; (b) increases or decreases the authorized number of Shares of Series A Preferred; (c) creates any new class or series of shares that has a preference over or is on a parity with the Series A Preferred with respect to voting, dividends or liquidation preferences (except that the Corporation may create and issue the Series B Preferred and the Series C Preferred and may grant voting rights to shares of a series of preferred stock which have the right to vote with holders of Common Stock on an as-converted basis, but in any event not in preference to Shares of Series A Preferred); (d) reclassifies stock into shares having a preference over or parity with the Series A Preferred with respect to voting, dividends or liquidation preferences (except that the Corporation may grant voting rights to shares of a series of preferred stock which have the right to vote with holders of Common Stock on an as-converted basis, but in any event not in preference to Shares of Series A Preferred); (e) authorizes any dividend or other distribution (other than a stock dividend) with respect to the Corporation's Preferred Stock or the Common Stock (other than cash dividends payable to the holders of Series A Preferred); (f) repurchases any shares of capital stock of the Corporation other than the purchase of Common Stock from employees acquired pursuant to any stock option plan, stock purchase plan, stock award plan or other incentive plan of the Corporation or the purchase of Common Stock pursuant to contractual rights to repurchase shares of Common Stock held by employees, directors or consultants of the Corporation or its subsidiaries upon termination of their employment or services or pursuant to the exercise of a contractual right of first refusal, call right or other purchase option held by the Corporation; provided that in the event the Corporation repurchases any such shares from one or more employees pursuant to this Section 8(f), the aggregate value of such permitted repurchases shall not exceed $1,000,000 (exclusive of any amount of indebtedness owed to the Corporation by an officer or employee that is canceled or rescinded as part of a repurchase) in any twelve (12) month period; (g) increases the number of directors of the Corporation to greater than seven (7) persons; (h) other than Options or shares purchasable on the exercise of Options, offer Additional Shares of Common Stock at an issue price that is less than the fair market value for such shares as of the date of issuance; (i) offer or issue any equity security that has a preference over, more favorable terms than, or is on a parity with the Series A Preferred with respect to voting, dividends, liquidation preferences or any other material term or condition; provided, however, the Corporation may create and issue the Series B Preferred and the Series C Preferred; or (j) effects the consolidation or merger of the Corporation with or into any other corporation or business entity (other than with or into a wholly owned domestic subsidiary of the Corporation), the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Corporation, or the liquidation, dissolution, winding-up or reorganization of the Corporation. [Remainder of this page intentionally left blank] EX-4.3 7 EXHIBIT 4.3 CERTIFICATE OF DESIGNATION OF SERIES B CONVERTIBLE PREFERRED STOCK of DIGITALCONVERGENCE.:COM INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware We, the undersigned, Patrick V. Stark and William S. Leftwich, the Executive Vice President and Secretary, respectively, of DigitalConvergence.:Com Inc., a Delaware corporation (the "Corporation"), pursuant to Section 151 of the General Corporation Law of the State of Delaware, do hereby make this Certificate of Designation and do hereby state and certify that, pursuant to the authority expressly vested in the Board of Directors of the Corporation by the Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors by written consent unanimously adopted the following resolutions providing for the issuance of a series of the Corporation's Preferred Stock designated as the Series B Convertible Preferred Stock: RESOLVED, that the Board of Directors of the Corporation, in accordance with the provisions of its Amended and Restated Certificate of Incorporation, does hereby provide for the issue of a series of the Corporation's Preferred Stock, and does hereby fix and herein state the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof as follows: Section 1. DESIGNATION AND AMOUNT; OTHER SERIES OF PREFERRED. (a) SERIES B PREFERRED. There shall be a series of the Corporation's Preferred Stock designated as "Series B Convertible Preferred Stock" (the "Series B Preferred") and the number of shares of such series shall be twelve million one-hundred thousand (12,100,000). Each share of Series B Preferred is referred to herein as a "Share" and, collectively, the "Shares." Immediately after a Qualified Public Offering (as defined in Section 4(b) hereof), all authorized and unissued shares of Series B Preferred shall be returned to the status of authorized, unissued and undesignated shares of the Corporation's Preferred Stock, and all such shares shall no longer be governed by this Certificate of Page 1 Designation. (b) OTHER SERIES OF PREFERRED. The Corporation has also designated a Series A Convertible Preferred Stock (the "Series A Preferred") and a Series C Convertible Preferred Stock (the "Series C Preferred"). Section 2. DIVIDENDS AND DISTRIBUTIONS. The holders of Shares of Series B Preferred shall be entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor. In the event that the Corporation declares or pays any dividends upon the common stock, par value $0.01 per share, of the Corporation (the "Common Stock") (whether payable in cash, securities or other property), the Corporation shall also declare and pay to the holders of the Series B Preferred at the same time that it declares and pays such dividends to the holders of the Common Stock, the dividends which would have been declared and paid with respect to the Common Stock issuable upon conversion of the Series B Preferred pursuant to Section 4 hereof had all of the outstanding Shares been so converted immediately prior to the record date for such dividend, or if no record date is fixed, the date as of which the record holders of Common Stock entitled to such dividends are to be determined. No dividend shall be paid on or declared and set apart for the Shares for any dividend period unless at the same time a like proportionate dividend for the same dividend period, determined on an as-converted basis, shall be paid on or declared and set apart for the shares of Series A Preferred and Series C Preferred. Section 3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a "Liquidation"), subject to the pari passu rights of the Series A Preferred and the Series C Preferred set forth in Section 3(d) below, distributions shall be made to the holders of Series B Preferred in respect of such Series B Preferred before any amount shall be paid to the holders of any other class or series of capital stock of the Corporation in the following manner: (a) SERIES B PREFERRED. The holders of the Series B Preferred shall be entitled to receive an amount equal to (i) the Conversion Value PLUS any declared but unpaid dividends and (ii) the holders of Series B Preferred shall be entitled to share ratably, on an "as if converted" basis, in all remaining assets and surplus funds along with the holders of Common Stock (and any other class of capital stock of the Corporation which has such "as if converted" status with respect to a Liquidation). Page 2 (b) EVENTS DEEMED A LIQUIDATION. For purposes of this Section 3, the holders of a majority of the Shares may elect to have treated as a Liquidation the consolidation or merger of the Corporation with or into any other corporation or the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Corporation, or any other reorganization of the Corporation, unless the stockholders of the Corporation immediately prior to any such transaction are holders of a majority of the voting securities of the surviving or acquiring corporation immediately thereafter with comparable rights with respect to their respective classes of shares (and for purposes of this calculation equity securities which any stockholder or the Corporation owned immediately prior to such merger or consolidation as a stockholder of another party to the transaction shall be disregarded). (c) VALUATION OF SECURITIES AND PROPERTY. In the event the Corporation proposes to distribute assets other than cash in connection with any Liquidation, the value of the assets to be distributed to the holders of Shares of Series B Preferred shall be determined in good faith by the Board of Directors. Any securities not subject to contractual restrictions on free marketability shall be valued as follows: (i) if traded on a national securities exchange or the Nasdaq National Market System ("Nasdaq"), the value shall be deemed to be the average of the security's closing prices on such exchange or Nasdaq over the thirty (30) trading day period ending three (3) days prior to the distribution; (ii) if actively traded over-the-counter (other than Nasdaq), the value shall be deemed to be the average of the closing bid prices over the thirty (30) day period ending three (3) days prior to the distribution; or (iii) if there is no active public market, the value shall be the fair market value thereof as determined in good faith by the Board of Directors. The method of valuation of securities subject to contractual restrictions on free marketability shall be adjusted to make an appropriate discount from the market value determined as above in clauses (i), (ii) or (iii) to reflect the fair market value thereof as determined in good faith by the Board of Directors. The holders of at least 50% of the outstanding Series B Preferred shall have the right to challenge any determination by the Board of Directors of fair market value pursuant to this Section 3(c), in which case the determination of fair market value shall be made by an independent appraiser selected jointly by the Board of Directors and such holders, the cost of such appraisal to Page 3 be borne equally by the Corporation and such holders. If the Board of Directors and such holders cannot agree on an independent appraiser, each shall select an independent appraiser and such two independent appraisers shall select one independent appraiser to make such determination. (d) PARI PASSU LIQUIDATION PRIORITY OF SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C PREFERRED. Notwithstanding any other term or provision hereof, the Series A Preferred, Series B Preferred and Series C Preferred shall rank on a pari passu basis in the event of any Liquidation. If the proceeds from a Liquidation are not sufficient to pay to the holders of the Series A Preferred, Series B Preferred and Series C Preferred the full preference amount set forth in paragraph 3(a)(i) of the respective Certificates of Designation for such shares, then such holders shall instead be entitled to receive the entire assets and funds of the Corporation legally available for distribution, which assets and funds shall be distributed ratably among the holders of the Series A Preferred, the Series B Preferred and the Series C Preferred in proportion to the full amount to which each holder would otherwise be entitled as set forth in paragraph 3(a)(i) of the respective Certificates of Designation for such shares. Section 4. CONVERSION. The holders of Series B Preferred have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Each Share of Series B Preferred shall initially be convertible, at the option of the holder thereof, at any time on or after the date of issuance thereof, into the number of fully paid and nonassessable shares of Common Stock which results from dividing the Conversion Price (as hereinafter specified) per share in effect at the time of conversion into the per share Conversion Value in effect at the time of conversion. The initial Conversion Price of the Series B Preferred shall be $7.03 per share, and the Conversion Value of the Series B Preferred shall be $7.03 per share. The initial Conversion Price of the Series B Preferred shall be subject to adjustment from time to time as provided in Section 4(d) hereof. The Conversion Value shall not be subject to adjustment (except in connection with a stock split, stock dividend, combination, recapitalization or other such adjustment). Upon conversion, all declared but unpaid dividends on the Series B Preferred so converted shall be paid in cash, to the extent permitted by applicable law (and if not then permitted by applicable law, at such time as the Corporation is permitted by applicable law to pay any such dividends). (b) AUTOMATIC CONVERSION. Page 4 Each Share of Series B Preferred shall automatically be converted into shares of Common Stock upon (i) the election of the holders of at least two-thirds of the then outstanding Shares of Series B Preferred or (ii) the closing of a firm commitment underwritten public offering of Common Stock pursuant to an effective registration statement under the Securities Act of 1933 in which: (A) the gross proceeds equal or exceed $75,000,000 and (B) the aggregate market value of the Common Stock of the Corporation immediately prior to the closing of the underwritten public offering, but assuming the conversion of each then outstanding share of the Corporation's Preferred Stock (and determined utilizing the offering price in such underwriting), equals or exceeds $750,000,000 (a "Qualified Public Offering"). Upon conversion, all declared but unpaid dividends on the Series B Preferred shall be paid in cash, to the extent permitted by applicable law (and if not then permitted by applicable law, at such time as the Corporation is permitted by applicable law to pay any such dividends). (c) MECHANICS OF CONVERSION. Before any holder of Series B Preferred shall be entitled to convert the same into shares of Common Stock and to receive certificates therefor, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the principal office of the Corporation or of any transfer agent for the Series B Preferred, and shall give written notice to the Corporation at such office that such holder elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 4(b) hereof, the outstanding Shares of Series B Preferred shall be converted automatically without any further action by the holders of such Shares and whether or not the certificates representing such Shares are surrendered to the Corporation or its transfer agent; and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless and until the certificates evidencing such Shares of Series B Preferred are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall as soon as practicable after such delivery, or after such agreement and indemnification, issue and deliver at such office to such holder of Series B Preferred, a certificate or certificates for the number of shares of Common Stock to which he or she shall be entitled as aforesaid and a check payable to the holder in the amount of any declared but unpaid dividends payable pursuant to Section 2 hereof, if any. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Shares of Series B Preferred to be converted, or, in the case of automatic conversion, immediately prior to the occurrence of the event leading to such automatic conversion, and the person or persons entitled to receive the shares of Common Stock issuable Page 5 upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the Corporation fails to pay all such dividends within twenty (20) days of the date of conversion, the holder entitled to such dividends may elect to have the Corporation issue to such holder, in lieu of such cash payment, additional shares of Common Stock calculated by dividing the total amount payable on such date by the Conversion Value. (d) ADJUSTMENTS TO CONVERSION PRICE. (i) SPECIAL DEFINITIONS. For purposes of this Section 4(d), the following definitions shall apply: (1) "OPTIONS" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities, other than the warrants issued to National Broadcasting Company, Inc. pursuant to the Warrant Agreements, both entered into in April of 2000. (2) "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Common Stock. (3) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable: (A) upon conversion of Shares or any other shares of the Corporation's Preferred Stock; (B) as a dividend or distribution on any shares of the Corporation's Preferred Stock, including the Shares; (C) in a transaction described in Section 4(d)(vi); (D) pursuant to any stock option plan, stock purchase plan, stock award plan or stock incentive plan of the Corporation in any amount less than fifteen percent (15%) of the fully diluted Common Stock and the Corporation's Preferred Stock on an as-converted basis; (E) the issuance of warrants to National Broadcasting Company, Inc. pursuant to the Warrant Agreements, both entered into in April of 2000, or shares of Common Stock issuable upon exercise thereof; (F) upon the exercise or conversion of warrants or options outstanding on the Original Issue Date; or (G) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (A), (B), (C), (D), (E), (F) or this clause (G). (4) "ORIGINAL ISSUE DATE" shall mean the date on which the first Share of Series B Preferred was issued. Page 6 (ii) ADJUSTMENT OF CONVERSION PRICE RESULTING FROM ISSUANCE OF ADDITIONAL SHARES. No adjustment in the Conversion Price of the Series B Preferred shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price for the Series B Preferred in effect on the date of, and immediately prior to, such issue. (iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options (other than Options under the Corporation's Stock Option Plan that upon exercise would not constitute Additional Shares of Common Stock) or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the exercise of such Options and conversion or exchange of such Convertible Securities shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (1) except as provided in Section 4(d)(iii)(2), no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (2) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Corporation, or change in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (other than under or by reason of provisions designed to protect against dilution), the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect Page 7 such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and (3) no readjustment pursuant to clause (2) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (A) the Conversion Price on the original adjustment date or (B) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANC OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall issue Additional shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(d)(iii)) without consideration or for a consideration per share less than the Conversion Price in effect on the date of and immediately prior to such issue, then and in each such event the Conversion Price of the Series B Preferred shall be reduced to a price (calculated to the nearest cent) determined by multiplying such Conversion Price of the Series B Preferred by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price of the Series B Preferred, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. (v) DETERMINATION OF CONSIDERATION. For purposes of this Section 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (1) CASH AND PROPERTY: (A) insofar as it consists of cash, such consideration shall be computed at the aggregate amount of cash received by the Corporation; (B) insofar as it consists of property other than cash, such consideration shall be computed at the fair value thereof at the time of such issue, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, such consideration shall be the proportion of such consideration so received, computed as provided in clauses Page 8 (A) and (B) above, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) OTHER ADJUSTMENTS. (1) SUBDIVISIONS, COMBINATIONS, OR CONSOLIDATIONS OF COMMON STOCK. In the event the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by stock split, stock dividend, combination or like event, into a greater or lesser number of shares of Common Stock, the Conversion Price of the Series B Preferred in effect immediately prior to such subdivision, combination, consolidation or stock dividend shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted. (2) RECLASSIFICATIONS. In the case, at any time after the date hereof, of any capital reorganization or any reclassification of the stock of the Corporation (other than as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another person (other than a consolidation or merger (A) in which the Corporation is the continuing entity and which does not result in any change in the Common Stock or (B) which is treated as a Liquidation pursuant to Section 3(b) above), the Shares of Series B Preferred shall, after such reorganization, reclassification, consolidation or merger be convertible into the kind and number of shares of stock or other securities or property of the Page 9 Corporation or otherwise to which such holder would have been entitled if immediately prior to such reorganization, reclassification, consolidation or merger such holder had converted his Shares of Series B Preferred into Common Stock. The provisions of this clause 4(d)(vi)(2) shall similarly apply to successive reorganizations, reclassifications, consolidations or mergers. (e) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price of the Series B Preferred pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series B Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series B Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, if any, (ii) the Conversion Price of the Series B Preferred at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series B Preferred. (f) STATUS OF CONVERTED STOCK. In case any Shares of Series B Preferred shall be converted pursuant to Section 4 hereof, the Shares so converted shall be returned to the status of authorized, unissued and undesignated shares of the Corporation's Preferred Stock, and all such shares shall no longer be governed by this Certificate of Designation. (g) FRACTIONAL SHARES. In lieu of any fractional shares in the aggregate to which the holder of Series B Preferred would otherwise be entitled upon conversion, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of one share of Common Stock as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (h) MISCELLANEOUS. (i) All calculations under this Section 4 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. (ii) The holders of at least 50% of the outstanding Series B Preferred shall have the right to challenge any determination by the Board of Directors Page 10 of fair market value pursuant to this Section 4, in which case such determination of fair market value shall be made by an independent appraiser selected jointly by the Board of Directors and such holders, the cost of such appraisal to be borne equally by the Corporation and such holders. If the Board of Directors and such holders cannot agree on an independent appraiser, each shall select an independent appraiser and such two independent appraisers shall select one independent appraiser to make such determination. (iii) No adjustment in the Conversion Price of the Series B Preferred will be made if such adjustment would result in a change in such Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in such Conversion Price. (i) NO IMPAIRMENT. The Corporation will not through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all action as may be necessary or appropriate in order to protect the conversion rights of the holders of Series B Preferred against impairment. (j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Shares of Series B Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Shares of Series B Preferred. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Shares of Series B Preferred, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Section 5. VOTING RIGHTS. (a) GENERAL. Except as otherwise required by law, by Section 5(b) hereof or by Section Page 11 8 hereof, the holder of each Share of Series B Preferred will be entitled to vote on all matters with the Common Stock as a single class, and not as a separate class or series. Each Share of Series B Preferred will entitle the holder to the number of votes per share equal to the full number of shares of Common Stock into which each Share of Series B Preferred is convertible on the record date for such vote. The holders of Series B Preferred shall receive notice of and shall be entitled to attend in person or by proxy any meeting of the holders of Common Stock. (b) VOTING FOR DIRECTORS. The holders of the Series B Preferred shall otherwise also be entitled to vote in the election of directors pursuant to the terms of Section 5(a) above. In addition, for so long as at least 3,791,900 shares of the Corporation's Preferred Stock remain outstanding, at any time when Michael Jordan is not a director of the Corporation, the holders of at least a majority of the shares of the Corporation's Preferred Stock, voting as a single class, shall be entitled to nominate and elect one (1) director. Any vacancy on the Board occurring because of the death, resignation or removal of Michael Jordan or a director elected by the holders of the Corporation's Preferred Stock, shall be filled by the vote or written consent of the holders of a majority of the shares of the Corporation's Preferred Stock. A director nominated and elected by the holders of the Corporation's Preferred Stock may be removed from the Board with or without cause by the vote or consent of the holders of the outstanding class with voting power entitled to elect him or her in accordance with the Delaware General Corporation Law. Section 6. NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series B Preferred, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the anticipated amount and character of such dividend, distribution or right. Section 7. NOTICES. Any notice required by the provisions of this Certificate to be given to the holders of Series B Preferred shall be deemed given when deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of the Corporation. Page 12 Section 8. APPROVAL OF CERTAIN TRANSACTIONS WHILE ANY SERIES B PREFERRED IS OUTSTANDING. So long as not less than 1,800,000 Shares of Series B Preferred are outstanding, the Corporation shall not, without first obtaining the written approval of the holders of at least two-thirds of the Series B Preferred then outstanding, voting as a separate class, take any action that: (a) amends, alters or repeals the Corporation's Bylaws or Amended and Restated Certificate of Incorporation so as to adversely affect the preferences, special rights or other powers of Shares of Series B Preferred; (b) increases or decreases the authorized number of Shares of Series B Preferred; (c) creates any new class or series of shares that has a preference over or is on a parity with the Series B Preferred with respect to voting, dividends or liquidation preferences (except that the Corporation may create and issue the Series A Preferred and the Series C Preferred and may grant voting rights to shares of a series of preferred stock which have the right to vote with holders of Common Stock on an as-converted basis, but in any event not in preference to Shares of Series B Preferred); (d) reclassifies stock into shares having a preference over or parity with the Series B Preferred with respect to voting, dividends or liquidation preferences (except that the Corporation may grant voting rights to shares of a series of preferred stock which have the right to vote with holders of Common Stock on an as-converted basis, but in any event not in preference to Shares of Series B Preferred); (e) authorizes any dividend or other distribution (other than a stock dividend) with respect to the Corporation's Preferred Stock or the Common Stock (other than cash dividends payable to the holders of Series B Preferred); (f) repurchases any shares of capital stock of the Corporation other than the purchase of Common Stock from employees acquired pursuant to any stock option plan, stock purchase plan, stock award plan or other incentive plan of the Corporation or the purchase of Common Stock pursuant to contractual rights to repurchase shares of Common Stock held by employees, directors or consultants of the Corporation or its subsidiaries upon termination of their employment or services or pursuant to the exercise of a contractual right of first refusal, call right or other purchase option held by the Corporation; provided that in the event the Corporation repurchases any such shares from one or more employees pursuant to this Section 8(f), the aggregate value of such permitted repurchases shall not exceed $1,000,000 (exclusive of any amount of indebtedness owed to the Corporation by an officer or employee that Page 13 is canceled or rescinded as part of a repurchase) in any twelve (12) month period; (g) increases the number of directors of the Corporation to greater than seven (7) persons; (h) other than Options or shares purchasable on the exercise of Options, offer Additional Shares of Common Stock at an issue price that is less than the fair market value for such shares as of the date of issuance; (i) offer or issue any equity security that has a preference over, more favorable terms than, or is on a parity with the Series B Preferred with respect to voting, dividends, liquidation preferences or any other material term or condition; provided, however, the Corporation may create and issue the Series A Preferred and the Series C Preferred; or (j) effects the consolidation or merger of the Corporation with or into any other corporation or business entity (other than with or into a wholly owned domestic subsidiary of the Corporation), the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Corporation, or the liquidation, dissolution, winding-up or reorganization of the Corporation. [Remainder of this page intentionally left blank] Page 14 IN WITNESS WHEREOF, this Certificate of Designation is hereby executed by the undersigned officer of DigitalConvergence.:Com Inc., as of this 19th day of April, 2000. DIGITALCONVERGENCE.:COM INC. By: /s/ Patrick V. Stark ----------------------------------- Patrick V. Stark Executive Vice President ATTEST: By: /s/ William S. Leftwich ---------------------------------------- Name: William S. Leftwich Title: Secretary EX-4.4 8 EXHIBIT 4.4 CERTIFICATE OF DESIGNATION OF SERIES C CONVERTIBLE PREFERRED STOCK of DIGITALCONVERGENCE.:COM INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware We, the undersigned, Patrick V. Stark and William S. Leftwich, the Executive Vice President and Secretary, respectively, of DigitalConvergence.:Com Inc., a Delaware corporation (the "Corporation"), pursuant to Section 151 of the General Corporation Law of the State of Delaware, do hereby make this Certificate of Designation and do hereby state and certify that, pursuant to the authority expressly vested in the Board of Directors of the Corporation by the Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors by written consent unanimously adopted the following resolutions providing for the issuance of a series of the Corporation's Preferred Stock designated as the Series C Convertible Preferred Stock: RESOLVED, that the Board of Directors of the Corporation, in accordance with the provisions of its Amended and Restated Certificate of Incorporation, does hereby provide for the issue of a series of the Corporation's Preferred Stock, and does hereby fix and herein state the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof as follows: Section 1. DESIGNATION AND AMOUNT; OTHER SERIES OF PREFERRED. (a) SERIES C PREFERRED. There shall be a series of the Corporation's Preferred Stock designated as "Series C Convertible Preferred Stock" (the "Series C Preferred") and the number of shares of such series shall be thirteen million three-hundred thousand (13,300,000). Each share of Series C Preferred is referred to herein as a "Share" and, collectively, the "Shares." Immediately after a Qualified Public Offering (as defined in Section 4(b) hereof), all authorized and unissued shares of Series C Preferred shall be returned to the status of authorized, unissued and undesignated shares of the Corporation's Preferred Stock, and all such shares shall no longer be governed by this Certificate of Designation. SERIES C CERTIFICATE OF DESIGNATION - Page 1 (b) OTHER SERIES OF PREFERRED. The Corporation has also designated a Series A Convertible Preferred Stock (the "Series A Preferred") and a Series B Convertible Preferred Stock (the "Series B Preferred"). Section 2. DIVIDENDS AND DISTRIBUTIONS. The holders of Shares of Series C Preferred shall be entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor. In the event that the Corporation declares or pays any dividends upon the common stock, par value $0.01 per share, of the Corporation (the "Common Stock") (whether payable in cash, securities or other property), the Corporation shall also declare and pay to the holders of the Series C Preferred at the same time that it declares and pays such dividends to the holders of the Common Stock, the dividends which would have been declared and paid with respect to the Common Stock issuable upon conversion of the Series C Preferred pursuant to Section 4 hereof had all of the outstanding Shares been so converted immediately prior to the record date for such dividend, or if no record date is fixed, the date as of which the record holders of Common Stock entitled to such dividends are to be determined. No dividend shall be paid on or declared and set apart for the Shares for any dividend period unless at the same time a like proportionate dividend for the same dividend period, determined on an as-converted basis, shall be paid on or declared and set apart for the shares of Series A Preferred and Series B Preferred. Section 3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a "Liquidation"), subject to the pari passu rights of the Series A Preferred and the Series B Preferred set forth in Section 3(d) below, distributions shall be made to the holders of Series C Preferred in respect of such Series C Preferred before any amount shall be paid to the holders of any other class or series of capital stock of the Corporation in the following manner: (a) SERIES C PREFERRED. The holders of the Series C Preferred shall be entitled to receive an amount equal to (i) the Conversion Value PLUS any declared but unpaid dividends and (ii) the holders of Series C Preferred shall be entitled to share ratably, on an "as if converted" basis, in all remaining assets and surplus funds along with the holders of Common Stock (and any other class of capital stock of the Corporation which has such "as if converted" status with respect to a Liquidation). SERIES C CERTIFICATE OF DESIGNATION - Page 2 (b) EVENTS DEEMED A LIQUIDATION. For purposes of this Section 3, the holders of a majority of the Shares may elect to have treated as a Liquidation the consolidation or merger of the Corporation with or into any other corporation or the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Corporation, or any other reorganization of the Corporation, unless the stockholders of the Corporation immediately prior to any such transaction are holders of a majority of the voting securities of the surviving or acquiring corporation immediately thereafter with comparable rights with respect to their respective classes of shares (and for purposes of this calculation equity securities which any stockholder or the Corporation owned immediately prior to such merger or consolidation as a stockholder of another party to the transaction shall be disregarded). (c) VALUATION OF SECURITIES AND PROPERTY. In the event the Corporation proposes to distribute assets other than cash in connection with any Liquidation, the value of the assets to be distributed to the holders of Shares of Series C Preferred shall be determined in good faith by the Board of Directors. Any securities not subject to contractual restrictions on free marketability shall be valued as follows: (i) if traded on a national securities exchange or the Nasdaq National Market System ("Nasdaq"), the value shall be deemed to be the average of the security's closing prices on such exchange or Nasdaq over the thirty (30) trading day period ending three (3) days prior to the distribution; (ii) if actively traded over-the-counter (other than Nasdaq), the value shall be deemed to be the average of the closing bid prices over the thirty (30) day period ending three (3) days prior to the distribution; or (iii) if there is no active public market, the value shall be the fair market value thereof as determined in good faith by the Board of Directors. The method of valuation of securities subject to contractual restrictions on free marketability shall be adjusted to make an appropriate discount from the market value determined as above in clauses (i), (ii) or (iii) to reflect the fair market value thereof as determined in good faith by the Board of Directors. The holders of at least 50% of the outstanding Series C Preferred shall have the right to challenge any determination by the Board of Directors of fair market value pursuant to this Section 3(c), in which case the determination of fair market value shall be made by an independent appraiser selected jointly by the Board of Directors and such holders, the cost of such appraisal to be borne equally by the Corporation and such holders. If the Board of Directors and such holders cannot agree on an independent appraiser, each shall select an SERIES C CERTIFICATE OF DESIGNATION - Page 3 independent appraiser and such two independent appraisers shall select one independent appraiser to make such determination. (d) PARI PASSU LIQUIDATION PRIORITY OF SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C PREFERRED. Notwithstanding any other term or provision hereof, the Series A Preferred, Series B Preferred and Series C Preferred shall rank on a pari passu basis in the event of any Liquidation. If the proceeds from a Liquidation are not sufficient to pay to the holders of the Series A Preferred, Series B Preferred and Series C Preferred the full preference amount set forth in paragraph 3(a)(i) of the respective Certificates of Designation for such shares, then such holders shall instead be entitled to receive the entire assets and funds of the Corporation legally available for distribution, which assets and funds shall be distributed ratably among the holders of the Series A Preferred, the Series B Preferred and the Series C Preferred in proportion to the full amount to which each holder would otherwise be entitled as set forth in paragraph 3(a)(i) of the respective Certificates of Designation for such shares. Section 4. CONVERSION. The holders of Series C Preferred have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Each Share of Series C Preferred shall initially be convertible, at the option of the holder thereof, at any time on or after the date of issuance thereof, into the number of fully paid and nonassessable shares of Common Stock which results from dividing the Conversion Price (as hereinafter specified) per share in effect at the time of conversion into the per share Conversion Value in effect at the time of conversion. The initial Conversion Price of the Series C Preferred shall be $10.54 per share, and the Conversion Value of the Series C Preferred shall be $10.54 per share. The initial Conversion Price of the Series C Preferred shall be subject to adjustment from time to time as provided in Section 4(d) hereof. The Conversion Value shall not be subject to adjustment (except in connection with a stock split, stock dividend, combination, recapitalization or other such adjustment). Upon conversion, all declared but unpaid dividends on the Series C Preferred so converted shall be paid in cash, to the extent permitted by applicable law (and if not then permitted by applicable law, at such time as the Corporation is permitted by applicable law to pay any such dividends). (b) AUTOMATIC CONVERSION. Each Share of Series C Preferred shall automatically be converted into shares of Common Stock upon (i) the election of the holders of at least two-thirds of the SERIES C CERTIFICATE OF DESIGNATION - Page 4 then outstanding Shares of Series C Preferred or (ii) the closing of a firm commitment underwritten public offering of Common Stock pursuant to an effective registration statement under the Securities Act of 1933 in which: (A) the gross proceeds equal or exceed $75,000,000 and (B) the aggregate market value of the Common Stock of the Corporation immediately prior to the closing of the underwritten public offering, but assuming the conversion of each then outstanding share of the Corporation's Preferred Stock (and determined utilizing the offering price in such underwriting), equals or exceeds $750,000,000 (a "Qualified Public Offering"). Upon conversion, all declared but unpaid dividends on the Series C Preferred shall be paid in cash, to the extent permitted by applicable law (and if not then permitted by applicable law, at such time as the Corporation is permitted by applicable law to pay any such dividends). (c) MECHANICS OF CONVERSION. Before any holder of Series C Preferred shall be entitled to convert the same into shares of Common Stock and to receive certificates therefor, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the principal office of the Corporation or of any transfer agent for the Series C Preferred, and shall give written notice to the Corporation at such office that such holder elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 4(b) hereof, the outstanding Shares of Series C Preferred shall be converted automatically without any further action by the holders of such Shares and whether or not the certificates representing such Shares are surrendered to the Corporation or its transfer agent; and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless and until the certificates evidencing such Shares of Series C Preferred are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall as soon as practicable after such delivery, or after such agreement and indemnification, issue and deliver at such office to such holder of Series C Preferred, a certificate or certificates for the number of shares of Common Stock to which he or she shall be entitled as aforesaid and a check payable to the holder in the amount of any declared but unpaid dividends payable pursuant to Section 2 hereof, if any. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Shares of Series C Preferred to be converted, or, in the case of automatic conversion, immediately prior to the occurrence of the event leading to such automatic conversion, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the Corporation fails to pay all such dividends within twenty (20) days of the date of conversion, the holder entitled to such dividends may elect to have the Corporation issue to such holder, in lieu of such cash SERIES C CERTIFICATE OF DESIGNATION - Page 5 payment, additional shares of Common Stock calculated by dividing the total amount payable on such date by the Conversion Value. (d) ADJUSTMENTS TO CONVERSION PRICE. (i) SPECIAL DEFINITIONS. For purposes of this Section 4(d), the following definitions shall apply: (1) "OPTIONS" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities, other than the warrants issued to National Broadcasting Company, Inc. pursuant to the Warrant Agreements, both entered into in April of 2000. (2) "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Common Stock. (3) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable: (A) upon conversion of Shares or any other shares of the Corporation's Preferred Stock; (B) as a dividend or distribution on any shares of the Corporation's Preferred Stock, including the Shares; (C) in a transaction described in Section 4(d)(vi); (D) pursuant to any stock option plan, stock purchase plan, stock award plan or stock incentive plan of the Corporation in any amount less than fifteen percent (15%) of the fully diluted Common Stock and the Corporation's Preferred Stock on an as-converted basis; (E) the issuance of warrants to National Broadcasting Company, Inc. pursuant to the Warrant Agreements, both entered into in April of 2000, or shares of Common Stock issuable upon exercise thereof; (F) upon the exercise or conversion of warrants or options outstanding on the Original Issue Date; or (G) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (A), (B), (C), (D), (E), (F) or this clause (G). (4) "ORIGINAL ISSUE DATE" shall mean the date on which the first Share of Series C Preferred was issued. (ii) ADJUSTMENT OF CONVERSION PRICE RESULTING FROM ISSUANCE OF ADDITIONAL SHARES. No adjustment in the Conversion Price of the Series C Preferred shall be made in respect of the issuance of Additional Shares of Common Stock unless SERIES C CERTIFICATE OF DESIGNATION - Page 6 the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price for the Series C Preferred in effect on the date of, and immediately prior to, such issue. (iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options (other than Options under the Corporation's Stock Option Plan that upon exercise would not constitute Additional Shares of Common Stock) or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the exercise of such Options and conversion or exchange of such Convertible Securities shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (1) except as provided in Section 4(d)(iii)(2), no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (2) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Corporation, or change in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (other than under or by reason of provisions designed to protect against dilution), the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and (3) no readjustment pursuant to clause (2) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (A) the Conversion Price on the original adjustment date or (B) the Conversion SERIES C CERTIFICATE OF DESIGNATION - Page 7 Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(d)(iii)) without consideration or for a consideration per share less than the Conversion Price in effect on the date of and immediately prior to such issue, then and in each such event the Conversion Price of the Series C Preferred shall be reduced to a price (calculated to the nearest cent) determined by multiplying such Conversion Price of the Series C Preferred by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price of the Series C Preferred, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. (v) DETERMINATION OF CONSIDERATION. For purposes of this Section 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (1) CASH AND PROPERTY: (A) insofar as it consists of cash, such consideration shall be computed at the aggregate amount of cash received by the Corporation; (B) insofar as it consists of property other than cash, such consideration shall be computed at the fair value thereof at the time of such issue, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, such consideration shall be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing SERIES C CERTIFICATE OF DESIGNATION - Page 8 (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) OTHER ADJUSTMENTS. (1) SUBDIVISIONS, COMBINATIONS, OR CONSOLIDATIONS OF COMMON STOCK. In the event the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by stock split, stock dividend, combination or like event, into a greater or lesser number of shares of Common Stock, the Conversion Price of the Series C Preferred in effect immediately prior to such subdivision, combination, consolidation or stock dividend shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted. (2) RECLASSIFICATIONS. In the case, at any time after the date hereof, of any capital reorganization or any reclassification of the stock of the Corporation (other than as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another person (other than a consolidation or merger (A) in which the Corporation is the continuing entity and which does not result in any change in the Common Stock or (B) which is treated as a Liquidation pursuant to Section 3(b) above), the Shares of Series C Preferred shall, after such reorganization, reclassification, consolidation or merger be convertible into the kind and number of shares of stock or other securities or property of the Corporation or otherwise to which such holder would have been entitled if immediately prior to such reorganization, reclassification, consolidation or merger such holder had converted his Shares of Series C Preferred into Common Stock. The provisions of this clause 4(d)(vi)(2) shall similarly apply to successive reorganizations, reclassifications, consolidations or mergers. (e) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the SERIES C CERTIFICATE OF DESIGNATION - Page 9 Conversion Price of the Series C Preferred pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series C Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series C Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, if any, (ii) the Conversion Price of the Series C Preferred at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series C Preferred. (f) STATUS OF CONVERTED STOCK. In case any Shares of Series C Preferred shall be converted pursuant to Section 4 hereof, the Shares so converted shall be returned to the status of authorized, unissued and undesignated shares of the Corporation's Preferred Stock, and all such shares shall no longer be governed by this Certificate of Designation. (g) FRACTIONAL SHARES. In lieu of any fractional shares in the aggregate to which the holder of Series C Preferred would otherwise be entitled upon conversion, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of one share of Common Stock as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (h) MISCELLANEOUS. (i) All calculations under this Section 4 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. (ii) The holders of at least 50% of the outstanding Series C Preferred shall have the right to challenge any determination by the Board of Directors of fair market value pursuant to this Section 4, in which case such determination of fair market value shall be made by an independent appraiser selected jointly by the Board of Directors and such holders, the cost of such appraisal to be borne equally by the Corporation and such holders. If the Board of Directors and such holders cannot agree on an independent appraiser, each shall select an independent appraiser and such two independent appraisers shall select one independent appraiser to make such determination. (iii) No adjustment in the Conversion Price of the Series C Preferred will be made if such adjustment would result in a change in such Conversion SERIES C CERTIFICATE OF DESIGNATION - Page 10 Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in such Conversion Price. (i) NO IMPAIRMENT. The Corporation will not through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all action as may be necessary or appropriate in order to protect the conversion rights of the holders of Series C Preferred against impairment. (j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Shares of Series C Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Shares of Series C Preferred. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Shares of Series C Preferred, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Section 5. VOTING RIGHTS. (a) GENERAL. Except as otherwise required by law, by Section 5(b) hereof or by Section 8 hereof, the holder of each Share of Series C Preferred will be entitled to vote on all matters with the Common Stock as a single class, and not as a separate class or series. Each Share of Series C Preferred will entitle the holder to the number of votes per share equal to the full number of shares of Common Stock into which each Share of Series C Preferred is convertible on the record date for such vote. The holders of Series C Preferred shall receive notice of and shall be entitled to attend in person or by proxy any meeting of the holders of Common Stock. (b) VOTING FOR DIRECTORS. The holders of the Series C Preferred shall otherwise also be entitled to SERIES C CERTIFICATE OF DESIGNATION - Page 11 vote in the election of directors pursuant to the terms of Section 5(a) above. In addition, for so long as at least 3,791,900 shares of the Corporation's Preferred Stock remain outstanding, at any time when Michael Jordan is not a director of the Corporation, the holders of at least a majority of the shares of the Corporation's Preferred Stock, voting as a single class, shall be entitled to nominate and elect one (1) director. Any vacancy on the Board occurring because of the death, resignation or removal of Michael Jordan or a director elected by the holders of the Corporation's Preferred Stock, shall be filled by the vote or written consent of the holders of a majority of the shares of the Corporation's Preferred Stock. A director nominated and elected by the holders of the Corporation's Preferred Stock may be removed from the Board with or without cause by the vote or consent of the holders of the outstanding class with voting power entitled to elect him or her in accordance with the Delaware General Corporation Law. Section 6. NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series C Preferred, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the anticipated amount and character of such dividend, distribution or right. Section 7. NOTICES. Any notice required by the provisions of this Certificate to be given to the holders of Series C Preferred shall be deemed given when deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of the Corporation. Section 8. APPROVAL OF CERTAIN TRANSACTIONS WHILE ANY SERIES C PREFERRED IS OUTSTANDING. So long as not less than 1,990,000 Shares of Series C Preferred are outstanding, the Corporation shall not, without first obtaining the written approval of the holders of at least two-thirds of the Series C Preferred then outstanding, voting as a separate class, take any action that: (a) amends, alters or repeals the Corporation's Bylaws or Amended and Restated Certificate of Incorporation so as to adversely affect the preferences, special rights or other powers of Shares of Series C Preferred; SERIES C CERTIFICATE OF DESIGNATION - Page 12 (b) increases or decreases the authorized number of Shares of Series C Preferred; (c) creates any new class or series of shares that has a preference over or is on a parity with the Series C Preferred with respect to voting, dividends or liquidation preferences (except that the Corporation may create and issue the Series A Preferred and the Series B Preferred and may grant voting rights to shares of a series of preferred stock which have the right to vote with holders of Common Stock on an as-converted basis, but in any event not in preference to Shares of Series C Preferred); (d) reclassifies stock into shares having a preference over or parity with the Series C Preferred with respect to voting, dividends or liquidation preferences (except that the Corporation may grant voting rights to shares of a series of preferred stock which have the right to vote with holders of Common Stock on an as-converted basis, but in any event not in preference to Shares of Series C Preferred); (e) authorizes any dividend or other distribution (other than a stock dividend) with respect to the Corporation's Preferred Stock or the Common Stock (other than cash dividends payable to the holders of Series C Preferred); (f) repurchases any shares of capital stock of the Corporation other than the purchase of Common Stock from employees acquired pursuant to any stock option plan, stock purchase plan, stock award plan or other incentive plan of the Corporation or the purchase of Common Stock pursuant to contractual rights to repurchase shares of Common Stock held by employees, directors or consultants of the Corporation or its subsidiaries upon termination of their employment or services or pursuant to the exercise of a contractual right of first refusal, call right or other purchase option held by the Corporation; provided that in the event the Corporation repurchases any such shares from one or more employees pursuant to this Section 8(f), the aggregate value of such permitted repurchases shall not exceed $1,000,000 (exclusive of any amount of indebtedness owed to the Corporation by an officer or employee that is canceled or rescinded as part of a repurchase) in any twelve (12) month period; (g) increases the number of directors of the Corporation to greater than seven (7) persons; (h) other than Options or shares purchasable on the exercise of Options, offer Additional Shares of Common Stock at an issue price that is less than the fair market value for such shares as of the date of issuance; (i) offer or issue any equity security that has a preference over, more favorable terms than, or is on a parity with the Series C Preferred with respect to voting, dividends, liquidation preferences or any other material term or condition; provided, however, the Corporation may create and issue the Series A Preferred and the Series B SERIES C CERTIFICATE OF DESIGNATION - Page 13 Preferred; or (j) effects the consolidation or merger of the Corporation with or into any other corporation or business entity (other than with or into a wholly owned domestic subsidiary of the Corporation), the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Corporation, or the liquidation, dissolution, winding-up or reorganization of the Corporation. [Remainder of this page intentionally left blank] SERIES C CERTIFICATE OF DESIGNATION - Page 14 IN WITNESS WHEREOF, this Certificate of Designation is hereby executed by the undersigned officer of DigitalConvergence.:Com Inc., as of this 19th day of April, 2000. DIGITALCONVERGENCE.:COM INC. By: /s/ Patrick V. Stark ------------------------------ Patrick V. Stark Executive Vice President ATTEST: By: /s/ William S. Leftwich ----------------------------------- Name: William S. Leftwich Title: Secretary EX-10.1 9 EXHIBIT 10.1 EMPLOYMENT AGREEMENT AGREEMENT made as of August 16, 1999, by and between DigitalConvergence.com Inc., a corporation incorporated under the laws of the state of Delaware, with its principal place of business at 4264 Kellway Circle, Addison, Texas 75001 (the "Company"), and MICHAEL GARIN, residing at the address set forth at the end of this Agreement (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive desire to set forth the terms and conditions of the Executive's employment by the Company; NOW, THEREFORE, the parties hereto agree as follows: 1. TERM OF EMPLOYMENT. The Executive's employment under this Agreement shall be for a term commencing on October 4, 1999 and terminating on October 3, 2002, subject to earlier termination as provided in section 5 hereof (the "Term of Employment"). Each year of the Term of Employment is referred to herein as a "Contract Year." 2. EMPLOYMENT 2.1 During the Term of Employment, the Company shall employ the Executive as its President and Chief Operating Officer, and the Executive shall serve in such position, perform such services and have such authority, functions, duties, powers and responsibilities as ordinarily are associated with such title. The Executive shall faithfully and diligently serve the Company and shall, as of January 1, 2000, devote all of his business time, attention, skill and efforts thereto; provided, that the Executive may manage his passive investments and be involved in charitable interests so long as they do not interfere or conflict with the performance of the Executive's duties hereunder. Through December 31, 1999, Executive may continue to perform services on a part-time basis at Executive's discretion for his current employer. The Executive shall be based in New York City. 3. COMPENSATION AND OTHER REMUNERATION. 3.1 BASE SALARY. The Company shall pay to the Executive during the Term of Employment base salary at the annual rate of Two Hundred Fifty Thousand Dollars ($250,000); provided, that Executive's base salary shall be increased to Four Hundred Thousand Dollars ($400,000) at such time as the Company closes a financing or financings which raise(s) an aggregate of $40 million; provided further, that Executive's base salary shall be further increased at such time as the Company completes an initial public offering, to a level commensurate with presidents of comparable companies at comparable stages of development. Base salary will be paid in accordance with the customary payroll practices of the Company and shall be subject to required payroll deductions and withholdings. The compensation due to Executive hereunder shall be due and payable notwithstanding any compensation which Executive may earn from any other entity or outside source. 3.2 BONUS. The Executive shall be eligible to receive a bonus in respect of each Contract Year in such amount, if any, as may be determined by the Company's board of directors. 3.3 VACATION. The Executive shall be entitled to a reasonable number of days of vacation during each Contract Year, scheduled in advance with the Company to avoid excessive disruption of the Company's operations. 3.4 STOCK OPTIONS. 3.4.1. Pursuant to one or more stock option agreements (hereafter referred to as the "Stock Option Agreement") dated the date hereof, the Company shall grant to Executive stock options, under and pursuant to the Company's 1999 Stock Option Plan, to purchase four thousand (4,000) shares of the Company's common stock, $.01 par value ("Common Stock"), at the price of Two Thousand Eighty-Five Dollars ($2,085) per share. Twenty five percent (25%) of these options will vest immediately upon grant, and the balance 2 will vest in thirds on the last day of the first, second and third Contract Year, provided Executive is employed on such dates, except as otherwise provided in the last sentence hereof. The Stock Option Agreement will provide that the maximum number of options which may be issued in the form of incentive stock options pursuant to Section 422 of the Internal Revenue Code will be so issued, with the balance of the options granted pursuant hereto to be issued as non-qualified options. The Stock Option Agreement will further provide that if the Executive dies during the Term of Employment or if the Company terminates this Agreement due to his disability (as described below) or without "Cause" (as defined below), or the Executive terminates this Agreement for "Good Reason" (as defined below), all unvested options shall immediately become exercisable. 3.4.2. All vested options will be exercisable for a period of ten (10) years from the date of grant, regardless of whether this Agreement has terminated. Any options granted in the form of incentive stock options which are not exercised within three (3) months of the termination of employment (other than due to death or disability) or twelve (12) month in the event of termination due to disability automatically shall be converted into non-qualified options. 4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES. 4.1 BENEFITS. The Executive shall participate in all benefit plans of the Company generally available to its employees and/or to any senior executive of the Company, whether n ow existing or hereafter established (collectively, the "Benefit Plans"). The extent of Executive's participation in the Benefit Plans shall be at the same level as the most senior executives of the Company. 4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses incurred by the Executive in accordance with the Company's policies will be reimbursed upon the presentation of receipts. Business-related air travel shall be such class as is determined by Executive in his reasonable discretion. 3 4.3 INSURANCE. During any period that the Executive is rendering any services hereunder, the Company agrees to cause Executive to be named as an insured under a director and officer liability insurance policy which the Company shall obtain. 5. TERMINATION. 5.1 TERMINATION FOR CAUSE. 5.1.1 The Company may terminate this Agreement and all of the Company's obligations hereunder, other than its obligations set forth below in this section 5.1, for "Cause." "Cause" shall mean that the Executive (i) is convicted of a felony, or any misdemeanor involving fraud or theft, (ii) engages in dishonest behavior which materially adversely affects the Company, (iii) commits a willful and intentional act having the effect of materially injuring the reputation or business of the Company, including, without limitation, habitual use of illegal drugs or alcohol or (iv) materially breaches this Agreement and, after having been given written notice thereof by the Company, fails to correct such breach within ten (10) days after receipt of such notice. 5.1.2 In the event of termination by the Company for Cause, the Company shall have no further obligations to the Executive other than to pay (i) base salary accrued through the effective date of termination; and (ii) all other benefits and amounts which may be then due the Executive under the general provisions then in effect of any Benefit Plan ((i) and (ii) collectively, the "Termination Entitlements"). 5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate upon the Executive's death, and in such event the Company shall have no further obligations hereunder, other than to pay to the Executive's estate the Termination Entitlements. 5.3 TERMINATION DUE TO DISABILITY. If, during the Term of Employment, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is unable to perform the material functions of his position for periods aggregating one hundred 4 thirty five (135) days in any twelve (12) month period, the Company shall be entitled to terminate this Agreement upon written notice to the Executive given at any time thereafter during which the Executive is still so disabled. Upon such termination, the Term of Employment shall end, and the Company shall have no further obligations hereunder other than to pay to the Executive the Termination Entitlements. 5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean any of the following: (i) a material breach by the Company of this Agreement, (ii) a material diminution of Executive's authority, duties or responsibilities with the Company or (iii) the assignment to Executive of duties materially inconsistent with Executive's position with the Company, unless otherwise approved by the Executive. If there exists an event or condition that constitutes Good Reason, and such event or condition is not cured within ten (10) days following Executive's giving the Company notice thereof, Executive at any time thereafter shall have the right to terminate this Agreement by giving the Company written notice of such termination, and upon his doing so, the provisions of sections 3.4.1 and 5.5 and all other relevant provisions hereof shall apply. 5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the Company terminates this Agreement without Cause (as defined in section 5.1 hereof), or if the Executive terminates this Agreement for Good Reason (as defined in section 5.4 hereof), in addition to the Termination Entitlements, the Executive shall be entitled to receive all base salary due for the balance of the Term of Employment in a lump sum within thirty (30) days of the date of termination. 5.6 STOCK OPTION VESTING. The impact of the termination of this Agreement on the stock options referred to in section 3 hereof, shall be as described in section 3 and in the Stock Option Agreements under which such options shall be issued. 5 6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive acknowledges that employment by the Company will bring the Executive into close contact with the confidential affairs of the Company and its affiliates. In recognition of the foregoing, the Executive covenants and agrees that the Executive will keep secret all confidential matters of the Company and its affiliates, including, without limitation, the terms and provisions of this Agreement, and will not use for his own benefit or intentionally disclose such matters to anyone outside of the Company, either during or after the Term of Employment, except with the Company's consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder; (ii) the Executive may disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process; and (iii) the Executive may disclose the terms of this Agreement to his attorney(s), accountant(s) and/or financial advisor(s). 7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that in the course of employment hereunder, he may conceive of, discover, or create inventions or new contributions relating to the subject matter of his employment (all of the foregoing being collectively referred to herein as "Work Product"). The Executive acknowledges that, unless the Company otherwise agrees, all of such Work Product shall be owned by and belong exclusively to the Company. The Executive shall further, unless the Company otherwise agrees in writing, (i) promptly disclose any such Work Product to the Company; (ii) assign to the Company, upon request, the entire rights to such Work Product to the extent not otherwise owned at law by the Company; and (iii) sign all papers reasonably necessary to carry out the foregoing. 8. REPRESENTATIONS. Both Executive and Company represent and warrant that each is not a party to any agreements or understandings which would prevent the fulfillment by such party of the terms of this Agreement or which would be violated by entering into this Agreement and performing such party's obligations hereunder. 6 9. NOTICES. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or three days after being mailed first-class, postage prepaid, by registered or certified mail, to the address of the recipient given herein (or such other address of which notice is given or, in the case of notice to the Executive, to the most recent address set forth on the records of the Company). 10. INDEMNIFICATION. The Company shall indemnify Executive against any and all judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with any action or proceeding, whether civil, criminal, judicial, legislative, administrative or investigative, or in connection with an appeal therein, by reason of the fact that Executive is or was a director, officer, employee, representative or agent of the Company; provided, however, that no such indemnification shall be made to Executive if an adverse judgment or other final adjudication establishes that the acts of Executive were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated. Without limiting the foregoing, Executive shall also be entitled to indemnification by the Company against any liability or damage, including attorney's fees and liabilities under federal and state securities laws, arising from any act or omission by Executive provided such act or omission was reasonably believed to be within the scope of Executive's authority or was taken upon advice of the accountants or legal counsel for the Company. The indemnification of Executive provided by this section 10 shall continue after Executive has ceased to be a director, officer, employee, representative or agent of the Company and shall inure to the benefit of Executive's heirs, executors, administrators and legal representatives. 7 11. GENERAL. 11.1 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of the State of New York applicable to agreements made and to be wholly performed therein. 11.2 CAPTIONS. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties expressly acknowledge, represent and agree that this Agreement is fully integrated and contains and constitutes the complete and entire agreement and understanding of the parties with respect to the subject matters hereof and supersedes any and all agreements, understandings and discussions, whether written or oral, between the parties with respect to the subject matters hereof, other than the Proprietary Rights and Information Agreement being entered into simultaneously herewith. The parties further acknowledge, represent, and agree that neither has made any representations, promises or statements to induce the other party to enter into this Agreement, and each party specifically disclaims reliance, and represents that there has been no reliance, on any such representations, promises or statements. 11.4 ASSIGNABILITY. This Agreement and the parties' rights and obligations hereunder may not be assigned by Executive or the Company without the other's prior written consent. 11.5 AMENDMENTS; WAIVERS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and covenants hereof may be waived, only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provisions hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained 8 in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 CONSTRUCTION. No presumption will be made or inference drawn because the attorneys for one of the parties drafted this Agreement or because of its drafting history. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. DigitalConvergence.com Inc. By: /s/ J. Jovan Philyaw ---------------------------------- Its: C.E.O. ---------------------------------- MICHAEL GARIN Signature: /s/ Michael Garin ---------------------------- Address: 49 Moore Road ---------------------------- Bronxville, N.Y. 10708 ---------------------------- 9 EX-10.2 10 EXHIBIT 10.2 EMPLOYMENT AGREEMENT AGREEMENT made as of August 16, 1999, by and between DigitalConvergence.com Inc., a corporation incorporated under the laws of the state of Delaware, with its principal place of business at 4264 Kellway Circle, Addison, Texas 75001 (the "Company"), and GREGORY LERMAN residing at the address set forth at the end of this Agreement (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive desire to set forth the terms and conditions of the Executive's employment by the Company; NOW, THEREFORE, the parties hereto agree as follows: 1. TERM OF EMPLOYMENT. The Executive's employment under this Agreement shall be for a term commencing on October 18, 1999 and terminating on October 17, 2002, subject to earlier termination as provided in section 5 hereof (the "Term of Employment"). Each year of the Term of Employment is referred to herein as a "Contract Year." 2. EMPLOYMENT 2.1 During the Term of Employment, the Company shall employ the Executive as its President - Interactive Group, and the Executive shall serve in such position, perform such services and have such authority, functions, duties, powers and responsibilities as ordinarily are associated with such title. The Executive shall faithfully and diligently serve the Company and shall devote all of his business time, attention, skill and efforts thereto; provided, that the Executive may manage his passive investments and be involved in charitable interests so long as they do not interfere or conflict with the performance of the Executive's duties hereunder. The Executive shall be based in Dallas, Texas. 3. COMPENSATION AND OTHER REMUNERATION. 3.1 BASE SALARY. The Company shall pay to the Executive during the Term of Employment base salary at the annual rate of Two Hundred Fifty Thousand Dollars ($250,000); provided that Executive's base salary may be increased at such time as the Company completes an initial public offering, to a level to be negotiated in good faith at that time. Base salary will be paid in accordance with the customary payroll practices of the Company and shall be subject to required payroll deductions and withholdings. The compensation due to Executive hereunder shall be due and payable notwithstanding any compensation which Executive may earn from any other entity or outside source. 3.2 BONUS. The Executive shall be eligible to receive a bonus in respect of each Contract Year in such amount, if any, as may be determined by the Company's board of directors. 3.3 VACATION. The Executive shall be entitled to a reasonable number of days of vacation during each Contract Year, scheduled in advance with the Company to avoid excessive disruption of the Company's operations. 3.4 STOCK OPTIONS. 3.4.1. Pursuant to one or more stock option agreements (hereafter referred to as the "Stock Option Agreement") dated the date hereof, the Company shall grant to Executive stock options, under and pursuant to the Company's 1999 Stock Option Plan, to purchase one thousand five hundred (1,500) shares of the Company's common stock, $.01 par value ("Common Stock"), at the price of Two Thousand Eighty-Five Dollars ($2,085) per share. Twenty five percent (25%) of these options will vest immediately upon grant, and the balance will vest in thirds on the last day of the first, second and third Contract Year, provided Executive is employed on such dates, except as otherwise provided in the last sentence hereof. The Stock Option Agreement will provide that the maximum number of options which may be issued in the form of incentive stock options pursuant to Section 422 of the Internal Revenue Code will be so 2 issued, with the balance of the options granted pursuant hereto to be issued as non-qualified options. The Stock Option Agreement will further provide that if the Executive dies during the Term of Employment or if the Company terminates this Agreement due to his disability (as described below) or without "Cause" (as defined below), or the Executive terminates this Agreement for "Good Reason" (as defined below), all unvested options shall immediately become exercisable. 3.4.2 Pursuant to a second Stock Option Agreement dated the date hereof, the Company shall grant to Executive stock options, under and pursuant to the Company's 1999 Stock Option Plan, to purchase two hundred fifty (250) shares of Common Stock at the price of Two Thousand Eighty-Five Dollars ($2,085) per share. The Stock Option Agreement will provide that the maximum number of options which may be issued in the form of incentive stock options pursuant to Section 422 of the Internal Revenue Code will be so issued, with the balance of the options granted pursuant hereto to be issued as non-qualified options. Such options shall become fully vested (i) upon satisfaction of the performance criteria described in EXHIBIT A, annexed hereto, or (ii) if the Executive dies or if the Company terminates this Agreement due to his disability (as described below) or without "Cause" (as defined below) or the Executive terminates this Agreement for "Good Reason" (as defined below), if such event occurs prior to the fulfillment of such performance criteria. 3.4.3. All vested options will be exercisable for a period of ten (10) years from the date of grant, regardless of whether this Agreement has terminated. Any options granted in the form of incentive stock options which are not exercised within three (3) months of the termination of employment (other than due to death or disability) or twelve (12) month in the event of termination due to disability automatically shall be converted into non-qualified options. 3 4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES. 4.1 BENEFITS. The Executive shall participate in all benefit plans of the Company generally available to its employees and/or to any senior executive of the Company, whether now existing or hereafter established (collectively, the "Benefit Plans"). The extent of Executive's participation in the Benefit Plans shall be at the same level as the most senior executives of the Company. 4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses incurred by the Executive in accordance with the Company's policies will be reimbursed upon the presentation of receipts. Business-related air travel shall be such class as is determined by Executive in his reasonable discretion. 4.3 MOVING EXPENSES. The Company will pay or reimburse the Executive for the expenses of his moving from Safety Harbor, Florida, to Dallas, Texas, up to Fifteen Thousand Dollars ($15,000). 4.4 INSURANCE. During any period that the Executive is rendering any services hereunder, the Company agrees to cause Executive to be named as an insured under a director and officer liability insurance policy which the Company shall obtain. 5. TERMINATION. 5.1 TERMINATION FOR CAUSE. 5.1.1 The Company may terminate this Agreement and all of the Company's obligations hereunder, other than its obligations set forth below in this section 5.1, for "Cause." "Cause" shall mean that the Executive (i) is convicted of a felony, or any misdemeanor involving fraud or theft, (ii) engages in dishonest behavior which materially adversely affects the Company, (iii) commits a willful and intentional act having the effect of materially injuring the reputation or business of the Company, including, without limitation, habitual use of illegal drugs or alcohol or (iv) materially breaches this Agreement and, after 4 having been given written notice thereof by the Company, fails to correct such breach within ten (10) days after receipt of such notice. 5.1.2 In the event of termination by the Company for Cause, the Company shall have no further obligations to the Executive other than to pay (i) base salary accrued through the effective date of termination; and (ii) all other benefits and amounts which may be then due the Executive under the general provisions then in effect of any Benefit Plan ((i) and (ii) collectively, the "Termination Entitlements"). 5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate upon the Executive's death, and in such event the Company shall have no further obligations hereunder, other than to pay to the Executive's estate the Termination Entitlements. 5.3 TERMINATION DUE TO DISABILITY. If, during the Term of Employment, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is unable to perform the material functions of his position for periods aggregating one hundred thirty five (135) days in any twelve (12) month period, the Company shall be entitled to terminate this Agreement upon written notice to the Executive given at any time thereafter during which the Executive is still so disabled. Upon such termination, the Term of Employment shall end, and the Company shall have no further obligations hereunder other than to pay to the Executive the Termination Entitlements. 5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean any of the following: (i) a material breach by the Company of this Agreement, (ii) a material diminution of Executive's authority, duties or responsibilities with the Company or (iii) the assignment to Executive of duties materially inconsistent with Executive's position with the Company, unless otherwise approved by the Executive. If there exists an event or condition that constitutes Good Reason, and such event or condition is not cured within ten (10) days following Executive's giving the Company notice thereof, Executive at any time thereafter shall have the right to terminate this Agreement by giving the Company written notice of such termination, and upon 5 his doing so, the provisions of sections 3.4.1, 3.4.2, and 5.5 and all other relevant provisions hereof shall apply. 5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the Company terminates this Agreement without Cause (as defined in section 5.1 hereof), or if the Executive terminates this Agreement for Good Reason (as defined in section 5.4 hereof), in addition to the Termination Entitlements, the Executive shall be entitled to receive all base salary due for the balance of the Term of Employment in a lump sum within thirty (30) days of the date of termination. 5.6 STOCK OPTION VESTING. The impact of the termination of this Agreement on the stock options referred to in section 3 hereof, shall be as described in section 3 and in the Stock Option Agreements under which such options shall be issued. 6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive acknowledges that employment by the Company will bring the Executive into close contact with the confidential affairs of the Company and its affiliates. In recognition of the foregoing, the Executive covenants and agrees that the Executive will keep secret all confidential matters of the Company and its affiliates, including, without limitation, the terms and provisions of this Agreement, and will not use for his own benefit or intentionally disclose such matters to anyone outside of the Company, either during or after the Term of Employment, except with the Company's consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder; (ii) the Executive may disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process; and (iii) the Executive may disclose the terms of this Agreement to his attorney(s), accountant(s) and/or financial advisor(s). 7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that in the course of employment hereunder, he may conceive of, discover, or create inventions or new contributions relating to the subject matter of his employment (all of the foregoing being collectively referred 6 to herein as "Work Product"). The Executive acknowledges that, unless the Company otherwise agrees, all of such Work Product shall be owned by and belong exclusively to the Company. The Executive shall further, unless the Company otherwise agrees in writing, (i) promptly disclose any such Work Product to the Company; (ii) assign to the Company, upon request, the entire rights to such Work Product to the extent not otherwise owned at law by the Company; and (iii) sign all papers reasonably necessary to carry out the foregoing. 8. REPRESENTATIONS. Both Executive and Company represent and warrant that each is not a party to any agreements or understandings which would prevent the fulfillment by such party of the terms of this Agreement or which would be violated by entering into this Agreement and performing such party's obligations hereunder. 9. NOTICES. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or three days after being mailed first-class, postage prepaid, by registered or certified mail, to the address of the recipient given herein (or such other address of which notice is given or, in the case of notice to the Executive, to the most recent address set forth on the records of the Company). 10. INDEMNIFICATION. The Company shall indemnify Executive against any and all judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with any action or proceeding, whether civil, criminal, judicial, legislative, administrative or investigative, or in connection with an appeal therein, by reason of the fact that Executive is or was a director, officer, employee, representative or agent of the Company; provided, however, that no such indemnification shall be made to Executive if an adverse judgment or other final adjudication establishes that the acts of Executive were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated. Without limiting the foregoing, Executive shall also be entitled to indemnification by the Company against any liability or damage, 7 including attorney's fees and liabilities under federal and state securities laws, arising from any act or omission by Executive provided such act or omission was reasonably believed to be within the scope of Executive's authority or was taken upon advice of the accountants or legal counsel for the Company. The indemnification of Executive provided by this section 10 shall continue after Executive has ceased to be a director, officer, employee, representative or agent of the Company and shall inure to the benefit of Executive's heirs, executors, administrators and legal representatives. 11. GENERAL. 11.1 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of the State of Texas applicable to agreements made and to be wholly performed therein. 11.2 CAPTIONS. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties expressly acknowledge, represent and agree that this Agreement is fully integrated and contains and constitutes the complete and entire agreement and understanding of the parties with respect to the subject matters hereof and supersedes any and all agreements, understandings and discussions, whether written or oral, between the parties with respect to the subject matters hereof, other than the Proprietary Rights and Information Agreement being entered into simultaneously herewith. The parties further acknowledge, represent, and agree that neither has made any representations, promises or statements to induce the other party to enter into this Agreement, and each party specifically disclaims reliance, and represents that there has been no reliance, on any such representations, promises or statements. 11.4 ASSIGNABILITY. This Agreement and the parties' rights and obligations hereunder may not be assigned by Executive or the Company without the other's prior written consent. 8 11.5 AMENDMENTS; WAIVERS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and covenants hereof may be waived, only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provisions hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 CONSTRUCTION. No presumption will be made or inference drawn because the attorneys for one of the parties drafted this Agreement or because of its drafting history. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. DigitalConvergence.com Inc. By: /s/ J. Jovan Philyaw ------------------------------------ Its: C.E.O. ------------------------------------ GREGORY LERMAN Signature: /s/ Gregory D. Lerman ------------------------------ Address: 2410 Country Trails Dr. ------------------------------ Safety Harbor, FL 34695 ------------------------------ 9 EX-10.3-1 11 EXHIBIT 10.3.1 EMPLOYMENT AGREEMENT AGREEMENT made as of August 16, 1999, by and between DigitalConvergence.com Inc., a corporation incorporated under the laws of the state of Delaware, with its principal place of business at 4264 Kellway Circle, Addison, Texas 75001 (the "Company"), and SCOTT CARLIN, residing at the address set forth at the end of this Agreement (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive desire to set forth the terms and conditions of the Executive's employment by the Company; NOW, THEREFORE, the parties hereto agree as follows: 1. TERM OF EMPLOYMENT. The Executive's employment under this Agreement shall be for a term commencing on October 4, 1999 and terminating on October 3, 2002, subject to earlier termination as provided in section 5 hereof (the "Term of Employment"). Each year of the Term of Employment is referred to herein as a "Contract Year." 2. EMPLOYMENT. During the Term of Employment, the Company shall employ the Executive as President, Media, and the Executive shall serve in such position, perform such services and have such authority, functions, duties, powers and responsibilities as ordinarily are associated with such title. The Executive shall report solely to the President, CEO and Board of Directors of the Company. The Executive shall faithfully and diligently serve the Company and shall devote all of his business time, attention, skill and efforts thereto; provided, that the Executive may manage his passive investments and be involved in charitable interests. The Executive shall be based in New York City. 3. COMPENSATION AND OTHER REMUNERATION. 3.1 BASE SALARY. The Company shall pay to the Executive during the Term of Employment base salary at the annual rate of Two Hundred Fifty Thousand Dollars ($250,000); provided, that Executive's base salary shall be increased to Four Hundred Thousand Dollars ($400,000) at such time as the Company closes a financing or financings which raise(s) an aggregate of $40 million; provided further, that Executive's base salary shall be further increased to a level to be negotiated in good faith at such time as the Company completes an initial public offering. Base salary will be paid in accordance with the customary payroll practices of the Company and shall be subject to required payroll deductions and withholdings. The compensation due to Executive hereunder shall be due and payable notwithstanding any compensation which Executive may earn from any other entity or outside source. 3.2 BONUS. The Executive shall be eligible to receive a bonus in respect of each Contract Year in such amount, if any, as may be determined by the Company's board of directors. 3.3 VACATION. The Executive shall be entitled to a reasonable number of days of vacation during each Contract Year, scheduled in advance with the Company to avoid excessive disruption of the Company's operations. 3.4 STOCK OPTIONS. 3.4.1. Pursuant to one or more stock option agreements (hereafter referred to as the "Stock Option Agreement") dated the date hereof, the Company shall grant to Executive stock options, under and pursuant to the Company's 1999 Stock Option Plan, to purchase one thousand five hundred (1,500) shares of its common stock, $.01 par value ("Common Stock"), at the price of Two Thousand Eighty-Five Dollars ($2,085) per share. Twenty five percent (25%) of these options will vest immediately upon grant, and the balance will vest in thirds on the last day of the first, second and third Contract Year, provided Executive is employed on such dates, except as otherwise provided in the last sentence hereof. The Stock Option Agreement will provide that the maximum number of options which may be issued in the form of incentive stock options pursuant to Section 422 of the Internal Revenue Code will be so issued, with the balance of the options granted pursuant hereto to be issued as non-qualified options. The Stock Option Agreement will further provide that if the Executive dies during the Term of Employment or if the Company terminates this Agreement due to his disability (as described below) or without "Cause" (as defined below), or the Executive terminates this Agreement for "Good Reason" (as defined below), all unvested options shall immediately become exercisable. 3.4.2. Pursuant to a second Stock Option Agreement dated the date hereof, the Company shall grant to Executive stock options, under and pursuant to the Company's 1999 Stock Option Plan, to purchase two hundred fifty (250) shares of Common Stock at the price of Two Thousand Eighty-Five Dollars ($2,085) per share. The Stock Option Agreement will provide that the maximum number of options which may be issued in the form of incentive stock options pursuant to Section 422 of the Internal Revenue Code will be so issued, with the balance of the options granted pursuant hereto to be issued as non-qualified options. Such options shall become fully vested (i) upon satisfaction of the performance criteria described in Exhibit A, annexed hereto, or (ii) if the Executive dies or if the Company terminates this Agreement due to his disability (as described below) or without "Cause" (as defined below) or the Executive terminates this Agreement for "Good Reason" (as defined below), if such event occurs prior to the fulfillment of such performance criteria. 3.4.3 All vested options will be exercisable for a period of ten (10) years from the date of grant, regardless of whether this Agreement has terminated. Any options granted in the form of incentive stock options which are not exercised within three (3) months of the termination of employment (other than due to death or disability) or twelve (12) month in the event of termination due to disability automatically shall be converted into non-qualified options. 4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES. 4.1 BENEFITS. The Executive shall participate in all benefit plans of the Company generally available to its employees and/or to any senior executive of the Company, whether now existing or hereafter established (collectively, the "Benefit Plans"). The extent of Executive's participation in the Benefit Plans shall be at the same level as the most senior executives of the Company. Notwithstanding the foregoing, Company shall provide comprehensive medical insurance for Executive, his wife and his minor children. 4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses incurred by the Executive in accordance with the Company's policies will be reimbursed upon the presentation of receipts. 4.3 MOVING AND CERTAIN OTHER EXPENSES. 4.3.1 The Company will pay or reimburse the Executive for the expenses of his moving from California to New York, up to Twenty-Five Thousand Dollars ($25,000). 4.3.2 The Company will reimburse the Executive for the rental cost ($3,250 per month) of his Los Angeles apartment (including utilities of approximately $250 per month) until the Executive is able to arrange for the possessions in such apartment to be moved to the Executive's permanent home in New York City; provided, however, that such reimbursement will not extend beyond December 31, 1999. 4.4 INSURANCE. During any period that the Executive is rendering any services hereunder, the Company agrees to cause Executive to be named as an insured under a director and officer liability insurance policy which the Company shall obtain. 5. TERMINATION. 5.1 TERMINATION FOR CAUSE. 5.1.1 The Company may terminate this Agreement and all of the Company's obligations hereunder, other than its obligations set forth below in this section 5.1, for "Cause." "Cause" shall mean that the Executive (i) is convicted of a felony, or any misdemeanor involving fraud or theft, (ii) engages in dishonest behavior which materially adversely affects the Company, (iii) commits a willful and intentional act having the effect of materially injuring the reputation or business of the Company, including, without limitation, habitual use of illegal drugs or alcohol or (iv) materially breaches this Agreement and, after having been given written notice thereof by the Company, fails to correct such breach within ten (10) days after receipt of such notice. 5.1.2 In the event of termination by the Company for Cause, the Company shall have no further obligations to the Executive other than to pay (i) base salary accrued through the effective date of termination; and (ii) all other benefits and amounts which may be then due the Executive under the general provisions then in effect of any Benefit Plan ((i) and (ii) collectively, the "Termination Entitlements"). 5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate upon the Executive's death, and in such event the Company shall have no further obligations hereunder, other than to pay to the Executive's estate the Termination Entitlements. 5.3 TERMINATION DUE TO DISABILITY. If, during the Term of Employment, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is unable to perform the material functions of his position for periods aggregating one hundred thirty five (135) days in any twelve (12) month period, the Company shall be entitled to terminate this Agreement upon written notice to the Executive given at any time thereafter during which the Executive is still so disabled. Upon such termination, the Term of Employment shall end, and the Company shall have no further obligations hereunder other than to pay to the Executive the Termination Entitlements. 5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean any of the following: (i) a material breach by the Company of this Agreement, (ii) a material diminution of Executive's authority, duties or responsibilities with the Company, (iii) the assignment to Executive of duties materially inconsistent with Executive's position with the Company, unless otherwise approved by the Executive, or (iv) a change in the reporting structure as specified in section 2.1 hereof, unless otherwise approved by the Executive. If there exists an event or condition that constitutes Good Reason, and such event or condition is not cured within ten (10) days following Executive's giving the Company notice thereof, Executive at any time thereafter shall have the right to terminate this Agreement by giving the Company written notice of such termination, and upon his doing so, the provisions of sections 3.4.1, 3.4.2 and 5.5 and all other relevant provisions hereof shall apply. 5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the Company terminates this Agreement without Cause (as defined in section 5.1 hereof), or if the Executive terminates this Agreement for Good Reason (as defined in section 5.4 hereof), in addition to the Termination Entitlements, the Executive shall be entitled to receive all base salary due for the balance of the Term of Employment in a lump sum within thirty (30) days of the date of termination. 5.6 STOCK OPTION VESTING. The impact of the termination of this Agreement on the stock options referred to in section 3 hereof, shall be as described in section 3 and in the Stock Option Agreements under which such options shall be issued. 6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive acknowledges that employment by the Company will bring the Executive into close contact with the confidential affairs of the Company and its affiliates. In recognition of the foregoing, the Executive covenants and agrees that the Executive will keep secret all confidential matters of the Company and its affiliates, including, without limitation, the terms and provisions of this Agreement, and will not use for his own benefit or intentionally disclose such matters to anyone outside of the Company, either during or after the Term of Employment, except with the Company's consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder; (ii) the Executive may disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process; and (iii) the Executive may disclose the terms of this Agreement to his attorney(s), accountant(s) and/or financial advisor(s). 7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that in the course of employment hereunder, he may conceive of, discover, or create inventions or new contributions relating to the subject matter of his employment (all of the foregoing being collectively referred to herein as "Work Product"). The Executive acknowledges that, unless the Company otherwise agrees, all of such Work Product shall be owned by and belong exclusively to the Company. The Executive shall further, unless the Company otherwise agrees in writing, (i) promptly disclose any such Work Product to the Company; (ii) assign to the Company, upon request, the entire rights to such Work Product to the extent not otherwise owned at law by the Company; and (iii) sign all papers reasonably necessary to carry out the foregoing. 8. REPRESENTATIONS. Both Executive and Company represent and warrant that each is not a party to any agreements or understandings which would prevent the fulfillment by such party of the terms of this Agreement or which would be violated by entering into this Agreement and performing such party's obligations hereunder. 9. NOTICES. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or three days after being mailed first-class, postage prepaid, by registered or certified mail, to the address of the recipient given herein (or such other address of which notice is given or, in the case of notice to the Executive, to the most recent address set forth on the records of the Company). 10. INDEMNIFICATION. The Company shall indemnify Executive against any and all judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with any action or proceeding, whether civil, criminal, judicial, legislative, administrative or investigative, or in connection with an appeal therein, by reason of the fact that Executive is or was a director, officer, employee, representative or agent of the Company; provided, however, that no such indemnification shall be made to Executive if an adverse judgment or other final adjudication establishes that the acts of Executive were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated. Without limiting the foregoing, Executive shall also be entitled to indemnification by the Company against any liability or damage, including attorney's fees and liabilities under federal and state securities laws, arising from any act or omission by Executive provided such act or omission was reasonably believed to be within the scope of Executive's authority or was taken upon advice of the accountants or legal counsel for the Company. The indemnification of Executive provided by this section 10 shall continue after Executive has ceased to be a director, officer, employee, representative or agent of the Company and shall inure to the benefit of Executive's heirs, executors, administrators and legal representatives. 11. GENERAL. 11.1 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of the State of New York applicable to agreements made and to be wholly performed therein. 11.2 CAPTIONS. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties expressly acknowledge, represent and agree that this Agreement is fully integrated and contains and constitutes the complete and entire agreement and understanding of the parties with respect to the subject matters hereof and supersedes any and all agreements, understandings and discussions, whether written or oral, between the parties with respect to the subject matters hereof, other than the Proprietary Rights and Information Agreement being entered into simultaneously herewith and further described in section 11.7 hereof. The parties further acknowledge, represent, and agree that neither has made any representations, promises or statements to induce the other party to enter into this Agreement, and each party specifically disclaims reliance, and represents that there has been no reliance, on any such representations, promises or statements. 11.4 ASSIGNABILITY. This Agreement and the parties' rights and obligations hereunder may not be assigned by Executive or the Company without the other's prior written consent. 11.5 AMENDMENTS; WAIVERS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and covenants hereof may be waived, only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provisions hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 CONSTRUCTION. No presumption will be made or inference drawn because the attorneys for one of the parties drafted this Agreement or because of its drafting history. 11.7 PROPRIETARY RIGHTS AND INFORMATION AGREEMENT. The parties acknowledge that simultaneously with the execution and delivery hereof, the Executive is executing and delivering a Proprietary Rights and Information Agreement ("PRIA"), and that paragraph III(d) thereof contains a twelve (12) month post-termination restriction on any activity that "competes with the business of the Company...." The parties hereby confirm their mutual understanding that the quoted phrase will be deemed to apply only to activities which compete with the business of the Company by virtue of the use of technology similar to, or functionally the equivalent of, the technology employed by the Company. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. DigitalConvergence.com Inc. DigitalConvergence.com Inc. By: /s/ J. Jovan Philyaw ---------------------- Its: C.E.O. ---------------------- SCOTT CARLIN Signature: /s/ Scott Carlin ----------------- Address:________________________ ________________________ EX-10.3-2 12 EXHIBIT 10.3.2 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to Employment Agreement (the "First Amendment") is dated this 16th day of August, 1999, by and between DigitalConvergence.com Inc., a Delaware corporation (the "Company"), and Scott Carlin (the "Executive"). WHEREAS the Company and the Executive have executed that certain Employment Agreement dated August 16,1999 relating to the employment of Executive as the President, Media, of the Company (the "Base Agreement"); and WHEREAS the parties hereto desire to amend the Base Agreement in accordance with the provisions of Section 11.5 thereof. NOW, THEREFORE, BE IT RESOLVED that the Base Agreement is hereby amended as follows: 1. The first full sentence of subsection 3.4.1. is hereby amended to read in its entirety as follows: "3.4.1. Pursuant to one or more stock option agreements (hereafter referred to as the "Stock Option Agreement") dated the date hereof, the Company shall grant to Executive stock options, under and pursuant to the Company's 1999 Stock Option Plan, to purchase one thousand seven hundred fifty (1,750) shares of its common stock, $.01 par value ("Common Stock"), at a price of Two Thousand Eighty-Five Dollars ($2,085) per share." 2. Subsection 3.4.2. is hereby deleted in its entirety. All references in the Base Agreement to Section 3.4.2. are hereby deleted. 3. The balance of the Base Agreement shall remain in full force and effect from and after the date hereof. IN WITNESS WHEREOF the parties hereto have duly executed this Agreement as the date first above written. DIGITALCONVERGENCE.COM INC. By: /s/ Michael Garin ------------------- Its: President ------------------- SCOTT CARLIN Signature: /s/ Scott Carlin ----------------- EX-10.4 13 EXHIBIT 10.4 EMPLOYMENT AGREEMENT AGREEMENT made as of January 3, 2000, by and between DigitalConvergence. com Inc., a corporation incorporated under the laws of the state of Delaware, with its principal place of business at 9101 N. Central Expressway, 6th Floor, Dallas, Texas, 75231 (the "Company"), and DONALD E. WELSH residing at the address set forth at the end of this Agreement (the "Employee"). W I T N E S S E T H: -------------------- WHEREAS, the Company and the Employee desire to set forth the terms and conditions of the Employee's employment by the Company; NOW, THEREFORE, the parties hereto agree as follows: 1. TERM OF EMPLOYMENT. The Employee's employment under this Agreement shall be for a term commencing on January 3, 2000 and terminating on December 31, 2002, subject to earlier termination as provided in Section 5 hereof (the "Term of Employment"). Each year of the Term of Employment is referred to herein as a "Contract Year." 2. EMPLOYMENT. 2.1 During the Term of Employment, the Company shall employ the Employee as its Director/Magazine Sales, and the Employee shall serve in such position, perform such services and have such authority, functions, duties, powers and responsibilities as ordinarily are associated with such title and as shall be designated by the President/Media Group of the Company or others to whom the Employee reports from time to time. The Employee shall faithfully and diligently serve the Company and, other than as set forth hereinafter in this Section 2.1, shall devote all of his business time, attention, skill and efforts thereto; provided, that the Employee may manage his passive investments and be involved in charitable interests so long as they do not interfere or conflict with the performance of the Employee's duties hereunder. The Company and the Employee acknowledge that the Employee has executed a one-year Employment Agreement with Newsweek Budget Travel, Inc. dated December 20, 1999 (the "Newsweek Agreement") which agreement requires by its terms that Employee dedicate up to fifty percent (50%) of his professional time to the business and affairs of Newsweek Budget Travel, Inc. and its affiliates during the year 2000. The Company acknowledges that the Employee may fulfill his obligations under the Newsweek Agreement. 3. COMPENSATION AND OTHER REMUNERATION. 3.1 BASE SALARY. The Company shall pay to the Employee during the first Contract Year of this Agreement base salary at the annual rate of Seventy-Five Thousand Dollars ($75,000) and thereafter, during the remainder of the Term of Employment, base salary at the annual rate of Two Hundred Thousand Dollars ($200,000); provided that Employee's base salary may be increased at such time as the Board of Directors of the Company deems appropriate. Base salary will be paid in accordance with the customary payroll practices of the Company and shall be subject to required payroll deductions and withholdings. 3.2 BONUS. The Employee shall be eligible to receive a bonus in respect of each Contract Year in such amount, if any, as may be determined by the Company's Board of Directors. 3.3 VACATION. The Employee shall be entitled to a reasonable number of days of vacation during each Contract Year (not to exceed fifteen (15) days in the aggregate), scheduled in advance with the Company to avoid excessive disruption of the Company's operations. 3.4 STOCK OPTIONS. 3.4.1 Pursuant to one or more stock option agreements (hereinafter referred to as the "Stock Option Agreement") dated the date hereof, the Company has granted to Employee stock options, under and pursuant to the Company's 1999 Stock Option Plan, to purchase one hundred twenty-five thousand (125,000) shares of the Company's common stock, $.01 par value ("Common Stock"), at the price of Five Dollars ($5.00) per share. The Company and the Employee recognize and acknowledge that the Company executed a split of its Common Stock on the effective date hereof and that the shares of Common Stock subject to the Stock Option Agreement are on a post-split basis. One-third (33.33%) of these options will vest on each of the last day of the first, second and third Contract Year, provided Employee is employed with the Company on each such date, subject to and except as otherwise provided in Section 5.5 hereof. The Stock Option Agreement will provide the following: (a) the maximum number of options which may be issued in the form of incentive stock options pursuant to Section 422 of the Internal Revenue Code will be so issued, with the balance of the options granted pursuant to Section 3.4.1. to be issued as non-qualified options; (b) all vested options will be exercisable for a period of ten (10) years from the date of grant, regardless of whether this Agreement has terminated. This provision shall apply to any options granted in the form of incentive stock options notwithstanding that they will not be treated for Federal income tax purposes as incentive stock options unless they are exercised within the time limits provided by the Internal Revenue Code; (c) notwithstanding any provision of the Company's 1999 Stock Option Plan to the contrary, Employee shall not forfeit any rights to any vested options for any reason unless this Agreement is terminated by the Company for "Cause", as defined in Section 5.1 of this Agreement. 4. BENEFITS: REIMBURSEMENT OF BUSINESS EXPENSES. 4.1 BENEFITS. From and after the expiration of the first Contract Year of this Agreement, the Employee shall participate in all benefit plans of the Company generally available to its employees of the Company, whether now existing or hereafter established (collectively, the "Benefit Plans"). 4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses incurred by the Employee in accordance with the Company's policies will be reimbursed upon the presentation of receipts. Business-related air travel shall be such class as is determined by Employee in his reasonable discretion. 5. TERMINATION. 5.1 TERMINATION FOR CAUSE. 5.1.1 The Company may terminate this Agreement and all of the Company's obligations hereunder, other than its obligations set forth below in this Section 5.1, for "Cause." "Cause" shall mean that the Employee (i) is convicted of a felony, or any misdemeanor involving fraud or theft, (ii) engages in dishonest behavior which materially adversely affects the Company, (iii) commits a willful and intentional act having the effect of materially injuring the reputation or business of the Company, including, without limitation, habitual use of illegal drugs or alcohol or (iv) materially breaches this Agreement and, after having been given written notice thereof by the Company, fails to correct such breach within ten (10) days after receipt of such notice. 5.1.2 In the event of termination by the Company for Cause, the Company shall have no further obligations to the Employee other than to pay (i) base salary accrued through the effective date of termination; and (ii) all other benefits and amounts which may be then due the Employee under the general provisions then in effect of any Benefit Plan ((i) and (ii) collectively, the "Termination Entitlements"). 5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate upon the Employee's death, and in such event the Company shall have no further obligations hereunder, other than to pay to the Employee's estate the Termination Entitlements. 5.3 TERMINATION DUE TO DISABILITY. During the Term of Employment, the Employee shall become physically or mentally disabled, whether totally or partially, so that he is unable to perform the material functions of his position for periods aggregating ninety (90) days in any twelve (12) month period, the Company shall be entitled to terminate this Agreement upon written notice to the Employee given at any time thereafter during which the Employee is still so disabled. Upon such termination, the Terms of Employment shall end, and the Company shall have no further obligations hereunder other than to pay to the Employee the Termination Entitlements. 5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean any of the following: (i) a material breach by the Company of this Agreement, (ii) a material diminution of Employee's authority, duties or responsibilities with the Company or (iii) the assignment to Employee of duties materially inconsistent with Employee's position with the Company, unless otherwise approved by the Employee. If there exists an event or condition that constitutes Good Reason, and such event or condition is not cured within ten (10) days following Employee's giving the Company notice thereof, Employee at any time thereafter shall have the right to terminate this Agreement by giving the Company written notice of such termination, and upon his doing so, the provisions of Section 5.5 shall apply. 5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. The Company may terminate this Agreement without Cause (as defined in Section 5.1 hereof) upon giving written notice thereof to the Employee. If the Company terminates this Agreement without Cause, or if the Employee terminates this Agreement for Good Reason (as defined in Section 5.4 hereof), in addition to the Termination Entitlements: (i) the Employee shall be entitled to receive six months of his monthly base salary then in effect payable on ordinary payroll dates over the ensuing six months following termination; and (ii) for the purposes of determining the date upon which options shall vest pursuant to Section 3.4.1 of this Agreement, the Employee shall be deemed to have been employed continuously by the Company until the date which is six months after the effective date of the termination of the Agreement pursuant to this Section 5.5. 6. PROTECTION OF CONFIDENTIAL INFORMATION. The Employee acknowledges that employment by the Company will bring the Employee into close contact with the confidential affairs of the Company and its affiliates. In recognition of the foregoing, the Employee covenants and agrees that the Employee will keep secret all confidential matters of the Company and its affiliates, including, without limitation, the terms and provisions of this Agreement, and will not use for his own benefit or intentionally disclose such matters to anyone outside of the Company, either during or after the Term of Employment, except with the Company's consent, provided that (i) the Employee shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Employee's breach of his obligations hereunder; (ii) the Employee may disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process; and (iii) the Employee may disclose the terms of this Agreement to his attorney(s), accountant(s) and/or financial advisor(s). 7. OWNERSHIP OF WORK PRODUCT. The Employee acknowledges that in the course of employment hereunder, he may conceive of, discover, or create inventions or new contributions relating to the subject matter of his employment (all of the foregoing being collectively referred to herein as "Work Product"). The Employee acknowledges that, unless the Company otherwise agrees, all of such Work Product shall be owned by and belong exclusively to the Company. The Employee shall further, unless the Company otherwise agrees in writing, (i) promptly disclose any such Work Product to the Company; (ii) assign to the Company, upon request, the entire rights to such Work Product to the extent not otherwise owned at law by the Company; and (iii) sign all papers reasonably necessary to carry out the foregoing. 8. REPRESENTATIONS. Both Employee and Company represent and warrant that each is not a party to any agreements or understandings which would prevent the fulfillment by such party of the terms of this Agreement or which would be violated by entering into this Agreement and performing such party's obligations hereunder other than the Newsweek Agreement. 9. NOTICES. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, by overnight courier or three days after being mailed first-class, postage prepaid, by registered or certified mail, to the address of the recipient given herein (or such other address of which notice is given or, in the case of notice to the Employee, to the most recent address set forth on the records of the Company). 10. INDEMNIFICATION. The Company shall indemnify Employee against any and all judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees incurred in connection with any action or proceeding, whether civil, criminal, judicial, legislative, administrative or investigative, or in connection with an appeal therein, by reason of the fact that Employee is or was a director, officer, employee, representative or agent of the Company; provided, however, that no such indemnification shall be made to Employee if an adverse judgment or other final adjudication establishes that the acts of Employee were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated. Without limiting the foregoing, Employee shall also be entitled to indemnification by the Company against any liability or damage, including attorney's fees and liabilities under federal and state securities laws, arising from any act or omission by Employee provided such act or omission was reasonably believed to be within the scope of Employee's authority or was taken upon advice of the accountants or legal counsel for the Company. The indemnification of Employee provided by this Section 10 shall continue after Employee has ceased to be a director, officer, employee, representative or agent of the Company and shall inure to the benefit of Employee's heirs, executors, administrators and legal representatives. 11. GENERAL. 11.1 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of the State of Texas applicable to agreements made and to be wholly performed therein. 11.2 CAPTIONS. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties expressly acknowledge, represent and agree that this Agreement is fully integrated and contains and constitutes the complete and entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all agreements, understandings and discussions, whether written or oral, between the parties with respect to the subject matters hereof, other than the Proprietary Rights and Information Agreement and the Stock Option Agreement being entered into simultaneously herewith. The parties further acknowledge, represent, and agree that neither has made any representations, promises or statements to induce the other party to enter into this Agreement, and each party specifically disclaims reliance, and represents that there has been no reliance, on any such representations, promises or statements. 11.4 ASSIGNABILITY. This Agreement and the parties' rights and obligations hereunder may not be assigned by Employee or the Company without the other's prior written consent. 11.5 AMENDMENTS; WAIVERS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and covenants hereof may be waived, only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provisions hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 CONSTRUCTION. No presumption will be made or inference drawn because the attorneys for one of the parties drafted this Agreement or because of its drafting history. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. DigitalConvergence.com Inc. By: /s/ Michael Garin --------------------- Its: President & COO --------------------- DONALD E. WELSH Signature: /s/ Donald E. Welsh --------------------- Address: 501 East 79th Street --------------------- New York, New York 10021 ------------------------- (212) 988-8921 -------------- EX-10.5 14 EXHIBIT 10.5 EMPLOYMENT AGREEMENT AGREEMENT made as of December 15, 1999, by and between DigitalConvergence.com Inc., a corporation incorporated under the laws of the state of Delaware, with its principal place of business at 4264 Kellway Circle, Addison, Texas 75001 (the "Company"), and DOUG DAVIS residing at the address set forth at the end of this Agreement (the "Executive"). WITNESSETH: WHEREAS, the Company and the Executive desire to set forth the terms and conditions of the Executive's employment by the Company; NOW, THEREFORE, the parties hereto agree as follows: 1. TERM OF EMPLOYMENT. The Executive's employment under this Agreement shall be for a term commencing on December 15, 1999 and terminating on December 14, 2002, subject to earlier termination as provided in section 5 hereof (the "Term of Employment"). Each year of the Term of Employment is referred to herein as a "Contract Year." 2. EMPLOYMENT 2.1 During the Term of Employment, the Company shall employ the Executive as its President/Technology Group, and the Executive shall serve in such position, perform such services and have such authority, functions, duties, powers and responsibilities as ordinarily are associated with such title and as shall be designated by the President and/or CEO of the Company. The Executive shall faithfully and diligently serve the Company and shall devote all of his business time, attention, skill and efforts thereto; provided, that the Executive may manage his passive investments and be involved in charitable interests so long as they do not interfere or conflict with the performance of the Executive's duties hereunder. The Executive shall be based in Dallas, Texas. 3. COMPENSATION AND OTHER REMUNERATION. 3.1 BASE SALARY. The Company shall pay to the Executive during the Term of Employment base salary at the annual rate of One Hundred Seventy-Five Thousand Dollars ($175,000); provided that Executive's base salary may be increased at such time as the Board of Directors of the Company deems appropriate. Base salary will be paid in accordance with the customary payroll practices of the Company and shall be subject to required payroll deductions and withholdings. 3.2 BONUS. The Executive shall be eligible to receive a bonus in respect of each Contract Year in such amount, if any, as may be determined by the Company's board of directors. 3.3 VACATION. The Executive shall be entitled to a reasonable number of days of vacation during each Contract Year (not to exceed fifteen (15) days in the aggregate), scheduled in advance with the Company to avoid excessive disruption of the Company's operations. 3.4 STOCK OPTIONS. 3.4.1. Pursuant to one or more stock option agreements (hereafter referred to as the "Stock Option Agreement") dated the date hereof, the Company shall grant to Executive stock options, under and pursuant to the Company's 1999 Stock Option Plan, to purchase seven hundred fifty (750) shares of the Company's common stock, $.01 par value ("Common Stock"), at the price of Three Thousand One Hundred Fifty Dollars ($3,150) per share. Twenty five percent (25%) of these options will vest on the date hereof, and the balance will vest in thirds on the last day of the first, second and third Contract Year, provided Executive is employed with the Company on such dates. The Stock Option Agreement will provide that the maximum number of options which may be issued in the form of incentive stock options pursuant to Section 422 of the Internal Revenue Code will be so issued, with the balance of the options granted pursuant hereto to be issued as nonqualified options. 3.4.2. All vested options will be exercisable for a period of ten (10) years from the date of grant, regardless of whether this Agreement has terminated. Any options granted in the form of incentive stock options which are not exercised within three (3) months of the termination of employment (other than due to death or disability) or twelve (12) month in the event of termination due to disability automatically shall be converted into non-qualified options. 4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES. 4.1 BENEFITS. The Executive shall participate in all benefit plans of the Company generally available to its employees of the Company, whether now existing or hereafter established (collectively, the "Benefit Plans"). 4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses incurred by the Executive in accordance with the Company's policies will be reimbursed upon the presentation of receipts. Business-related air travel shall be such class as is determined by Executive in his reasonable discretion. 5. TERMINATION. 5.1 TERMINATION FOR CAUSE. 5.1.1 The Company may terminate this Agreement and all of the Company's obligations hereunder, other than its obligations set forth below in this section 5.1, for "Cause." "Cause" shall mean that the Executive (i) is convicted of a felony, or any misdemeanor involving fraud or theft, (ii) engages in dishonest behavior which materially adversely affects the Company, (iii) commits a willful and intentional act having the effect of materially injuring the reputation or business of the Company, including, without limitation, habitual use of illegal drugs or alcohol or (iv) materially breaches this Agreement and, after having been given written notice thereof by the Company, fails to correct such breach within ten (10) days after receipt of such notice. 5.1.2 In the event of termination by the Company for Cause, the Company shall have no further obligations to the Executive other than to pay (i) base salary accrued through the effective date of termination; and (ii) all other benefits and amounts which may be then due the Executive under the general provisions then in effect of any Benefit Plan ((i) and (ii) collectively, the "Termination Entitlements"). 5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate upon the Executive's death, and in such event the Company shall have no further obligations hereunder, other than to pay to the Executive's estate the Termination Entitlements. 5.3 TERMINATION DUE TO DISABILITY. If, during the Term of Employment, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is unable to perform the material functions of his position for periods aggregating ninety (90) days in any twelve (12) month period, the Company shall be entitled to terminate this Agreement upon written notice to the Executive given at any time thereafter during which the Executive is still so disabled. Upon such termination, the Term of Employment shall end, and the Company shall have no further obligations hereunder other than to pay to the Executive the Termination Entitlements. 5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean any of the following: (i) a material breach by the Company of this Agreement, (ii) a material diminution of Executive's authority, duties or responsibilities with the Company or (iii) the assignment to Executive of duties materially inconsistent with Executive's position with the Company, unless otherwise approved by the Executive. If there exists an event or condition that constitutes Good Reason, and such event or condition is not cured within ten (10) days following Executive's giving the Company notice thereof, Executive at any time thereafter shall have the right to terminate this Agreement by giving the Company written notice of such termination, and upon his doing so, the provisions of section 5.5 shall apply. 5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the Company terminates this Agreement without Cause (as defined in section 5.1 hereof), or if the Executive terminates this Agreement for Good Reason (as defined in section 5.4 hereof), in addition to the Termination Entitlements, the Executive shall be entitled to receive six months of monthly base salary payable on ordinary payroll dates over the ensuing six months following termination. 6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive acknowledges that employment by the Company will bring the Executive into close contact with the confidential affairs of the Company and its affiliates. In recognition of the foregoing, the Executive covenants and agrees that the Executive will keep secret all confidential matters of the Company and its affiliates, including, without limitation, the terms and provisions of this Agreement, and will not use for his own benefit or intentionally disclose such matters to anyone outside of the Company, either during or after the Term of Employment, except with the Company's consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder; (ii) the Executive may disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process; and (iii) the Executive may disclose the terms of this Agreement to his attorney(s), accountant(s) and/or financial advisor(s). 7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that in the course of employment hereunder, he may conceive of, discover, or create inventions or new contributions relating to the subject matter of his employment (all of the foregoing being collectively referred to herein as "Work Product"). The Executive acknowledges that, unless the Company otherwise agrees, all of such Work Product shall be owned by and belong exclusively to the Company. The Executive shall further, unless the Company otherwise agrees in writing, (i) promptly disclose any such Work Product to the Company; (ii) assign to the Company, upon request, the entire rights to such Work Product to the extent not otherwise owned at law by the Company; and (iii) sign all papers reasonably necessary to carry out the foregoing. 8. REPRESENTATIONS. Both Executive and Company represent and warrant that each is not a party to any agreements or understandings which would prevent the fulfillment by such party of the terms of this Agreement or which would be violated by entering into this Agreement and performing such party's obligations hereunder. 9. NOTICES. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or three days after being mailed first-class, postage prepaid, by registered or certified mail, to the address of the recipient given herein (or such other address of which notice is given or, in the case of notice to the Executive, to the most recent address set forth on the records of the Company). 10. INDEMNIFICATION. The Company shall indemnify Executive against any and all judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with any action or proceeding, whether civil, criminal, judicial, legislative, administrative or investigative, or in connection with an appeal therein, by reason of the fact that Executive is or was a director, officer, employee, representative or agent of the Company; provided, however, that no such indemnification shall be made to Executive if an adverse judgment or other final adjudication establishes that the acts of Executive were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated. Without limiting the foregoing, Executive shall also be entitled to indemnification by the Company against any liability or damage, including attorney's fees and liabilities under federal and state securities laws, arising from any act or omission by Executive provided such act or omission was reasonably believed to be within the scope of Executive's authority or was taken upon advice of the accountants or legal counsel for the Company. The indemnification of Executive provided by this section 10 shall continue after Executive has ceased to be a director, officer, employee, representative or agent of the Company and shall inure to the benefit of Executive's heirs, executors, administrators and legal representatives. 11. GENERAL. 11.1 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of the State of Texas applicable to agreements made and to be wholly performed therein. 11.2 CAPTIONS. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties expressly acknowledge, represent and agree that this Agreement is fully integrated and contains and constitutes the complete and entire agreement and understanding of the parties with respect to the subject matters hereof and supersedes any and all agreements, understandings and discussions, whether written or oral, between the parties with respect to the subject matters hereof, other than the Proprietary Rights and Information Agreement being entered into simultaneously herewith. The parties further acknowledge, represent, and agree that neither has made any representations, promises or statements to induce the other party to enter into this Agreement, and each party specifically disclaims reliance, and represents that there has been no reliance, on any such representations, promises or statements. 11.4 ASSIGNABILITY. This Agreement and the parties' rights and obligations hereunder may not be assigned by Executive or the Company without the other's prior written consent. 11.5 AMENDMENTS; WAIVERS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and covenants hereof may be waived, only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provisions hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 CONSTRUCTION. No presumption will be made or inference drawn because the attorneys for one of the parties drafted this Agreement or because of its drafting history. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. DigitalConvergence.com Inc. By: /s/ Michael Garin ----------------- Its: President --------- DOUG DAVIS Signature:/s/ Doug Davis -------------- Address: 1601 Branwood --------------- Dallas, TX 75243 ---------------------- EX-10.6 15 EXHIBIT 10.6 EMPLOYMENT AGREEMENT AGREEMENT made as of January 1, 2000, by and between DigitalConvergence.com Inc., a corporation incorporated under the laws of the state of Delaware, with its principal place of business at One Dallas Center, 350 N. St. Paul, Suite 200, Dallas, Texas, 75201 (the "Company"), and Patrick V. Stark residing at the address set forth at the end of this Agreement (the "Executive"). WITNESSETH: WHEREAS, the Company and the Executive desire to set forth the terms and conditions of the Executive's employment by the Company; NOW, THEREFORE, the parties hereto agree as follows: 1. TERM OF EMPLOYMENT. The Executive's employment under this Agreement shall be for a term commencing on January 1, 2000 and terminating on December 31, 2002, subject to earlier termination as provided in section 5 hereof (the "Term of Employment"). Each year of the Term of Employment is referred to herein as a "Contract Year." 2. EMPLOYMENT 2.1 During the Term of Employment, the Company shall employ the Executive as its Executive Vice-President, and the Executive shall serve in such position, perform such services and have such authority, functions, duties, powers and responsibilities as ordinarily are associated with such title and as shall be designated by the President and/or CEO of the Company. The Executive shall faithfully and diligently serve the Company and shall devote all of his business time, attention, skill and efforts thereto; provided, that the Executive may manage his passive investments, act as a non-executive director of companies in which Executive has an investment and be involved in charitable interests so long as they do not interfere or conflict with the performance of the Executive's duties hereunder. The parties also recognize the Executive will maintain a relationship with the firm of Kane, Russell, Coleman & Logan, P.C. as "Of Counsel", and will continue to perform services on a part-time basis to such firm for the purpose of finalizing matters to which the Executive has previously devoted time and effort at such firm. 3. COMPENSATION AND OTHER REMUNERATION. 3.1 BASE SALARY. The Company shall pay to the Executive during the Term of Employment base salary at the annual rate of Two Hundred Fifty Thousand Dollars ($250,000); provided that Executive's base salary may be increased at such time as the Company completes an initial public offering, to a level to be negotiated in good faith at that time. Base salary will be paid in accordance with the customary payroll practices of the Company and shall be subject to required payroll deductions and withholdings. The compensation due to Executive hereunder shall be due and payable notwithstanding any compensation which Executive may earn from any other entity or outside source. 3.2 BONUS. The Executive shall be eligible to receive a bonus in respect of each Contract Year in such amount, if any, as may be determined by the Company's board of directors. 3.3 VACATION. The Executive shall be entitled to a reasonable number of days of vacation during each Contract Year, scheduled in advance with the Company to avoid excessive disruption of the Company's operations. 3.4 STOCK OPTIONS. 3.4.1. Pursuant to one or more stock option agreements (hereafter referred to as the "Stock Option Agreement") dated the date hereof, the Company shall grant to Executive stock options, under and pursuant to the Company's 1999 Stock Option Plan, to purchase one thousand (1,000) shares of the Company's common stock, $.O1 par value ("Common Stock"), at the price of Three Thousand One Hundred Fifty Dollars ($3,150) per share. Twenty five percent (25%) of these options will vest immediately upon grant, and the balance will vest in thirds on the last day of the first, second and third Contract Year, provided Executive is employed on such dates, except as otherwise provided in the last sentence hereof. The Stock Option Agreement will provide that the maximum number of options which may be issued in the form of incentive stock options pursuant to Section 422 of the Internal Revenue Code will be so issued, with the balance of the options granted pursuant hereto to be issued as non-qualified options. The Stock Option Agreement will further provide that if the Executive dies during the Term of Employment or if the Company terminates this Agreement due to his disability (as described below) or without "Cause" (as defined below), or the Executive terminates this Agreement for "Good Reason" (as defined below), all unvested options shall immediately become exercisable. 3.4.2. All vested options will be exercisable for a period of ten (10) years from the date of grant, regardless of whether this Agreement has terminated. Any options granted in the form of incentive stock options which are not exercised within three (3) months of the termination of employment (other than due to death or disability) or twelve (12) month in the event of termination due to disability automatically shall be converted into non-qualified options. 4. BENEFITS; REIMBURSEMENT OF BUSINESS EXPENSES. 4.1 BENEFITS. The Executive shall participate in all benefit plans of the Company generally available to its employees and/or to any senior executive of the Company, whether now existing or hereafter established (collectively, the "Benefit Plans"). The extent of Executive's participation in the Benefit Plans shall be at the same level as the most senior executives of the Company. 4.2 REIMBURSEMENT OF BUSINESS EXPENSES. Business expenses incurred by the Executive in accordance with the Company's policies will be reimbursed upon the presentation of receipts. Business-related air travel shall be such class as is determined by Executive in his reasonable discretion. 4.3 INSURANCE. During any period that the Executive is rendering any services hereunder, the Company agrees to cause Executive to be named as an insured under a director and officer liability insurance policy which the Company shall obtain. 5. TERMINATION. 5.1 TERMINATION FOR CAUSE. 5.1.1 The Company may terminate this Agreement and all of the Company's obligations hereunder, other than its obligations set forth below in this section 5.1, for "Cause." "Cause" shall mean that the Executive (i) is convicted of a felony, or any misdemeanor involving fraud or theft, (ii) engages in dishonest behavior which materially adversely affects the Company, (iii) commits a willful and intentional act having the effect of materially injuring the reputation or business of the Company, including, without limitation, habitual use of illegal drugs or alcohol or (iv) materially breaches this Agreement and, after having been given written notice thereof by the Company, fails to correct such breach within ten (10) days after receipt of such notice. 5.1.2 In the event of termination by the Company for Cause, the Company shall have no further obligations to the Executive other than to pay (i) base salary accrued through the effective date of termination; and (ii) all other benefits and amounts which may be then due the Executive under the general provisions then in effect of any Benefit Plan ((i) and (ii) collectively, the "Termination Entitlements"). 5.2 TERMINATION DUE TO DEATH. This Agreement shall terminate upon the Executive's death, and in such event the Company shall have no further obligations hereunder, other than to pay to the Executive's estate the Termination Entitlements. 5.3 TERMINATION DUE TO DISABILITY. If, during the Term of Employment, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is unable to perform the material functions of his position for periods aggregating one hundred thirty five (135) days in any twelve (12) month period, the Company shall be entitled to terminate this Agreement upon written notice to the Executive given at any time thereafter during which the Executive is still so disabled. Upon such termination, the Term of Employment shall end, and the Company shall have no further obligations hereunder other than to pay to the Executive the Termination Entitlements. 5.4 TERMINATION FOR GOOD REASON. "Good Reason" shall mean any of the following: (i) a material breach by the Company of this Agreement, (ii) a material diminution of Executive's authority, duties or responsibilities with the Company or (iii) the assignment to Executive of duties materially inconsistent with Executive's position with the Company, unless otherwise approved by the Executive. If there exists an event or condition that constitutes Good Reason, and such event or condition is not cured within ten (10) days following Executive's giving the Company notice thereof, Executive at any time thereafter shall have the right to terminate, this Agreement by giving the Company written notice of such termination, and upon his doing so, the provisions of sections 3.4.1, 3.4.2, and 5.5 and all other relevant provisions hereof shall apply. 5.5 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the Company terminates this Agreement without Cause (as defined in section 5.1 hereof), or if the Executive terminates this Agreement for Good Reason (as defined in section 5.4 hereof), in addition to the Termination Entitlements, the Executive shall be entitled to receive all base salary due for the balance of the Term of Employment in a lump sum within thirty (30) days of the date of termination. 5.6 STOCK OPTION VESTING. The impact of the termination of this Agreement on the stock options referred to in section 3 hereof, shall be as described in section 3 and in the Stock Option Agreements under which such options shall be issued. 6. PROTECTION OF CONFIDENTIAL INFORMATION. The Executive acknowledges that employment by the Company will bring the Executive into close contact with the confidential affairs of the Company and its affiliates. In recognition of the foregoing, the Executive covenants and agrees that the Executive will keep secret all confidential matters of the Company and its affiliates, including, without limitation, the terms and provisions of this Agreement, and will not use for his own benefit or intentionally disclose such matters to anyone outside of the Company, either during or after the Term of Employment, except with the Company's consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder; (ii) the Executive may disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process; and (iii) the Executive may disclose the terms of this Agreement to his attorney(s), accountant(s) and/or financial advisor(s). 7. OWNERSHIP OF WORK PRODUCT. The Executive acknowledges that in the course of employment hereunder, he may conceive of, discover, or create inventions or new contributions relating to the subject matter of his employment (all of the foregoing being collectively referred to herein as "Work Product"). The Executive acknowledges that, unless the Company otherwise agrees, all of such Work Product shall be owned by and belong exclusively to the Company. The Executive shall further, unless the Company otherwise agrees in writing, (i) promptly disclose any such Work Product to the Company; (ii) assign to the Company, upon request, the entire rights to such Work Product to the extent not otherwise owned at law by the Company; and (iii) sign all papers reasonably necessary to carry out the foregoing. 8. REPRESENTATIONS. Both Executive and Company represent and warrant that each is not a party to any agreements or understandings which would prevent the fulfillment by such party of the terms of this Agreement or which would be violated by entering into this Agreement and performing such party's obligations hereunder. 9. NOTICES. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or three days after being mailed first-class, postage prepaid, by registered or certified mail, to the address of the recipient given herein (or such other address of which notice is given or, in the case of notice to the Executive, to the most recent address set forth on the records of the Company). 10. INDEMNIFICATION. The Company shall indemnify Executive against any and all judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with any action or proceeding, whether civil, criminal, judicial, legislative, administrative or investigative, or in connection with an appeal therein, by reason of the fact that Executive is or was a director, officer, employee, representative or agent of the Company; provided, however, that no such indemnification shall be made to Executive if an adverse judgment or other final adjudication establishes that the acts of Executive were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated. Without limiting the foregoing, Executive shall also be entitled to indemnification by the Company against any liability or damage, including attorney's fees and liabilities under federal and state securities laws, arising from any act or omission by Executive provided such act or omission was reasonably believed to be within the scope of Executive's authority or was taken upon advice of the accountants or legal counsel for the Company. The indemnification of Executive provided by this section 10 shall continue after Executive has ceased to be a director, officer, employee, representative or agent of the Company and shall inure to the benefit of Executive's heirs, executors, administrators and legal representatives. 11. GENERAL. 11.1 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of the State of Texas applicable to agreements made and to be wholly performed therein. 11.2 CAPTIONS. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. The parties expressly acknowledge, represent and agree that this Agreement is fully integrated and contains and constitutes the complete and entire agreement and understanding of the parties with respect to the subject matters hereof and supersedes any and all agreements, understandings and discussions, whether written or oral, between the parties with respect to the subject matters hereof, other than the Proprietary Rights and Information Agreement being entered into simultaneously herewith. The parties further acknowledge, represent, and agree that neither has made any representations, promises or statements to induce the other party to enter into this Agreement, and each party specifically disclaims reliance, and represents that there has been no reliance, on any such representations, promises or statements. 11.4 ASSIGNABILITV. This Agreement and the parties' rights and obligations hereunder may not be assigned by Executive or the Company without the other's prior written consent. 11.5 AMENDMENTS: WAIVERS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and covenants hereof may be waived, only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provisions hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 CONSTRUCTION. No presumption will be made or inference drawn because the attorneys for one of the parties drafted this Agreement or because of its drafting history. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. DigitalConvergence.com Inc. By: /s/ Michael Garin ----------------- Its: President --------- Signature:/s/ Patrick V. Stark -------------------- Address: 6206 Lupton Dallas, Texas 75225 EX-10.8-1 16 EXHIBIT 10.8.1 EXECUTION COPY WARRANT AGREEMENT Dated as of September 29, 1999 by and between DIGITALCONVERGENCE.COM INC. and BELO ENTERPRISES, INC. THIS WARRANT AGREEMENT (this "AGREEMENT") is made and entered into as of September 29, 1999 by and between DIGITALCONVERGENCE.COM INC., a Delaware corporation (the "COMPANY"), BELO ENTERPRISES, INC., a Delaware corporation ("BELO") and the Holders of the Warrants from time to time. WHEREAS, the Company agrees to issue Common Stock warrants as hereinafter described (the "WARRANTS") to purchase shares of Common Stock (as defined below), in such number and at such price determined in accordance with this Agreement. Each Warrant entitles the holder thereof to purchase one share of Common Stock. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, and for the purpose of defining the respective rights and obligations of the Company and Belo, the parties hereto agree as follows: Section 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "COMMISSION" means the Securities and Exchange Commission. "COMMON EQUITY SECURITIES" means Common Stock and securities convertible into, or exercisable or exchangeable for, Common Stock or rights or options to acquire Common Stock or such other securities, excluding the Warrants. "COMMON STOCK" means the common stock, par value $.01 per share, of the Company, and any other capital stock of the Company into which such common stock may be converted or reclassified or that may be issued in respect of, in exchange for, or in substitution for, such common stock by reason of any stock splits, stock dividends, distributions, mergers, consolidations or other like events. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder. "EXERCISE PRICE" means the purchase price per share of Common Stock to be paid upon the exercise of each Warrant in accordance with the terms hereof, which price shall initially be $3,150.00 per share, subject to adjustment from time to time pursuant to SECTION 11 hereof. "EXPIRATION DATE" means September 29, 2004, as the same may be extended pursuant to SECTION 6 hereof. "HOLDER" or "WARRANT HOLDER" means a Person who is the owner as shown on the Warrant register maintained by the Company. "ISSUE DATE" means the date of the initial issuance of the Warrants, which shall be the date of this Agreement. "REGISTRABLE SECURITIES" means any of (i) the Warrant Shares and (ii) any other securities issued or issuable with respect to any Warrant Shares by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, unless, in each case, such Warrant Shares and securities, if any, have been offered and sold to the Holders pursuant to an effective Registration Statement under the Securities Act declared effective prior to the date of exercisability of the Warrants or the date such Warrant Shares and securities, if any, may be sold to the public pursuant to Rule 144 without any restriction on the amount of securities which may be sold by such Holders or the satisfaction of any condition. As to any particular Registrable Securities held by a Holder, such securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the exercise or offering of such securities by the Holder thereof shall have been declared effective under the Securities Act and such securities shall have been exercised and/or disposed of by such Holder pursuant to such Registration Statement, (ii) such securities may at the time of determination be sold to the public pursuant to Rule 144 without any restriction on the amount of securities which may be sold by such Holder (or any similar provision then in force, but not Rule 144A) without the lapse of any further time or the satisfaction of any condition, (iii) such securities shall have been otherwise transferred by such Holder and new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Company or its transfer agent and subsequent disposition of such securities shall not require registration or qualification under the Securities Act or any similar state law then in force or (iv) such securities shall have ceased to be outstanding. "REGISTRATION RIGHTS AGREEMENT" means the registration rights agreement, dated as of the date hereof by and between the Company, Belo, Young & Rubicam Inc., and certain investors and initial investors, under which registration rights agreement the Warrant Shares constitute registrable securities. 2 "RULE 144" shall mean Rule 144 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the Commission providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act. "RULE 144A" shall mean Rule 144A promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended, or any successor statute and the rules and regulations promulgated thereunder. "WARRANT HOLDER" or "HOLDER" means a Person who is the owner as shown on the Warrant register maintained by the Company. "WARRANT SHARES" means the shares of Common Stock issued or issuable upon the exercise of the Warrants. Section 2. ISSUANCE OF WARRANTS; WARRANT CERTIFICATES. (a) The Warrants will be issued in the form of definitive certificates, substantially in the form of Exhibit A (the "WARRANT CERTIFICATES"). Each Warrant shall provide that it shall represent the aggregate amount of outstanding Warrants from time to time endorsed thereon and that the aggregate amount of outstanding Warrants represented thereby may from time to time be reduced or increased, as appropriate. (b) The Warrants shall be initially issued on the Issue Date in the aggregate amount of 198 shares of Common Stock, subject to adjustment as herein provided, and shall be issued under one Warrant Certificate. Section 3. EXECUTION OF WARRANT CERTIFICATES. Warrant Certificates shall be signed on behalf of the Company by the Company's President or a Vice President and by its Secretary or an Assistant Secretary under its corporate seal. Each such signature upon the Warrant Certificates may be in the form of a facsimile signature of the present or any future President, Vice President, Secretary or Assistant Secretary and may be imprinted or otherwise reproduced on the Warrant Certificates and for that purpose the Company may adopt and use the facsimile signature of any person who shall have been President, Vice President, Secretary or Assistant Secretary, notwithstanding the fact that at the time the Warrant Certificates shall be countersigned and delivered or disposed of, such person shall have ceased to hold such office. The seal of the Company may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Warrant Certificates. 3 In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer before the Warrant Certificates so signed shall have been disposed of by the Company, such Warrant Certificates nevertheless may be countersigned and delivered or disposed of as though such person had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be a proper officer of the Company to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such officer. Section 4. REGISTRATION. The Company shall number and register the Warrant Certificates in a register as they are issued by the Company. The Company may deem and treat the person in whose name any Warrant is registered as the absolute owner(s) thereof, for all purposes, and the Company shall not be affected by any notice to the contrary. Section 5. REGISTRATION OF TRANSFERS AND EXCHANGES. (a) TRANSFER AND EXCHANGE OF WARRANTS AND REGISTRABLE SECURITIES. When Warrants or Registrable Securities are presented to the Company with a request to register their transfer; or to exchange such Warrants for an equal number of Warrants of other authorized denominations, the Company shall register the transfer or make the exchange as requested if the following requirements are met: (i) the Warrants presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Company, duly executed by the Holder thereof or by his attorney-in-fact, duly authorized in writing; and (ii) in the case of Registrable Securities, such request shall be accompanied by the following additional information and documents (all of which may be submitted by facsimile), as applicable: (A) if such Registrable Security is being delivered to the Company by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in substantially the form of Exhibit B hereto); (B) if such Registrable Security is being transferred (1) to a "qualified institutional buyer" (as defined in Rule 144A) in accordance with Rule 144A or (2) pursuant to an exemption from registration in accordance with Rule 144 (and based on an opinion of counsel if the Company so requests) or (3) pursuant to an 4 effective registration statement under the Securities Act, a certification to that effect (in substantially the form of Exhibit B hereto); (C) if such Registrable Security is being transferred pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act (and based on an opinion of counsel if the Company so requests), a certification to that effect (in substantially the form of Exhibit B hereto); or (D) if such Registrable Security is being transferred in reliance on another exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests), a certification to that effect (in substantially the form of Exhibit B hereto). (b) LEGENDS. (i) Except for any Registrable Security sold or transferred as discussed in clause (ii) below, each Warrant Certificate (and all Warrants issued in exchange therefor or substitution thereof) and each certificate representing the Warrant Shares shall bear a legend in substantially the following form: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY AND THE SECURITIES DELIVERED UPON EXERCISE THEREOF MAY NOT BE EXERCISED, OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY AND THE SECURITIES DELIVERED UPON THE EXERCISE THEREOF IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) SUCH SECURITY AND THE SECURITIES DELIVERED UPON EXERCISE HEREOF MAY BE EXERCISED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A PERSON THAT IS NOT A U.S. PERSON (AS DEFINED IN RULE 902 UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION 5 FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (IN THE CASE OF (b), (c) or (d), UPON AN OPINION OF COUNSEL AND WRITTEN CERTIFICATION IF THE ISSUER, REGISTRAR OR TRANSFER AGENT FOR THE SECURITIES SO REQUESTS), (2) TO THE ISSUER OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY AND THE SECURITIES DELIVERED UPON EXERCISE HEREOF OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." (ii) Upon any sale or transfer of a Registrable Security pursuant to an effective registration statement under the Securities Act, pursuant to Rule 144(A) or pursuant to an opinion of counsel reasonably satisfactory to the Company that no legend is required, the Holder thereof shall be permitted to exchange such Registrable Security for a Warrant that does not bear the legend set forth in clause (i) above and rescind any restriction on the transfer of such Registrable Security. (c) OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES OF WARRANTS. (i) To permit registrations of transfers and exchanges, the Company shall execute in accordance with the provisions of SECTION 4 and this SECTION 5, Warrants as required pursuant to the provisions of this SECTION 5. Notwithstanding anything to the contrary contained herein, the Company shall refuse to register any transfer of the Warrants not made in accordance with Regulation S, pursuant to registration under the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act; provided, however, that if a foreign law prevents the Company from refusing to register securities transfers, the Company shall implement other reasonable measures designed to prevent transfers of the Warrants not made in accordance with Regulation S, pursuant to registration under the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act. (ii) All Warrants issued upon any registration of transfer or exchange of Warrants shall be the valid obligations of the Company, entitled to the same benefits under this Warrant Agreement, as the Warrants surrendered upon such registration of transfer or exchange. (iii) Prior to due presentment for registration of transfer of any Warrant, the Company may deem and treat the person in whose name any Warrant is registered as the absolute owner of such Warrant and the Company shall not be affected by notice to the contrary. 6 (iv) No service charge shall be made to a Holder for any registration of transfer or exchange. Section 6. TERMS OF WARRANTS; EXERCISE OF WARRANTS. Subject to the terms of this Agreement, each Warrant Holder shall have the right, which may be exercised at any time and from time to time, in whole or in part, commencing on the date hereof and ending at 4:00 p.m., Dallas, Texas, time, on the Expiration Date, to receive from the Company the number of fully paid and nonassessable Warrant Shares which the Holder may at the time be entitled to receive on exercise of such Warrants and payment of the Exercise Price then in effect for such Warrant Shares; provided, however, that no Warrant Holder shall be entitled to exercise such Holder's Warrants at any time, unless, at the time of exercise, (i) a registration statement under the Securities Act relating to the Warrant Shares has been filed with, and declared effective by, the Commission, and no stop order suspending the effectiveness of such registration statement has been issued by the Commission or (ii) the issuance of the Warrant Shares is permitted pursuant to an exemption from the registration requirements of the Securities Act. Subject to the provisions of the following paragraph of this SECTION 6, each Warrant not exercised prior to 4:00 p.m., Dallas, Texas, time, on the Expiration Date shall become void and all rights thereunder and all rights in respect thereof under this Agreement shall cease as of such time. No adjustments as to dividends will be made upon exercise of the Warrants. A Warrant may be exercised upon surrender to the Company of the certificate or certificates evidencing the Warrant to be exercised with the form of election to purchase on the reverse thereof properly completed and signed, which signature shall be guaranteed by a bank or trust company having an office or correspondent in the United States or a broker or dealer which is a member of a registered securities exchange or the National Association of Securities Dealers, Inc., and upon payment to the Company of the Exercise Price as adjusted as herein provided, for each of the Warrant Shares in respect of which such Warrants are then exercised. Payment of the aggregate Exercise Price shall be made in cash or by certified or official bank check, payable to the order of the Company. In the alternative, each Holder may exercise its right to receive Warrant Shares (i) on a net basis, such that without the exchange of any funds, the Holder receives that number of Warrant Shares otherwise issuable upon exercise of its Warrants less that number of Warrant Shares having a fair market value equal to the aggregate Exercise Price that would otherwise have been paid by the Holder for the Warrant Shares being issued, (ii) by any Holder to whom the Company is indebted, by tendering indebtedness having an aggregate principal amount, plus accrued but unpaid interest, if any, thereon, to the date of exercise equal to the aggregate Exercise Price that would otherwise have been paid by the Holder for the Warrant Shares being issued, or (iii) by a combination of the procedures in clauses (i) and (ii). For purposes of the foregoing sentence, "fair market value" of the Warrant Shares shall be as determined by the Board of Directors of the Company in good faith and evidenced by a resolution thereof. The Company shall notify the Holders in writing of any such determination of fair market value. 7 Subject to the provisions of SECTION 7 hereof, upon surrender of Warrants and payment of the Exercise Price as provided above, the Company shall promptly transfer to the Holder of such Warrant a certificate or certificates for the appropriate number of Warrant Shares or other securities or property (including any money) to which the Holder is entitled, registered or otherwise placed in, or payable to the order of, such name or names as may be directed in writing by the Holder, and shall deliver such certificate or certificates representing the Warrant Shares and any other securities or property (including any money) to the Person or Persons entitled to receive the same, together with an amount in cash in lieu of any fraction of a share as provided in SECTION 13. Any such certificate or certificates representing the Warrant Shares shall be deemed to have been issued and any Person so designated to be named therein shall be deemed to have become a Holder of record of such Warrant Shares as of the later of the date of the surrender of such Warrants and payment of the Exercise Price. The Warrants shall be exercisable commencing on the Issue Date, at the election of the Holders thereof, either in full or from time to time in part and, in the event that a certificate evidencing Warrants is exercised in respect of fewer than all of the Warrant Shares issuable on such exercise at any time prior to the date of expiration of the Warrants, a new certificate evidencing the remaining Warrant or Warrants will be issued and delivered pursuant to the provisions of this SECTION and of SECTION 3 hereof. All Warrant Certificates surrendered upon exercise of Warrants shall be canceled. Such canceled Warrant Certificates shall then be disposed of in accordance with customary procedures. Section 7. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if any, attributable to the issuance of the Warrant Certificates or the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any certificates for Warrant Shares in a name other than that of the Holder of a Warrant Certificate surrendered upon the exercise of a Warrant. Section 8. MUTILATED OR MISSING WARRANT CERTIFICATES. In case any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company may in its discretion issue in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and, if requested, indemnity reasonably satisfactory to them. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. Section 9. RESERVATION OF WARRANT SHARES. The Company will at all times reserve and keep available, free from any preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, for the purpose 8 of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of all outstanding Warrants. The transfer agent for the Common Stock (the "TRANSFER AGENT") and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Company will supply such Transfer Agent with duly executed certificates for such purposes and will provide or otherwise make available any cash which may be payable as provided in SECTION 13. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto, transmitted to each Holder of the Warrants pursuant to SECTION 14 hereof. Before taking any action which would cause an adjustment pursuant to SECTION 11 hereof that would reduce the Exercise Price below the then par value (if any) of the Warrant Shares, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. The Company covenants that all Warrant Shares which may be issued upon exercise of Warrants in accordance with the terms of this Agreement (including the payment of the Exercise Price) will, upon issue, be duly and validly issued, fully paid, nonassessable, and free of preemptive rights and Liens. Section 10. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from time to time take all action which may be necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on the principal securities exchanges and markets (including, without limitation, the Nasdaq National or SmallCap Markets) within the United States of America, if any, on which other shares of Common Stock are then listed. Upon the listing of such Warrant Shares, the Company shall notify the Holders in writing. The Company will obtain and keep all required permits and records in connection with such listing. Section 11. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES ISSUABLE. The number and kind of shares purchasable upon the exercise of Warrants and the Exercise Price shall be subject to adjustment from time to time (as set forth in the notices required by SECTION 14 hereof) as follows: (a) STOCK SPLITS, COMBINATIONS, ETC. In case the Company shall hereafter (A) pay a dividend or make a distribution on its Common Stock in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class), (B) subdivide its outstanding shares of 9 Common Stock, (C) combine its outstanding shares of Common Stock into a smaller number of shares, or (D) issue by reclassification of its shares of Common Stock any shares of capital stock of the Company, the Exercise Price in effect and the number of Warrant Shares issuable upon exercise of each Warrant immediately prior to such action shall be adjusted so that the Holder of any Warrant thereafter exercised shall be entitled to receive the number of shares of capital stock of the Company which such Holder would have owned immediately following such action had such Warrant been exercised immediately prior thereto. Any adjustment made pursuant to this paragraph shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this paragraph, the Holder of any Warrant thereafter exercised shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive and evidenced by a Board resolution) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock. (b) RECLASSIFICATION, COMBINATIONS, MERGERS, ETC. In case of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrants (other than as set forth in PARAGRAPH (a) above and other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation (other than a merger in which the Company is the continuing corporation and which does not result in any reclassification or change of the then outstanding shares of Common Stock or other capital stock issuable upon exercise of the Warrants) or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Company, then, as a condition of such reclassification, change, consolidation, merger, sale or conveyance, the Company or such a successor or purchasing corporation, as the case may be, shall forthwith make lawful and adequate provision whereby the Holder of each Warrant then outstanding shall have the right thereafter to receive on exercise of such Warrant the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a Holder of the number of shares of Common Stock issuable upon exercise of such Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance and enter into a supplemental warrant agreement so providing. Such provisions shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this SECTION 11. If the issuer of securities deliverable upon exercise of Warrants under the supplemental warrant agreement is an affiliate of the formed, surviving or transferee corporation, that issuer shall join in the supplemental warrant agreement. The above provisions of this PARAGRAPH (b) shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (c) ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Company shall, at any time or from time to time after the date hereof, issue, sell, distribute or otherwise grant in any manner (including by assumption) any additional shares of Common Stock (other than shares pursuant to the Corporation's Stock Option Plan in any amount less than twelve percent (12%) 10 of the fully diluted capital stock of the Company) without consideration or for a price per share less than the current market price per share of Common Stock on the date of the issuance, sale, distribution or granting of such additional shares, then, effective upon such issuance or sale, (I) the Exercise Price shall be reduced to the price (calculated to the nearest 1/1,000 of one cent) determined by multiplying the Exercise Price in effect immediately prior to such issuance or sale by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately prior to such issuance or sale multiplied by the current market price per share of Common Stock on the date of such issuance or sale plus (ii) the consideration, if any, received by the Company in respect of such issuance or sale, and the denominator of which shall be the product of (A) the total number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately after such issuance or sale multiplied by (B) the current market price per share of Common Stock on the record date for such issuance or sale and (II) the number of shares of Common Stock purchasable upon the exercise of each Warrant shall be increased to a number determined by multiplying the number of shares of Common Stock so purchasable immediately prior to the record date for such issuance or sale by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment required by clause (I) of this sentence and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. (d) ISSUANCE OF OPTIONS OR CONVERTIBLE SECURITIES. In the event the Company shall, at any time or from time to time after the date hereof, issue, sell, distribute or otherwise grant in any manner (including by assumption) any rights to subscribe for or to purchase, or any warrants or options for the purchase of, Common Stock (other than shares pursuant to the Corporation's Stock Option Plan in any amount less than twelve percent (12%) of the fully diluted capital stock of the Company) or any stock or securities convertible into or exchangeable for Common Stock (any such rights, warrants or options being herein called "OPTIONS" and any such convertible or exchangeable stock or securities being herein called "CONVERTIBLE SECURITIES") or any Convertible Securities (other than upon exercise of any Option), whether or not such Options or the rights to convert or exchange such Convertible Securities are immediately exercisable, and if the price per share at which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the aggregate amount, if any, received or receivable by the Company as consideration for the issuance, sale, distribution or granting of such Options or any such Convertible Security, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options or upon conversion or exchange of all such Convertible Securities, plus, in the case of Options to acquire Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange of all such Convertible Securities, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of all such Options or upon the conversion or exchange of all such Convertible Securities or upon the conversion or exchange of all Convertible Securities issuable upon the exercise of all such Options) shall be less than the current market price per share of Common Stock on the date for the issuance, sale, distribution or granting of such Options or Convertible Securities (any such event being herein called a "DISTRIBUTION"), then, effective upon such Distribution, (I) the Exercise 11 Price shall be reduced to the price (calculated to the nearest 1/1,000 of one cent) determined by multiplying the Exercise Price in effect immediately prior to such Distribution by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately prior to such Distribution multiplied by the current market price per share of Common Stock on the date of such Distribution plus (ii) the consideration, if any, received by the Company in respect of such Distribution, and the denominator of which shall be the product of (A) the total number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately after such Distribution multiplied by (B) the current market price per share of Common Stock on the record date for such Distribution and (II) the number of shares of Common Stock purchasable upon the exercise of each Warrant shall be increased to a number determined by multiplying the number of shares of Common Stock so purchasable immediately prior to the record date for such Distribution by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment required by clause (I) of this sentence and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. For purposes of the foregoing, the total maximum number of shares of Common Stock issuable upon exercise of all such Options or upon conversion or exchange of all such Convertible Securities or upon the conversion or exchange of the total maximum amount of the Convertible Securities issuable upon the exercise of all such Options shall be deemed to have been issued as of the date of such Distribution and thereafter shall be deemed to be outstanding and the Company shall be deemed to have received as consideration therefor such price per share, determined as provided above. Except as provided in PARAGRAPHS (j) AND (k) below, no additional adjustment of the Exercise Price shall be made upon the actual exercise of such Options or upon conversion or exchange of the Convertible Securities or upon the conversion or exchange of the Convertible Securities issuable upon the exercise of such Options. (e) DIVIDENDS AND DISTRIBUTIONS. In the event the Company shall, at any time or from time to time after the date hereof, distribute to all the holders of Common Stock any dividend or other distribution of cash, evidences of its indebtedness, other securities or other properties or assets (in each case other than (i) dividends payable in Common Stock, Options or Convertible Securities and (ii) any cash dividend that, when added to all other cash dividends paid with respect to Common Stock in the one year prior to the declaration date of such dividend (excluding any such other dividend included in a previous adjustment of the Exercise Price pursuant to this PARAGRAPH (e) and excluding any cash dividends or other cash distributions from current or retained earnings), does not exceed 5% of the current market price per share of Common Stock on such declaration date), or any options, warrants or other rights to subscribe for or purchase any of the foregoing, then (A) the Exercise Price shall be decreased to a price determined by multiplying the Exercise Price then in effect by a fraction, the numerator of which shall be the current market price per share of Common Stock on the record date for such distribution less the sum of (X) the cash portion, if any, of such distribution per share of Common Stock outstanding (exclusive of any treasury shares) on the record date for such distribution plus (Y) the then fair market value (as determined in good faith by the Board of Directors of the Company) per share of Common Stock outstanding (exclusive of any treasury shares) on the record date for such distribution of that portion, if any, of such distribution consisting of evidences of indebtedness, 12 other securities, properties, assets, options, warrants or subscription or purchase rights, and the denominator of which shall be such current market price per share of Common Stock and (B) the number of shares of Common Stock purchasable upon the exercise of each Warrant shall be increased to a number determined by multiplying the number of shares of Common Stock so purchasable immediately prior to the record date for such distribution by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment required by clause (A) of this sentence and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. The adjustments required by this PARAGRAPH (e) shall be made whenever any such distribution occurs retroactive to the record date for the determination of stockholders entitled to receive such distribution. (f) CURRENT MARKET PRICE. For the purpose of any computation of current market price under this SECTION 11 and SECTION 13, the current market price per share of Common Stock at any date shall be (x) for purposes of SECTION 13, the closing price on the business day immediately prior to the exercise of the applicable Warrant pursuant to SECTION 6 and (y) in all other cases, the daily closing price the last full trading day on the exchange or market specified in the second succeeding sentence prior to the Time of Determination (as defined below). The term "TIME OF DETERMINATION" as used herein shall be the time and date of the earlier to occur of (A) the date as of which the current market price is to be computed and (B) the last full trading day on such exchange or market before the commencement of "ex-dividend" trading in the Common Stock relating to the event giving rise to the adjustment required by PARAGRAPH (a), (b), (c), (d) OR (e) above. The closing price for any day shall be the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in each case (1) on the principal national securities exchange on which the shares of Common Stock are listed or to which such shares are admitted to trading or (2) if the Common Stock is not listed or admitted to trading on a national securities exchange, in the over-the-counter market as reported by Nasdaq National or SmallCap Markets or any comparable system or (3) if the Common Stock is not listed on Nasdaq National or SmallCap Markets or a comparable system but a public market for the Common Stock exists, as furnished by two members of the NASD selected from time to time in good faith by the Board of Directors of the Company for that purpose. In the absence of all of the foregoing, or if for any other reason the current market price per share cannot be determined pursuant to the foregoing provisions of this PARAGRAPH (f), the current market price per share shall be the fair market value thereof as determined in good faith by the Board of Directors of the Company and evidenced by a resolution of such Board, subject to the following dispute resolution right of the Holders of the Warrants. In the event that Holders of a majority of the Warrants dispute the determination of the Board of Directors, such Holders shall notify the Company and the current market price shall be determined in a reasonably prompt manner as follows: (1) The Company and Holders of a majority of the Warrants shall each appoint an independent, experienced appraiser who is a member of a recognized professional association of business appraisers. The two appraisers shall determine the value of shares of Common Stock at the relevant date, assuming a sale between a willing buyer and a 13 willing seller, both of whom have full knowledge of the financial and other affairs of the Company, and neither of whom is under any compulsion to sell or to buy. (2) If the higher of the two appraisals is not more than 20% more than the lower of the appraisals, the current market price per share shall be the average of the two appraisals. If the higher of the two appraisals is 20% or more than the lower of the two appraisals, then a third appraiser shall be appointed by the two appraisers, and if they cannot agree on a third appraiser, the American Arbitration Association shall appoint the third appraiser. The third appraiser, regardless of who appoints him or her, shall have the same qualifications as the first two appraisers. (3) The current market price per share after the appointment of the third appraiser shall be the average of the two appraisals that are closest in value to each other. (4) The fees and expenses of the appraisers shall be paid one-half by the Company and one-half by the Holders. (g) CERTAIN DISTRIBUTIONS. If the Company shall pay a dividend or make any other distribution payable in Options or Convertible Securities, then, for purposes of PARAGRAPH (d) above, such Options or Convertible Securities shall be deemed to have been initially issued or sold on such date without consideration. (h) CONSIDERATION RECEIVED. If any shares of Common Stock, Options or Convertible Securities shall be issued, sold or distributed for a consideration other than cash, the amount of the consideration other than cash received by the Company in respect thereof shall be deemed to be the then fair market value of such consideration (as determined in good faith by the Board of Directors of the Company and evidenced by a Board resolution). If any Options shall be issued in connection with the issuance and sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration; provided, however, that if such Options have an exercise price equal to or greater than the current market price of the Common Stock on the date of issuance of such Options, then such Options shall be deemed to have been issued for consideration equal to such exercise price. (i) DEFERRAL OF CERTAIN ADJUSTMENTS. No adjustment to the Exercise Price (including the related adjustment to the number of shares of Common Stock purchasable upon the exercise of each Warrant) shall be required hereunder unless such adjustment, together with other adjustments carried forward as provided below, would result in an increase or decrease of at least one percent of the Exercise Price; provided that any adjustments which by reason of this PARAGRAPH (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. No adjustment need be made for a change in the par value of the Common Stock. All calculations under this SECTION shall be made to the nearest 1/1,000 of one cent or to the nearest 1/1000 of a share, as the case may be. 14 (j) CHANGES IN OPTIONS AND CONVERTIBLE SECURITIES. If the exercise price provided for in any Options referred to in PARAGRAPH (d) above, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in PARAGRAPH (d) OR (e) above, or the rate at which any Convertible Securities referred to in PARAGRAPH (d) OR (e) above are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution upon an event which results in a related adjustment pursuant to this SECTION 11), the Exercise Price then in effect and the number of shares of Common Stock purchasable upon the exercise of each Warrant shall forthwith be readjusted (effective only with respect to any exercise of any Warrant after such readjustment) to the Exercise Price and number of shares of Common Stock so purchasable that would then be in effect had the adjustment made upon the issuance, sale, distribution or granting of such Options or Convertible Securities been made based upon such changed purchase price, additional consideration or conversion rate, as the case may be, but only with respect to such Options and Convertible Securities as then remain outstanding. (k) EXPIRATION OF OPTIONS AND CONVERTIBLE SECURITIES. If, at any time after any adjustment to the number of shares of Common Stock purchasable upon the exercise of each Warrant shall have been made pursuant to PARAGRAPH (d), (e) OR (j) above or this PARAGRAPH (k), any Options or Convertible Securities shall have expired unexercised, the number of such shares so purchasable shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) as if (i) the only shares of Common Stock deemed to have been issued in connection with such Options or Convertible Securities were the shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or Convertible Securities and (ii) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for the issuance, sale, distribution or granting of all such Options or Convertible Securities, whether or not exercised; provided that no such readjustment shall have the effect of decreasing the number of such shares so purchasable by an amount (calculated by adjusting such decrease to account for all other adjustments made pursuant to this SECTION 11 following the date of the original adjustment referred to above) in excess of the amount of the adjustment initially made in respect of the issuance, sale, distribution or granting of such Options or Convertible Securities. (l) OTHER ADJUSTMENTS. In the event that at any time, as a result of an adjustment made pursuant to this SECTION 11, the Holders shall become entitled to receive any securities of the Company other than shares of Common Stock, thereafter the number of such other securities so receivable upon exercise of the Warrants and the Exercise Price applicable to such exercise shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in this SECTION 11. 15 Section 12. STATEMENT ON WARRANTS. Irrespective of any adjustment in the number or kind of shares issuable upon the exercise of the Warrants or the Exercise Price, Warrants theretofore or thereafter issued may continue to express the same number and kind of shares as are stated in the Warrants initially issuable pursuant to this Agreement. Section 13. FRACTIONAL INTEREST. The Company shall not be required to issue fractional shares of Common Stock on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same Holder, the number of full shares of Common Stock which shall be issuable upon such exercise shall be computed on the basis of the aggregate number of shares of Common Stock acquirable on exercise of the Warrants so presented. If any fraction of a share of Common Stock would, except for the provisions of this SECTION, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall direct the Transfer Agent to pay an amount in cash calculated by it equal to (i) the then current market price per share multiplied by such fraction computed to the nearest whole cent, less (ii) an amount equal to the Exercise Price multiplied by such fraction computed to the nearest whole cent. The Holders, by their acceptance of the Warrant Certificates, expressly waive any and all rights to receive any fraction of a share of Common Stock or a stock certificate representing a fraction of a share of Common Stock. Section 14. NOTICES TO WARRANT HOLDERS. Upon any adjustment of the Exercise Price pursuant to SECTION 11, the Company shall promptly thereafter cause to be given to each of the registered Holders by first-class mail, postage prepaid, a certificate executed by the Chief Financial Officer of the Company setting forth the Exercise Price after such adjustment and setting forth in reasonable detail the method of calculation and the facts upon which such calculations are based and setting forth the number of Warrant Shares (or portion thereof) issuable after such adjustment in the Exercise Price, upon exercise of a Warrant and payment of the adjusted Exercise Price, which certificate shall be conclusive evidence, absent manifest error, of the correctness of the matters set forth therein. In case: (a) the Company shall authorize the issuance to all holders of shares of Common Stock of rights, options or warrants to subscribe for or purchase shares of Common Stock or of any other subscription rights or warrants; or (b) the Company shall authorize the distribution to all holders of shares of Common Stock of evidences of its indebtedness or assets (other than cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends payable in shares of Common Stock or distributions referred to in SECTION 11 hereof); or (c) of any consolidation or merger to which the Company is a party for which approval of any shareholders of the Company is required and following which the shareholders of the Company before such consolidation or merger no longer hold at least 16 50% of the outstanding capital stock of the Company following the merger or consolidation, or of the conveyance or transfer of all or substantially all of the properties and assets of the Company, or of any reclassification or change of Common Stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or a tender offer or exchange offer for shares of Common Stock, or other transaction that would result in a change in control; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company proposes to take any other action that would require an adjustment of the Exercise Price or the number of Warrant Shares pursuant to SECTION 11; then the Company shall cause to be given to each of the registered Holders of the Warrants at such Holder's address appearing on the Warrant register, at least 20 days (or 10 days in any case specified in clauses (a) or (b) above) prior to the applicable record date hereinafter specified, or promptly in the case of events for which there is no record date, by first-class mail, postage prepaid, a written notice stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such rights, options, warrants or distribution are to be determined, or (ii) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock, or (iii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up or change of control is expected to become effective or consummated, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up or change of control. The failure to give the notice required by this SECTION 14 or any defect therein shall not affect the legality or validity of any distribution, right, option, warrant, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or change of control or the vote upon any action. Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the Holders thereof the right to vote or to consent or to receive notice as shareholders in respect of the meetings of shareholders or the election of Directors of the Company or any other matter, or any rights whatsoever as shareholders of the Company. Section 15. REGISTRATION. The Company acknowledge that Holders of Warrants shall have the registration rights set forth in the Registration Rights Agreement. Section 16. REPORTS. For each fiscal quarter and each fiscal year of the Company, the Company will transmit by mail to all Warrant Holders, as their names and addresses appear in the register, without cost to such Warrant Holders, unaudited quarterly and audited annual financial statements of the Company prepared in accordance with GAAP. Beginning with the 17 initial public offering of the Company and thereafter, whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, or any successor provision thereto, the Company shall prepare the annual and quarterly reports and other information, and documents ("SEC REPORTS") as the Commission shall prescribe pursuant to such Section 13(a) or 15(d) and which the Company is or would be (if they were so subject) required to file with the Commission pursuant to such Section 13(a) or 15(d) or any successor provision thereto (on or prior to the respective dates (the "REQUIRED FILING DATES") by which the Company is or would (if they were so subject) be required so to file such SEC Reports) and shall, within 15 days of the Required Filing Date transmit by mail to all Warrant Holders, as their names and addresses appear in the register, without cost to such Warrant Holders, copies of such annual and quarterly reports. Section 17. RULE 144A. The Company hereby agrees with each Holder, for so long as any Registrable Securities remain outstanding and the Company is not subject to Section 13(a) or 15(d) of the Exchange Act, to make available, upon request of any Holder of Registrable Securities, to any Holder or beneficial owner of Registrable Securities in connection with any sale thereof and any prospective purchaser of such Registrable Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Securities Act in order to permit resales of such Registrable Securities pursuant to Rule 144A. Section 18. NOTICES TO COMPANY. Any notice or demand authorized by this Agreement to be given or made by the Holder of any Warrants to or on the Company shall be sufficiently given or made when and if deposited in the mail, first-class or registered, postage prepaid, addressed (until another address is filed in writing by the Company), as follows: Digital Convergence.Com Inc. 4264 Kellway Circle Addison, Texas 75001 Telephone: (972) 818-4777 Telecopy: (972) 818-4805 Attn: Chief Financial Officer Any notice pursuant to this Agreement to be given by the Company to the Holders shall be sufficiently given when and if deposited in the mail, first-class or registered, postage prepaid, addressed (until another address is filed in writing with the Company) to the addresses of the Holders provided to the Company from time to time. Section 19. SUPPLEMENTS AND AMENDMENTS. The Company and Belo may from time to time supplement or amend this Agreement without the approval of any Holders of Warrants in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and Belo may deem necessary or desirable and which shall not in any way adversely affect the interests of the Holders of Warrants. Any amendment or supplement to this Agreement that has a material adverse effect 18 on the interests of Holders shall require the written consent of Holders representing a majority of the then outstanding Warrants (excluding Warrants held by the Company or any of its Affiliates); provided, however, that the consent of each Holder of a Warrant affected shall be required for any amendment pursuant to which the Exercise Price would be increased or the number of Warrant Shares purchasable upon exercise of Warrants would be decreased (other than pursuant to adjustments provided for in SECTION 11 hereof). Belo shall be entitled to receive and shall be fully protected in relying upon an officer's certificate and opinion of counsel as conclusive evidence that any such amendment or supplement is authorized or permitted hereunder, that it does or does not, as the case may be, require the written consent of Holders to be effective hereunder, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. Section 20. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. Section 21. TERMINATION. This Agreement (other than any party's obligations with respect to Warrants previously exercised and with respect to indemnification) shall terminate at 4:00 p.m., Dallas, Texas, time on the Expiration Date. Section 22. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT CERTIFICATE ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF TEXAS AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF SAID STATE, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. Section 23. BENEFITS OF THIS AGREEMENT. (a) The Holders are the third-party beneficiaries of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, Belo and the Holders of the Warrants any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, Belo and the Holders of the Warrants from time to time. (b) Prior to the exercise of the Warrants, no Holder of a Warrants, as such, shall be entitled to any rights of a stockholder of a Company, including, without limitation, the right to receive dividends or subscription rights, the right to vote, to consent, to exercise any preemptive right, to receive any notice of or to participate in meetings of stockholders for the election of directors of the Company or any other matter or to receive any notice of any proceedings of the Company, except as may be specifically and expressly provided for herein. The Holders of the Warrants are not entitled to share in the assets of the Company in the event of the liquidation, dissolution or winding up of the Company's affairs. 19 (c) All rights of action in respect of this Agreement are vested in the Holders of the Warrants, and any Holder of any Warrant, without the consent of the Holder of any other Warrant, may, on such Holder's own behalf and for such Holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company suitable to enforce, or otherwise in respect of, such Holder's rights hereunder, including the right to exercise, exchange or surrender for purchase such Holder's Warrants in the manner provided in this Agreement. Section 24. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company made in that certain Stock Purchase Agreement dated as of September 29, 1999 among the Company, Belo, Young & Rubicam Inc. and certain other investors (the "Stock Purchase Agreement") are hereby incorporated herein by reference and deemed made by the Company to Belo with respect to this Agreement; PROVIDED, that all references in such representations and warranties to "Preferred Shares" shall be deemed references to the Warrants and the Warrant Certificates, all references to the "Series A Preferred" shall be deemed references to the Warrants, all references to "this Agreement" shall be deemed references to this Agreement. Section 25. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. DIGITALCONVERGENCE.COM INC. By: /s/ J. Jovan Philyaw ------------------------------- Name: ------------------------------- Title: ------------------------------- BELO ENTERPRISES, INC. By: /s/ Mark T. Ryan ------------------------------- Name: Mark T. Ryan ------------------------------- Title: President ------------------------------- 20 EX-10.8-2 17 EXHIBIT 10.8.2 THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY AND THE SECURITIES DELIVERED UPON EXERCISE THEREOF MAY NOT BE EXERCISED, OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY AND THE SECURITIES DELIVERED UPON THE EXERCISE THEREOF IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) SUCH SECURITY AND THE SECURITIES DELIVERED UPON EXERCISE HEREOF MAY BE EXERCISED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A PERSON THAT IS NOT A U.S. PERSON (AS DEFINED IN RULE 902 UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, or (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (IN THE CASE OF (b), (c) OR (d), UPON AN OPINION OF COUNSEL AND WRITTEN CERTIFICATION IF THE ISSUER, REGISTRAR OR TRANSFER AGENT FOR THE SECURITIES SO REQUESTS), (2) TO THE ISSUER OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY AND THE SECURITIES DELIVERED UPON EXERCISE HEREOF OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. 198 Shares of Common Stock Warrant Certificate No. 1 WARRANT CERTIFICATE For the Purchase of Common Stock of DIGITALCONVERGENCE.COM INC. 1. CERTIFICATE. THIS IS TO CERTIFY THAT Belo Enterprises, Inc., or its registered assigns ("Holder"), is entitled to exercise this Warrant Certificate to purchase from DigitalConvergence.com Inc., a Delaware corporation (the "Company"), one hundred ninety-eight (198) shares of common stock, par value $0.01 per share, of the Company (the "Common Stock"), all on the terms and conditions and pursuant to the provisions hereinafter set forth. This Warrant Certificate is executed pursuant to the terms of that certain Warrant Agreement of even date herewith (the "Agreement") between the Company and the Holder. Any capitalized terms not defined herein will have the meanings set forth in the Agreement. 2. EXERCISE PRICE. The exercise price per share of Common Stock shall be $3,150 (the "Exercise Price"). Such Exercise Price and the number of shares of Common Stock into which this Warrant Certificate is exercisable are subject to adjustment from time to time as provided in the Agreement. 3. EXERCISE. This Warrant Certificate may be exercised at any time or from time to time on or after the date hereof; provided, however, that this Warrant Certificate shall be void and all rights represented hereby shall cease unless exercised in full before September 29, 2004 (the "Expiration Date"). In order to exercise this Warrant Certificate, in whole or in part, the Holder hereof shall deliver to the Company at its principal office, or at such other office as shall be designated by the Company pursuant to the Agreement: (a) written notice of Holder's election to exercise this Warrant Certificate, which notice shall specify the number of shares of Common Stock to be purchased pursuant to such exercise; (b) payment of the Exercise Price in cash or by certified check or on a "net basis" as set forth in SECTION 6 of the Agreement; and (c) this Warrant Certificate, properly indorsed. Upon receipt thereof, the Company shall promptly execute or cause to be executed and deliver to such Holder a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise. The stock certificate or certificates so delivered shall be registered in the name of such Holder, or such other name as shall be designated in said notice (subject to any restrictions on transfer set forth in the Agreement). If the exercise is for less than all of the shares of Common Stock issuable as provided in the Warrant Certificate, the Company will issue a new Warrant Certificate of like tenor and date for the balance of such shares issuable hereunder to the Holder. 4. TRANSFER. This Warrant Certificate and all options and rights hereunder are transferable, as to all or any part of the number of shares of Common Stock purchasable upon its exercise, in accordance with the Agreement. 2 5. REGISTRATION RIGHTS. The Common Stock into which this Warrant Certificate is exercisable is subject to registration rights as provided in the Registration Rights Agreement. 6. SUCCESSORS AND ASSIGNS. This Warrant Certificate and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors and assigns of the Holder hereof and, shall be enforceable by any such Holder. 7. HEADINGS. Headings of the paragraphs in this Warrant Certificate are for convenience and reference only and shall not, for any purpose, be deemed a part of this Warrant Certificate. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed and issued. DATED as of September 29, 1999. DIGITALCONVERGENCE.COM INC. By: /s/ J. Jovan Philyaw ----------------------------------- Name: J. Jovan Philyaw ---------------------------------- Title: --------------------------------- ATTEST: By: /s/ ----------------------------------- Name: ---------------------------------- Title: --------------------------------- CORPORATE SEAL: 3 EX-10.13 18 EXHIBIT 10.13 PROMISSORY NOTE DIGITALCONVERGENCE.COM INC. $8,000,000 Dallas, Texas January 4, 1999 DIGITALCONVERGENCE.COM INC., a Delaware corporation (the "Company"), the principal office of which is located at 4264 Kellway Circle, Addison, Texas 75244, for value received hereby promises to pay to Infotainment Telepictures, Inc., or its registered assigns ("Payee"), the sum of Eight Million and 00/100ths Dollars ($8,000,000.00), or such lesser amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest thereon, as set forth below, on January 31, 2004. Payment of all amounts due hereunder shall be made by registered or certified mail to the registered address of Payee, or at such other address as Payee may, from time to time, designate in writing to the Company. The following is a statement of the rights of Payee of this Promissory Note and the conditions to which this Promissory Note is subject, and to which Payee hereof, by the acceptance of this Promissory Note, agrees: 1. DEFINITIONS. As used in this Promissory Note, the following terms, unless the context otherwise requires, have the following meanings: (a) "Anniversary Year" shall mean that period of time commencing on January 4 of each year and terminating on January 3 of the following year. (b) "Company" includes any corporation which shall succeed to or assume the obligations of the Company under this Promissory Note. (c) "Holder," when the context refers to a holder of this Promissory Note, shall mean any person who shall at the time be the registered holder of this Promissory Note. (d) "First Level Qualified Public Offering" shall mean the closing of an initial public offering of the common stock of the Company pursuant to which the Company shall raise at least Twenty Million Dollars ($20,000,000) after commissions and underwriting discounts. (e) "Second Level Qualified Public Offering" shall mean the closing of an initial public offering of the common stock of the Company pursuant to which the Company shall raise at least Thirty Million Dollars ($30,000,000) after commissions and underwriting discounts. (f) "Sale of Assets" shall mean the sale of all or substantially all of the assets of the Company. 1 2. INTEREST. (a) INTEREST RATE. The unpaid principal balance of this Promissory Note shall bear interest at a rate equal to 6.0% per annum from the date hereof until paid in full. (b) PAYMENT OF PRINCIPAL AND INTEREST. Accrued interest shall not be payable during the first two Anniversary Years hereof unless otherwise determined by the Board of Directors of the Company. At the end of the second Anniversary Year the accrued amount of interest not paid shall be added to the principal amount of this Promissory Note (collectively, the "Revised Principal Amount") and interest thereafter should be calculated on the Revised Principal Amount or so much of the unpaid principal balance of this Promissory Note then outstanding. During the third Anniversary Year hereof the Company shall pay interest only on a quarterly basis such amounts to be due and payable on March 31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001, respectively. During the fourth and fifth Anniversary Years quarterly payments of principal and interest shall be due and payable. The amount of the principal payment due for each such quarterly payment, unless earlier paid, shall be 12.5% of the principal amount of this Promissory Note outstanding as of the end of the second Anniversary Year, or if higher, the Revised Principal Amount. 3. VOLUNTARY PAYMENT. Upon five (5) days' prior written notice to Payee, the Company may PREPAY the principal sum of this Promissory Note, at any time, in whole or in part, plus unpaid accrued interest to the date of payment. 4. MANDATORY PAYMENTS. (a) UPON LIQUIDATION OF THE COMPANY. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a Sale of Assets, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of capital stock of the Company by reason of their ownership thereof, all outstanding principal and unpaid accrued interest on this Promissory Note shall be immediately due and payable. (b) UPON EVENT OF DEFAULT. Within 30 days of Payee obtaining actual knowledge of the occurrence of an Event of Default (as hereinafter defined), Payee may demand the prepayment of all or any portion of this Promissory Note by submission of written notice of prepayment to the Company. Following the receipt of such notice, the Company shall prepay the portion of this Promissory Note requested to be prepaid as soon as reasonably practicable, but in any event within 30 days of date of such notice. An Event of Default for purposes of this Section 4(b) shall mean: (i) the failure to pay interest or principal on any scheduled payment date; (ii) the filing of any petition, whether voluntary or involuntary, seeking the reorganization or liquidation of the Company under any provision of the Federal Bankruptcy Code or any other federal or state reorganization, insolvency or debtor relief law; or (iii) the appointment of any receiver, liquidator or trustee for the Company or any of its properties by a court order and which appointment is not vacated within 30 days; or (iv) the Company is adjudicated insolvent or the Company shall make an assignment for the benefit of any of its creditors, admit in writing an inability to pay debts when they become due in the ordinary course of its business, or consent to 2 the appointment of a receiver, trustee or liquidator for the Company or all or any part of the property of the Company. (c) UPON QUALIFIED PUBLIC OFFERING. If, at any time, the Company proposes to make a First Level Qualified Public Offering, then at the closing of the First Level Qualified Public Offering, fifty percent (50%) of the principal amount of this Promissory Note, plus the unpaid accrued interest thereon, shall be prepaid. If, at any time, the Company proposes to make a Second Level Qualified Public Offering, then at the closing of the Second Level Qualified Public Offering, all of the principal amount of this Promissory Note, plus the unpaid accrued interest thereon, shall be prepaid in full. 5. ASSIGNMENT. The rights of the Company and Payee shall be binding upon and benefit the permitted successors, assigns, heirs, administrators and transferees of the parties. 6. WAIVER AND AMENDMENT. Any provision of this Promissory Note may be amended, WAIVED or modified upon the written consent of the Company and Payee of this Promissory Note. 7. SUBORDINATION. Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to make payments of principal or interest hereunder if the Company shall, at SUCH time, be in payment default on the payment of any secured debt of the Company or any debentures issued by the Company to investors in the Company. 8. AGREEMENT NOT TO ATTACH. The Payee, by its acceptance of this Promissory Note, agrees that in the Event of Default as described in subsection 4(b)(i) hereof, and whether or not the Payee shall have obtained a judgment thereon, unless the Company shall also be in default pursuant to subsections 4(b)(ii), (iii) or (iv) hereof, Payee shall not seek, or cause any third party to seek, an attachment on or possession of any of the Company's intellectual property, including but not limited to any of the Company's technology, patents, trademarks, copyrights or any goodwill associated with any of the foregoing. 9. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or, if MAILED, by registered or certified mail, postage prepaid, at the respective addresses of the parties as set forth herein. Any party hereto by notice so given may change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail in the manner set forth above and shall be deemed to have been received when delivered. 10. PAYMENTS DUE ON SATURDAY, SUNDAY OR LEGAL HOLIDAYS. If an interest payment date for this Promissory Note, or a date fixed for payment or prepayment of all or a portion of this Promissory Note shall be a Saturday, Sunday or, in Dallas, Texas, a legal holiday or a day on which BANKING institutions are authorized or required by law or executive order to close or remain closed, then any such payment need not be made on such date but may be made on the next succeeding day which is not a Saturday, Sunday, or in such city, a legal holiday or a day on 3 which banking institutions are closed, with the same force and effect as if made on such required payment date. 11. GOVERNING LAW. This Promissory Note shall be governed by and construed in accordance with the laws of the State of Texas, excluding that body of law relating to conflict of laws. 12. HEADINGS; REFERENCES. All headings used herein are used for convenience only and shall not be USED to construe or interpret this Promissory Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof. 13. USURY SAVINGS CLAUSE. Regardless of any provision contained herein, or in any document executed in connection herewith, Payee shall never be entitled to receive, collect, or apply, as interest on the indebtedness evidenced hereby, any amount in excess of the maximum rate permitted BY law. If Payee ever receives, collects, or applies, as interest, any such excess, such amount which would be excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if, the principal hereof is paid in full, any remaining excess shall be refunded to the Company. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the maximum rate permitted by law, the Company and Payee shall, to the maximum extent permitted under applicable law: (a) characterize any nonprincipal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) prorate, allocate, and spread, the total amount of interest throughout the entire contemplated term hereof, provided, that if the principal balance hereof is paid and performed in full prior to the end of the full contemplated term hereof. However, if the interest received for the actual period of existence thereof exceeds the maximum rate permitted by law, Payee shall either apply or refund to the Company the amount of such excess as herein provided, and in such event, Payee shall not be subject to any penalties provided by any laws for contracting for, charging, or receiving interest in excess of the maximum rate permitted by law. IN WITNESS WHEREOF, the Company has caused this Promissory Note to be issued this 4th day of January, 1999. DIGITALCONVERGENCE.COM INC. By: /s/ J. Jovan Philyaw ---------------------------- Its: President - Secretary ----------------------- Name of Holder: Infotainment Telepictures, Inc. Address: 4264 Kellway Circle Addison, Texas 75244 4 EX-10.14 19 EXHIBIT 10.14 THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN EXEMPTION FROM REGISTRATION, UNDER SAID ACT. DIGITALCONVERGENCE.COM INC. 8.0% DEBENTURE SERIES 1999A $1,500,000 Dallas, Texas January 28, 1999 DIGITALCONVERGENCE.COM INC., a Delaware corporation (the "Company"), the principal office of which is located at 4264 Kellway Circle, Addison, Texas 75244, for value received hereby promises to pay to JAT III L.L.C., or its registered assigns, the sum of One Million Five Hundred Thousand and 00/100ths Dollars ($1,500,000), or such lesser amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest thereon, as set forth below, on January 27, 2004. Payment of all amounts due hereunder shall be made by registered or certified mail to the registered address of the Holder, or at such other address as Holder may, from time to time, designate in writing to the Company. This Debenture is issued in connection with the transactions described in Section 1.1 of that certain Common Stock and Debenture Purchase Agreement of even date herewith by and among the Company and the Purchasers described therein, as the same may from time to time be amended, modified or supplemented (the "Purchase Agreement"). The Holder of this Debenture is subject to certain restrictions set forth in the Purchase Agreement and shall be entitled to certain rights and privileges set forth in the Purchase Agreement. This Debenture is one of the Debentures referred to as the "Debentures" in the Purchase Agreement. The following is a statement of the rights of the Holder of this Debenture and the conditions to which this Debenture is subject, and to which the Holder hereof, by the acceptance of this Debenture, agrees: 1. DEFINITIONS. As used in this Debenture, the following terms, unless the context otherwise requires, have the following meanings: (a) "Anniversary Year" shall mean that period of time commencing on January 28th of each year and terminating on January 27 of the following year. (b) "Company" includes any corporation which shall succeed to or assume the obligations of the Company under this Debenture. (c) "Holder," when the context refers to a holder of this Debenture, shall mean any person who shall at the time be the registered holder of this Debenture. 1 (d) "First Level Qualified Public Offering" shall mean the closing of an initial public offering of the common stock of the Company pursuant to which the Company shall raise at least Twenty Million Dollars ($20,000,000) after commissions and underwriting discounts. (e) "Second Level Qualified Public Offering" shall mean the closing of an initial public offering of the common stock of the Company pursuant to which the Company shall raise at least Thirty Million Dollars ($30,000,000) after commissions and underwriting discounts. (f) "Sale of Assets" shall mean the sale of all or substantially all of the assets of the Company. 2. INTEREST. (a) INTEREST RATE. The unpaid principal balance of this Debenture shall bear interest at a rate equal to 8.0% per annum from the date hereof until paid in full. (b) PAYMENT OF PRINCIPAL AND INTEREST. Accrued interest shall not be payable during the first two Anniversary Years hereof unless otherwise determined by the Board of Directors of the Company. At the end of the second Anniversary Year the accrued amount of interest not paid shall be added to the principal amount of this Debenture (collectively, the "Revised Principal Amount") and interest thereafter should be calculated on the Revised Principal Amount or so much of the unpaid principal balance of this Debenture then outstanding. During the third Anniversary Year hereof the Company shall pay interest only on a quarterly basis such amounts to be due and payable on March 31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001, respectively. During the fourth and fifth Anniversary Years quarterly payments of principal and interest shall be due and payable. The amount of the principal payment due for each such quarterly payment, unless earlier paid, shall be 12.5% of the principal amount of this Debenture outstanding as of the end of the second Anniversary Year, or if higher, the Revised Principal Amount. 3. VOLUNTARY PAYMENT. Upon five (5) days' prior written notice to the Holder, the Company may prepay the principal sum of this Debenture, at any time, in whole or in part, plus unpaid accrued interest to the date of payment. 4. MANDATORY PAYMENTS. (a) UPON LIQUIDATION OF THE COMPANY. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a Sale of Assets, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of capital stock of the Company by reason of their ownership thereof, all outstanding principal and unpaid accrued interest on this Debenture shall be immediately due and payable. If the assets and funds of the Company are insufficient to permit payment in full of all of the then 2 outstanding Debentures issued pursuant to the Purchase Agreement, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of such Debentures in proportion to the principal amounts thereof outstanding at the time of payment. (b) UPON EVENT OF DEFAULT. Within 30 days of the Holder obtaining actual knowledge of the occurrence of an Event of Default (as hereinafter defined), the Holder may demand the prepayment of all or any portion of this Debenture by submission of written notice of prepayment to the Company. Following the receipt of such notice, the Company shall prepay the portion of this Debenture requested to be prepaid as soon as reasonably practicable, but in any event within 30 days of date of such notice. An Event of Default for purposes of this Section 4(b) shall mean: (i) the failure to pay interest or principal on any scheduled payment date; (ii) the occurrence of any material breach of any representation, warranty or covenant by the Company under the Purchase Agreement, if such breach is not cured within 30 days of the receipt by the Company of written notice thereof; or (iii) the filing of any petition, whether voluntary or involuntary, seeking the reorganization or liquidation of the Company under any provision of the Federal Bankruptcy Code or any other federal or state reorganization, insolvency or debtor relief law; or (iv) the appointment of any receiver, liquidator or trustee for the Company or any of its properties by a court order and which appointment is not vacated within 30 days; or (v) the Company is adjudicated insolvent or the Company shall make an assignment for the benefit of any of its creditors, admit in writing an inability to pay debts when they become due in the ordinary course of its business, or consent to the appointment of a receiver, trustee or liquidator for the Company or all or any part of the property of the Company. (c) UPON QUALIFIED PUBLIC OFFERING. If, at any time, the Company proposes to make a First Level Qualified Public Offering, then at the closing of the First Level Qualified Public Offering, fifty percent (50%) of the principal amount of this Debenture, plus the unpaid accured interest thereon, shall be prepaid. If, at any time, the Company proposes to make a Second Level Qualified Public Offering, then at the closing of the Second Level Qualified Public Offering, all of the principal amount of this Debenture, plus the unpaid accrued interest thereon, shall be prepaid. (d) LIMITATION. If, the Company lacks sufficient funds to pay lawfully all of the Debentures which the Company is, at any such time, obligated to pay in accordance with this Section 4, then holders of all the then outstanding Debentures issued pursuant to the Purchase Agreement shall share ratably in any funds legally available for payment of such Debentures according to the respective amounts which would be payable with respect to the face amount of the Debentures owned by them if all such Debentures were paid in full. 5. ASSIGNMENT. Subject to the restrictions on transfer described in Section 7 below, the rights of the Company and the Holder shall be binding upon and benefit the permitted successors, assigns, heirs, administrators and transferees of the parties. 3 6. WAIVER AND AMENDMENT. Any provision of this Debenture may be amended, waived or modified upon the written consent of the Company and the holders of all then outstanding Debentures issued pursuant to the Purchase Agreement. 7. AGREEMENT NOT TO ATTACH. The Holder, by its acceptance of this Debenture, agrees that in the Event of Default as described in subsection 4(b)(i) or (ii) hereof, and whether or not the Holder shall have obtained an judgment thereon, unless the Company shall also be in default pursuant to subsections 4(b)(iii), (iv) or (v) hereof, Holder shall not seek, or cause any third party to seek, an attachment on or possession of any of the Company's intellectual property, including but not limited to any of the Company's technology, patents, trademarks, copyright or any goodwill associated with any of the foregoing. 8. TRANSFER OF THIS DEBENTURE. This Debenture may not be transferred or assigned without the prior written consent of holders of at least seventy-five percent (75%) of the face amount of all the then outstanding Debentures issued pursuant to the Purchase Agreement, except that the Holder may transfer or assign this Debenture to an affiliate of the initial Holder of this Debenture without requiring such consent. With respect to any proposed offer, sale or other disposition of this Debenture, the Holder will give prior written notice to the Company and each of the other holders of the then outstanding Debentures issued pursuant to the Purchase Agreement, describing briefly the manner thereof, together with a written opinion of the Holder's counsel, addressed to the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Promptly upon receiving such written notice and reasonably satisfactory opinion, the Company, as promptly as practicable, shall notify the Holder that the Holder may sell or otherwise dispose of this Debenture, in accordance with the terms of the notice delivered to the Company and subject to the above consent requirement from other holders of Debentures. If a determination has been made pursuant to this Section 7 that the opinion of counsel for the Holder is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly after such determination has been made. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 9. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or, if mailed, by registered or certified mail, postage prepaid, at the respective addresses of the parties as set forth herein. Any party hereto by notice so given may change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail in the manner set forth above and shall be deemed to have been received when delivered. 10. PAYMENTS DUE ON SATURDAY, SUNDAY OR LEGAL HOLIDAYS. If an interest payment date for this Debenture, or a date fixed for payment or prepayment of all or a portion of this Debenture shall be a Saturday, Sunday or, in Dallas, Texas, a legal holiday or a day on which banking institutions are authorized or required by law or executive order to close or remain closed, then any such payment need not be made on such date but may be made on the next 4 succeeding day which is not a Saturday, Sunday, or in such city, a legal holiday or a day on which banking institutions are closed, with the same force and effect as if made on such required payment date. 11. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, excluding that body of law relating to conflict of laws. 12. HEADINGS; REFERENCES. All headings used herein are used for convenience only and shall not be used to construe or interpret this Debenture. Except where otherwise indicated, all references herein to Sections refer to Sections hereof. 13. USURY SAVINGS CLAUSE. Regardless of any provision contained herein, or in any document executed in connection herewith, the Holder shall never be entitled to receive, collect, or apply, as interest on the indebtedness evidenced hereby, any amount in excess of the maximum rate permitted by law. If the Holder ever receives, collects, or applies, as interest, any such excess, such amount which would be excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if, the principal hereof is paid in full, any remaining excess shall be refunded to the Company. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the maximum rate permitted by law, the Company and the Holder shall, to the maximum extent permitted under applicable law: (a) characterize any nonprincipal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) prorate, allocate, and spread, the total amount of interest throughout the entire contemplated term hereof, provided, that if the principal balance hereof is paid and performed in full prior to the end of the full contemplated term hereof. However, if the interest received for the actual period of existence thereof exceeds the maximum rate permitted by law, the Holder shall either apply or refund to the Company the amount of such excess as herein provided, and in such event, the Holder shall not be subject to any penalties provided by any laws for contracting for, charging, or receiving interest in excess of the maximum rate permitted by law. IN WITNESS WHEREOF, the Company has caused this Debenture to be issued this 28th day of January, 1999. DIGITALCONVERGENCE.COM INC. By: /s/ J. Jovan Philyaw ---------------------------- Its: President - Secretary ----------------------- Name of Holder: JAT III, L.L.C. Address: 8600 Douglas Ave. Dallas, Texas 75225 5 EX-10.15 20 EXHIBIT 10.15 THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN EXEMPTION FROM REGISTRATION, UNDER SAID ACT. DIGITALCONVERGENCE.COM INC. 8.0% DEBENTURE SERIES 1999A $500,000 Dallas, Texas January 28, 1999 DIGITALCONVERGENCE.COM INC., a Delaware corporation (the "Company"), the principal office of which is located at 4264 Kellway Circle, Addison, Texas 75244, for value received hereby promises to pay to B&G PARTNERSHIP, LTD., or its registered assigns, the sum of Five Hundred Thousand and 00/100ths Dollars ($500,000), or such lesser amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest thereon, as set forth below, on January 27, 2004. Payment of all amounts due hereunder shall be made by registered or certified mail to the registered address of the Holder, or at such other address as Holder may, from time to time, designate in writing to the Company. This Debenture is issued in connection with the transactions described in Section 1.1 of that certain Common Stock and Debenture Purchase Agreement of even date herewith by and among the Company and the Purchasers described therein, as the same may from time to time be amended, modified or supplemented (the "Purchase Agreement"). The Holder of this Debenture is subject to certain restrictions set forth in the Purchase Agreement and shall be entitled to certain rights and privileges set forth in the Purchase Agreement. This Debenture is one of the Debentures referred to as the "Debentures" in the Purchase Agreement. The following is a statement of the rights of the Holder of this Debenture and the conditions to which this Debenture is subject, and to which the Holder hereof, by the acceptance of this Debenture, agrees: 1. DEFINITIONS. As used in this Debenture, the following terms, unless the context otherwise requires, have the following meanings: (a) "Anniversary Year" shall mean that period of time commencing on January 28th of each year and terminating on January 27 of the following year. (b) "Company" includes any corporation which shall succeed to or assume the obligations of the Company under this Debenture. 1 (c) "Holder," when the context refers to a holder of this Debenture, shall mean any person who shall at the time be the registered holder of this Debenture. (d) "First Level Qualified Public Offering" shall mean the closing of an initial public offering of the common stock of the Company pursuant to which the Company shall raise at least Twenty Million Dollars ($20,000,000) after commissions and underwriting discounts. (e) "Second Level Qualified Public Offering" shall mean the closing of an initial public offering of the common stock of the Company pursuant to which the Company shall raise at least Thirty Million Dollars ($30,000,000) after commissions and underwriting discounts. (f) "Sale of Assets" shall mean the sale of all or substantially all of the assets of the Company. 2. INTEREST. (a) INTEREST RATE. The unpaid principal balance of this Debenture shall bear interest at a rate equal to 8.0% per annum from the date hereof until paid in full. (b) PAYMENT OF PRINCIPAL AND INTEREST. Accrued interest shall not be payable during the first two Anniversary Years hereof unless otherwise determined by the Board of Directors of the Company. At the end of the second Anniversary Year the accrued amount of interest not paid shall be added to the principal amount of this Debenture (collectively, the "Revised Principal Amount") and interest thereafter should be calculated on the Revised Principal Amount or so much of the unpaid principal balance of this Debenture then outstanding. During the third Anniversary Year hereof the Company shall pay interest only on a quarterly basis such amounts to be due and payable on March 31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001, respectively. During the fourth and fifth Anniversary Years quarterly payments of principal and interest shall be due and payable. The amount of the principal payment due for each such quarterly payment, unless earlier paid, shall be 12.5% of the principal amount of this Debenture outstanding as of the end of the second Anniversary Year, or if higher, the Revised Principal Amount. 3. VOLUNTARY PAYMENT. Upon five (5) days' prior written notice to the Holder, the Company may prepay the principal sum of this Debenture, at any time, in whole or in part, plus unpaid accrued interest to the date of payment. 4. MANDATORY PAYMENTS. (a) UPON LIQUIDATION OF THE COMPANY. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a Sale of Assets, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of capital stock of the Company by reason of their ownership thereof, all outstanding 2 principal and unpaid accrued interest on this Debenture shall be immediately due and payable. If the assets and funds of the Company are insufficient to permit payment in full of all of the then outstanding Debentures issued pursuant to the Purchase Agreement, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of such Debentures in proportion to the principal amounts thereof outstanding at the time of payment. (b) UPON EVENT OF DEFAULT. Within 30 days of the Holder obtaining actual knowledge of the occurrence of an Event of Default (as hereinafter defined), the Holder may demand the prepayment of all or any portion of this Debenture by submission of written notice of prepayment to the Company. Following the receipt of such notice, the Company shall prepay the portion of this Debenture requested to be prepaid as soon as reasonably practicable, but in any event within 30 days of date of such notice. An Event of Default for purposes of this Section 4(b) shall mean: (i) the failure to pay interest or principal on any scheduled payment date; (ii) the occurrence of any material breach of any representation, warranty or covenant by the Company under the Purchase Agreement, if such breach is not cured within 30 days of the receipt by the Company of written notice thereof; or (iii) the filing of any petition, whether voluntary or involuntary, seeking the reorganization or liquidation of the Company under any provision of the Federal Bankruptcy Code or any other federal or state reorganization, insolvency or debtor relief law; or (iv) the appointment of any receiver, liquidator or trustee for the Company or any of its properties by a court order and which appointment is not vacated within 30 days; or (v) the Company is adjudicated insolvent or the Company shall make an assignment for the benefit of any of its creditors, admit in writing an inability to pay debts when they become due in the ordinary course of its business, or consent to the appointment of a receiver, trustee or liquidator for the Company or all or any part of the property of the Company. (c) UPON QUALIFIED PUBLIC OFFERING. If, at any time, the Company proposes to make a First Level Qualified Public Offering, then at the closing of the First Level Qualified Public Offering, fifty percent (50%) of the principal amount of this Debenture, plus the unpaid accured interest thereon, shall be prepaid. If, at any time, the Company proposes to make a Second Level Qualified Public Offering, then at the closing of the Second Level Qualified Public Offering, all of the principal amount of this Debenture, plus the unpaid accrued interest thereon, shall be prepaid. (d) LIMITATION. If, the Company lacks sufficient funds to pay lawfully all of the Debentures which the Company is, at any such time, obligated to pay in accordance with this Section 4, then holders of all the then outstanding Debentures issued pursuant to the Purchase Agreement shall share ratably in any funds legally available for payment of such Debentures according to the respective amounts which would be payable with respect to the face amount of the Debentures owned by them if all such Debentures were paid in full. 5. ASSIGNMENT. Subject to the restrictions on transfer described in Section 7 below, the rights of the Company and the Holder shall be binding upon and benefit the permitted successors, assigns, heirs, administrators and transferees of the parties. 3 6. WAIVER AND AMENDMENT. Any provision of this Debenture may be amended, waived or modified upon the written consent of the Company and the holders of all then outstanding Debentures issued pursuant to the Purchase Agreement. 7. AGREEMENT NOT TO ATTACH. The Holder, by its acceptance of this Debenture, agrees that in the Event of Default as described in subsection 4(b)(i) or (ii) hereof, and whether or not the Holder shall have obtained an judgment thereon, unless the Company shall also be in default pursuant to subsections 4(b)(iii), (iv) or (v) hereof, Holder shall not seek, or cause any third party to seek, an attachment on or possession of any of the Company's intellectual property, including but not limited to any of the Company's technology, patents, trademarks, copyright or any goodwill associated with any of the foregoing. 8. TRANSFER OF THIS DEBENTURE. This Debenture may not be transferred or assigned without the prior written consent of holders of at least seventy-five percent (75%) of the face amount of all the then outstanding Debentures issued pursuant to the Purchase Agreement, except that the Holder may transfer or assign this Debenture to an affiliate of the initial Holder of this Debenture without requiring such consent. With respect to any proposed offer, sale or other disposition of this Debenture, the Holder will give prior written notice to the Company and each of the other holders of the then outstanding Debentures issued pursuant to the Purchase Agreement, describing briefly the manner thereof, together with a written opinion of the Holder's counsel, addressed to the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Promptly upon receiving such written notice and reasonably satisfactory opinion, the Company, as promptly as practicable, shall notify the Holder that the Holder may sell or otherwise dispose of this Debenture, in accordance with the terms of the notice delivered to the Company and subject to the above consent requirement from other holders of Debentures. If a determination has been made pursuant to this Section 7 that the opinion of counsel for the Holder is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly after such determination has been made. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 9. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or, if mailed, by registered or certified mail, postage prepaid, at the respective addresses of the parties as set forth herein. Any party hereto by notice so given may change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail in the manner set forth above and shall be deemed to have been received when delivered. 10. PAYMENTS DUE ON SATURDAY, SUNDAY OR LEGAL HOLIDAYS. If an interest payment date for this Debenture, or a date fixed for payment or prepayment of all or a portion of this Debenture shall be a Saturday, Sunday or, in Dallas, Texas, a legal holiday or a day on which banking institutions are authorized or required by law or executive order to close or remain 4 closed, then any such payment need not be made on such date but may be made on the next succeeding day which is not a Saturday, Sunday, or in such city, a legal holiday or a day on which banking institutions are closed, with the same force and effect as if made on such required payment date. 11. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, excluding that body of law relating to conflict of laws. 12. HEADINGS; REFERENCES. All headings used herein are used for convenience only and shall not be used to construe or interpret this Debenture. Except where otherwise indicated, all references herein to Sections refer to Sections hereof. 13. USURY SAVINGS CLAUSE. Regardless of any provision contained herein, or in any document executed in connection herewith, the Holder shall never be entitled to receive, collect, or apply, as interest on the indebtedness evidenced hereby, any amount in excess of the maximum rate permitted by law. If the Holder ever receives, collects, or applies, as interest, any such excess, such amount which would be excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if, the principal hereof is paid in full, any remaining excess shall be refunded to the Company. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the maximum rate permitted by law, the Company and the Holder shall, to the maximum extent permitted under applicable law: (a) characterize any nonprincipal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) prorate, allocate, and spread, the total amount of interest throughout the entire contemplated term hereof, provided, that if the principal balance hereof is paid and performed in full prior to the end of the full contemplated term hereof. However, if the interest received for the actual period of existence thereof exceeds the maximum rate permitted by law, the Holder shall either apply or refund to the Company the amount of such excess as herein provided, and in such event, the Holder shall not be subject to any penalties provided by any laws for contracting for, charging, or receiving interest in excess of the maximum rate permitted by law. IN WITNESS WHEREOF, the Company has caused this Debenture to be issued this 28th day of January, 1999. DIGITALCONVERGENCE.COM INC. By: /s/ J. Jovan Philyaw ----------------------------- Its: President - Secretary ------------------------ Name of Holder: B&G Partnership, Ltd. Address: 17604 Woods Edge Drive Dallas, Texas 75287 5 EX-10.16 21 EXHIBIT 10.16 THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN EXEMPTION FROM REGISTRATION, UNDER SAID ACT. DIGITALCONVERGENCE.COM INC. 8.0% DEBENTURE SERIES 1999A $500,000 Dallas, Texas January 28, 1999 DIGITALCONVERGENCE.COM INC., a Delaware corporation (the "Company"), the principal office of which is located at 4264 Kellway Circle, Addison, Texas 75244, for value received hereby promises to pay to BCG PARTNERSHIP, LTD., or its registered assigns, the sum of Five Hundred Thousand and 00/100ths Dollars ($500,000), or such lesser amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest thereon, as set forth below, on January 27, 2004. Payment of all amounts due hereunder shall be made by registered or certified mail to the registered address of the Holder, or at such other address as Holder may, from time to time, designate in writing to the Company. This Debenture is issued in connection with the transactions described in Section 1.1 of that certain Common Stock and Debenture Purchase Agreement of even date herewith by and among the Company and the Purchasers described therein, as the same may from time to time be amended, modified or supplemented (the "Purchase Agreement"). The Holder of this Debenture is subject to certain restrictions set forth in the Purchase Agreement and shall be entitled to certain rights and privileges set forth in the Purchase Agreement. This Debenture is one of the Debentures referred to as the "Debentures" in the Purchase Agreement. The following is a statement of the rights of the Holder of this Debenture and the conditions to which this Debenture is subject, and to which the Holder hereof, by the acceptance of this Debenture, agrees: 1. DEFINITIONS. As used in this Debenture, the following terms, unless the context otherwise requires, have the following meanings: (a) "Anniversary Year" shall mean that period of time commencing on January 28th of each year and terminating on January 27 of the following year. (b) "Company" includes any corporation which shall succeed to or assume the obligations of the Company under this Debenture. 1 (c) "Holder," when the context refers to a holder of this Debenture, shall mean any person who shall at the time be the registered holder of this Debenture. (d) "First Level Qualified Public Offering" shall mean the closing of an initial public offering of the common stock of the Company pursuant to which the Company shall raise at least Twenty Million Dollars ($20,000,000) after commissions and underwriting discounts. (e) "Second Level Qualified Public Offering" shall mean the closing of an initial public offering of the common stock of the Company pursuant to which the Company shall raise at least Thirty Million Dollars ($30,000,000) after commissions and underwriting discounts. (f) "Sale of Assets" shall mean the sale of all or substantially all of the assets of the Company. 2. INTEREST. (a) INTEREST RATE. The unpaid principal balance of this Debenture shall bear interest at a rate equal to 8.0% per annum from the date hereof until paid in full. (b) PAYMENT OF PRINCIPAL AND INTEREST. Accrued interest shall not be payable during the first two Anniversary Years hereof unless otherwise determined by the Board of Directors of the Company. At the end of the second Anniversary Year the accrued amount of interest not paid shall be added to the principal amount of this Debenture (collectively, the "Revised Principal Amount") and interest thereafter should be calculated on the Revised Principal Amount or so much of the unpaid principal balance of this Debenture then outstanding. During the third Anniversary Year hereof the Company shall pay interest only on a quarterly basis such amounts to be due and payable on March 31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001, respectively. During the fourth and fifth Anniversary Years quarterly payments of principal and interest shall be due and payable. The amount of the principal payment due for each such quarterly payment, unless earlier paid, shall be 12.5% of the principal amount of this Debenture outstanding as of the end of the second Anniversary Year, or if higher, the Revised Principal Amount. 3. VOLUNTARY PAYMENT. Upon five (5) days' prior written notice to the Holder, the Company may prepay the principal sum of this Debenture, at any time, in whole or in part, plus unpaid accrued interest to the date of payment. 4. MANDATORY PAYMENTS. (a) UPON LIQUIDATION OF THE COMPANY. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a Sale of Assets, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of capital stock of the Company by reason of their ownership thereof, all outstanding 2 principal and unpaid accrued interest on this Debenture shall be immediately due and payable. If the assets and funds of the Company are insufficient to permit payment in full of all of the then outstanding Debentures issued pursuant to the Purchase Agreement, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of such Debentures in proportion to the principal amounts thereof outstanding at the time of payment. (b) UPON EVENT OF DEFAULT. Within 30 days of the Holder obtaining actual knowledge of the occurrence of an Event of Default (as hereinafter defined), the Holder may demand the prepayment of all or any portion of this Debenture by submission of written notice of prepayment to the Company. Following the receipt of such notice, the Company shall prepay the portion of this Debenture requested to be prepaid as soon as reasonably practicable, but in any event within 30 days of date of such notice. An Event of Default for purposes of this Section 4(b) shall mean: (i) the failure to pay interest or principal on any scheduled payment date; (ii) the occurrence of any material breach of any representation, warranty or covenant by the Company under the Purchase Agreement, if such breach is not cured within 30 days of the receipt by the Company of written notice thereof; or (iii) the filing of any petition, whether voluntary or involuntary, seeking the reorganization or liquidation of the Company under any provision of the Federal Bankruptcy Code or any other federal or state reorganization, insolvency or debtor relief law; or (iv) the appointment of any receiver, liquidator or trustee for the Company or any of its properties by a court order and which appointment is not vacated within 30 days; or (v) the Company is adjudicated insolvent or the Company shall make an assignment for the benefit of any of its creditors, admit in writing an inability to pay debts when they become due in the ordinary course of its business, or consent to the appointment of a receiver, trustee or liquidator for the Company or all or any part of the property of the Company. (c) UPON QUALIFIED PUBLIC OFFERING. If, at any time, the Company proposes to make a First Level Qualified Public Offering, then at the closing of the First Level Qualified Public Offering, fifty percent (50%) of the principal amount of this Debenture, plus the unpaid accured interest thereon, shall be prepaid. If, at any time, the Company proposes to make a Second Level Qualified Public Offering, then at the closing of the Second Level Qualified Public Offering, all of the principal amount of this Debenture, plus the unpaid accrued interest thereon, shall be prepaid. (d) LIMITATION. If, the Company lacks sufficient funds to pay lawfully all of the Debentures which the Company is, at any such time, obligated to pay in accordance with this Section 4, then holders of all the then outstanding Debentures issued pursuant to the Purchase Agreement shall share ratably in any funds legally available for payment of such Debentures according to the respective amounts which would be payable with respect to the face amount of the Debentures owned by them if all such Debentures were paid in full. 5. ASSIGNMENT. Subject to the restrictions on transfer described in Section 7 below, the rights of the Company and the Holder shall be binding upon and benefit the permitted successors, assigns, heirs, administrators and transferees of the parties. 3 6. WAIVER AND AMENDMENT. Any provision of this Debenture may be amended, waived or modified upon the written consent of the Company and the holders of all then outstanding Debentures issued pursuant to the Purchase Agreement. 7. AGREEMENT NOT TO ATTACH. The Holder, by its acceptance of this Debenture, agrees that in the Event of Default as described in subsection 4(b)(i) or (ii) hereof, and whether or not the Holder shall have obtained an judgment thereon, unless the Company shall also be in default pursuant to subsections 4(b)(iii), (iv) or (v) hereof, Holder shall not seek, or cause any third party to seek, an attachment on or possession of any of the Company's intellectual property, including but not limited to any of the Company's technology, patents, trademarks, copyright or any goodwill associated with any of the foregoing. 8. TRANSFER OF THIS DEBENTURE. This Debenture may not be transferred or assigned without the prior written consent of holders of at least seventy-five percent (75%) of the face amount of all the then outstanding Debentures issued pursuant to the Purchase Agreement, except that the Holder may transfer or assign this Debenture to an affiliate of the initial Holder of this Debenture without requiring such consent. With respect to any proposed offer, sale or other disposition of this Debenture, the Holder will give prior written notice to the Company and each of the other holders of the then outstanding Debentures issued pursuant to the Purchase Agreement, describing briefly the manner thereof, together with a written opinion of the Holder's counsel, addressed to the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Promptly upon receiving such written notice and reasonably satisfactory opinion, the Company, as promptly as practicable, shall notify the Holder that the Holder may sell or otherwise dispose of this Debenture, in accordance with the terms of the notice delivered to the Company and subject to the above consent requirement from other holders of Debentures. If a determination has been made pursuant to this Section 7 that the opinion of counsel for the Holder is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly after such determination has been made. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 9. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or, if mailed, by registered or certified mail, postage prepaid, at the respective addresses of the parties as set forth herein. Any party hereto by notice so given may change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail in the manner set forth above and shall be deemed to have been received when delivered. 10. PAYMENTS DUE ON SATURDAY, SUNDAY OR LEGAL HOLIDAYS. If an interest payment date for this Debenture, or a date fixed for payment or prepayment of all or a portion of this Debenture shall be a Saturday, Sunday or, in Dallas, Texas, a legal holiday or a day on which banking institutions are authorized or required by law or executive order to close or remain 4 closed, then any such payment need not be made on such date but may be made on the next succeeding day which is not a Saturday, Sunday, or in such city, a legal holiday or a day on which banking institutions are closed, with the same force and effect as if made on such required payment date. 11. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, excluding that body of law relating to conflict of laws. 12. HEADINGS; REFERENCES. All headings used herein are used for convenience only and shall not be used to construe or interpret this Debenture. Except where otherwise indicated, all references herein to Sections refer to Sections hereof. 13. USURY SAVINGS CLAUSE. Regardless of any provision contained herein, or in any document executed in connection herewith, the Holder shall never be entitled to receive, collect, or apply, as interest on the indebtedness evidenced hereby, any amount in excess of the maximum rate permitted by law. If the Holder ever receives, collects, or applies, as interest, any such excess, such amount which would be excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if, the principal hereof is paid in full, any remaining excess shall be refunded to the Company. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the maximum rate permitted by law, the Company and the Holder shall, to the maximum extent permitted under applicable law: (a) characterize any nonprincipal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) prorate, allocate, and spread, the total amount of interest throughout the entire contemplated term hereof, provided, that if the principal balance hereof is paid and performed in full prior to the end of the full contemplated term hereof. However, if the interest received for the actual period of existence thereof exceeds the maximum rate permitted by law, the Holder shall either apply or refund to the Company the amount of such excess as herein provided, and in such event, the Holder shall not be subject to any penalties provided by any laws for contracting for, charging, or receiving interest in excess of the maximum rate permitted by law. IN WITNESS WHEREOF, the Company has caused this Debenture to be issued this 28th day of January, 1999. DIGITALCONVERGENCE.COM INC. By: /s/ J. Jovan Philyaw ----------------------------- Its: President - Secretary ------------------------ Name of Holder: BCG Partnership, Ltd. Address: 17604 Woods Edge Drive Dallas, Texas 75287 5 EX-10.17 22 EXHIBIT 10.17 INDEMNIFICATION AGREEMENT This INDEMNIFICATION AGREEMENT (the "Agreement") is made and entered into effective as of this ______ day of _______________, ____, by and between DigitalConvergence.:Com Inc., a Delaware corporation (including any successors thereto, the "Company"), and ________________________ ("Indemnitee"). RECITALS: A. Competent and experienced persons are reluctant to serve or to continue to serve corporations as directors, officers, or in other capacities unless they are provided with adequate protection through insurance or indemnification (or both) against claims and actions against them arising out of their service to and activities on behalf of those corporations. B. The current uncertainties relating to the availability of adequate insurance for directors and officers have increased the difficulty for corporations to attract and retain competent and experienced persons. C. The Board of Directors of the Company (the "Board") has determined that the continuation of present trends in litigation will make it more difficult to attract and retain competent and experienced persons, that this situation is detrimental to the best interests of the Company's stockholders, and that the Company should act to assure its directors and officers that there will be increased certainty of adequate protection in the future. D. It is reasonable, prudent, and necessary for the Company to obligate itself contractually to indemnify its directors and officers to the fullest extent permitted by applicable law in order to induce them to serve or continue to serve the Company. E. Indemnitee is willing to serve and continue to serve the Company on the condition that he be indemnified to the fullest extent permitted by law. F. Concurrently with the execution of this Agreement, Indemnitee is agreeing to serve or to continue to serve as a director or officer of the Company. AGREEMENTS: NOW, THEREFORE, in consideration of the foregoing premises, Indemnitee's agreement to serve or continue to serve as a director or officer of the Company, and the covenants contained in this Agreement, the Company and Indemnitee hereby covenant and agree as follows: -1- 1. CERTAIN DEFINITIONS. For purposes of this Agreement: a. AFFILIATE: shall mean any Person that directly, or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the Person specified. b. CHANGE OF CONTROL: shall mean the occurrence of any of the following events: i. The acquisition after the date of this Agreement by any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this paragraph (i), the following acquisitions shall not constitute a Change of Control: any acquisition directly from the Company or any Subsidiary thereof; any acquisition by the Company or any Subsidiary thereof; any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary of the Company; or any acquisition by any entity or its security holders pursuant to a transaction which complies with clauses (A), (B), and (C) of paragraph (iii) below; ii. Individuals who, as of the date of this Agreement, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date of this Agreement whose election or appointment by the Board or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board, shall in either case be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; -2- iii. Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or an acquisition of assets of another corporation (a "Business Combination"), unless in each case, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Corporation Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or the corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership of the Company existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or iv. Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. c. CLAIM: shall mean any threatened, pending, or completed action, suit, or proceeding (including, without limitation, securities laws actions, suits, and proceedings and also any cross claim or counterclaim in any action, suit, or proceeding), whether civil, criminal, arbitral, administrative, or investigative in nature, or any inquiry or investigation (including discovery), whether conducted by the Company or any other Person, that Indemnitee in good faith believes might lead to the institution of any action, suit, or proceeding. -3- d. EXPENSES: shall mean all costs, expenses (including attorneys' and expert witnesses' fees), and obligations paid or incurred in connection with investigating, defending (including affirmative defenses and counterclaims), being a witness in, or participating in (including on appeal), or preparing to defend, be a witness in, or participate in, any Claim relating to any Indemnifiable Event. e. INDEMNIFIABLE EVENT: shall mean any actual or alleged act, omission, statement, misstatement, event, or occurrence related to the fact that Indemnitee is or was a director, officer, agent, or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, trustee, agent, or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise, or by reason of any actual or alleged thing done or not done by Indemnitee in any such capacity. For purposes of this Agreement, the Company agrees that Indemnitee's service on behalf of or with respect to any Subsidiary or employee benefits plan of the Company or any Subsidiary of the Company shall be deemed to be at the request of the Company. f. INDEMNIFIABLE LIABILITIES: shall mean all Expenses and all other liabilities, damages (including, without limitation, punitive, exemplary, and the multiplied portion of any damages), judgments, payments, fines, penalties, amounts paid in settlement, and awards paid or incurred that arise out of, or in any way relate to, any Indemnifiable Event. g. POTENTIAL CHANGE OF CONTROL: shall be deemed to have occurred if (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change of Control, (ii) any Person (including the Company) publicly announces an intention to take or to consider taking actions that, if consummated, would constitute a Change of Control, or (iii) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change of Control has occurred. h. REVIEWING PARTY: shall mean a member or members of the Board who are not parties to the particular Claim for which Indemnitee is seeking indemnification or if a Change of Control has occurred or if there is a Potential Change of Control and Indemnitee so requests, or if the members of the Board so elect, or if all of the members of the Board are parties to such Claim, Special Counsel. i. SPECIAL COUNSEL: shall mean special, independent legal counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld), and who has not otherwise performed material services for the Company or for Indemnitee within the last three years (other than as Special Counsel under this Agreement or similar agreements). -4- j. SUBSIDIARY: shall mean, with respect to any Person, any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by that Person. INDEMNIFICATION AND EXPENSE ADVANCEMENT. k. The Company shall indemnify Indemnitee and hold Indemnitee harmless to the fullest extent permitted by law, as soon as practicable but in any event no later than 30 days after written demand is presented to the Company, from and against any and all Indemnifiable Liabilities. Notwithstanding the foregoing, the obligations of the Company under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined (in a written opinion, in any case in which Special Counsel is involved) that Indemnitee is not permitted to be indemnified under applicable law. Nothing contained in this Agreement shall require any determination under this Section 2(a) to be made by the Reviewing Party prior to the disposition or conclusion of the Claim against the Indemnitee. l. If so requested by Indemnitee, the Company shall advance to Indemnitee all reasonable Expenses incurred by Indemnitee to the fullest extent permitted by law (or, if applicable, reimburse Indemnitee for any and all reasonable Expenses incurred by Indemnitee and previously paid by Indemnitee) within ten business days after such request (an "Expense Advance") and delivery by Indemnitee of an undertaking to repay Expense Advances if and to the extent such undertaking is required by applicable law prior to the Company's payment of Expense Advances. The Company shall be obligated from time to time at the request of Indemnitee to make or pay an Expense Advance in advance of the final disposition or conclusion of any Claim. In connection with any request for an Expense Advance, if requested by the Company, Indemnitee or Indemnitee's counsel shall submit an affidavit stating that the Expenses to which the Expense Advances relate are reasonable. Any dispute as to the reasonableness of any Expense shall not delay an Expense Advance by the Company. If, when, and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be indemnified with respect to a Claim under applicable law or the amount of the Expense Advance was not reasonable, the Company shall be entitled to be reimbursed by Indemnitee and Indemnitee hereby agrees to reimburse the Company without interest (which agreement shall be an unsecured obligation of Indemnitee) for (x) all related Expense Advances theretofore made or paid by the Company in the event that it is determined that indemnification would not be permitted or (y) the excessive portion of any Expense Advances in the event that it is determined that such Expenses Advances were unreasonable, in either case, if and to the extent such reimbursement is required by applicable law; provided, however, that if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee could be indemnified under applicable law, or that the Expense Advances were reasonable, any determination made by the Reviewing Party that Indemnitee would not be -5- permitted to be indemnified under applicable law or that the Expense Advances were unreasonable shall not be binding, and the Company shall be obligated to continue to make Expense Advances, until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed), which determination shall be conclusive and binding. If there has been a Potential Change of Control or a Change of Control, the Reviewing Party shall be advised by or shall be Special Counsel, if Indemnitee so requests. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively is not permitted to be indemnified in whole or part under applicable law or that any Expense Advances were unreasonable, Indemnitee shall have the right to commence litigation in any court in the states of Texas or Delaware having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. m. Nothing in this Agreement, however, shall require the Company to indemnify Indemnitee with respect to any Claim initiated by Indemnitee, other than a Claim solely seeking enforcement of the Company's indemnification obligations to Indemnitee or a Claim authorized by the Board. CHANGE OF CONTROL. The Company agrees that, if there is a Potential Change in Control or a Change of Control and if Indemnitee requests in writing that Special Counsel be the Reviewing Party, then Special Counsel shall be the Reviewing Party. In such a case, the Company agrees not to request or seek reimbursement from Indemnitee of any indemnification payment or Expense Advances unless Special Counsel has rendered its written opinion to the Company and Indemnitee (i) that the Company was not or is not permitted under applicable law to pay Indemnitee and to allow Indemnitee to retain such indemnification payment or Expense Advances or (ii) that such Expense Advances were unreasonable. However, if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee could be indemnified under applicable law or that the Expense Advances were reasonable, any determination made by Special Counsel that Indemnitee would not be permitted to be indemnified under applicable law or that the Expense Advances were unreasonable shall not be binding, and Indemnitee shall not be required to reimburse the Company for any Expense Advance, and the Company shall be obligated to continue to make Expense Advances, until a final judicial determination is made with respect thereto (as to which all rights of appeal therefore have been exhausted or lapsed), which determination shall be conclusive and binding. The Company agrees to pay the reasonable fees of Special Counsel and to indemnify Special Counsel against any and all expenses (including attorneys' fees), claims, liabilities, and damages arising out of or relating to this Agreement or Special Counsel's engagement pursuant hereto. -6- ESTABLISHMENT OF TRUST. In the event of a Potential Change of Control or a Change of Control, the Company shall, upon written request by Indemnitee, create a trust for the benefit of Indemnitee (the "Trust") and from time to time upon written request of Indemnitee shall fund the Trust in an amount equal to all Indemnifiable Liabilities reasonably anticipated at the time to be incurred in connection with any Claim. The amount to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by the Reviewing Party. The terms of the Trust shall provide that, upon a Change of Control, the Trust shall not be revoked or the principal thereof invaded, without the written consent of Indemnitee, the trustee of the Trust shall advance, within ten business days of a request by Indemnitee, any and all reasonable Expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the circumstances in which Indemnitee would be required to reimburse the Company for Expense Advances under this Agreement), any required determination concerning the reasonableness of the Expenses to be made by the Reviewing Party, the Trust shall continue to be funded by the Company in accordance with the funding obligation set forth above, the trustee of the Trust shall promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to indemnification pursuant to this Agreement, and all unexpended funds in the Trust shall revert to the Company upon a final determination by the Reviewing Party or a court of competent jurisdiction, as the case may be, that Indemnitee has been fully indemnified under the terms of this Agreement. The trustee of the Trust shall be chosen by Indemnitee, and shall be an institution that is not affiliated with Indemnitee. Nothing in this Section 4 shall relieve the Company of any of its obligations under this Agreement. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify Indemnitee against any and all costs and expenses (including attorneys' and expert witnesses' fees) and, if requested by Indemnitee, shall (within two business days of that request) advance those costs and expenses to Indemnitee, that are incurred by Indemnitee if Indemnitee, whether by formal proceedings or through demand and negotiation without formal proceedings: (a) seeks to enforce Indemnitee's rights under this Agreement; (b) seeks to enforce Indemnitee's rights to expense advancement or indemnification under any other agreement or provision of the Company's Certificate of Incorporation, as amended (the "Certificate of Incorporation"), or Bylaws (the "Bylaws") now or hereafter in effect relating to Claims for Indemnifiable Events; or (c) seeks recovery under any directors' and officers' liability insurance policies maintained by the Company, in each case regardless of whether Indemnitee ultimately prevails; provided that a court of competent jurisdiction has not found Indemnitee's claim for indemnification or expense advancements under the foregoing clause (a), (b) or (c) to be frivolous, presented for an improper purpose, without evidentiary support, or otherwise sanctionable under Federal Rule of Civil Procedure No. 11 or an analogous rule or law, and provided further, that if a court makes such a finding, Indemnitee shall reimburse the Company for all amounts previously advanced to Indemnitee pursuant to this Section 5. Subject to the provisos contained in the preceding sentence, to the fullest extent permitted by law, the Company waives any and all rights that it may have to recover its costs and expenses from Indemnitee. PARTIAL INDEMNITY. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some, but not all, of Indemnitee's Indemnifiable Liabilities, the Company shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. -7- CONTRIBUTION. n. CONTRIBUTION PAYMENT. To the extent the indemnification provided for under any provision of this Agreement is determined (in the manner hereinabove provided) not to be permitted under applicable law, the Company, in lieu of indemnifying Indemnitee, shall, to the extent permitted by law, contribute to the amount of any and all Indemnifiable Liabilities incurred or paid by Indemnitee for which such indemnification is not permitted. The amount the Company contributes shall be in such proportion as is appropriate to reflect the relative fault of Indemnitee, on the one hand, and of the Company and any and all other parties (including officers and directors of the Company other than Indemnitee) who may be at fault (collectively, including the Company, the "Third Parties"), on the other hand. o. RELATIVE FAULT. The relative fault of the Third Parties and the Indemnitee shall be determined by reference to the relative fault of Indemnitee as determined by the court or other governmental agency or to the extent such court or other governmental agency does not apportion relative fault, by the Reviewing Party (which shall include Special Counsel) after giving effect to, among other things, the relative intent, knowledge, access to information, and opportunity to prevent or correct the relevant events, of each party, and other relevant equitable considerations. The Company and Indemnitee agree that it would not be just and equitable if contribution were determined by pro rata allocation or by any other method of allocation that does take account of the equitable considerations referred to in this Section 7(b). BURDEN OF PROOF. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified under any provision of this Agreement or to receive contribution pursuant to Section 7 of this Agreement, to the extent permitted by law the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. NO PRESUMPTION. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval), or conviction, or upon a plea of NOLO CONTENDERE, or its equivalent, or an entry of an order of probation prior to judgment shall not create a presumption (other than any presumption arising as a matter of law that the parties may not contractually agree to disregard) that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. NON-EXCLUSIVITY. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Bylaws or Certificate of Incorporation or the Delaware General Corporation Law or otherwise. To the extent that a change in the Delaware General Corporation Law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Bylaws or Certificate of Incorporation and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so -8- afforded by that change. Indemnitee's rights under this Agreement shall not be diminished by any amendment to the Certificate of Incorporation or Bylaws, or of any other agreement or instrument to which Indemnitee is not a party, and shall not diminish any other rights that Indemnitee now or in the future has against the Company. LIABILITY INSURANCE. Except as otherwise agreed to by the Company and Indemnitee in a written agreement, to the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by that policy or those policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer. PERIOD OF LIMITATIONS. No action, lawsuit, or proceeding may be brought against Indemnitee or Indemnitee's spouse, heirs, executors, or personal or legal representatives, nor may any cause of action be asserted in any such action, lawsuit, or proceeding, by or on behalf of the Company, after the expiration of two years after the statute of limitations commences with respect to Indemnitee's act or omission that gave rise to the action, lawsuit, proceeding, or cause of action; provided, however, that, if any shorter period of limitations is otherwise applicable to any such action, lawsuit, proceeding, or cause of action, the shorter period shall govern. AMENDMENTS. No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any provision of this Agreement shall be effective unless in a writing signed by the party granting the waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall that waiver constitute a continuing waiver. OTHER SOURCES. Indemnitee shall not be required to exercise any rights that Indemnitee may have against any other Person (for example, under an insurance policy) before Indemnitee enforces his rights under this Agreement. However, to the extent the Company actually indemnifies Indemnitee or advances him Expenses, the Company shall be subrogated to the rights of Indemnitee and shall be entitled to enforce any such rights which Indemnitee may have against third parties. Indemnitee shall assist the Company in enforcing those rights if it pays his costs and expenses of doing so. If Indemnitee is actually indemnified or advanced Expenses by any third party, then, for so long as Indemnitee is not required to disgorge the amounts so received, to that extent the Company shall be relieved of its obligation to indemnify Indemnitee or advance Indemnitee Expenses. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by merger or consolidation), spouses, heirs, and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company or another enterprise at the Company's request. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, that provision shall be fully severable; this Agreement shall be construed and enforced as if that illegal, invalid, or unenforceable provision had -9- never comprised a part hereof; and the remaining provisions shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of that illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in that state without giving effect to the principles of conflicts of laws. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. NOTICES. Whenever this Agreement requires or permits notice to be given by one party to the other, such notice must be in writing to be effective and shall be deemed delivered and received by the party to whom it is sent upon actual receipt (by any means) of such notice. Receipt of a notice by the Secretary of the Company shall be deemed receipt of such notice by the Company. COMPLETE AGREEMENT. This Agreement constitutes the complete understanding and agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings between the parties with respect to the subject matter hereof, other than any indemnification rights that Indemnitee may enjoy under the Certificate of Incorporation, the Bylaws, or the Delaware General Corporation Law. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but in making proof hereof it shall not be necessary to produce or account for more than one such counterpart. [Remainder of page intentionally left blank] EXECUTED as of the date first written above. DIGITALCONVERGENCE.:COM INC. By: _____________________________________ Name: _____________________________________ Title:_____________________________________ INDEMNITEE: -10- __________________________________ -11- EX-10.18-1 23 EXHIBIT 10.18.1 DIGITALCONVERGENCE.COM INC. 1999 STOCK OPTION PLAN 1. PURPOSE. DigitalConvergence.com inc., a Delaware corporation (herein, together with its successors, referred to as the "COMPANY"), by means of this 1999 Stock Option Plan (the "PLAN"), desires to afford certain individuals and key employees of the Company and any parent corporation or subsidiary corporation thereof now existing or hereafter formed or acquired (such parent and subsidiary corporations sometimes referred to herein as "RELATED ENTITIES") who are responsible for the continued growth of the Company an opportunity to acquire a proprietary interest in the Company, and thus to create in such persons an increased interest in and a greater concern for the welfare of the Company and any Related Entities. As used in the Plan, the terms "parent corporation" and "subsidiary corporation" shall mean, respectively, a corporation within the definition of such terms contained in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the "CODE"). All defined terms not otherwise defined in Sections 1 through 17 of this Plan shall have the meanings set forth in Section 18 of this Plan. The stock options described in Sections 6 and 7 (the "OPTIONS") and the shares of Common Stock (as hereinafter defined) acquired pursuant to the exercise of such Options are a matter of separate inducement and are not in lieu of any salary or other compensation for services. 2. ADMINISTRATION. (a) COMMITTEE. The Board of Directors of the Company (the "BOARD OF DIRECTORS") shall administer the Plan with respect to all Key Employees (as hereinafter defined) or Eligible Non-Employees (as hereinafter defined) or may delegate all or part of its duties under this Plan to any committee or sub-committee appointed by the Board of Directors (the "COMMITTEE") or to any officer or committee of officers of the Company, subject in each case to such conditions and limitations as the Board of Directors may establish and subject to the following sentence. Unless a majority of the members of the Board of Directors determines otherwise: (a) the Committee shall be constituted in a manner that satisfies the requirements of Rule 16b-3, which Committee shall administer the Plan with respect to all Key Employees or Eligible Non-Employees who are subject to Section 16 of the Exchange Act in a manner that satisfies the requirements of Rule 16b-3; and (b) the Committee shall be constituted in a manner that satisfies the requirements of Section 162(m), which Committee shall administer the Plan with respect to "performance-based compensation" for all Key Employees or Eligible Non-Employees who are reasonably expected to be "covered employees" as those terms are defined in Section 162(m). The number of persons that shall constitute the Committee shall be determined from time to time by a majority of all the members of the Board of Directors. Except for references in Sections 2(a), 2(b), and 2(c) and unless the context otherwise requires, references herein to the Committee shall also refer to the Board of Directors as -1- administrator of the Plan for Key Employees or Eligible Non-Employees or to the appropriate delegate of the Committee or the Board of Directors. (b) DURATION, REMOVAL, ETC. The members of the Committee shall serve at the pleasure of the Board of Directors, which shall have the power, at any time and from time to time, to remove members from or add members to the Committee. Removal from the Committee may be with or without cause. Any individual serving as a member of the Committee shall have the right to resign from membership in the Committee by written notice to the Board of Directors. The Board of Directors, and not the remaining members of the Committee, shall have the power and authority to fill vacancies on the Committee, however caused. (c) MEETINGS AND ACTIONS OF COMMITTEE. The Board of Directors shall designate which of the Committee members shall be the chairman of the Committee. If the Board of Directors fails to designate a Committee chairman, the members of the Committee shall elect one of the Committee members as chairman, who shall act as chairman until he ceases to be a member of the Committee or until the Board of Directors elects a new chairman. The Committee shall hold its meetings at those times and places as the chairman of the Committee may determine. At all meetings of the Committee, a quorum for the transaction of business shall be required, and a quorum shall be deemed present if at least a majority of the members of the Committee are present. At any meeting of the Committee, each member shall have one vote. All decisions and determinations of the Committee shall be made by the majority vote or majority decision of all of its members present at a meeting at which a quorum is present; provided, however, that any decision or determination reduced to writing and signed by all of the members of the Committee shall be as fully effective as if it had been made at a meeting that was duly called and held. The Committee may make any rules and regulations as it may deem advisable for the conduct of its business that are not inconsistent with the provisions of the Plan, the certificate of incorporation of the Company, the by-laws of the Company, Rule 16b-3 so long as it is applicable, and Section 162(m) so long as it is applicable. 3. SHARES AVAILABLE. Subject to the adjustments provided in Section 10, the maximum aggregate number of shares of Common Stock, $.01 par value, of the Company ("COMMON STOCK") in respect of which Options may be granted for all purposes under the Plan shall be 15,000 shares. If, for any reason, any shares as to which Options have been granted cease to be subject to purchase thereunder, including the expiration of such Option, the termination of such Option prior to exercise, or the forfeiture of such Option, such shares shall thereafter be available for grants under the Plan. Options granted under the Plan may be fulfilled in accordance with the terms of the Plan with (i) authorized and unissued shares of the Common Stock, (ii) issued shares of such Common Stock held in the Company's treasury, or (iii) issued shares of Common Stock reacquired by the Company in each situation as the Board of Directors or the Committee may determine from time to time. -2- 4. ELIGIBILITY AND BASES OF PARTICIPATION. Grants of Incentive Options (as hereinafter defined) and Non-Qualified Options (as hereinafter defined) may be made under the Plan, subject to and in accordance with Section 6, to Key Employees. As used herein, the term "KEY EMPLOYEE" shall mean any employee of the Company or any Related Entity, including officers and directors of the Company or any Related Entity who are also employees of the Company or any Related Entity, who is regularly employed on a salaried basis and who is so employed on the date of such grant, whom the Committee identifies as having a direct and significant effect on the performance of the Company or any Related Entity. Grants of Non-Qualified Options may be made, subject to and in accordance with Section 7, to any Eligible Non-Employee. As used herein, the term "ELIGIBLE NON-EMPLOYEE" shall mean any director of the Company who is not regularly employed on a salaried basis with the Company and any other person or entity of any nature whatsoever, specifically including an individual, a firm, a company, a corporation, a partnership, a trust, or other entity (collectively, a "PERSON"), that the Committee designates as eligible for a grant of Options pursuant to this Plan because such Person performs bona fide consulting, advisory, or other services for the Company or any Related Entity (other than services in connection with the offer or sale of securities in a capital-raising transaction) and the Board of Directors or the Committee determines that the Person has a direct and significant effect on the financial development of the Company or any Related Entity. The adoption of this Plan shall not be deemed to give any Person a right to be granted any Options. Notwithstanding any other provision of this Plan to the contrary, with respect to the grant of any Options to any Key Employee or Eligible Non-Employee, the Committee shall first determine the number of shares in respect of which Options are to be granted to such Key Employee or Eligible Non-Employee and shall then cause to be granted to such Key Employee or Eligible Non-Employee an Option exercisable for such shares. The exercise price per share of Common Stock under each Option shall be fixed by the Committee at the time of grant of the Option and shall equal at least 100% of the Fair Market Value of a share of Common Stock on the date of grant. 5. AUTHORITY OF COMMITTEE. Subject to the express provisions of the Plan and any applicable law with which the Company intends the Plan to comply, the Committee shall have the authority, in its sole and absolute discretion, (a) to adopt, amend, and rescind administrative and interpretive rules and regulations relating to the Plan, including without limitation to adopt and observe such procedures concerning the counting of Options against the Plan and individual maximums as it may deem appropriate from time to time; (b) to determine the Key Employees or Eligible Non-Employees to whom, and the time or times at which, Options shall be granted; (c) to determine the number of shares of Common Stock, that shall be the subject of each Option; (d) to determine the terms and provisions of each award -3- evidencing Options granted hereunder (which need not be identical), including provisions defining or otherwise relating to (i) the term and the period or periods and extent of exerciseability of the Options, (ii) the extent to which the transferability of shares of Common Stock issued or transferred pursuant to any Option is restricted, (iii) the effect of termination of employment on the Option, (iv) the effect of approved leaves of absence (consistent with any applicable regulations of the Internal Revenue Service) and (v) the establishment of procedures for an optionee (A) to have withheld from the total number of shares of Common Stock to be acquired upon the exercise of an Option that number of shares having a Fair Market Value which, together with such cash as shall be paid in respect of fractional shares, shall equal the aggregate exercise price under such Option for the number of shares then being acquired (including the shares to be so withheld), and (B) to exercise a portion of an Option by delivering that number of shares of Common Stock already owned by such optionee having an aggregate Fair Market Value which shall equal the partial Option exercise price and to deliver the shares thus acquired by such optionee in payment of shares to be received pursuant to the exercise of additional portions of such Option, the effect of which shall be that such optionee can in sequence utilize such newly acquired shares in payment of the exercise price of the entire Option, together with such cash as shall be paid in respect of fractional shares; provided, however, that (A) in the case of Incentive Options, no shares shall be used to pay the exercise price under this paragraph unless (1) such shares were not acquired through the exercise of Incentive Options or (2) if so acquired, (x) such shares have been held for more than two years since the grant of such Incentive Options and for more than one year since the exercise of such Incentive Options (the "Holding Period"), or (y) if such shares have not been held for the Holding Period, the optionee elects in writing to use such shares to pay the exercise price under this paragraph, and (B) no such procedure shall be available if there is an opinion of the Company's independent accounting firm that the use of such a procedure could negatively affect the financial statements of the Company or a Related Entity; (e) to accelerate, pursuant to Section 8 or otherwise, the time of exerciseability of any Option that has been granted; (f) to construe the respective awards evidencing Options pursuant to the Plan; (g) to make determinations of the Fair Market Value of the Common Stock pursuant to the Plan; (h) to delegate its duties under the Plan to such agents as it may appoint from time to time, subject to the second sentence of Section 2(a); and (i) to make all other determinations, perform all other acts, and exercise all other powers and authority necessary or advisable for administering the Plan, including the delegation of those ministerial acts and responsibilities as the Committee deems appropriate. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan, in any Option, or in any awards evidencing Options granted hereunder in the manner and to the extent it deems necessary or desirable to carry the Plan into effect, and the Committee shall be the sole and final judge of that necessity or desirability. The determinations of the Committee on the matters referred to in this Section 5 shall be final and conclusive. The Committee shall not have the power to appoint members of the Committee or to terminate, modify, or amend the Plan. Those powers are vested in the Board of Directors. From time to time, the Board of Directors and appropriate officers of the Company shall be and are authorized to take whatever actions are necessary to file required documents with -4- governmental authorities, stock exchanges, and other appropriate Persons to make shares of Common Stock available for issuance pursuant to awards evidencing Options granted hereunder. 6. STOCK OPTIONS FOR KEY EMPLOYEES. Subject to the express provisions of this Plan, the Committee shall have the authority to grant incentive stock options pursuant to Section 422 of the Code ("INCENTIVE OPTIONS"), to grant non-qualified stock options (options which do not qualify under Section 422 of the Code) ("NON-QUALIFIED OPTIONS"), and to grant both types of Options to Key Employees. No Incentive Option shall be granted pursuant to this Plan after the earlier of ten years from the date of adoption of the Plan or ten years from the date of approval of the Plan by the stockholders of the Company. Notwithstanding anything in this Plan to the contrary, Incentive Options may be granted only to Key Employees. The terms and conditions of the Options granted under this Section 6 shall be determined from time to time by the Committee; PROVIDED, HOWEVER, that the Options granted under this Section 6 shall be subject to all terms and provisions of the Plan (other than Section 7), including the following: (a) OPTION EXERCISE PRICE. Subject to Section 4, the Committee shall establish the Option exercise price at the time any Option is granted at such amount as the Committee shall determine; PROVIDED, that such price shall not be less than the Fair Market Value per share of Common Stock at the date the Option is granted; and PROVIDED, FURTHER, that in the case of an Incentive Option granted to a person who, at the time such Incentive Option is granted, owns shares of the Company or any Related Entity which possess more than 10% of the total combined voting power of all classes of shares of the Company or of any Related Entity, the option exercise price shall not be less than 110% of the Fair Market Value per share of Common Stock at the date the Option is granted. The Option exercise price shall be subject to adjustment in accordance with the provisions of Section 10 of the Plan. (b) PAYMENT. The price per share of Common Stock with respect to each Option exercise shall be payable at the time of such exercise. Such price shall be payable in cash or by any other means acceptable to the Committee, including delivery to the Company of shares of Common Stock owned by the optionee or by the delivery or withholding of shares pursuant to a procedure created pursuant to Section 5(d) of the Plan. Shares delivered to or withheld by the Company in payment of the Option exercise price shall be valued at the Fair Market Value of the Common Stock on the day preceding the date of the exercise of the Option. (c) CONTINUATION OF EMPLOYMENT. Each Incentive Option shall require the optionee to remain in the continuous employ of the Company or any Related Entity from the date of grant of the Incentive Option until no more than three months prior to the date of exercise of the Incentive Option. -5- (d) EXERCISEABILITY OF STOCK OPTION. Subject to Section 8, each Option shall be exercisable in one or more installments as the Committee may determine at the time of the grant. No Incentive Option by its terms shall be exercisable after the expiration of ten years from the date of grant of such Option; PROVIDED, HOWEVER, that no Incentive Option granted to a person who, at the time such Option is granted, owns stock of the Company, or any Related Entity, possessing more than 10% of the total combined voting power of all classes of stock of the Company, or any Related Entity, shall be exercisable after the expiration of five years from the date such Option is granted. (e) DEATH. If any optionee's employment with the Company or a Related Entity terminates due to the death of such optionee, the estate of such optionee, or a Person who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of the optionee, shall have the right to exercise such Option in accordance with its terms at any time and from time to time within 180 days after the date of death unless a shorter or longer period is expressly provided in such Option (but in no event prior to the 90th day after the death of such optionee) or established by the Committee pursuant to Section 8 (but in no event after the expiration date of such Option). (f) DISABILITY. If the employment of any optionee terminates because of his Disability (as defined in Section 18), such optionee or his legal representative shall have the right to exercise the Option in accordance with its terms at any time and from time to time within 180 days after the date of such termination unless a shorter or longer period is expressly provided in such Option (but in no event prior to the 90th day after the date of such termination of employment) or established by the Committee pursuant to Section 8 (but not after the expiration date of the Option); PROVIDED, HOWEVER, that in the case of an Incentive Option, the optionee or his legal representative shall in any event be required to exercise the Incentive Option within one year after termination of the optionee's employment due to his Disability. (g) TERMINATION FOR GOOD CAUSE. Unless an optionee's Option expressly provides otherwise or the Committee determines otherwise, such optionee shall immediately forfeit all rights under his Option, except as to the shares of stock already purchased thereunder, if the employment of such optionee with the Company or a Related Entity is terminated by the Company or any Related Entity for Good Cause (as defined in Section 18 below). The determination that there exists Good Cause for termination shall be made by the Committee (unless otherwise agreed to in writing by the Company and the optionee) and any decision in respect thereof by the Committee shall be final and binding on all parties in interest. (h) OTHER TERMINATION OF EMPLOYMENT. If the employment of an optionee with the Company or a Related Entity terminates for any reason other than those specified in subsections 6(e), (f) or (g) above, such optionee shall have the right to exercise his Option in accordance with its terms, within 90 days after the date of such termination, unless a shorter or longer period is expressly provided in such Option or established by the Committee pursuant to Section 8 (but not after the expiration date of the Option); PROVIDED, that no Incentive Option shall be exercisable more than three months after such termination. -6- (i) MAXIMUM EXERCISE. The aggregate Fair Market Value of stock (determined at the time of the grant of the Option) with respect to which Incentive Options are exercisable for the first time by an optionee during any calendar year under all plans of the Company and any Related Entity shall not exceed $100,000. 7. STOCK OPTION GRANTS TO ELIGIBLE NON-EMPLOYEES. (a) Subject to the express provisions of this Plan, the Committee shall have the authority to grant Non-Qualified Options to Eligible Non-Employees. The terms and conditions of the Options granted under this Section 7 shall be determined from time to time by the Committee; PROVIDED, HOWEVER, that the Options granted under this Section 7 shall be subject to all terms and provisions of the Plan (other than Section 6), including the following: (i) OPTION EXERCISE PRICE. Subject to Section 4, the Committee shall establish the Option exercise price at the time any Non-Qualified Option is granted at such amount as the Committee shall determine. The Option exercise price shall be subject to adjustment in accordance with the provisions of Section 10 of the Plan. (ii) PAYMENT. The price per share of Common Stock with respect to each Option exercise shall be payable at the time of such exercise. Such price shall be payable in cash or by any other means acceptable to the Committee, including delivery to the Company of shares of Common Stock owned by the optionee or by the delivery or withholding of shares pursuant to a procedure created pursuant to Section 5(d) of the Plan. Shares delivered to or withheld by the Company in payment of the Option exercise price shall be valued at the Fair Market Value of the Common Stock on the day preceding the date of the exercise of the Option. (iii) EXERCISEABILITY OF STOCK OPTION. Subject to Section 8, each Option shall be exercisable in one or more installments as the Committee may determine at the time of the grant. No Option shall be exercisable after the expiration of ten years from the date of grant of the Option, unless otherwise expressly provided in such Option. (iv) DEATH. If the retention by the Company or any Related Entity of the services of any Eligible Non-Employee terminates because of his death, the estate of such optionee, or a Person who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of the optionee, shall have the right to exercise such Option in accordance with its terms, at any time and from time to time within 180 days after the date of death unless a shorter or -7- longer period is expressly provided in such Option (but in no event prior to the 90th day after the death of such optionee) or established by the Committee pursuant to Section 8 (but in no event after the expiration date of such Option). (v) DISABILITY. If the retention by the Company or any Related Entity of the services of any Eligible Non-Employee terminates because of his Disability, such optionee or his legal representative shall have the right to exercise the Option in accordance with its terms at any time and from time to time within 180 days after the date of the optionee's termination unless a shorter or longer period is expressly provided in such Option (but in no event prior to the 90th day after the date of such termination of employment) or established by the Committee pursuant to Section 8 (but not after the expiration of the Option). (vi) TERMINATION FOR GOOD CAUSE. If the retention by the Company or any Related Entity of the services of any Eligible Non-Employee is terminated (i) for Good Cause or (ii) as a result of removal of the optionee from office as a director of the Company or of any Related Entity for cause by action of the stockholders of the Company or such Related Entity in accordance with the by-laws of the Company or such Related Entity, as applicable, and the corporate law of the jurisdiction of incorporation of the Company or such Related Entity, then such optionee shall immediately forfeit his rights under his Option except as to the shares of stock already purchased. The determination that there exists Good Cause for termination shall be made by the Committee (unless otherwise agreed to in writing by the Company and the optionee) and any decision in respect thereof by the Committee shall be final and binding on all parties in interest. (vii) OTHER TERMINATION OF RELATIONSHIP. If the retention by the Company or any Related Entity of the services of any Eligible Non-Employee terminates for any reason other than those specified in subsections 7(a)(iv), (a)(v) or (a)(vi) above, such optionee shall have the right to exercise his or its Option in accordance with its terms within 30 days after the date of such termination, unless a shorter or longer period is expressly provided in such Option or established by the Committee pursuant to Section 8 (but not after the expiration date of the Option). (b) An Eligible Non-Employee that is a non-employee director of the Company may elect to receive Options in lieu of all or a portion of such director's annual cash retainer fee for services as a director of the Company. Notwithstanding subsection 7(a)(ii), the following shall apply if a non-employee director elects to receive all or a portion of his/her annual cash retainer in Options: -8- (i) METHOD OF ELECTION. Except as otherwise specified by the Committee, a non-employee director's election shall be made in accordance with the following provisions. Unless the Committee provides otherwise, the election may be made only by written notice delivered to the Committee prior to the first day of the calendar year in which the cash payment would otherwise be made. The election shall specify the amount of the annual cash retainer that is to be paid in the form of Options and shall be irrevocable except for payments otherwise payable in the next calendar year after the date of a written notice of revocation. (ii) TERMS OF OPTIONS. The date of grant of an Option granted pursuant to this Section 7(b) shall be the date on which the portion of the annual cash retainer fee that the non-employee director has elected not to receive would otherwise have been paid. The number of shares subject to that Option shall be determined by dividing the foregone amount of the annual cash retainer fee otherwise due and payable on the date of grant by the value of an Option for one share of Common Stock on the date of grant having the terms set forth herein, which value shall be calculated pursuant to the Black-Scholes Model. The exercise price with respect to a share of Common Stock subject to that Option shall be the Fair Market Value of a share of Common Stock on the Option's date of grant. 8. CHANGE OF CONTROL. Except as otherwise expressly provided in a particular Option, if (i) a Change of Control shall occur or (ii) the Company shall enter into an agreement providing for a Change of Control, then the Committee may declare any or all Options outstanding under the Plan to be exercisable in full at such time or times as the Committee shall determine and the Company may purchase any or all of such Options for an amount of cash equal to the amount that could have been attained upon the exercise of such Options or the realization of the optionee's rights had such Option been currently exercisable. Each Option accelerated by the Committee pursuant to the preceding sentence shall terminate, notwithstanding any express provision thereof or any other provision of the Plan, on such date (not later than the stated exercise date) as the Committee shall determine. 9. PURCHASE OPTION. (a) Except as otherwise expressly provided in any particular Option, if (i) any optionee's employment (or, in the case of any Option granted under Section 7, the optionee's relationship) with the Company or a Related Entity terminates for any reason at any time or (ii) a Change of Control occurs, the Company (and/or its designees) shall have the option (the "PURCHASE OPTION") to purchase, and if the option is exercised, the optionee (or the optionee's executor or the administrator -9- of the optionee's estate, in the event of the optionee's death, or the optionee's legal representative in the event of the optionee's incapacity) (hereinafter, collectively with such optionee, the "GRANTOR") shall sell to the Company and/or its assignee(s), all or any portion (at the Company's option) of the shares of Common Stock acquired by exercise of an Option and/or Options held by the Grantor (such shares of Common Stock and Options collectively being referred to as the "PURCHASABLE SHARES"). (b) The Company shall give notice in writing to the Grantor of the exercise of the Purchase Option within one year from the date of the termination of the optionee's employment or engagement or such Change of Control. Such notice shall state the number of Purchasable Shares to be purchased and the determination of the Board of Directors of the Fair Market Value per share of such Purchasable Shares. If no notice is given within the time limit specified above, the Purchase Option shall terminate. (c) The purchase price to be paid for the Purchasable Shares purchased pursuant to the Purchase Option shall be, in the case of any Common Stock, the Fair Market Value per share as of the date of the notice of exercise of the Purchase Option times the number of shares being purchased, and in the case of any Option, the Fair Market Value per share times the number of vested shares subject to such Option which are being purchased, less the applicable per share Option exercise price. The purchase price shall be paid in cash. The closing of such purchase shall take place at the Company's principal executive offices within ten days after the purchase price has been determined. At such closing, the Grantor shall deliver to the purchasers the certificates or instruments evidencing the Purchasable Shares being purchased, duly endorsed (or accompanied by duly executed stock powers) and otherwise in good form for delivery, against payment of the purchase price by check of the purchasers. In the event that, notwithstanding the foregoing, the Grantor shall have failed to obtain the release of any pledge or other encumbrance on any Purchasable Shares by the scheduled closing date, at the option of the purchasers, the closing shall nevertheless occur on such scheduled closing date, with the cash purchase price being reduced to the extent of all unpaid indebtedness for which such Purchasable Shares are then pledged or encumbered. (d) To assure the enforceability of the Company's rights under this Section 9, each certificate or instrument representing Common Stock or an Option held by him or it shall bear a conspicuous legend in substantially the following form: THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE PURSUANT TO THIS AGREEMENT] ARE SUBJECT TO AN OPTION TO REPURCHASE PROVIDED UNDER THE PROVISIONS OF THE COMPANY'S 1999 STOCK OPTION PLAN AND A STOCK OPTION AGREEMENT ENTERED INTO PURSUANT THERETO. A COPY OF SUCH OPTION PLAN AND OPTION AGREEMENT ARE AVAILABLE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES. -10- The Company's rights under this Section 9 shall terminate upon the consummation of a Qualifying Public Offering. 10. ADJUSTMENT OF SHARES. Except as otherwise contemplated in Section 8, and unless otherwise expressly provided in a particular Option, in the event that, by reason of any merger, consolidation, combination, liquidation, reorganization, recapitalization, stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or other like change in capital structure of the Company (collectively, a "REORGANIZATION"), the Common Stock is substituted, combined, or changed into any cash, property, or other securities, or the shares of Common Stock are changed into a greater or lesser number of shares of Common Stock, the number and/or kind of shares and/or interests subject to an Option and the per share price or value thereof shall be appropriately adjusted by the Committee to give appropriate effect to such Reorganization. Any fractional shares or interests resulting from such adjustment shall be eliminated. Notwithstanding the foregoing, (i) each such adjustment with respect to an Incentive Option shall comply with the rules of Section 424(a) of the Code, and (ii) in no event shall any adjustment be made which would render any Incentive Option granted hereunder other than an "incentive stock option" for purposes of Section 422 of the Code. The maximum aggregate number of shares of Common Stock in respect of which Options may be granted under this Plan as provided for in Section 3 shall be subject to adjustment as contemplated above. Except as otherwise contemplated in Section 8, and unless otherwise expressly provided in a particular Option, in the event that the Company is not the surviving entity of a Reorganization and, following such Reorganization and, in connection with such Reorganization, any optionee will hold Options issued pursuant to this Plan which have not been exercised, canceled, or terminated in connection therewith, the Company shall cause such Options to be assumed (or canceled and replacement Options issued) by the surviving entity or a Related Entity with such changes in the number and/or kind of shares and/or interests subject to an Option and the per share price or the value thereof as the Committee determines is necessary to give appropriate effect to such Reorganization. In the event of any perceived conflict between the provisions of Section 8 and this Section 10, the Committee's determination under Section 8 shall control. 11. ASSIGNMENT OR TRANSFER. (a) TRANSFER OF INCENTIVE OPTIONS. Incentive Options are not transferrable by an optionee other than by will or the laws of descent and distribution. (b) TRANSFER OF NON-QUALIFIED OPTIONS. (i) PERMITTED TRANSFEREES. The Committee may, in its discretion, permit an optionee to transfer all or any portion of a Non-Qualified Option, or authorize -11- all or a portion of any Non-Qualified Option to be granted to an optionee to be on terms which permit transfer by such optionee, to (A) the spouse, former spouse, children, stepchildren, grandchildren, parents, stepparents, grandparents, siblings, nieces, nephews, mother-in-law, father-in-law, sons-in-law, daughters-in-law, brothers-in-law, or sisters-in-law of the optionee, including adoptive relationships, or any other person sharing the optionee's household (other than a tenant or employee) (collectively, "IMMEDIATE FAMILY MEMBERS"), (B) a trust or trusts in which such Immediate Family Members have more than fifty percent of the beneficial interest, (C) a foundation in which such Immediate Family Members (or the optionee) control the management of assets, or (D) any other entity in which such Immediate Family Members (or the optionee) own more than fifty percent of the voting interests (collectively, "PERMITTED TRANSFEREES"); provided that (x) there may be no consideration for any such transfer, (y) subsequent transfers of Non-Qualified Options transferred as provided above shall be prohibited except subsequent transfers back to the option grantee and transfers to other Permitted Transferees of the option grantee. (ii) DOMESTIC RELATIONS ORDERS. In the Committee's sole discretion Non-Qualified Options may be transferred pursuant to domestic relations orders entered or approved by a court of competent jurisdiction upon delivery to the Company of written notice of such transfer and a certified copy of such order. (iii) OTHER TRANSFERS AND EXERCISE RIGHTS. Except as expressly permitted by Sections 11(b)(i) and 11(b)(ii), Non-Qualified Options requiring exercise shall not be transferable other than by will or the laws of descent and distribution. In the event that a legal representative has been appointed in connection with the Disability of an optionee, the optionee's options may be exercised by the legal representative. (iv) EFFECT OF TRANSFER. Following the transfer of any Non-Qualified Option as contemplated by Sections 11(b)(i), 11(b)(ii) and 11(b)(iii), (A) such Non-Qualified Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that the term "optionee" shall be deemed to refer to the Permitted Transferee, the recipient under a domestic relations order, or the estate or heirs of a deceased optionee, as applicable, to the extent appropriate to enable the optionee to exercise the transferred Non-Qualified Option in accordance with the terms of this Plan and applicable law, (B) the provisions of Sections 7(e) through (h) hereof shall continue to be applied with respect to the original optionee and, following the occurrence of any such events described therein the Non-Qualified Options shall be exercisable by the Permitted Transferee, the -12- recipient under a domestic relations order, or the estate or heirs of a deceased Holder, as applicable, only to the extent and for the periods specified in Sections 7(e) through (h), and (C) in the discretion of the Committee, all voting control in the Common Stock transferred pursuant to the exercise of Non-Qualified Options shall be retained in the option grantee. (c) PROCEDURES AND RESTRICTIONS. Any optionee desiring to transfer an Option as permitted under Section 11(a) or 11(b) shall make application therefor in the manner and time specified by the Committee and shall comply with such other requirements as the Committee may require to assure compliance with all applicable securities laws. The Committee shall not give permission for such a transfer if (i) it would give rise to short-swing liability under Section 16(b) of the Exchange Act, or (ii) it may not be made in compliance with all applicable federal, state and foreign securities laws. (d) At least ninety (90) days prior to selling, pledging, hypothecating, transferring or otherwise disposing ("TRANSFER") of any interest in Common Stock issued upon exercise of an Option, the optionee, provided that, for purposes of this Section 11(d), the term "optionee" shall be deemed to refer to the Permitted Transferee, the recipient under a qualified domestic relations order, or the estate or heirs of a deceased optionee, as applicable proposing such Transfer shall deliver a written notice (the "SALE NOTICE") to the Company. The Sale Notice will disclose in reasonable detail the identity of the prospective transferee(s) and the terms and conditions of the proposed transfer. Such optionee, shall not consummate any such Transfer until ninety (90) days after the Sale Notice has been delivered to the Company, unless the Company has notified such optionee in writing that it will not exercise its rights under this Section 11(d) (the date of the first to occur of such events is referred to herein as the "AUTHORIZATION DATE"). The Company or its designee may elect to purchase all (but not less than all) of the shares of Common Stock to be Transferred upon the same terms and conditions as those set forth in the Sale Notice ("RIGHT OF FIRST REFUSAL") by delivering a written notice of such election to such optionee, within thirty (30) days after the receipt of the Sale Notice by the Company (the "ELECTION NOTICE"). If the Company has not elected to purchase all of the shares of Common Stock specified in the Sale Notice, such optionee, may Transfer the shares of Common Stock to the prospective transferee(s) as specified in the Sale Notice, at a price and on terms no more favorable to the transferee(s) thereof than specified in the Sale Notice, during the 90-day period immediately following the Authorization Date. Any shares of Common Stock not so transferred within such 90-day period must be reoffered to the Company in accordance with the provisions of this Section 11(d). The Right of First Refusal will not apply with respect to Transfers of such shares of Common Stock by will or pursuant to applicable laws of descent and distribution or among the option grantee's family group; provided that the restrictions contained in this Section 11(d) will continue to be applicable to the shares of Common Stock after any such Transfer and provided further that the transferees of such shares of Common Stock have agreed in writing to be bound by the terms and provisions of this Plan and the applicable Option Agreement as each may be amended from time to time. In addition, upon any transfer to a member of the option grantee's family group, the grantee shall be required to give notice to the Company and as a condition to such Transfer to a member of the grantee's family group, the grantee will maintain all voting control over -13- all of the shares of Common Stock. The grantee's "family group" means the grantee's spouse and lineal descendants (whether natural or adopted) and any trust solely for the benefit of the grantee and/or the grantee's spouse and/or lineal descendants. In addition, with the prior approval of the Committee, notwithstanding the provisions of this Section 11(d), an optionee may pledge such shares of Common Stock creating a security interest therein; provided, that the pledgee agrees in writing to be bound, and that such shares of Common Stock remain bound, by the terms and provisions of this Plan and the applicable Option Agreement, as each may be amended from time to time. To assure the enforceability of the Company's rights under this Section 11(d), each certificate or instrument representing Common Stock or an Option held by him or it shall bear a conspicuous legend in substantially the following form: THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE PURSUANT TO THIS AGREEMENT] ARE SUBJECT TO A RIGHT OF FIRST REFUSAL PROVIDED UNDER THE COMPANY'S 1999 STOCK OPTION PLAN AND A STOCK OPTION AGREEMENT ENTERED INTO PURSUANT THERETO. A COPY OF SUCH OPTION PLAN AND OPTION AGREEMENT ARE AVAILABLE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES. (e) The rights and obligations pursuant to Section 11(d) hereof will terminated upon the consummation of a Qualifying Public Offering. 12. COMPLIANCE WITH SECURITIES LAWS. The Company shall not in any event be obligated to file any registration statement under the Securities Act or any applicable state securities law to permit exercise of any option or to issue any Common Stock in violation of the Securities Act or any applicable state securities law. Each optionee (or, in the event of his death or, in the event a legal representative has been appointed in connection with his Disability, the Person exercising the Option) shall, as a condition to his right to exercise any Option, deliver to the Company an agreement or certificate containing such representations, warranties and covenants as the Company may deem necessary or appropriate to ensure that the issuance of shares of Common Stock pursuant to such exercise is not required to be registered under the Securities Act or any applicable state securities law. Certificates for shares of Common Stock, when issued, may have substantially the following legend, or statements of other applicable restrictions, endorsed thereon, and may not be immediately transferable: THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY -14- STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT VIOLATE APPLICABLE FEDERAL OR STATE LAWS. This legend shall not be required for shares of Common Stock issued pursuant to an effective registration statement under the Securities Act and in accordance with applicable state securities laws. 13. WITHHOLDING TAXES. By acceptance of the Option, the optionee will be deemed to (i) agree to reimburse the Company or Related Entity by which the optionee is employed for any federal, state, or local taxes required by any government to be withheld or otherwise deducted by such corporation in respect of the optionee's exercise of all or a portion of the Option; (ii) authorize the Company or any Related Entity by which the optionee is employed to withhold from any cash compensation paid to the optionee or in the optionee's behalf, an amount sufficient to discharge any federal, state, and local taxes imposed on the Company, or the Related Entity by which the optionee is employed, and which otherwise has not been reimbursed by the optionee, in respect of the optionee's exercise of all or a portion of the Option; and (iii) agree that the Company may, in its discretion, hold the stock certificate to which the optionee is entitled upon exercise of the Option as security for the payment of the aforementioned withholding tax liability, until cash sufficient to pay that liability has been accumulated, and may, in its discretion, effect such withholding by retaining shares issuable upon the exercise of the Option having a Fair Market Value on the date of exercise which is equal to the amount to be withheld. 14. COSTS AND EXPENSES. The costs and expenses of administering the Plan shall be borne by the Company and shall not be charged against any Option nor to any employee receiving an Option. 15. FUNDING OF PLAN. The Plan shall be unfunded. The Company shall not be required to make any segregation of assets to assure the payment of any Option under the Plan. 16. OTHER INCENTIVE PLANS. -15- The adoption of the Plan does not preclude the adoption by appropriate means of any other incentive plan for employees. 17. EFFECT ON EMPLOYMENT. Nothing contained in the Plan or any agreement related hereto or referred to herein shall affect, or be construed as affecting, the terms of employment of any Key Employee except to the extent specifically provided herein or therein. Nothing contained in the Plan or any agreement related hereto or referred to herein shall impose, or be construed as imposing, an obligation on (i) the Company or any Related Entity to continue the employment of any Key Employee, and (ii) any Key Employee to remain in the employ of the Company or any Related Entity. 18. DEFINITIONS. In addition to the terms specifically defined elsewhere in the Plan, as used in the Plan, the following terms shall have the respective meanings indicated unless another definition is agreed to in writing by the Company and the optionee in an option grant agreement with respect to such term or a similar term: (a) "AFFILIATE" shall mean, as to any Person, a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. (b) "AUTHORIZATION DATE" shall have the meaning set forth in Section 11(b) hereof. (c) "BOARD OF DIRECTORS" shall have the meaning set forth in Section 2 hereof. (d) "CHANGE OF CONTROL" shall mean the first to occur of the following events: (i) any sale, lease, exchange, or other transfer (in one transaction or series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act, (ii) a majority of the Board of Directors of the Company shall consist of Persons who are not Continuing Directors; or (iii) the acquisition after the date of acceptance of this Plan by any Person or Group of the power, directly or indirectly, to vote or direct the voting of securities having more than 50% of the ordinary voting power for the election of directors of the Company. (e) "CODE" shall have the meaning set forth in Section 1 hereof. (f) "COMMITTEE" shall have the meaning set forth in Section 2 hereof. (g) "COMMON STOCK" shall have the meaning set forth in Section 3 hereof. -16- (h) "COMPANY" shall have the meaning set forth in Section 1 hereof. (i) "CONTINUING DIRECTOR" shall mean, as of the date of determination, any Person who (i) was a member of the Board of Directors of the Company on the date of adoption of this Plan or (ii) was nominated for election or elected to the Board of Directors of the Company with the affirmative vote of a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election. (j) "DISABILITY" shall mean permanent disability as defined under Section 22(e)(3) of the Code. (k) "ELECTION NOTICE" shall have the meaning set forth in Section 11(b) hereof. (l) "ELIGIBLE NON-EMPLOYEE" shall have the meaning set forth in Section 4 hereof. (m) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (n) "FAIR MARKET VALUE", shall, as it relates to the Common Stock, mean, at the option of the Committee, the average of the high and low prices or the closing price of such Common Stock as reported on the principal national securities exchange on which the shares of Common Stock are then listed or the NASDAQ National Market, as applicable, on the date specified herein for such a determination, or if there were no sales on such date, on the next succeeding day or immediately preceding day on which there were sales, or if such Common Stock is not listed on a national securities exchange or the NASDAQ National Market, the last reported bid price in the over-the-counter market, or if such shares are not traded in the over-the-counter market, the per share cash price for which all of the outstanding Common Stock could be sold to a willing purchaser in an arms length transaction (without regard to minority discount, absence of liquidity, or transfer restrictions imposed by any applicable law or agreement) at the date of the event giving rise to a need for a determination. Except as may be otherwise expressly provided in a particular Option, Fair Market Value shall be determined in good faith by the Committee. (o) "GOOD CAUSE", with respect to any Key Employee, shall mean (unless another definition is agreed to in writing by the Company and the optionee) termination by action of the Board of Directors because of: (A) the optionee's conviction of, or plea of nolo contendere to, a felony or a crime involving moral turpitude; (B) the optionee's personal dishonesty, incompetence, willful misconduct, willful violation of any law, rule, or regulation (other than minor traffic violations or similar offenses) or breach of fiduciary duty which involves personal profit; (C) the optionee's commission of material mismanagement in the conduct of his duties as assigned to him by the Board of Directors or the optionee's supervising officer or officers of the Company or any Related Entity; (D) the optionee's willful failure to execute or comply with the policies of the Company or any Related Entity or his stated duties as established by the Board of Directors or the optionee's supervising officer or officers of the Company or any Related Entity, or the optionee's -17- intentional failure to perform the optionee's stated duties; or (E) substance abuse or addiction on the part of the optionee. "Good Cause", with respect to any Eligible Non-Employee, shall mean (unless another definition is agreed to in writing by the Company and the optionee) termination by action of the Board of Directors because of: (A) the optionee's conviction of, or plea of nolo contendere to, a felony or a crime involving moral turpitude; (B) the optionee's personal dishonesty, incompetence, willful misconduct, willful violation of any law, rule, or regulation (other than minor traffic violations or similar offenses) or breach of fiduciary duty which involves personal profit; (C) the optionee's commission of material mismanagement in providing services to the Company or any Related Entity; (D) the optionee's willful failure to comply with the policies of the Company in providing services to the Company or any Related Entity, or the optionee's intentional failure to perform the services for which the optionee has been engaged; (E) substance abuse or addiction on the part of the optionee; or (F) the optionee's willfully making any material misrepresentation or willfully omitting to disclose any material fact to the board of directors of the Company or any Related Entity with respect to the business of the Company or any Related Entity. (p) "GRANTOR" shall have the meaning set forth in Section 9 hereof. (q) "HOLDING PERIOD" shall have the meaning set forth in Section 5 hereof. (r) "INCENTIVE OPTIONS" shall have the meaning set forth in Section 6 hereof. (s) The terms "include," "included" or "including" when used herein shall mean "including, but not limited to". (t) "KEY EMPLOYEE" shall have the meaning set forth in Section 4 hereof. (u) "NON-QUALIFIED OPTIONS" shall have the meaning set forth in Section 6 hereof. (v) "OPTIONS" shall have the meaning set forth in Section 1 hereof. (w) "PERSON" shall have the meaning set forth in Section 4 hereof. (x) "PLAN" shall have the meaning set forth in Section 1 hereof. (y) "PURCHASABLE SHARES" shall have the meaning set forth in Section 9 hereof. (z) "PURCHASE OPTION" shall have the meaning set forth in Section 9 hereof. (aa) "QUALIFYING PUBLIC OFFERING" shall mean a firm commitment underwritten public offering of Common Stock for cash where the proceeds to the Company (prior to deducting any underwriters' discounts and commissions) exceed $10 million and the shares of Common Stock -18- registered under the Securities Act are listed on a national securities exchange or the NASDAQ National Market System. (bb) "RELATED ENTITIES" shall have the meaning set forth in Section 1 hereof. (cc) "REORGANIZATION" shall have the meaning set forth in Section 10 hereof. (dd) "RIGHT OF FIRST REFUSAL" shall have the meaning set forth in Section 11(b) hereof. (ee) "RULE 16b-3" shall mean Rule 16b-3, as amended, or other applicable rules under Section 16(b) of the Exchange Act. (ff) "SALE NOTICE" shall have the meaning set forth in Section 11(b) hereof. (gg) "Section 162(m)" means Section 162(m) of the Code and the rules and regulations adopted from time to time thereunder, or any successor law or rule as it may be amended from time to time. (hh) "SECURITIES ACT" shall mean the Securities Act of 1933. (ii) "SUBSIDIARY" shall mean, with respect to any Person, any other Person of which such first Person owns or has the power to vote, directly or indirectly, securities representing a majority of the votes ordinarily entitled to be cast for the election of directors or other governing Persons. (jj) "TRANSFER" shall have the meaning set forth in Section 11(b) hereof. 19 AMENDMENT OF PLAN. The Board of Directors shall have the right to amend, modify, suspend or terminate the Plan at any time; provided, that no amendment shall be made which shall increase the total number of shares of the Common Stock which may be issued and sold pursuant to Options granted under the Plan unless such amendment is made by or with the approval of the stockholders. The Board of Directors shall have the right to amend the Plan and the Options outstanding thereunder, without the consent or joinder of any optionee or other Person, in such manner as may be determined necessary or appropriate by the Board of Directors in order to cause the Plan and the Options outstanding thereunder (i) to qualify as "incentive stock options" within the meaning of Section 422 of the Code, (ii) to comply with Rule 16b-3 (or any successor rule) under the Exchange Act (or any successor law) and the regulations (including any temporary regulations) promulgated thereunder, or (iii) to comply with Section 162(m) of the Code (or any successor section) and the regulations (including any temporary regulations) promulgated thereunder. Except as provided above, no amendment, modification, suspension or termination of the Plan shall alter or impair any Options previously granted under the Plan, without the consent of the holder thereof. -19- 20. EFFECTIVE DATE. The Plan shall become effective on the date on which it is approved by the Board of Directors and the stockholders of the Company. -20- EX-10.20 24 EXHIBIT 10.20 STOCK PURCHASE AGREEMENT This Agreement is made as of the 17th day of May 1999, by and among Digital Convergence.com Inc., a Delaware corporation (the "Corporation"), and William S. Leftwich, a natural person residing in the State of Texas (the "Purchaser"). ARTICLE I. PURCHASE OF SHARES SECTION 1.1 PURCHASE. The Purchaser hereby purchases, and the Corporation hereby sells to the Purchaser, 750 shares of Common Stock, $.01 par value, of the Corporation (the "Purchased Shares") at a purchase price of $.10 per share (the "Purchase Price"). The Corporation and the Purchaser agree that the fair market value of the Purchased Shares as of the date of this Agreement is $.10 per share of Common Stock. SECTION 1.2 PAYMENT. Concurrently with the execution of this Agreement, the Purchaser shall pay the Purchase Price for the Purchased Shares by check. SECTION 1.3 DELIVERY OF CERTIFICATES. Concurrently with the execution of this Agreement, the Corporation shall issue and deliver certificates evidencing the Purchased Shares to the Purchaser. The Purchased Shares are subject to the Corporation's Repurchase Right under Article IV hereof and the certificates evidencing the Purchased Shares subject to the Repurchase Right shall be held in escrow by the Secretary of the Corporation as provided in Article V hereof. Purchaser shall also deliver to the Secretary of the Corporation a duly executed blank Assignment Separate from Certificate (in the form attached hereto as EXHIBIT "A") with respect to such Purchased Shares. SECTION 1.4 EXECUTION OF AGREEMENT AMONG STOCKHOLDERS. Concurrently with the execution of this Agreement, the Purchaser and his spouse will execute and deliver that certain execution page for Shareholders' Agreement (IN THE FORM ATTACHED HERETO AS EXHIBIT "B") pursuant to which the Purchaser will be bound by the terms of that certain Shareholders' Agreement dated January 29, 1999 by and among the Corporation and certain prior signatories thereto. ARTICLE II. TRANSFER RESTRICTIONS SECTION 2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and are being issued to Purchaser in reliance upon the exemption from such registration provided by Rule 701 of the Securities and Exchange Commission for stock issuances under compensatory benefit arrangements such as this Agreement. Purchaser hereby acknowledges receipt of a copy of this Agreement. SECTION 2.2 RESTRICTED SECURITIES. Purchaser hereby confirms that Purchaser has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be sold or transferred unless the Purchased Shares are first registered under the federal securities laws or unless an exemption from such registration is available. Accordingly, Purchaser hereby acknowledges that Purchaser is prepared to hold the Purchased Shares for an indefinite period and that Purchaser is aware that Rule 144 of the Securities and Exchange Commission issued under the 1933 Act is not presently available to exempt the sale of the Purchased Shares from the registration requirements of the 1933 Act. Purchaser is aware that Rule 144 permits limited public resales of securities acquired in a nonpublic offering, subject to the satisfaction of certain conditions. Purchaser understands that under Rule 144, the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not less than one year after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified limitations. Purchaser acknowledges and understands that the Corporation may not be satisfying the current public information requirement of Rule 144 at the time Purchaser wishes to sell the Purchased Shares or other conditions under Rule 144 which are required of the Corporation. If so, Purchaser understands that Purchaser will be precluded from selling the securities under Rule 144 even if the one-year holding period of said Rule has been satisfied. Prior to Purchaser's acquisition of the Purchased Shares, Purchaser acquired sufficient information about the Corporation to reach an informed knowledgeable decision to acquire the Purchased Shares. Purchaser has such knowledge and experience in financial and business matters as to make Purchaser capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. Purchaser is able to bear the economic risk of Purchaser's investment in the Purchased Stock. SECTION 2.3 RESTRICTIONS ON TRANSFER. (a) Purchaser shall not transfer, assign, encumber, or otherwise dispose of any of the Purchased Shares that are subject to the Corporation's Repurchase Right under Article IV. (b) Purchaser hereby agrees that Purchaser shall make no disposition of the Purchased Shares unless and until: (i) Purchaser shall have complied with all requirements of this Agreement applicable to the disposition of the Purchased Shares; (ii) Purchaser shall have complied with all requirements of that certain Agreement Among Stockholders of even date herewith by and among the Corporation and the stockholders of the Corporation party thereto (the "Agreement Among Stockholders") applicable to the disposition of the Purchased Shares and shall have provided to the Corporation evidence of such compliance which is reasonably satisfactory to the Corporation; The Corporation shall NOT be required (i) to transfer on its books any Purchased Shares that have been sold or transferred in violation of the provisions of this Article II OR (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting or dividend rights to, any transferee to whom the Purchased Shares have been transferred in contravention of this Agreement. SECTION 2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on disposition of the Purchased Shares, the stock certificates for the Purchased Shares will be endorsed with restrictive legends, including one or both of the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF (i) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER SUCH ACT, (ii) A `NO ACTION' LETTER OF THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH SALE OR OFFER, OR (iii) AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT REGISTRATION UNDER SUCH ACT IS NOT REQUIRED WITH RESPECT TO SUCH SALE OR OFFER." (b) If required by the authorities of any state in connection with the issuance of the Shares, the legend or legends required by such state authorities shall also be endorsed on all such certificates. ARTICLE III. SPECIAL PROVISIONS SECTION 3.1 STOCKHOLDER RIGHTS. Until such time as the Corporation actually exercises its repurchase rights under this Agreement, Purchaser (or any successor in interest) shall have all the rights of a stockholder (including voting and dividend rights) with respect to the Purchased Shares, including the Purchased Shares held in escrow under Article V, subject, however, to the transfer restrictions of Article II. SECTION 3.2 SECTION 83(b) ELECTION. Purchaser understands that under Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), the difference between the Purchase Price paid for the Purchased Shares and their fair market value on the date any forfeiture restrictions applicable to such shares lapse will be reportable as ordinary income at that time. For this purpose, the term "forfeiture restrictions" includes the right of the Corporation to repurchase the Purchased Shares pursuant to its Repurchase Right under Article IV of this Agreement. Purchaser understands that Purchaser may elect to be taxed at the time the Purchased Shares are acquired hereunder to the extent the fair market value of the Purchased Shares differs from the Purchase Price rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions, by filing an election under Section 83(b) of the Code with the I.R.S. within thirty (30) days after the date of purchase hereunder. Purchaser understands that failure to make this filing within the thirty (30) day period will result in the recognition of ordinary income by the Purchaser (in the event the fair market value of the Purchased Shares increases after the date of purchase) as the forfeiture restrictions lapse. PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON PURCHASER'S BEHALF. PURCHASER IS RELYING SOLELY ON PURCHASER'S ADVISORS WITH RESPECT TO THE DECISION AS TO WHETHER OR NOT TO FILE AN 83(b) ELECTION. ARTICLE IV. REPURCHASE RIGHT SECTION 4.1 GRANT. The Corporation is hereby granted the right (the "Repurchase Right"), exercisable at any time during the sixty (60) day period following the date the Purchaser ceases for any reason to be employed by the Corporation or any of its direct or indirect subsidiaries (the "Repurchase Event") (or such longer period of time mutually agreed to by the parties), to repurchase at a price of $.10 per share (the "Repurchase Price") all or, at the discretion of the Corporation, any portion of the Purchased Shares in which the Purchaser has not acquired a vested interest in accordance with the vesting provisions of Section 4.3 (such shares to be hereinafter called the "Unvested Shares"). SECTION 4.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to the holder of the Unvested Shares prior to the expiration of the applicable period specified in Section 4.1. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of notice. To the extent one or more certificates representing Unvested Shares may have been previously delivered out of escrow to the holder, then the holder shall, prior to the close of business on the date specified for the repurchase, deliver to the Secretary of the Corporation the certificates representing the Unvested Shares to be repurchased, each certificate to be properly endorsed for transfer. The Corporation shall, concurrently with the receipt of such stock certificates (either from escrow in accordance with Section 5.3 or from the holder as herein provided), pay to the holder in cash an amount equal to the Repurchase Price for the Unvested Shares that are to be repurchased. SECTION 4.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under Section 4.2. In addition, the Repurchase Right shall terminate, and cease to be exercisable, with respect to any and all Purchased Shares in which the Purchaser vests in accordance with the schedule below. Accordingly, provided the Repurchase Event has not occurred, the Purchaser shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, the Purchased Shares in accordance with the following provisions: (a) Commencing on that date following the expiration of the initial twelve (12) month period measured from the date of this Agreement (the "Initial Vesting Date"), the Purchaser shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, the Purchased Shares in a series of three annual installments each equal to thirty-three and one-third percent (33.33%) of the Purchased Shares. Such installments shall vest upon each twelve (12) month anniversary date, measured from the date of this Agreement, so long as the Repurchase Event has not occurred on or prior to such anniversary date, and there shall be no partial or pro rata vesting with respect to any portion of a twelve (12) month period in which the Repurchase Event has occurred. SECTION 4.4 FRACTIONAL SHARES. No fractional shares shall be repurchased by the Corporation. Accordingly, should the Repurchase Right extend to a fractional share (in accordance with the vesting computation provisions of Section 4.3) at the time the Repurchase Event occurs, then such fractional share shall be added to any fractional share in which the Purchaser is at such time vested in order to make one whole vested share no longer subject to the Repurchase Right. SECTION 4.5 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which is by reason of any such transaction distributed with respect to the Purchased Shares shall be immediately subject to the Repurchase Right, but only to the extent of the Purchased Shares that are at the time covered by such right. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number of Purchased Shares hereunder and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such transaction upon the Corporation's capital structure; provided, however, that the aggregate Repurchase Price shall remain the same. SECTION 4.6 CORPORATE TRANSACTION. In the event of any of the following transactions (a "Corporate Transaction"): (i) a merger or acquisition in which the Corporation is not the surviving entity, except for a transaction the principal purpose of which is to change the State in which the Corporation is incorporated; (ii) a change in control (as defined in the Corporation's 1999 Stock Compensation Plan) shall have occurred; or (iii) any dissolution, winding up or liquidation of the Corporation, whether voluntary or involuntary, then the Repurchase Right shall automatically lapse in its entirety, and the Purchaser shall acquire a vested interest in all the Purchased Shares, upon the consummation of such Corporate Transaction. SECTION 4.7 LEGEND. In addition to the legends required by Section 2.4, all certificates representing Purchased Shares subject to the Corporation's Repurchase Right shall be endorsed with the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF THAT CERTAIN STOCK PURCHASE AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS CERTAIN REPURCHASE RIGHTS TO THE CORPORATION UPON TERMINATION OF SERVICE WITH THE CORPORATION. THE SECRETARY OF THE CORPORATION WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE." ARTICLE V. ESCROW SECTION 5.1 DEPOSIT. Upon issuance, certificates for the Unvested Shares shall be deposited in escrow with the Secretary of the Corporation to be held in accordance with the provisions of this Article V. Each deposited certificate shall be accompanied by a duly executed Assignment Separate from Certificate in the form of EXHIBIT A. The deposited certificates, together with any other assets or securities from time to time deposited with the Corporation pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with Section 5.3. Upon delivery of the certificates (or other assets and securities) to the Corporation, the holder shall be issued an instrument of deposit acknowledging the number of Unvested Shares (or other assets and securities) delivered in escrow to the Secretary of the Corporation. SECTION 5.2 RECAPITALIZATION. All regular cash dividends on the Unvested Shares (or other securities at the time held in escrow) shall be paid directly to the holder and shall not be held in escrow. However, in the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration or in the event of a Corporate Transaction, any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Unvested Shares shall be immediately delivered to the Secretary of the Corporation to be held in escrow under this Article V, but only to the extent the Unvested Shares are at the time subject to the escrow requirements of Section 5.1. SECTION 5.3 RELEASE SURRENDER. The Unvested Shares, together with any other assets or securities held in escrow hereunder, shall be subject to the following terms and conditions relating to their release from escrow or their surrender to the Corporation for repurchase and cancellation: (a) Should the Corporation elect to exercise the Repurchase Right under Article IV with respect to any Unvested Shares, then the escrowed certificates for such Unvested Shares (together with any other assets or securities issued with respect thereto) shall be delivered to the Corporation for cancellation, concurrently with the payment to the holder, in cash, an amount equal to the aggregate Repurchase Price for such Unvested Shares, and the holder shall cease to have any further rights or claims with respect to such Unvested Shares (or other assets or securities). (b) As the interest of the Purchaser in the Unvested Shares (or any other assets or securities issued with respect thereto) vests in accordance with the provisions of Article IV, the certificates for such vested shares (as well as all other vested assets and securities) shall be released from escrow and delivered to the holder as follows: (i) the initial release of vested shares (as well as all other vested assets and securities) from escrow shall be effected within ten (10) days following the expiration of the initial twelve (12) month period measured from the date of this Agreement; (ii) subsequent releases of vested shares (as well as all other vested assets and securities) from escrow shall be effected at annual intervals thereafter, with the first such annual release to occur twenty-four (24) months after the date of this Agreement; and (iii) upon any earlier termination of the Corporation's Repurchase Right in accordance with the applicable provisions of Article IV, the Unvested Shares (as well as all other assets or securities) at the time held in escrow hereunder shall immediately be released to the holder as fully vested shares or other property. ARTICLE VI. GENERAL PROVISIONS SECTION 6.1 ASSIGNMENT. This Agreement may not be assigned by either party hereto. SECTION 6.2 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement shall confer upon the Purchaser any right to continue in the service of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Purchaser) for any period of time or interfere with or restrict in any way the rights of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Purchaser), which rights are hereby expressly reserved by each, to terminate the Purchaser as an employee of the Corporation or any parent or subsidiary of the Corporation at any time for any reason whatsoever, with or without cause. SECTION 6.3 NOTICES. Any notice required under this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon receipt following deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days' advance written notice under this Section 6.3 to all other parties to this Agreement. SECTION 6.4 NO WAIVER. The failure of the Corporation (or its assignees) in any instance to exercise the Repurchase Rights granted under Article IV, shall not constitute a waiver of any other repurchase rights that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and the Purchaser. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. SECTION 6.5 CANCELLATION OF SHARES. If the Corporation shall make available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement), and such shares shall be deemed purchased in accordance with the applicable provisions hereof and the Corporation shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. ARTICLE VII. AGREEMENT REGARDING COMMUNITY PROPERTY The spouse of the Purchaser hereby agrees that all of the Purchased Shares presently owned or hereafter acquired by the Purchaser are, if such Purchased Shares are community property, community property subject to the sole management, control and disposition of the Purchaser, and the Purchaser and the spouse of the Purchaser agree that all Purchased Shares now owned or hereafter acquired are subject to the sole management, control and disposition of the Purchaser. All interest in such shares owned by the spouse of the Purchaser shall for all purposes of this Agreement be included in, deemed part of and be bound by the same terms hereof as the Purchased Shares of which the Purchaser is the owner; and in any action taken, offer made or offer exercised hereunder with reference to the Purchased Shares of the Purchaser, the terms of this Agreement shall be applicable to any interest in such Purchased Shares owned by the spouse of the Purchaser. The spouse of the Purchaser, or any person who becomes a spouse of the Purchaser hereafter, shall agree in writing to be bound by this Agreement. If joinder of a spouse of the Purchaser should be required by law in connection with any document required to be executed by the Purchaser hereunder with respect to the Purchaser's sole management community property, upon request, such spouse shall execute any instruments necessary to effectuate the purposes of such required document. ARTICLE VIII. MISCELLANEOUS PROVISIONS SECTION 8.1 PURCHASER UNDERTAKING. Purchaser hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may in its judgment deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Purchaser or the Purchased Shares pursuant to the express provisions of this Agreement; provided, however, that the Corporation shall pay for any of the executor's reasonable expenses incurred with regard to such additional actions, including reasonable attorneys fees. SECTION 8.2 ENTIRE AGREEMENT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. SECTION 8.3 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. SECTION 8.4 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and the Purchaser and the Purchaser's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof. SECTION 8.5 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURES ON NEXT PAGE.) IN WITNESS WHEREOF, the parties have executed this Executive Stock Purchase Agreement on the day and year first indicated above. DIGITAL CONVERGENCE.COM INC. By: /s/ J. Jovan Philyaw ----------------------------------- J. Jovan Philyaw PURCHASER: /s/ William S. Leftwich -------------------------------------- William S. Leftwich /s/ -------------------------------------- __________________, Spouse of Purchaser EX-10.21 25 EXHIBIT 10.21 [LOGO] PROPRIETARY RIGHTS AND INFORMATION AGREEMENT (Version 1.1) THIS AGREEMENT is made effective this _________ day of _____________________, 200__, by and between ________________________________________ (hereinafter referred to as "you," "your," or "Employee"), and DigitalConvergence.:Com Inc., its affiliates and subsidiaries (hereinafter collectively referred to as the "Company"), in consideration of the employment and the continued employment of the Employee by the Company, and continued access to the Proprietary Information of the Company for no less than thirty (30) days from the date hereof, the current and future compensation, including any possible future increases in compensation, paid in respect to employment, and the responsibilities assigned and access granted to the Employee in connection with the Company's proprietary and confidential information. I. INVENTIONS. As used in this Agreement, the term "Inventions" means any and all creative work, inventions and discoveries, including improvements, original works of authorship, designs, formulas, processes, concepts, software development, computer programs, databases and trade secrets and related proprietary information and materials. a) YOUR RIGHTS IN INVENTIONS. The Company acknowledges that all Inventions: (a) that you made prior to your employment with the Company; and (b) that you claim belong to you or that you claim an interest in; and (c) in which you wish to retain all claimed ownership rights shall be considered to be "Employee Inventions" and not subject to claims by the Company. b) COMPANY RIGHTS IN INVENTIONS. 1) DISCLOSURE. You agree to maintain adequate and current written records of all Inventions you develop during and as the result of your employment at the Company, and to make full written disclosure in confidence to the Company of all such Inventions. 2) ASSIGNMENT OF INVENTIONS TO THE COMPANY. You agree that all Inventions that: (a) are developed using the equipment, supplies, facilities or trade secrets of the Company, or (b) result from work performed by you for the Company ("Company Inventions"), will be the sole and exclusive property of the Company, and you will and hereby do assign all your rights in such Company Inventions to the Company. In addition, you hereby transfer and assign any "moral" rights that you may have in any Company Inventions under any copyright or other similar law, whether U.S. or foreign. You agree to waive and never to assert any such "moral" rights in Company Inventions during or after the termination of your employment with the Company. c) PROTECTION OF COMPANY INVENTIONS. You agree (at the Company's expense) to assist the Company in every proper way to obtain and to help the Company enforce patents, trademarks, service marks, copyrights and other legal protections for Company Inventions in any and all countries. You agree to execute any documents that the Company may reasonable request for use in obtaining or enforcing such patents, trademarks, service marks, copyrights and other legal protections. In addition, by execution f this Agreement, you hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as your agent and attorney in fact to act for and in your behalf, to execute and file any and all such documents as the Company shall in its discretion determine necessary or advisable in obtaining or enforcing such patents, trademarks, service marks, copyrights and other legal protections, and to do all other lawfully permitted acts to accomplish the same, with the same legal force and effects as if executed by you. You acknowledge that all original works of authorship that are made by you (solely or jointly with others) within the scope of your employment at the Company, and that are protectable by copyright, are "works made for hire," as that term is defined in the United States Copyright Act (17U.S.C. Sec. 101). II. PROPRIETARY INFORAMTION OF THE COMPANY AND THIRD PARTIES. You understand that your employment with the Company creates a relationship of confidence and trust with respect to any information of a confidential or secret nature that may be disclosed to you by the Company or learned by you in the course of your duties at the Company, and that relates to (a) the business of the Company or that of any of its subsidiaries, affiliates, customers, suppliers, or (b) any confidential information of third parties disclosed to the Company. Such confidential and secret information includes information concerning Inventions, marketing plans, product plans, business strategies, financial information and forecasts, personal information and customer lists and is referred to collectively in this Agreement as "Proprietary Information." Employee acknowledges and agrees that, while knowledge of the Proprietary Information will continue to have value to Employee, the Proprietary Information continues to be developed. Employee releases and disclaims any right that he may have in the Proprietary Information to the Company. a) CONFIDENTIALITY OF PROPRIETARY INFORMATION. At all times, both during your employment by the Company and after its termination, you agree to keep all Proprietary Information in confidence and trust, and you will not use or disclose Proprietary Information without the written consent of the Company, except as may be necessary to perform your duties as an employee of the Company. Upon termination of your employment with the Company, you will promptly deliver to the Company all documents and materials of any kind pertaining to your work with the Company, and you will not take with you any documents and materials of any kind pertaining to your work with the Company, and you will not take with you any documents, materials or copies thereof, whether on paper, magnetic or optical media or any other medium, containing any Proprietary Information. b) INFORMATION OF FORMER EMPLOYER. You agree that during your employment at the Company you will not improperly use or disclose any confidential or Proprietary Information or trade secrets of your former employers. III. CONFLICTING OBLIGATIONS. 2 a) NO CONFLICTING EMPLOYMENT. You agree that during the term of your employment at the Company you will not plan or engage in other employment, occupation, consulting or other business activity directly related to the business in which the Company is now involved or becomes involved during the term of your employment, nor will you engage in any other activities that conflict with your employment obligations to the Company. b) NO CONFLICTING AGREEMENTS. You represent to the Company that you have no other agreements or commitments that would hinder or prevent the full performance of your duties as a Company employee or your obligations under this Agreement, and you agree not to enter into any such conflicting agreement during the term of your employment at the Company. c) DISCLOSURE OF AGREEMENT. You hereby authorize the Company to notify others, including customers of the Company and any future employers you may have, of the terms of this Agreement and your responsibilities under this Agreement. d) NON-COMPETITION AND NON-SOLICITATION. Ancillary to the promises contained herein, and particularly with regard to the Company's promise to provide the Proprietary Information and your promises with regard to the Proprietary Information, you agree that in the event you shall at any time cease to be associated with the Company as an employee, officer, and/or director you shall not, for a period of twelve (12) months thereafter, as an officer, director, employee, consultant, principal or trustee on behalf of any other person, firm, corporation, association or other entity, engage in any business or activity that competes with the business of the Company as now conducted or as conducted as of the time you leave the Company, nor shall you solicit or assist any person, firm, corporation, association or other entity in soliciting any customer of the Company for purposes competitive with the business of the Company. You acknowledge that the scope of the activity restricted is limited to the business of the Company and that such restriction is reasonable to protect the Proprietary Information of the Company. Because the Proprietary Information may be used from many locations and because of the potential worldwide application of the Proprietary Information, the parties stipulate and agree that the geographic restriction of this paragraph will include North America, South America, Europe, and Asia and shall include both operations based in such areas and contact with such areas through telephonic, electronic, Internet or other means. In exchange for such same consideration, you further agree that for a period of twelve (12) months following cessation of your association with the Company you shall not employ or solicit the employment of any person who shall then be employed by the Company or who shall have been employed by the Company within the prior twelve (12) month period, on behalf of yourself or any other person, firm, corporation, association or other entity, directly or indirectly. IV. NO IMPLIED EMPLOYMENT RIGHTS. You understand and agree that this Agreement does not confer upon you any rights to continued employment by the Company that you would not 3 otherwise have, nor does this Agreement obligate the Company to employ you for any specific period of time. V. GENERAL PROVISIONS. a) SEVERABILITY. Each covenant and/or provision of this Agreement shall be enforceable independent of every other covenant and/or provision. The assertion or existence of any breach by the Company or claim by Employee against the Company shall not constitute a defense to the enforcement of the provisions of this Agreement by the Company relating to Inventions, Proprietary Information, and Conflicting Obligations. Furthermore, in the event any covenant and/or provision of this Agreement is determined to be unenforceable for any reason, the remaining covenants and/or provisions will remain effective, binding, and enforceable. In the event a court were to determine that any provisions herein are unenforceable because unreasonable either in length or time or area to which said provisions apply, it is the intent of both parties hereto that said court shall reduce and reform the provisions thereof so as to apply to limits considered enforceable by said court. b) GOVERNING LAW. This Agreement will be governed by the laws of the State of Texas as they apply to contracts entered into and wholly to be performed within such state. Any litigation or dispute resolution between the parties relating to this Agreement will take place in Dallas County, Texas, and you and the Company each consent to the personal jurisdiction of and venue in the state and federal courts within that county. c) ENTIRE AGREEMENT. This Agreement sets for the entire agreement and understanding between you and the Company relating to the subject matter of this Agreement. No modification to or amendment of this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by both you and an authorized representative of the Company. Any subsequent changes in your duties, salary or compensation will not affect the validity or scope of this Agreement. d) SUCCESSORS AND ASSIGNS. This Agreement will be binding upon your heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors and assigns. __________________________________ _________________________ EMPLOYEE SIGNATURE DATE __________________________________ _________________________ PRINTED NAME TITLE 4 EX-10.22 26 EXHIBIT 10.22 MANUFACTURING AND MARKETING AGREEMENT between DIGITALCONVERGENCE.COM INC. and TANDY CORPORATION TABLE OF CONTENTS 1. DEFINITIONS...........................................................1 2. INTELLECTUAL PROPERTY.................................................2 2.1. Ownership of Intellectual Property...........................2 2.2. License to Manufacture.......................................2 2.3. License to Market............................................2 2.4. Retention of Rights..........................................3 2.5. Exclusivity..................................................3 2.6. Indemnification..............................................3 2.7. Designs. Molds and Tools.....................................4 2.8. Warranty of Patent Application...............................4 2.9. License for Internet and Other Uses..........................4 3. MANUFACTURING.........................................................4 3.1. Manufacturing Relationship...................................4 3.2. Quality......................................................5 3.3. Cost Reduction...............................................5 3.4. Orders.......................................................5 3.5. Delivery, Inspection and Acceptance..........................7 3.6. Reports......................................................8 3.7. Warranties of Manufacture....................................8 3.8. Disclaimer...................................................8 3.9. End User Returns.............................................8 3.10. Prototypes...................................................9 3.11. Large Scale Failures.........................................9 3.12. Second Sourcing..............................................9 4. MARKETING AND DISTRIBUTION............................................9 4.1. Marketing and Distribution Manager[s]........................9 4.2. Distribution................................................10 4.3. Deployment..................................................10 4.4. Media.......................................................10 4.5. Packaging...................................................10 4.6. Marketing...................................................10 4.7. Sales Incentives............................................11 4.8. Advertising.................................................11 4.9. End User License............................................12 4.10. Import......................................................12 -i- 5. SERVICES WARRANTY....................................................12 5.1. Services....................................................12 6. TRAINING.............................................................12 6.1. Training Program Development................................12 6.2. Training Program Dissemination..............................12 7. PAYMENT AND CONSIDERATION............................................13 7.1. Pricing.....................................................13 7.2. Export and Import Fees......................................13 7.3. Payment.....................................................13 7.4. Other Consideration.........................................13 8. AUDIT................................................................14 8.1. Records of Tandy............................................14 8.2. Records of Digital Convergence..............................14 9. TERM AND TERMINATION.................................................14 9.1. Term of Agreement...........................................14 9.2. Termination.................................................14 10. LIMITATIONS OF LIABILITY.............................................14 10.1. Limitations for Digital Convergence..........................14 10.2. Limitations for Tandy........................................15 10.3. Agreed Allocations of Risk...................................15 11. CONFIDENTIAL INFORMATION.............................................15 11.1. Disclosure and Use Limitations...............................15 11.2. Subpoena Procedure...........................................16 11.3. Remedies.....................................................16 11.4. Return or Destruction of Materials...........................16 12. MISCELLANEOUS........................................................17 12.1. Notice Generally.............................................17 12.2. Assignment...................................................17 12.3. Headings.....................................................18 12.4. Governing Law; Venue; Limitations............................18 12.5. Costs........................................................18 12.6. Delays.......................................................18 12.7. Severability.................................................18 12.8. Waiver.......................................................18 -ii- 12.9. Entire Agreement.............................................19 12.10. Approvals and Consents.......................................19 12.11. Further Assurances...........................................19 12.12. Representation of Counsel; Mutual Negotiation................19 12.13. Supremacy of Contract........................................19 12.14. Media Releases...............................................19 12.15. No Partnership...............................................19 12.16. Wireless Concerto............................................19 12.17. Premium Product..............................................20 12.18. Agreement Binding on Successors..............................20 12.19. Sales, Use, Property Taxes...................................20
-iii- This MANUFACTURING AND MARKETING AGREEMENT (this "Agreement"), effective as of December 6, 1999 (the "Effective Date"), is between DigitalConvergence.com Inc., a Delaware corporation ("Digital Convergence") and Tandy Corporation, a Delaware corporation and its wholly-owned subsidiary A&A International, Inc. ("A&A" and collectively, "Tandy") (hereinafter collectively referred to as the "Parties" and individually as a "Party"). The Parties hereby agree as follows: 1. DEFINITIONS As used in this Agreement, the following terms have the respective meanings set forth below: "Authorized Manufacturer" shall mean a manufacturer that: (i) is selected by Tandy; and (ii) has been approved by Digital Convergence in writing. "Confidential Information" shall mean all information disclosed by a Party (the "Disclosing Party") to the other Party (the "Receiving Party") (in writing, orally, or in any other form) that is identified as confidential or proprietary or that, due to the nature of the information or the circumstances surrounding disclosure, ought to be treated as confidential or proprietary, including but not limited to financial plans, strategic plans, customer lists, technical documentation, software, and, business marketing information. "Confidential Information" shall not include, however, information: (i) previously known to the Receiving Party before receipt from the Disclosing Party; (ii) independently developed by the Receiving Party without access to the Disclosing Party's information; (iii) acquired by the Receiving Party from a third party which is not under an obligation to the Disclosing Party not to disclose such information; or (iv) which is or becomes publicly available through no breach by the Receiving Party of this Agreement, expressly including becoming available through the issuance of a patent. "Digital Convergence Intellectual Property" shall mean all Intellectual Property: (i) owned by Digital Convergence as of the date hereof; or (ii) developed by or on behalf of Digital Convergence for use in connection with the Product(s), including without limitation the Digital Convergence Technology. "Digital Convergence Technology" shall mean the unique technology utilized in the product known as K.A.T.-TM- or :CAT-TM- and the software known as Concerto-TM-. "Documentation" shall mean printed or electronic materials intended to assist an end-user in installing or operating a Product. "Intellectual Property" shall mean all trademarks, service marks, trade names, Internet domain names, designs, logos, slogans and general intangibles of like nature, together with: goodwill, regions and applications relating to the foregoing; registered patents and unregistered patents pending; copyrights (including registrations and applications); computer programs, including 1 any and all software implementation of algorithms, applications, tools, models and methodologies whether in source code or object code, databases and computations, including any and all data and collections of data, all documentation, including user manuals and training materials, relating to any of the foregoing; and technology, know-how, inventions, processes, formulae, algorithms, models, trade secrets and methodologies. ":CAT Product(s)" shall mean a handheld device with the capability to read a plurality of barcode formats, the ultimate purpose of which is to direct an end user to a specific Web Site on the Internet or to any software application on their desktop, all as finther described in Exhibit A of this Agreement. "Product(s)" shall mean the "Keystroke Automation Technology" and the "Concerto Software Media" products described in Exhibit A, as amended in writing by the parties from time to time, including components and software. 2. INTELLECTUAL PROPERTY 2.1. OWNERSHIP OF INTELLECTUAL PROPERTY. As between Tandy and Digital Convergence, Tandy acknowledges and agrees that all Digital Convergence Intellectual Property shall be the sole property of Digital Convergence, and that Tandy shall not gain any right, title, or interest in such Digital Convergence Intellectual Property except as expressly provided under this Agreement. 2.2. LICENSE TO MANUFACTURE. Subject to the terms of this Agreement, Digital Convergence hereby grants to Tandy a limited, royalty-free, personal, nonexclusive, revocable, worldwide license, pursuant to Digital Convergence's Intellectual Property, to: (a) make, have made, uses have used, manufacture and have manufactured, import and have imported :CAT Products and to test, repair, modify, and assemble the :CAT Products; (b) sublicense the rights granted in (a) above and below, to Authorized Manufacturers, provided however that Tandy shall impose confidentiality restrictions and intellectual property protections which are at least as strict as those in this Agreement; and (c) copy, use and install the software necessary for the manufacture of the :CAT Products. 2.3. LICENSE TO MARKET. Subject to the terms of this Agreement, Digital Convergence hereby grants to Tandy a limited, royalty-free, personal, non-exclusive, nationwide (including U.S. territories), revocable license, pursuant to Digital Convergence's Intellectual Property, to: 2 (a) package, publish, market, sell (with the prior written approval of Digital Convergence), ship, maintain, support, upgrade and/or distribute the Products, in whole or in part; (b) generate and distribute marketing materials featuring the Products, in whole or in part; and (c) use the :CAT and Concerto trademarks in connection with the advertising, promotion, distribution, and sale of Products, provided that such use is consistent with the format and rules of use set out in Exhibit B, or as otherwise agreed by the Parties. 2.4. RETENTION OF RIGHTS. All rights to Digital Convergence Intellectual Property which are not expressly granted to Tandy in this Section 2 are retained by Digital Convergence. 2.5. EXCLUSIVITY. Without the prior written consent of Digital Convergence, neither Tandy nor any Authorized Manufacturer shall manufacture, distribute or offer for sale: (a) Any product, other than the Products, that makes use of the Concerto-TM- software; or (b) Any product during the team of this Agreement that is substantially similar in design, function and results to the Concerto-TM- software or the :CAT Product (while interacting with the Concerto software). This provision shall not restrict Tandy from offering for sale products distributed by third persons that make use of Internet navigation devices. 2.6. INDEMNIFICATION. For all Products, Digital Convergence will indemnify and hold harmless or, at its sole option, settle any action or claim brought against Tandy to the extent that it is based upon a claim that any Product infringes any patent rights, copyright rights, or other intellectual property rights, or incorporates any misappropriated trade secrets (a "Claim"). Digital Convergence will pay any damages finally ageed to or awarded against Tandy that are attributable to such Claim and that are awarded against Tandy in a judgment or settlement approved in advance by Digital Convergence, provided that: (i) Tandy promptly notifies Digital Convergence in writing of the Claim or any threat thereof, (ii) Tandy grants Digital Convergence sole control of the defense and settlement of the Claim; and (iii) Tandy provides Digital Convergence with all assistance, information, and authority reasonably required for the defense and settlement of the Claim at Digital Convergence's expense. Digital Convergence shall not be responsible for damages or costs under any settlement or compromise made without its consent. Tandy may retain their own counsel (at their expense) to monitor and/or participate in the defense and settlement of the Claim. 3 The foregoing indemnity does not apply to: (a) any Claim based upon any use of a Product other than for its intended purpose, whether by Tandy, any customer, end user, or otherwise; (b) any Claim which is not timely noticed to Digital Convergence by Tandy; (c) any Claim asserting infringement by a combination of a Product with other products, which combination is not intended by the Parties; and (d) any settlement of a Claim made without Digital Convergence's written consent. 2.7. DESIGNS. MOLDS AND TOOLS. Digital Convergence will notify Tandy prior to issuing an "Order" (as defined in Section 3.4), and will state on the Order itself, whether the pricing for the Order should include charges for designs, molds and tools necessary for the manufacture of the :CAT Products. Tandy will coordinate payment for, and assist in transferring ownership and possession of, such designs, molds and tools from the Authorized Manufacturer to Digital Convergence. As between the parties hereto, Digital Convergence will own, and Tandy hereby assigns, and will cause the Authorized Manufacturers to assign, all right, title and interest it may have in, all specifications, designs, molds and tools used in manufacturing the :CAT Products, as well as all :CAT Product improvements and :CAT Product manufacturing improvements created during the term hereof. 2.8. WARRANTY OF PATENT APPLICATION. Digital Convergence represents and warrants that it has filed one or more United States patent applications claiming ownership of the Digital Convergence Technology, :CAT and Concerto software and that such applications are currently pending in the United States Patent and Trademark Office. 2.9. LICENSE FOR INTERNET AND OTHER USES. Digital Convergence also hereby grants Tandy, during the term of this Agreement, a limited, royalty-free, nonexclusive, worldwide, revocable license to use :CAT-TM-/Concerto-TM- - readable codes in its RadioShack.com catalogs and other advertising, and to the extent necessary to enable the RadioShack.com web site to properly recognize and utilize such codes, to incorporate Digital Convergence Intellectual Property into the RadioShack.com web site during the term of this Agreement. Thereafter, for a period of one (1) year, Tandy shall be entitled to a continuation of this license at a royalty rate no less favorable to the rates charged by Digital Convergence to its top 10 clients. 3. MANUFACTURING 3.1. MANUFACTURING RELATIONSHIP 4 (a) MANAGER. A&A will be the product sourcing manager. The Tandy employee who shall serve as the primary contact person for Digital Convergence on all issues related to Product production and delivery will be the Manager of Internet Alliances (currently, Bill Berryhill). The identified contact person shall be authorized to act for Tandy, and will interact with A&A on all product sourcing issues as well as all issues concerning the Authorized Manufacturer and its manufacturing process, testing and analysis, and quality. A&A will, as product sourcing manager, oversee all manufacturing operations by Authorized Manufacturers involving or related to the :CAT Product and, if applicable, upon the request by Digital Convergence, the pressing of CD-ROM discs with the Concerto-TM- software. (b) TANDY'S RELATIONSHIP WITH AUTHORIZED MANUFACTURERS. The parties agree that although Tandy is not the manufacturer of the :CAT Products, Tandy will stand behind the Authorized Manufacturer[s] by using its best efforts to monitor and, to the extent possible, control the manufacturing of :CAT Products to meet scheduled delivery dates and desired Product quality. To that end, Tandy will cause A&A to have persons from its foreign offices monitor the Authorized Manufacturer's[s'] adherence to production schedules, perform sampling inspection at the Authorized Manufacturer's[s'] facility of every lot of :CAT Products manufactured, and perform routine audits to ensure that factory personnel are performing ongoing testing similar to that required by Tandy on its own products. 3.2. QUALITY. Tandy agrees that it will manage the manufacture of :CAT Products to meet the same quality goals used to manufacture its own line of private label products. Digital Convergence may, at its sole cost and expense, have quality control or other appropriate personnel present at all sites of manufacture of :CAT Products and may conduct reasonable inspections of the manufacturing processes of the :CAT Products. Digital Convergence shall coordinate any such visits and inspections with A&A. 3.3. COST REDUCTION. The Parties acknowledge that reduction in the cost of manufacturing the :CAT Product(s) is a primary goal of the Parties. Tandy and Digital Convergence each agree to use commercially reasonable efforts to reduce the manufacturing costs for the :CAT Product(s) from present levels. If Tandy fails to reduce the manufacturing costs within six (6) months of the effective date of this Agreement, Digital Convergence may, upon payment of all outstanding invoices (including work in progress) and thirty (30) days prior written notice, terminate all of Tandy's product sourcing functions under this Agreement and cause Tandy to terminate all manufacturing by Authorized Manufacturers. This right of limited termination shall be the sole remedy under this section. 3.4. ORDERS. (a) PURCHASE ORDERS. Digital Convergence shall submit manufacturing orders ("Orders") in writing to Tandy. Such Orders shall be subject to and governed by the terms and conditions of this Agreement. The preprinted terms and conditions of the Order form shall not apply to, and shall be of no force and effect with regard to, any Order placed hereunder. Orders shall, at 5 a minimum, contain: (i) a description of the Product to be manufactured; (ii) the quantity desired; (iii) the price; (iv) the delivery date; and (v) the delivery mechanism pursuant to Section 3.5, below. (b) ORDER ACCEPTANCE. Upon receipt of any Order conforming to this Agreement, Tandy will forward the Order to an Authorized Manufacturer for acceptance. Upon receipt of such acceptance, Tandy will provide Digital Convergence with written notice of acceptance of the Order and acknowledge tentative delivery date(s) of ordered Products, such written notice of acceptance to be provided within fourteen (14) business days from Tandy's receipt of the Order. (c) ORDER REJECTION. If the Order is rejected, Tandy will provide written notice within fourteen (14) business days from receipt of the Order specifying that the Order is not acceptable, stating the reasons and giving Digital Convergence an opportunity to correct it. If the Order is not correctable, or if the reason for rejection of the Order is Tandy's inability to fulfill an order, Digital Convergence may exercise its Second Sourcing rights set out in, and subject to Section 3.12 below. (d) CANCELLATION AND RESCHEDULING. Digital Convergence may, upon giving written notice fifteen (15) days prior to the date of actual manufacture of Products, request that any Order be rescheduled or cancelled. In the event of such cancellation or rescheduling, Tandy shall be entitled to reimbursement from Digital Convergence in the amount of its reasonable, actual costs (including costs of the Authorized Manufacturer) plus ten percent (10%) of such costs. Such additional reimbursement, if any, shall be separately invoiced by Tandy to Digital Convergence and due and payable within thirty (30) days from the date of the invoice. (e) PRODUCT SPECIFICATIONS AND DESIGN. From time to time, Digital Convergence will provide Tandy with specifications for one or more of the Products ("Product Specifications") which Tandy will provide to the Authorized Manufacturer. Based upon Product Specifications, Tandy will have the Authorized Manufacturer create a design for the Product ("Product Design") which Tandy will provide to Digital Convergence. Digital Convergence shall either approve or reject the Product Design in writing, and shall state the reasons for any rejection. If the Product Design is approved, subject to Section 3.10, Digital Convergence may begin submitting Orders for the Product. If the Product Design is rejected, Tandy will have the Authorized Manufacturer modify the Product Design to eliminate the basis of the rejection, and will re-submit the Product Design for approval or rejection. (f) REQUESTED CHANGES TO PRODUCTS. After a Product Design has been approved, either Party may submit a written request for changes in the Product, which the other may approve in its discretion. If the change appears to be substantial, either party may notify the other party that formal change control procedures will be utilized as follows: Within thirty (30) days of receipt of a written request for a substantial change in the Product, Tandy will discuss the change with the Authorized Manufacturer and will inform Digital Convergence of the price effect, if any, as well as the point of incorporation and anticipated logistic considerations of such change. Both Parties agree to negotiate in good faith regarding the incorporation of any such change, and if incorporated, the 6 price and other terms concerning such change. However, neither Party is under any obligation to agree to change requests unless otherwise expressly stated in this Agreement. 3.5. DELIVERY, INSPECTION AND ACCEPTANCE. The Parties anticipate two basic delivery mechanisms under this Agreement. Tandy may deliver Products to Digital Convergence or its designate for distribution by Digital Convergence or its designate as set forth in subsection (a) below, or Tandy may deliver Products to Digital Convergence by delivering same to Tandy's distribution centers for distribution by Tandy to RadioShack stores, as set forth in subsection (b) below. (a) DELIVERY TO DIGITAL CONVERGENCE. (i) DELIVERY. Delivery of Products to Digital Convergence shall be deemed completed when delivered duty paid to Digital Convergence's carrier or forwarding agent which is intended to deliver the Products from the U.S. port of entry to their ultimate "ship to" location (hereinafter each is referred to as a "Delivery"). Unless specified in Digital Convergence's Orders, at least thirty (30) days prior to the scheduled delivery date, Digital Convergence shall give Tandy written instructions regarding the ultimate "ship to" location, forwarding agent and/or carrier and type of conveyance by which such purchases are to be shipped from the U.S. port of entry to the ultimate "ship to" location. Should Digital Convergence fail to arrange and pay for the forwarding agent and/or carrier, Tandy shall select same, which selection shall conform to the standard commercial practices of Tandy for shipment of its products. All costs of transportation of Products from the U.S. port of entry to the ultimate "ship to" location shall be the responsibility of Digital Convergence. (ii) TITLE AND RISK OF LOSS. Title and risk of loss and damages shall pass from Tandy to Digital Convergence upon completion of Delivery as set forth in Section 3.5(a)(i) above. (iii) SECURITY INTEREST. Until the purchase price and all other charges payable by Digital Convergence hereunder are received in full, Tandy will retain a security interest in the Products, and proceeds therefrom, under the Uniform Commercial Code. If requested by Tandy, Digital Convergence agrees to execute such documents as may be necessary or required by Tandy to perfect and protect such security interest. (iv) INSPECTION. Digital Convergence, at its sole cost and expense, shall have the right to obtain, and Tandy will cause the Authorized Manufacturer to provide, randomly selected Product samples from an Order manufacturing run for testing purposes to verify the quality of the Products to be delivered, and Tandy will cooperate with Digital Convergence in regard to such testing and will provide a reasonable number of Product samples upon request. (b) DELIVERY TO RADIOSHACK STORES. 7 (i) DELIVERY. Delivery of Products to Tandy shall be deemed completed when placed in the possession of a carrier, packed with Tandy's standard commercial packing, F.O.B. Tandy's warehouse facility in the United States (hereinafter each is referred to as a "Tandy Delivery"). (ii) TIDE AND RISK OF LOSS. Title to the Products shall pass from Tandy to Digital Convergence upon completion of Tandy Delivery. However, risk of loss and damages shall remain with Tandy until the Products are distributed to end users. (iii) INSPECTION. Digital Convergence, at its sole cost and expense, shall have the right to obtain a reasonable number of randomly selected Product samples from Tandy's warehouse/distribution centers and RadioShack stores for testing purposes to verify the quality of the delivered Products, and Tandy will cooperate with Digital Convergence in regard to such testing and will provide a reasonable number of Product samples upon request. 3.6. REPORTS. The Parties shall cooperate with each other in forecasting demand and inventory needs, and shall provide any information reasonably requested to estimate current or future manufacturing needs or distribution needs, or to assess a Product's popularity or penetration in a given region. 3.7. WARRANTIES OF MANUFACTURE. Tandy will cause the Authorized Manufacturer to extend to Digital Convergence the warranties of manufacture typically extended by such manufacturers to Tandy with regard to Tandy's own products. At a minimum, such warranties will include a warranty of clear title free and clear of all liens and security interests, a warranty that the :CAT Products will conform to specifications and be free of defects in material and workmanship for a period of one hundred twenty (120) days from date of either Delivery or Tandy Delivery (provided :CAT Products are used in accordance with the recommendations, instructions, and/or specifications included in the :CAT Product packaging). Tandy will assist Digital Convergence in presenting warranty claims to any Authorized Manufacturer. 3.8. DISCLAIMER. THE EXPRESS WARRANTIES SET FORTH IN SECTION 3.7 AND THE OBLIGATIONS AND LIABILITIES OF TANDY HEREUNDER, ARE IN LIEU OF, AND DIGITAL CONVERGENCE HEREBY WAIVES, ALL OTHER GUARANTEES AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 3.9. END USER RETURNS. Tandy shall exchange any malfunctioning :CAT Product distributed by Tandy that is brought by a customer to the store from which it was distributed. Tandy may require the customer to return the defective :CAT Product in order to receive a replacement. Digital Convergence shall be entitled to receive, and Tandy shall provide, a credit on all sums due under this Agreement for each :CAT Product returned by an end-user within one hundred twenty (120) days from the date of Delivery due to a defect in workmanship or materials, or a failure to 8 properly operate, provided that the total number of such returned products exceeds three (3%) of the applicable Order (as measured by the number of returned :CAT Products during a twelve (12)-month period compared to the total number of :CAT Products distributed by Tandy during the same period). 3.10. PROTOTYPES. Before authorizing an initial manufacturing run, or any manufacturing run involving a change in the specifications or manufacturing process, Tandy shall produce, or shall cause an Authorized Manufacturer to produce, a reasonable number of prototype :CAT Products consistent with its practices for its RadioShack division and shall provide them to Digital Convergence for testing, analysis and other reasonable purposes. Additionally, Tandy shall produce, or shall cause the Authorized Manufacturer to produce, and provide a similar number of prototypes as reasonably requested by Digital Convergence each time the manufacturing process is changed or updated. 3.11. LARGE SCALE FAILURES. If a :CAT Product fails at rates higher than three percent (3%) of any Order, (a "Large Scale Failure") whether discovered in factory testing, Digital Convergence testing, Tandy testing, or through end-user complaints, the Parties shall work promptly and diligently to determine the cause of the failures. Digital Convergence shall be entitled to and Tandy shall pay a refund for all :CAT Products involved in a Large Scale Failure. If the cause of the Large Scale Failure is defects in material, workmanship or failure to conform to specifications, as between the Parties hereto, Tandy shall be responsible for all costs associated with investigating and correcting a Large Scale Failure. If the cause of the Large Scale Failure is the specifications or a design approved by Digital Convergence, Digital Convergence shall be responsible for all costs associated with investigating and correcting a Large Scale Failure. If the Parties do not promptly determine and correct the cause of a Large Scale Failure, Digital Convergence may exercise its Second Sourcing rights set out in, and subject to, Section 3.12 below. 3.12. SECOND SOURCING. At any time after Delivery of the first two (2) million units of :CAT Products, or should a need for a Second Source arise pursuant to Section 12.6 ("Delays"), Section 3.11 ("Large Scale Failures"), or Tandy's rejection of an Order due to the inability of an Authorized Manufacturer to fill the Order pursuant to Section 3.4(c) ("Order Rejection"), Tandy agrees that Digital Convergence may purchase :CAT Products from manufacturers other than those Authorized Manufacturers utilized by Tandy to perform its services under this Agreement (collectively "Second Sources"), provided that: (i) Digital Convergence has paid all invoices properly and currently due (including costs and work in progress); and (ii) Digital Convergence provides sixty (60) days prior written notice to Tandy that Digital Convergence intends to purchase :CAT Products from Second Sources. The decision by Digital Convergence to Second Source :CAT Products shall be made in good faith, and Digital Convergence shall deal fairly with Tandy in all Second Source situations. Digital Convergence shall not deal directly with any Authorized Manufacturer without the prior written consent of Tandy. Should Digital Convergence decide to obtain a Second Source for reasons of cost reduction, Digital Convergence shall provide Tandy not less than ten (10) business days within which to meet any lower quotes or pricing obtained from any such Second Source. 9 4. MARKETING AND DISTRIBUTION 4.1. MARKETING AND DISTRIBUTION MANAGER[S]. Tandy agrees to identify a marketing and a distribution manager (which may be the same person) to be the primary point[s] of contact for Digital Convergence for marketing and distribution issues. The identified marketing and distribution manager[s] shall be authorized to act for Tandy, and shall be knowledgeable in the areas of the marketing and distribution. The identified marketing and distribution manager[s] should oversee all marketing and distribution operations involving or related to the Products distributed through Tandy's outlets. 4.2. DISTRIBUTION. Tandy shall use its best efforts to stock the Products at its company owned RadioShack stores, and to encourage dealers to stock the Products at their RadioShack stores during the term hereof and in accordance with the deployment schedule agreed to by the parties hereto. Tandy shall provide nationwide distribution of Products according to the promotional criteria reasonably established by Digital Convergence. The Parties will agree on the methods and manner of distributing the Initial Deployment of Products for distribution to end-users by Tandy owned and associated retail outlets including RadioShack.com. Digital Convergence may also distribute the Products through retail and non-retail channels of distribution but may not directly distribute the :CAT Product through the outlets listed on Exhibit C unless Tandy has consented in writing. Nothing contained in this Agreement shall be construed so as to limit, restrict, or prohibit Digital Convergence from offering for sale, manufacture, or distribution the :CAT Product to other parties not identified on Exhibit C (including manufacturers) who may, in turn, distribute products to those outlets listed in Exhibit C. Tandy warrants and represents that Products it distributes will be distributed only to end users free and clear of all liens. 4.3. DEPLOYMENT. Digital Convergence shall provide Tandy with at least 1,000,000 :CAT Products on a scaled basis to be agreed upon by the parties hereto (the "Initial Deployment") and manufactured pursuant to this Agreement. Tandy will manage the manufacturing and distribution required to fulfill this obligation. The parties shall mutually develop subsequent deployment/distribution plan(s). 4.4. MEDIA. Digital Convergence shall provide Tandy with supplies of floppy diskettes or CD-ROMs containing the Concerto software in quantities sufficient to support the staged deployment of :CAT Products. Digital Convergence may also seek third parties to sponsor additional floppy diskettes or CD-ROMs for distribution by Tandy in support of the :CAT Products provided that Tandy consents in writing to act as distributor for such Products, which consent shall not be unreasonably withheld or delayed. 4.5. PACKAGING. The Parties shall cooperate to determine how Products should be packaged. 4.6. MARKETING. 10 (a) Digital Convergence may seek third parties to pay for all or part of Digital Convergence's cost of manufacturing in return for their participation in marketing campaigns. For example, a food manufacturer may pay for the manufacture of a Product provided that Tandy will give the Product at no charge to end users who present a proof of purchase from that manufacturer. Tandy will participate in marketing campaigns and provide ride along ad support to third parties that agree to pay for all or part of the cost of manufacturing a Product provided that Tandy consents in writing to provide such ad and marketing support to such third party, which consent shall not be unreasonably withheld or delayed. (b) The parties agree to cooperate to create new marketing efforts related to the Products. (c) Tandy will use commercially reasonable efforts to assist Digital Convergence in meeting with and establishing business relationships with key Tandy partners and resources. (d) Digital Convergence will use commercially reasonable efforts to provide Tandy with one-click online access to RadioShack.com. (e) Digital Convergence will provide on a monthly basis a copy of the initial customer profile to Tandy for any customer from whom Tandy collects profile information and sends the profile information to Digital Convergence. 4.7. SALES INCENTIVES. Tandy agrees to permit Digital Convergence to establish and fund sales incentives for Tandy Sales Associates, subject to Tandy's approval, which shall not be unreasonably withheld or delayed, including without limitation financial or gift incentive programs based upon various deployment criteria. Tandy will administer all such programs. 4.8. ADVERTISING. (a) Tandy shall support and promote the Products through unilateral expenditures from is established advertising budgets for its RadioShack division, including but not limited to RadioShack catalogs, flyers, inserts, direct mail pieces, television and radio, and RadioShack.com. Also, during the term of the Agreement, Tandy's RadioShack division shall tag Digital Convergence in ads using its corporate name, logo, service mark, or its Product marks in combination with the RadioShack service mark, as deemed appropriate solely in the discretion of Tandy on a space available basis, in all broadcast, print or electronic media advertising which directs consumers to RadioShack retail outlets where the Products are available for distribution. Tandy agrees to properly attribute Digital Convergence's trademarks as registered or owned trademarks of Digital Convergence, as appropriate, or as directed by Digital Convergence in writing. Tandy further agrees that, except with respect to materials substantially identical to materials that have previously been approved, it will furnish to Digital Convergence for approval of trademark usage of the Digital Convergence marks a sample of each use of a mark that is different from previously approved usages on advertising, promotional materials, packaging, and labels. If such use is not approved, Digital 11 Convergence shall correct the trademark usage on the sample, and return it to Tandy. Tandy will amend its use as instructed. Tandy will use all commercially reasonable efforts to provide Digital Convergence adequate review and approval time. Digital Convergence will use all commercially reasonable efforts to review, approve and return samples in sufficient time to allow production changes. The Parties will cooperate to develop, at Digital Convergence's cost, posters and other in-store, point of sale promotional materials which Tandy will cause to be displayed prominently in Tandy-owned RadioShack stores, and request to be displayed in dealer stores. (b) Digital Convergence will promote the Products and Tandy through advertising as follows: (i) as Digital Convergence deems it to be feasible, Digital Convergence will tag RadioShack stores in television marketing efforts conducted by Digital Convergence as a place to obtain :CATS; (ii) as Digital Convergence deems it to be feasible, Digital Convergence will mention Tandy or RadioShack in public relations efforts, as a place to obtain :CATS; (iii) Digital Convergence will tag Tandy and mutually agreed Tandy campaigns within Digital Convergence's nationwide long form advertisements; and (iv) Digital Convergence shall provide a reasonable number of posters to Tandy for display in RadioShack locations. (c) The Parties will cooperate to develop additional marketing campaigns. 4.9. END USER LICENSE. Digital Convergence shall provide Tandy with an end-user license to be included in or on the packaging for the Products. Tandy will only distribute Products to end users. 4.10. IMPORT. Tandy will mark :CAT Products and packaging and certify them in accordance with the laws and requirements of the country in which the :CAT Products are manufactured and the country to which the :CAT Products are shipped. 5. SERVICES WARRANTY 5.1. SERVICES. Tandy warrants and represents that it will perform its services and obligations under this Agreement in a good and workmanlike manner. 6. TRAINING 6.1. TRAINING PROGRAM DEVELOPMENT. Digital Convergence shall at its sole cost and expense write, produce, edit and master a video program which will familiarize end users with the installation and operation of the Product[s] and with the features and functions of the Product[s] (a "Customer Training Video"). Tandy shall participate in, review, and approve the Customer Training Video. Additionally, Digital Convergence shall write, produce, edit and master a video program which will familiarize Tandy employees with the installation and operation of the Product and with the features and functions of the Product, and prepare them to assist end users (an "Employee Training Video"). Tandy shall participate in, review, and approve the Employee Training Video. 12 Digital Convergence shall deliver to Tandy copies of the Customer Training Video and the Employee Training Video in quantities sufficient to support the staged deployment of Products. 6.2. TRAINING PROGRAM DISSEMINATION. Immediately after receiving copies of the Customer Training Video, Tandy shall provide a copy of the Customer Training Video to each Radio Shack store in accordance with the training program and deployment schedule developed by the parties. Tandy shall broadcast the Employee Training Video on the Tandy Satellite Training Network. The Parties will cooperate and work together in good faith to develop an effective training program and schedule which utilizes both the Customer Training Video and the Employee Training Video. 7. PAYMENT AND CONSIDERATION 7.1. PRICING. The price to be paid by Digital Convergence to Tandy for its services hereunder will be based on pre-Order quotes supplied by Tandy and will be Tandy's delivered cost, calculated by A&A in the same manner as for the RadioShack division of Tandy, but which will include a ten percent (10%) mark up for A&A's services, plus any tooling costs not included in the delivered cost. All pre-Order quotes will be based on shipment of Product Orders by sea, unless Digital Convergence specifies shipment by air. In that event, Digital Convergence will bear the difference in cost. 7.2. EXPORT AND IMPORT FEES. The prices to be paid by Digital Convergence for Products as set forth in this Agreement will include fees for any domestic or foreign forwarding agent, consular invoices, and for any of the documents required by the country of destination. The parties will cooperate to obtain all required import licenses, permits or other governmental orders and Tandy will notify Digital Convergence of the cost thereof 7.3. PAYMENT. All Orders shay be pre-paid or accompanied by a confirmed, irrevocable, documentary letter of credit ("L/C") in the amount of the total Order price (including estimated fees and commissions) estimated by Tandy, issued by a U.S. banking institution acceptable to Tandy, and in form and substance acceptable to Tandy. Upon verifiable proof the L/C has been properly arranged for, A&A will place the Order with the Authorized Manufacturer. At a minimum, each L/C shall: (i) be valid until the date of Delivery; (ii) specify A&A International, Inc., 100 Throckmorton, Suite 1200, Fort Worth, Texas as the beneficiary; (iii) provide for payment to A&A in United States dollars; and (iv) provide for payment to A&A upon the delivery of an original letter (or telecopy or fax thereof ) signed by the Controller of A&A or any Vice President of A&A, which provides: [A] the L/C number; [B] the U.S. dollar amount being drawn; and [C] a certification that the drawing is pursuant to an Order issued by Digital Convergence and that manufacturing has been completed. No other documentation shall be required. The Parties may modify these procedures by written agreement, signed by authorized officers of A&A or Tandy. Any L/C shortfall will be billed to Digital Convergence and all such invoices will be due and payable within thirty (30) days from the date of the invoice. 13 7.4. OTHER CONSIDERATION. The Parties agree that as additional consideration, Tandy is receiving the marketing and advertising services provided by Digital Convergence under this Agreement, and Digital Convergence is receiving the marketing, advertising and distribution services provided by Tandy under this Agreement. Each party shall account for the value of its respective services and provide such valuation to the other party within a reasonable time after the execution of this Agreement. 8. AUDIT 8.1. RECORDS OF TANDY. Tandy shall maintain all records necessary to demonstrate its performance under this Agreement, including without limitation, shipping records, materials invoices, store records, and defect and testing records. Digital Convergence shall have the right to audit Tandy's records, during normal business hours, no more than semi-annually. Should any audit reveal that Digital Convergence was overcharged by Tandy, Tandy shall refund the amount of any overcharge, and pay all of Digital Convergence's reasonable and necessary costs incurred in performing the audit. 8.2. RECORDS OF DIGITAL CONVERGENCE. Digital Convergence shall maintain all records necessary to demonstrate its performance under this Agreement. Tandy shall have the right to audit Digital Convergence's records, during normal business hours, no more than semi-annually. 9. TERM AND TERMINATION 9.1. TERM OF AGREEMENT. The initial term of this Agreement shall be from the Effective Date until December 31, 2001 (the "Initial Term") and will automatically renew for successive one (1) year terms unless written notice of nonrenewal is given by either Party at least ninety (90) days prior to the end of the Initial Term or any successive term. Notwithstanding the foregoing, however, either party may terminate this Agreement at any time after the expiration of the Initial Term by providing not less than ninety (90) days notice thereof to the other party. 9.2. TERMINATION. Additionally, without prejudice to any other rights or remedies at law, equity, or otherwise of the Party so terminating, a Party (the "Terminating Party") may terminate this Agreement by giving a notice to the other Party (the "Defaulting Party"): (i) if at any time, the Defaulting Party commits a material breach of this Agreement and fails to remedy same to the Terminating Party's satisfaction within thirty (30) days after delivery of notice by Terminating Party of the occurrence or existence of such breach; or (ii) if the Defaulting Party applies for or consents to the appointment of a receiver, trustee, or liquidator for substantially all of its assets or such a receiver, trustee, or liquidator is appointed; or the Defaulting Party has filed against it an involuntary petition of bankruptcy that has not been dismissed within thirty (30) days thereof, or files a voluntary petition of bankruptcy, or a petition or answer seeking reorganization, or an arrangement with creditors, or seeks to take advantage of any other law relating to relief of debtors, or makes an assignment for the benefit of creditors. 14 10. LIMITATIONS OF LIABILITY 10.1. LIMITATIONS FOR DIGITAL CONVERGENCE. WITH THE EXCEPTION OF CLAIMS MADE UNDER SECTION 2.6 ABOVE, DIGITAL CONVERGENCE SHALL NOT BE LIABLE OR OBLIGATED FOR ANY REASON IN ANY MANNER FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, INDIRECT OR TORT DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY DAMAGES RESULTING FROM LOSS OF USE, LOSS OF DATA, LOSS OF PROFITS OR LOSS OF BUSINESS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, THE PERFORMANCE OR NON-PERFORMANCE OR NON-AVAILABILITY OF THE DIGITAL CONVERGENCE TECHNOLOGY, OR OF ANY OTHER OBLIGATIONS RELATING TO THIS AGREEMENT, WHETHER OR NOT DIGITAL CONVERGENCE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. DIGITAL CONVERGENCE SHALL NOT BE LIABLE OR OBLIGATED IN ANY MANNER TO TANDY FOR ANY AMOUNT IN EXCESS OF THE PAYMENTS ACTUALLY MADE TO TANDY FOR THE TWELVE (12) MONTHS PRIOR TO A CLAIM RELATED TO THIS AGREEMENT. THIS LIMITATION OF DIGITAL CONVERGENCE'S LIABILITY IS CUMULATIVE, AND ALL OF DIGITAL CONVERGENCE'S REASONABLE EXPENDITURES ON ACCOUNT OF ANY LIABILITY OR OBLIGATION TO TANDY ARISING UNDER THIS AGREEMENT SHALL BE ADDED TO DETERMINE WHEN THIS LIMITATION ON DIGITAL CONVERGENCE'S LIABILITY IS EXHAUSTED. 10.2. LIMITATIONS FOR TANDY. WITH THE SOLE EXCEPTION OF CLAIMS BASED UPON MISAPPROPRIATION OF INTELLECTUAL PROPERTY BY TANDY OR BY AN AUTHORIZED MANUFACTURER (THE "EXCEPTION"), AND NOTWITHSTANDING ANY PROVISION CONTAINED HEREIN TO THE CONTRARY, THE MAXIMUM LIABILITY OF TANDY TO DIGITAL CONVERGENCE ARISING OUT OF OR IN CONNECTION WITH ANY SALE, USE OR OTHER EMPLOYMENT OF ANY PRODUCTS DELIVERED HEREUNDER OR ANY OTHER OBLIGATIONS RELATING TO THIS AGREEMENT, WHETHER SUCH LIABILITY ARISES FROM ANY CLAIM BASED UPON CONTRACT, WARRANTY, TORT OR OTHERWISE, SHALL NOT EXCEED THE ACTUAL AMOUNT PAID TO TANDY BY DIGITAL CONVERGENCE FOR THE SUBJECT UNITS OF PRODUCTS DELIVERED HEREUNDER. DIGITAL CONVERGENCE AGREES THAT IN NO EVENT OTHER THAN THE EXCEPTION SHALL TANDY BE LIABLE FOR ANY INDIRECT, SPECIAL, TORT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES. 10.3. AGREED ALLOCATIONS OF RISK. The Parties agree that the foregoing are freely bargained for allocations of risk. 11. CONFIDENTIAL INFORMATION 11.1. DISCLOSURE AND USE LIMITATIONS. Each Party shall maintain in confidence all Confidential Information received from the other Party, shall use such Confidential Information only as expressly contemplated by this Agreement, and shall not disclose any such Confidential 15 Information to a third party, or use or duplicate any Confidential Information, except as expressly permitted hereunder or make any unauthorized use thereof. Each Party will limit the disclosure of Confidential Information to those of its employees who have a need to access such Confidential Information for that Party's performance of this Agreement. Each Party shall treat such Confidential Information with the same degree of care against disclosure or unauthorized use which it affords to its own information of a similar nature. Notwithstanding the foregoing, Tandy may disclose Digital Convergence Confidential Information to Authorized Manufacturers as necessary to accomplish the manufacture of the :CAT Products, provided that Tandy imposes the same duties of confidentiality upon such Authorized Manufacturers as Tandy has under this Agreement. Tandy shall obtain a non- disclosure agreement (a sample of which is attached hereto as Exhibit D) from, and executed by, each Authorized Manufacturer and shall provide a copy thereof to Digital Convergence. 11.2. SUBPOENA PROCEDURE. In the event the Receiving Party receives a subpoena or other validly issued administrative or judicial process requesting any portion of the Confidential Information of the Disclosing Party, the Receiving Party shall promptly notify the Disclosing Party and tender to it defense of such demand. Unless the demand shall have been timely limited, quashed or extended, the Receiving Party shall thereafter be entitled to comply with such subpoena or other process to the extent permitted by law. If requested by the Disclosing Party to whom the defense has been tendered, the Receiving Party shall cooperate (at the expense of the Disclosing Party) in the defense of a demand. 11.3. REMEDIES. The Receiving Party agrees that the unauthorized disclosure or use of the Disclosing Party's Confidential Information may cause irreparable harm and significant and immeasurable injury. Accordingly, the Receiving Party agrees that the Disclosing Party shall have the right to seek an injunction against any breach of this Section 11. 11.4. RETURN OR DESTRUCTION OF MATERIALS. Except as otherwise stated herein, upon termination of this Agreement at the Disclosing Party's request, the Receiving Party shall, at the Receiving Party's option, either: (i) return to the Disclosing Party all copies of the Disclosing Party's Confidential Information in tangible (including electronic) form; or (ii) destroy all copies of Disclosing Party's Confidential Information in tangible (including electronic) form which are not returned, and certify to the Disclosing Party that all such copies of such Confidential Information have been destroyed. The foregoing notwithstanding, Confidential Information shall remain so for a period of one (1) year after termination or expiration of this Agreement or any renewal thereof. [Remainder of page intentionally left blank.] 16 12. MISCELLANEOUS 12.1. NOTICE GENERALLY. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Agreement shall be sufficiently given or made if in writing and either faxed, delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to Digital Convergence: Digital Convergence.Com 4264 Kellway Circle Addison, Texas 75244 Attn: Chief Executive Officer Facsimile: (972) 818-4805 and and Vinson & Elkins L.L.P. Patrick Stark, Esq. 3700 Trammell Crow Center Kane, Russell, Coleman & Logan 2001 Ross Avenue 1601 Elm Street, Dallas, Texas 75201-2975 Suite 3700 Attention: Jeffrey Chapman Dallas, Texas 75201 Facsimile: (214) 999-7797 Facsimile: (214) 777-4299 (b) If to Tandy: and Tandy Corporation A&A International, Inc. 100 Throckmorton Street, 100 Throckmorton Street, Suite 1900 Suite 1200 Fort Worth, Texas 76102 Fort Worth Texas 76102 Attn.: General Counsel Attn.: Controller Facsimile: (817) 415-3926 Facsimile: (817) 415-2774 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or three (3) business days after the same shall have been deposited in the United States mail. 12.2. ASSIGNMENT. The licenses granted under this Agreement are personal to Tandy and may not be assigned without the written consent of Digital Convergence. 17 12.3. HEADINGS. The section or other headings herein are inserted only for convenience and ease of reference and are not to be considered in the construction or interpretation of any provision of this Agreement. Unless otherwise stated, references to Sections herein are references to Sections hereof. 12.4. GOVERNING LAW; VENUE; LIMITATIONS. This Agreement and the rights and obligations of the Parties hereunder shall be governed by and construed in accordance with the laws of the State of Texas without reference to its provisions on conflict of laws. Texas is the exclusive venue if the action includes a claim arising out of or relating to this Agreement or the use of the Product. All payments to Tandy hereunder shall be made in Fort Worth, Tarrant County, Texas and all disputes hereunder shall be resolved in the applicable state or federal courts located in Tarrant County, Texas. Any and all claims hereunder shall be raised within one (1) year of the event or occurrence from which they arise. 12.5. COSTS. If either Party must bring suit to enforce or preserve its rights under this Agreement, the Party prevailing in such suit shall be entitled to all costs and expenses related to such enforcement, including, but not limited to, reasonable attorneys' fees. 12.6. DELAYS. Neither Party shall be liable to the other Party for any delay or failure to perform under this Agreement due to causes beyond the reasonable control of the nonperforming Party. Should such delay occur, the date or dates for performance shall be extended for a period equal to the number of days during which performance is so delayed. Notwithstanding the foregoing, if the Delivery of any :CAT Product is delayed for more than sixty (60) days due to any cause beyond the control of Digital Convergence but within the control of Tandy or the Authorized Manufacturer, Digital Convergence may cancel its Order for the delayed :CAT Product by giving written notice to Tandy of such cancellation at any time prior to Delivery thereof, and may exercise its Second Sourcing rights set out in, and subject to, Section 3.12 in lieu of any and all other remedies. Such cancellation will be without penalty if the cause of the delay was within Tandy's or the Authorized Manufacturers' control. Otherwise, the Parties will cooperate in good faith to reasonably apportion the costs of cancellation among Tandy, Digital Convergence and the Authorized Manufacturer. 12.7. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If the application of any provision of this Agreement to any particular facts or circumstances shall be held to be invalid or unenforceable by a court of competent jurisdiction, then: (i) the validity and enforceability of such provision as applied to any other particular facts or circumstances and the validity of other provisions of this Agreement shall not in any way be affected or impaired thereby; and (ii) such provision shall be enforced to the maximum extent possible so as to effect the intent of the Parties and shall be reformed without further action by the Parties to the extent necessary to make such provision valid and enforceable while preserving the original intent of the Parties. 18 12.8. WAIVER. The waiver by either Party of a breach of or a default under any provision of this Agreement shall be in writing and shall not be construed as a waiver of any subsequent breach of or default under the same or any other provision of this Agreement, nor shall any delay or omission on the part of either Party to exercise or avail itself of any right or remedy that it has or may have hereunder or by law or at equity operate as a waiver of any right or remedy. 12.9. ENTIRE AGREEMENT. This Agreement together with the Exhibits hereto constitutes the entire agreement between the Parties pertaining to the subject matter hereof and supersedes all previous communications, agreements, and understandings between the Parties relating to the subject matter hereof. Neither Party has entered into this Agreement in reliance upon any representation, warranty, or undertaking of the other Party that is not set out or referred to in this Agreement. No amendment or modification of any provision of this Agreement shall be effective unless in writing and signed by a duly authorized representative of each Party. 12.10. APPROVALS AND CONSENTS. Except as expressly provided otherwise in this Agreement, where agreement, approval, acceptance, or consent by either Party is required by any provision of this Agreement, that action will not be unreasonably delayed or withheld. 12.11. FURTHER ASSURANCES. Each Party will, at the other's request, enter into additional agreements or assignments, or will obtain other documentation as is reasonably necessary to give effect to this Agreement. 12.12. REPRESENTATION OF COUNSEL; MUTUAL NEGOTIATION. Each Party acknowledges it has had the opportunity to be represented by counsel of its choice in negotiating this Agreement. This Agreement will therefore be deemed to have been negotiated and prepared at the joint request, direction, and construction of the Parties, at arms length, with the advice and participation of counsel, and will be interpreted in accordance with its terms without favor to any Party. 12.13. SUPREMACY OF CONTRACT. If there is any conflict between the terms and conditions of this Agreement and any Exhibit, Schedule, addendum, or document incorporated by reference in this Agreement, the body of this Agreement will control. 12.14. MEDIA RELEASES. The Parties shall cooperate with each other to prepare a mutually acceptable press release with regard to the announcement of this Agreement. 12.15. NO PARTNERSHIP. The sole relationship between the Parties shall be that of independent contractors. Nothing herein shall be construed to constitute the Parties as partners, joint venturers, or agents of each other in any way whatsoever. Neither Party shall make any warranties or representations, or assume or create any obligations, on the other Party's behalf. Each Party shall be solely responsible for the actions of its respective employees, agents, and representatives. 19 12.16. WIRELESS CONCERTO. The Parties agree to work together in good faith to determine if it is feasible to market a wireless Concerto product. If the Parties determine that it is feasible, they may enter into a separate agreement related to the manufacturing and marketing of such a product. 12.17. PREMIUM PRODUCT. The Parties agree to work together in good faith to determine if it is feasible to market a "premium" :CAT Product. If the Parties determine that it is feasible, they may enter into a separate agreement related to the manufacturing and marketing of such a product. 12.18. AGREEMENT BINDING ON SUCCESSORS. This Agreement shall be binding on and shall inure to the benefit of the parties hereto, their successors, administrators, heirs and assigns. 12.19. SALES, USE, PROPERTY TAXES. All liability for sales/use taxes or property taxes due or claimed due as a result of the distribution of the Products to end-users (if any) shall be the responsibility of Digital Convergence. IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed. TANDY CORPORATION DIGITALCONVERGENCE.COM INC. By: /s/ David J. Edmondson By: /s/ J. Jovan Philyaw ----------------------------------- ------------------------------- Name: David J. Edmondson, Name: J. Jovan Philyaw, Title: Senior Vice President Title: Chief Executive Officer A&A INTERNATIONAL, INC. By: /s/ David Christopher ----------------------------------- Name: David Christopher, Title: President 20 EX-10.23 27 EXHIBIT 10.23 - ------------------------------------------------------------------------------ Neither party shall be bound by any agreement in whole or in part unless and until this document is executed and delivered by both parties. This document is otherwise intended for discussion purposes only. - ------------------------------------------------------------------------------ :CAT-TM- ORCHESTRATION-TM- PRINT PUBLISHING AGREEMENT (SHORT-FORM AGREEMENT)
PARTIES: - --------------------------------------------------------------------------------------------------------- DCI: DIGITAL CONVERGENCE.:COM INC. LICENSEE (USE FORMAL COMPANY NAME): Forbes Inc. - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- ADDRESS: 350 N. St. Paul, Ste. 200 ADDRESS: 60 5th Avenue Dallas, Texas 75201 New York, New York 10011 - --------------------------------------------------------------------------------------------------------- E-MAIL ADDRESS: jhuncke@digitalconvergence.com E-MAIL ADDRESS: tforbes@forbes.com jberrien@forbes.com bflatley@forbes.com - --------------------------------------------------------------------------------------------------------- PHONE NUMBER: 214 861 2850 PHONE NUMBER: 212 620 2200 FAX NUMBER: 214 861 2801 FAX NUMBER: 212 620 2232 - --------------------------------------------------------------------------------------------------------- PRINCIPAL CONTACT: Don Welsh PRINCIPAL CONTACT: Tim Forbes, John G. Huncke Jim Berrien, Bill Flatley - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
PRINCIPAL TERMS This :CAT-TM- Orchestration-TM- License Agreement (the "AGREEMENT") between DCI and Licensee (the "PARTIES") is dated as of January 13, 2000 and, upon execution by both Parties, shall bind them in accordance with the terms and conditions of these Principal Terms and the General Terms that are annexed below and made a part of this Agreement. Capitalized terms not defined in the Principal Terms are defined in the General Terms. As used in this AGREEMENT: (i) "TERM" means the period from September 1, 2000, through August 31, 2001 (ii) "PUBLICATION" means the print publication magazines known as FORBES, BEST OF THE WEB, ASAP and FYI (collectively, "PUBLICATIONS"). 1 (iii) "ORCHESTRATION" means use of DCI's proprietary device to read a striated graphic image ("GRAPHIC") by passing the device (":CAT") over the image and to enable a user's personal computer programmed with DCI's proprietary player software (the ":CAT SOFTWARE") with access to the World Wide Web (a "PROGRAMMED COMPUTER") to link automatically with a designated web site or data file (the "LINKED SITE"). Such Orchestration shall relate to one of the following: (i) non-commercial creative or editorial content within a Publication (a "CONTENT ORCHESTRATION") or (ii) advertising material within a Publication respecting any service or product (an "ADVERTISING ORCHESTRATION"). The Graphic will be obtained by Licensee as needed from DCI's server in accordance with directions to be furnished by DCI to Licensee. At the time Licensee requests from DCI the Graphic, Licensee will provide to DCI the address of the web site to be linked with the Graphic in a form designated by DCI. Subject to the terms hereof, DCI shall enable Orchestrations incorporated into Publications by Licensee hereunder during the Term to link with associated Linked Sites throughout the Term and for sixty (60) days thereafter; and Licensee shall ensure that each Linked Site remains relevant, accurate, current, operational, and accessible to users (e.g., who may store the address and return there) for at least sixty (60) days following the insertion of each associated Orchestration into a Publication. (iv) "PERMITTED NUMBER OF ORCHESTRATIONS" means the maximum number of Orchestrations to be incorporated into Publications during the Term, as follows: an unlimited number of ADVERTISING ORCHESTRATIONS per issue of each Publication; and an unlimited number of CONTENT ORCHESTRATIONS per issue of each Publication. A. FEE. As a condition to performance of DCI's obligations under this Agreement, Licensee shall pay DCI the following "FEE": For Content Orchestrations in all Publications, a flat fee ("BLANKET FEE") regardless of the number of Content Orchestrations used during the Term of $25,000, payable January 10, 2001 and for Advertising Orchestrations, $100 per each such Orchestration incorporated in each issue of each Publication between January 1, 2001 and August 31, 2001 only; provided that there will be no charge for Advertising Orchestrations in any Publications published in the entire year 2000 of the Term. B. MINIMUM PROMOTIONAL REQUIREMENTS BY LICENSEE. Licensee will mail to every FORBES subscriber a box containing one (1) :CAT, one (1) CD-ROM giving instruction on the use of the :CAT and incorporating the Concerto software (capable of being downloaded to a user's personal computer) and one (1) set of printed instructions on the use of the :CAT, at least one month before the printing of the September 13, 2000, issue of FORBES ("INAUGURAL ISSUE"). DCI will be responsible for all costs of manufacturing and shipping to Licensee the :CATS ,the CD-ROMs and the text (e.g. in electronic form) for the printed instructions ("INSTRUCTIONS") to consumers on how to use the :CATs and related software. Licensee will be responsible for all other costs related to manufacturing, printing (including without limitation, the Instructions) and shipping the boxes and their contents (except DC's costs as provided above) to its subscribers. In addition, after February 1, 2000, Licensee will use reasonable commercial efforts to promote the launch of the Orchestrations in the Publications ("LAUNCH") by print advertising and public relations activities, which may include purchasing advertising in and engaging in public relations with THE WALL STREET JOURNAL, THE 2 NEW YORK TIMES, AD AGE, and AD WEEK and other appropriate trade advertising publications. Licensee will use its best efforts to sell Advertising Orchestrations in the Publications during the Term; and DCI will provide Licensee with a Power Point presentation/demo to assist Licensee in this regard. During the first week of September 2000, Licensee will hold customary and reasonable press events on the Forbes yacht, "Highlander" and at the Forbes building in Silicon Valley for the primary purpose of promoting the Launch. On two (2) to three (3) issues immediately preceding the Inaugural Issue, Licensee will place a "bellyband" or wrapper around each of the Publications announcing exclusively the Launch; and in each such issue, Licensee will run a full page, four (4) color ad announcing the Launch. Licensee will include DCI's Concerto and :CAT technology as part the Forbes Technology tour during the Term. C. EXCLUSIVITY. DCI will not provide :CATS to FORTUNE, BUSINESS WEEK, BARONS, WORTH, FAST COMPANY, RED HERRING, SMART BUSINESS, SMART MONEY, KIPLINGERS, or INDUSTRY STANDARD before and during the Term or to TIME, NEWSWEEK, or US NEWS before, and from the beginning of, the Term through December 31, 2000. D. DCI'S PROVIDING :CATS. DCI will provide Licensee free of charge a number of the :CATS equal to the number of FORBES subscribers anticipated in September 2000 (currently approximately 750,000) reasonably in advance of the time necessary for Licensee to include the :CATS in the boxes it is shipping to subscribers as provided above. BY SIGNING BELOW, THE PARTIES HERETO AGREE TO BE BOUND BY THE TERMS AND CONDITIONS OF THIS AGREEMENT, INCLUDING THE PRINCIPAL TERMS AND THE GENERAL TERMS, UNTIL SUCH TIME IF ANY THAT A MORE FORMAL DOCUMENT IS EXECUTED BY BOTH PARTIES. DIGITALCONVERGENCE.:COM INC. FORBES INC. By: /s/ By: /s/ ----------------------------------- ------------------------------------ Title: Vice President Media Group Title: President - Forbes Magazine Date: February 10, 2000 Date: February 5, 2000 3 GENERAL TERMS :CAT-TM- ORCHESTRATION-TM- LICENSE AGREEMENT 1. GRANT OF RIGHTS. DCI hereby grants to Licensee during solely the Term the non-exclusive (except as specifically provided above), non-transferable license to incorporate Orchestrations within Publications, and advertising matter therein, owned or controlled by Licensee, up to the Permitted Number of Orchestrations authorized herein, subject to all the terms and conditions of this Agreement 2. USE OF ORCHESTRATIONS: CONTENT OF LINKED SITES. Except as provided in paragraph 7 below respecting "make goods," Licensee shall not exceed the Permitted Number of Orchestrations set forth in the Principal Terms at any time. Licensee agrees that (i) for so long as each Linked Site remains accessible, it shall be accurate, relevant and current (for example, time-sensitive data like a weather report at a Linked Site shall be periodically updated so that a viewer visiting a stored address days after the transmission of the Orchestration always will find accurate and timely information); (ii) at least 75% of the visible area of each screen accessible at each page of each Linked Site, and all auditory material, shag relate explicitly and exclusively to the non-commercial content or advertising matter (as applicable) with which the Linked Site is associated ("RELEVANT MATERIAL"); (iii) no Linked Site shall contain X-rated or illegal content or links thereto or advertising or promotion thereof, (iv) no Linked Site shall redirect viewers automatically (directly or indirectly) to any material that is not Relevant Material by "meta-refreshing" or by any other means; (v) no Linked Site shall contain "pop ups" or employ any other means or device that directly or indirectly coerces or compels redirection or otherwise that frustrates or impedes a viewer's ability to choose his/her next destination; (vi) no Linked Site associated with any Content Orchestration shall redirect viewers automatically (directly or indirectly) to any commercial, advertising and/or sponsored material; and (vii) each Linked Site associated with any Advertising Orchestration shall relate predominantly to the advertising matter in the Publication, and not redirect viewers automatically (directly or indirectly) to any other commercial, advertising and/or sponsored material. Subject to subsections (ii) - (vii) of this paragraph, nothing in this paragraph shall be construed to forbid standard banner advertising, signage, requests for information, or Licensee-related announcements, which may be included (in the discretion of Licensee) on each page of each Linked Site. 3. REPORTS AND ACCOUNTINGS. Licensee shall furnish written reports to DCI within ten (10) days following each sixty (60) day period of the Term, setting forth the number of Content Orchestrations and Advertising Orchestrations it has incorporated into Publications during the applicable period, including, without limitation, the dates of each issue and a description of each Content Orchestration and each Advertising Orchestration in such issue. In addition to the foregoing reports, Licensee shall send to DCI copies of representative Publications showing use of the Graphic as reasonably requested by DCI. Licensee shall render to DCI accountings monthly within thirty (30) days following the dose of each month showing the amounts due under this Agreement to DCI and accompany each accounting with payment of the amount due. DCI may audit Licensee's books and records (and make copies thereof) annually on at least twenty (20) days notice during normal business hours. The obligations of Licensee in this paragraph 3 are of the essence. 4. OWNERSHIP/LIMITS OF USE OF DCI PROPERTY. Licensee shall not add to or otherwise alter or edit any Graphic or other material, electronic or physical, received from DCI. All right, title and interest in and to the Orchestrations (including, without limitation, the Graphics), :CAT Software, any other software furnished to Licensee or third parties hereunder (the "DCI SOFTWARE"), any other hardware or other materials furnished to licensee or others (including without limitation the :CAT reading devices) hereunder (the "DCI HARDWARE") DCI's service marks and trademarks, (the "DCI MARKS" which, collectively with the DCI Software and DCI Hardware, shall be referred to as the "DCI PROPERTY"), including, without limitation, all rights under copyright, patent, trademark, trade dress, trade secret and all other intellectual property rights, are and shall remain the sole property of DCI. All uses by Licensee of the DCI Marks shall inure to the benefit of DCI and shall not create any right, title or interest in such DCI Marks for Licensee. Except as provided for herein, Licensee shall 4 make no other use whatsoever of the DCI Property. Without limiting the foregoing, Licensee shall not reverse assemble, reverse compile, reverse engineer, or disassemble, the DCI Software or DCI Hardware; or rent, lease, modify, merge, create derivative works from, incorporate within any other software, copy or transfer copies of, the DCI Property, or license or sublicense the DCI Property, in whole or in part to any third party. In all uses of the DCI Property, Licensee shall display any copyright, trademark or other notices directed by DCI, and shall conform to all criteria of use furnished by DCI. 5. PRESS RELEASES/PROMOTION/CONFIDENTIALITY. Any and all press releases or announcements referring to Orchestrations, the business relationship between DCI and Licensee or the subject matter of this Agreement, shall be subject to the prior approval in writing of DCI and DCI must obtain Licensee's written approval regarding any such announcements or press releases that refer to or mention FORBES or licensee. Without limiting the forgoing, any use by Licensee of the Orchestrations or the DCI Property not specifically authorized herein, must be approved in writing in advance by DCI. Licensee shall keep the terms of this Agreement and all DCI technology not known to the general public confidential and not disclose them to any third party without the prior consent in writing of DCI. 6. REPRESENTATIONS AND WARRANTIES/INDEMNITIES. DCI and Licensee each represent and warrant that it has the right to enter into this Agreement and grant the rights herein granted, and that the person executing this Agreement is duly authorized to do so. Licensee warrants and represents that the Orchestrations and all DCI Property will be used by Licensee solely in accordance with the terms and conditions of the Agreement, and will not be used in a way that reflects negatively on DCI or the DCI Marks or that violates any third party rights or any state, local or federal laws or other laws or regulations, including without I'unitation any FCC or FTC regulations. Licensee further warrants and represents that the DCI Property shall not be adapted, reproduced, distributed or disclosed to any third party without the prior consent in writing of DCI, except as provided herein. As between Licensee and DCI, Licensee shall be solely responsible for (i) the Linked Site(s), including, without limitation, the accuracy of all addresses thereof; and (ii) the integrity and non-infringement of content at the Linked Site(s) and any sites linked thereto and in Licensee's publications (including, without limitation, all non-commercial, editorial and advertising content). DCI shall be solely responsible for the non-infringement of the :CATs, the :CAT software or any other hardware or software provided by DCI to Licensee under this Agreement Each party shall indemnify and hold the other harmless from and against any claims, suits or proceedings brought by or on behalf of any third party unaffiliated with the indemnified party, arising out of or relating to any breach of any representation, warranty or agreement by the indemnifying party herein including, without limitation all damages, losses, civil and criminal penalties and fines, costs and expenses including reasonable outside attorneys' fees incurred as a result of any such claims, suits or proceedings. This obligation shall survive the expiration or termination of this Agreement. 7. LIMITED WARRANTIES. Notwithstanding anything to the contrary herein, the DCI Software, the DCI Hardware, all Graphics, all Orchestrations, and the services and materials being furnished by DCI hereunder are furnished by DCI under this Agreement "AS IS" without any warranties of any kind, whatsoever, provided that if DCI is unable to deliver any Orchestration to which Licensee is entitled hereunder, DCI shall authorize one substitute "make-good" Orchestration during the Term for each such undelivered Orchestration or, at DCI's election, provide a pro rata reduction of the Fee, and the foregoing shall be DCI's sole obligation and Licensee's sole and exclusive remedy for undelivered Orchestrations. In no event shall DCI be liable for damages or the Licensee entitled to a refund in such event. Except as explicitly provided above in this paragraph 7: LICENSEE ASSUMES TOTAL RESPONSIBILITY AND RISK FOR ITS USE OF THE DCI SOFTWARE AND DCI HARDWARE, AND WITH RESPECT TO THE OBTAINING AND USE OF ORCHESTRATIONS; DCI DOES NOT MAKE, AND EXPRESSLY DISCLAIMS, ANY AND ALL EXPRESS AND IMPLIED WARRANTIES OF ANY KIND WHATSOEVER, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL DCI BE LIABLE FOR (a) LOST PROFITS OR ANY INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES ARISING OUT OF THE USE OF OR INABILITY TO USE THE DCI 5 SOFTWARE, DCI HARDWARE, GRAPHICS AND/OR ORCHESTRATIONS; OR (b) ANY CLAIM ATTRIBUTABLE TO ERRORS, OMISSIONS, OR OTHER INACCURACIES IN THE GRAPHICS, DCI SOFTWARE OR DCI HARDWARE. UNDER NO CIRCUMSTANCES SHALL LICENSEE BE ENTITLED TO SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF OR OTHER EQUITABLE REMEDY ARISING OUT OF, OR RELATED TO THE SUBJECT MATTER OF, THIS AGREEMENT AND LICENSEE HEREBY WAIVES ALL RIGHTS THERETO. 8. TERMINATION/EXPIRATION. Without limiting any rights or remedies of DCI, DCI shall have the right to terminate this Agreement upon written notice to Licensee: (i) in the event Licensee breaches any of the material terms and conditions set forth herein, including, without limitation, a failure of Licensee to submit timely reports and/or payment to DCI; (ii) in the event there is a change of ownership of Licensee or if Licensee should become insolvent; or (iii) to avoid claims of infringement from third parties or other exposure to liability as determined in good faith by DCI in its sole discretion. Upon termination, Licensee shall within ten (10) days remit to DCI as monies due and owing, including without limitation, any unpaid balance of the Fee. Upon such termination (without limitation), and upon expiration of the Term, all rights in the DCI Property hereunder granted to Licensee shall immediately terminate and revert to DCI and, at DCI's discretion, return or destroy (and furnish an affidavit evidencing such destruction) all copies of the Software and other materials or other property in Licensee's possession furnished by DCI hereunder. DCI reserves the right to direct the public, commencing with the earlier of termination of this Agreement or the sixtieth (60th) day following expiration of the Term a notice of non-availability. 9. FORCE MAJEURE. The performance of the parties shall be suspended during any event of force majeure, as such term is commonly understood, except that (i) DCI shall have the right to terminate this Agreement in the event any event of force majeure lasts longer than ninety (90) days; and (ii) there shall be no extension of the Term hereof if such extension would conflict with any obligation or agreement of DCI or otherwise infringe the rights of any third party. 10. MISCELLANEOUS. To the extent there is any inconsistency between these General Terms and the Principal Terms, the Principal Terms shall govern. Licensee shall be responsible for any and all taxes (except for DCI's income taxes based upon payments of fees hereunder to DCI) incurred in connection with the grant of rights hereunder, including, without limitation, the exercise by Licensee of rights granted hereunder. Licensee and DCI are independent contractors under this Agreement, and nothing herein shall be construed to create a partnership, joint venture or agency relationship between Licensee and DCI. Licensee has no authority to enter into agreements of any kind on behalf of DCI. Licensee may not assign this Agreement or any of its rights or delegate any of its duties hereunder, except to its affiliates, without the prior consent in writing of DCI and any purported assignment or delegation without such required consent shall be null and void. This Agreement shall be construed in accordance with the laws of the State of New York. Any and all disputes, differences or controversies arising out of, under or in connection with this Agreement, or the breach or alleged breach thereof, shall be submitted to arbitration to be held in New York, New York under the rules and regulations of the American Arbitration Association before a single arbitrator, and judgment upon the award rendered may be entered in any court having jurisdiction thereof; except any claim (including defenses thereto) which potentially concerns the validity, enforceability or infringement of intellectual property owned or controlled by DCI shall not be resolved by arbitration without the prior approval in writing of DCI, and instead shall be resolved exclusively in a court of competent jurisdiction located in New York, New York, and both parties waive any objections to jurisdiction or venue with respect thereto. All notices, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given: (i) if mailed by certified mail, postage prepaid, on the date three (3) days following the date of mailing, (ii) if delivered by overnight courier, when received by the addressee or (iii) if sent by confirmed telecommunication, one business day following receipt by the addressee at the address set forth at the beginning of this Agreement, or such other address as either party may specify in writing. The termination or expiration of this Agreement, howsoever occasioned, shah not affect any of the provisions of this Agreement that are expressly or by implication to 6 come into or continue in force after such termination or expiration. This Agreement may be executed in one or more counterpart copies, each of which shall be considered an original, and all of which when taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page by telecopier shall be as effective as delivery of an original manually executed counterpart. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. In the event any provision of this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, the remaining provisions shall remain in full force and effect. In resolving any dispute or construing any provision hereunder, there shall be no presumptions made or inferences drawn (i) because the attorneys for one of the parties drafted the agreement; (ii) because of the drafting history of the agreement; or (iii) because of the inclusion of a provision not contained in a prior draft, or the deletion of a provision contained in a prior draft. Section headings are for convenience only and are not a part of this Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the transactions and matters contemplated hereby, supersedes all previous agreements between DCI and Licensee concerning the subject matter, and cannot be amended except by a writing signed by both parties. No party hereto has relied on any statement, representation or promise of any other party or with any other officer, agent, employee or attorney for the other party in executing this Agreement except as expressly stated herein. 7 EX-10.24 28 EXHIBIT 10.24 Neither party shall be bound by any agreement in whole or in part unless and until this document is executed and delivered by both parties. This document is otherwise intended for discussion purposes only. :CAT-TM- ORCHESTRATION-TM- PRINT LICENSE AGREEMENT (Short-Form Agreement) -PRINCIPAL TERMS- THE PARTIES TO THIS AGREEMENT ARE:
- ------------------------------------------------------------------------------- LICENSEE: DCCI: - ------------------------------------------------------------------------------- WIRED MAGAZINE C/O DIGITALCONVERGENCE.:COM INC. THE CONDE NAST PUBLICATIONS INC. 630 5th Avenue 4 Times Square 6th Floor 19th Floor New York, NY 10111 New York, New York 10036 Attn: John G. Huncke Phone: 212 286 5270 Executive Vice President, Media Group Fax: 212 287 5254 Main: 212 218 5270 Attn: Drew Schutte Direct: 212 218 5282 Publisher Fax: 212 218 5277 DREW@WIRED.COM jhuncke@digitalconvergence.com - -------------------------------------------------------------------------------
This :Cat-TM- Orchestration-TM- License Agreement (THE "AGREEMENT") between DCCI and LICENSEE (the "PARTIES") is dated as of February 16, 2000 and, upon execution by both Parties, shall bind them in accordance with the terms and conditions of these Principal Terms and the General Terms. Capitalized terms not defined in the Principal Terms are defined in the General Terms. A. As used in this AGREEMENT: (i) "TERM" means the period from the later of August 15, 2000 or a date of which DCCI will advise LICENSEE (by no later than July 15, 2000) coinciding approximately with the launch of DCCI's :Cat-TM- technology at the consumer level through December 31, 2000, subject to all provisions below (provided if the commencement of the Term is delayed beyond August 15, 2000, the Term will be extended a number of days equal to the number of days by which the commencement was delayed). It is intended that Graphics (defined below) for Orchestrations (defined below) will appear in three (3) consecutive issues of the Publication (defined below) tentatively commencing with the October 2000 issue. (ii) "PUBLICATION" means the print publication owned or controlled by LICENSEE, known as WIRED. (iii) "ORCHESTRATION" means use of DCCI's proprietary device to read a striated graphic image ("GRAPHIC") by passing the device (":CAT") over the image and to enable a user's personal computer programmed with DCCI's proprietary player software (the ":CAT SOFTWARE") with access to the World Wide Web (a "PROGRAMMED COMPUTER") to link automatically with a designated web site or data file (the "LINKED SITE"). Such Orchestration shall relate to only the following: (i) non-commercial creative or editorial content within a Publication (a "CONTENT ORCHESTRATION") and (ii) advertising material from third parties or WIRED (including, without limitation, product information in a catalog) within a Publication respecting any service or product (an "ADVERTISING ORCHESTRATION"). The Graphic will be obtained by LICENSEE as needed from DCCI's server (or at DCCI's election by software loaded on LICENSEE's requests from DCCI the Graphic, LICENSEE will provide to DCCI, free of charge, the address of the web site to be linked with the Graphic in a form designated by DCCI consistent with industry standards. LICENSEE may authorize advertisers and/or advertising agencies who license the right to place Advertising Orchestrations in WIRED to obtain Graphics directly from DCCI by LICENSEE's giving DCCI prior written notice of such authorization and by using best efforts to cause such advertisers and agencies to execute a letter requiring adherence ("LETTER OF ADHERENCE") to the policies prescribed in paragraph 2(b) of the General Terms below. Subject to the terms hereof, DCCI shall enable Orchestrations incorporated into Publication(s) by LICENSEE hereunder during the Term to link with associated Linked Sites throughout the Term and for sixty (60) days thereafter; and LICENSEE shall ensure that each Linked Site owned or controlled by LICENSEE or an affiliated party remains current, operational, and accessible to users (e.g., who may store the address and return there) for at least sixty (60) days following the insertion of associated Orchestration involving such owned or controlled Linked Site; provided, however, that any breach or alleged breach of this provision shall not give rise to a right to claim damages or injunctive relief by DCCI against LICENSEE or any affiliated party. (iv) "PERMITTED NUMBER OR ORCHESTRATIONS" means the maximum number of Orchestrations to be incorporated into the Publication during the Term, as follows: unlimited (within technically and commercially reasonable numbers) ADVERTISING ORCHESTRATIONS per issue of the Publication and unlimited (within technically and commercially reasonable numbers) total number of Advertising Orchestrations among all issues; and unlimited (within technically and commercially reasonable numbers) CONTENT ORCHESTRATIONS per issue of the Publication and unlimited total number of Content Orchestrations among all issues (subject to additional Orchestrations of "make goods" as provided in paragraph 7 in the General Terms below). B. FEE. As a condition to performance of DCCI's obligations under this Agreement, LICENSEE shall pay DCCI the following "Fee": For CONTENT ORCHESTRATIONS, NO CHARGE; and for ADVERTISING ORCHESTRATIONS, NO CHARGE. C. Minimum Promotion and Use Requirements of LICENSEE. (1) LICENSEE will mail to every WIRED subscriber as of the mailing date specified herein a box containing one (1) :CAT, one (1) CD-ROM giving instruction on the use of the :CAT and incorporating the :Concerto software (capable of being downloaded to a user's personal computer) and one (1) set of printed instructions on the use of the :Cat, at least one month before the printing of the October 2000 Issue of WIRED - or if the Term commencement date is delayed as provided above, the first issue published after such delayed date, to the extent reasonably practicable - ("INAUGURAL ISSUE"). DCCI will be responsible for all cost of manufacturing and shipping to LICENSEE the :Cats, the CD-ROMs and the text (e.g. in electronic from) for the printed instructions ("INSTRUCTIONS"), designed and ready for printing (in consultation with LICENSEE) to consumers on how to use the :Cats and related software. LICENSEE will be responsible for all other costs related to LICENSEE's fulfilling its obligations hereunder relating to manufacturing, printing (including without limitation, the instructions) and shipping the boxes and their contents (except DCCI's costs as provided above) to its subscribers. In addition, LICENSEE will use reasonable commercial efforts to promote the launch of the Orchestrations in the Publication(s) ("LAUNCH") by print advertising and public relations activities, which may include purchasing advertising in and engaging in public relations with THE WALL STREET JOURNAL, THE NEW YORK TIMES, AD AGE, and AD WEEK and other appropriate trade advertising publications. LICENSEE will use its best efforts to sell Advertising Orchestrations in the Publication(s) during the Term; and DCCI will provide LICENSEE with a Power Point presentation/demo to assist LICENSEE in this regard. On the two (2) issues immediately preceding the Inaugural Issue, LICENSEE will include a full page announcement regarding exclusively DCCI's Orchestration and :Cat technology. LICENSEE also will enclose each subscription copy of the Inaugural Issue in a polybag and in each polybag will include a letter from the publisher exclusively devoted to announcing the DCCI's Orchestration and :Cat technology. LICENSEE will incorporate a minimum of four (4), or more at LICENSEE's discretion, Content Orchestrations in each of the three (3) issues of WIRED referred to in paragraph A(i) above. (2) DCCI hereby grants LICENSEE a royalty free, non-exclusive, non-transferable license to use DCCI's name, logo, trademarks and/or service marks; and all other such images for which DCCI grants LICENSEE express written permission ("MARKS"), for the purpose of distributing DCCI's Orchestration software and distributing :Cats under the terms of this Agreement and promotion and use thereof. LICENSEE's use of the Marks will be limited to the purposes described in this Agreement. LICENSEE agrees that ownership of the Marks will remain solely with DCCI. LICENSEE further agrees that LICENSEE's use of the Marks will maintain the high standard with which DCCI has maintained the Marks. D. EXCLUSIVITY. The rights granted to LICENSEE hereunder are non-exclusive, except only that before and during the Term, DCCI will not provide :Cats to BUSINESS 2.0, INDUSTRY STANDARD, FAST COMPANY, RED HERRING, UPSIDE, E-COMPANY, SMART BUSINESS and all computer magazines currently published by Ziff Davis or its successor(s). E. DCCI'S PROVIDING :CATS. DCCI will provide LICENSEE free of charge a number of :Cats and CD-ROMS equal to the number of WIRED subscribers anticipated in September 2000, currently approximately 375,000, ("FIRST GROUP") plus up to an additional 20,000 :Cats and CD-ROMS for persons who become subscribers during the Term as a result of LICENSEE's offer to give them a free :Cat and CD-ROM as an incentive to becoming a new WIRED subscriber. DCCI will provide the First Group of :Cats and CD-ROMS reasonably in advance of the time necessary to LICENSEE to include the :Cats and CD-ROMS in the boxes it is shipping to subscribers as provided above (in no event later than six (6) weeks before the on-sale date of the Inaugural Issue). DCCI will provide four (4) actual samples of the :Cats and CD-ROMS to LICENSEE by no later than July 25, 2000, for the purpose of sizing, costing weight and the like. Commencing the earlier of September 1, 2000 or the beginning of the Term and continuing through the end of the Term, neither LICENSEE (i.e. WIRED MAGAZINE only) nor any party acting on its behalf will provide to the public any technology (i.e. software and hardware) so similar in design or function to DCCI's :Cat or Orchestration software technology that it could confuse the public, including, without limitation, any technology that uses a device to read any graphic or similar image to launch a web site, web page or any data file or any software that functions similarly to DCCI's Orchestration software; provided, however, that LICENSEE may accept advertising and publish editorial using, and promote or otherwise cooperate with, such third party technology. BY SIGNING BELOW, THE PARTIES HERETO AGREE TO BE BOUND BY THE TERMS AND CONDITIONS OF THIS AGREEMENT, INCLUDING THE PRINCIPAL TERMS AND THE GENERAL TERMS, UNTIL SUCH TIME, IF ANY, THAT A MORE FORMAL DOCUMENT IS EXECUTED BY BOTH PARTIES. - ------------------------------------------------------------------------------- LICENSEE WIRED MAGAZINE DCCI - ------------------------------------------------------------------------------- BY: /s/ BY: /s/ - ------------------------------------------------------------------------------- TITLE: Publisher TITLE: - ------------------------------------------------------------------------------- DATE: 3/31/2000 DATE: - ------------------------------------------------------------------------------- GENERAL TERMS :CAT-TM- ORCHESTRATION-TM- LICENSE AGREEMENT 1. GRANT OF RIGHTS. DCCI hereby grants to LICENSEE during solely the Term the non-exclusive, non-transferable license to incorporate Orchestrations within Publication(s) owned or controlled by LICENSEE and advertising matter therein, up to the Permitted Number of Orchestrations authorized herein, subject to all the terms and conditions of this Agreement. All rights not specifically granted to LICENSEE are reserved to DCCI. 2. USE OF ORCHESTRATIONS; CONTENT OF LINKED SITES. (a) Except as provided in paragraph 7 below respecting "make goods," LICENSEE shall not exceed the Permitted Number of Orchestrations set forth in the Principal Terms at any time. LICENSEE represents that although the WIRED Magazine Web site is not completely under its control, the contract between LICENSEE and the site's host/operator provides that the site will contain only material from Wired magazine, subscription information, and advertising, but such advertising may not be for pornographic materials. (b) The terms of the Letter of Adherence will provide substantially the following: Advertisers and their agencies agree (i) for so long as each Linked Site remains accessible, it shall be current (for example, time-sensitive data like a weather report at a Linked Site shall be periodically updated so that a viewer visiting a stored address days after the transmission of the Orchestration always will find timely information); (ii) at least 75% of the visible area of each screen accessible at each page of each Linked Site, and all auditory material, shall relate explicitly and exclusively to the non-commercial content or advertising matter (as applicable) with which the Linked Site is associated ("RELEVANT MATERIAL"); (iii) no Linked Site shall contain X-rated or illegal content or links thereto or advertising or promotion thereof; (iv) no Linked Site shall redirect viewers automatically (directly or indirectly) to any material that is not Relevant Material by "meta-refreshing" or by any other means; (v) no Linked Site shall contain "pop ups" or employ any other means or device that directly or indirectly coerces or compels redirection or otherwise that frustrates or impedes a viewer's ability to choose his/her next destination; (vi) no Linked Site associated with any Content Orchestration shall redirect viewers automatically (directly or indirectly) to any commercial, advertising and/or sponsored material; and (vii) each Linked Site associated with any Advertising Orchestration shall relate predominantly to the advertising matter in the Publication, and not redirect viewers automatically (directly or indirectly) to any other commercial, advertising and/or sponsored material; (viii) advertisers and their agencies indemnify LICENSEE and DCCI against any all third party claims relating to Linked Sites owned or controlled by such advertisers and advertising agencies. Subject to subsections (ii) - (vii) of this paragraph, nothing in this paragraph shall be construed to forbid standard banner advertising, signage, requests for information, or LICENSEE or its advertiser-related announcements, which may be included (in the discretion of LICENSEE or its advertisers) on each page of each Linked Site. DCCI will prepare the initial draft of the Letter of Adherence. 3. REPORTS AND ACCOUNTING. LICENSEE shall furnish written reports to DCCI within ten (10) days following each thirty (30) day period of the Term, setting forth the number of Content Orchestrations and Advertising Orchestrations it has incorporated into Publication(s) during the applicable period, including, without limitation, the dates of each issue and a description of each Content Orchestration and each Advertising Orchestration in such issue. LICENSEE shall send to DCCI copies of representative Publication(s) showing use of the Graphic as reasonably requested by DCCI. 4. OWNERSHIP/LIMITS OF USE OF DCCI PROPERTY. LICENSEE shall not add to or otherwise alter or edit any Graphic or other material, electronic or physical, received from DCCI. All right, title and interest in and to the Orchestrations (including, without limitation, the Graphics), "Cat Software, any other software furnished to LICENSEE or third parties by DCCI or its representatives hereunder (the "DCCI SOFTWARE"), any other hardware or other materials furnished to LICENSEE or others by DCCI or its representatives (including without limitation the :Cat scanning devices) hereunder (the "DCCI HARDWARE") DCCI's service marks and trademarks, (the "DCCI MARKS" which, collectively with the DCCI Software and DCCI Hardware shall be referred to as the "DCCI PROPERTY"), including, without limitation, all rights under copyright, patent, trademark, trade dress, trade secret and all other intellectual property rights, are and shall remain the sole property of DCCI. DCCI may add to or change the DCCI Marks for its products and services, which LICENSEE will use in lieu of or in addition to other DCCI Marks as DCCI may direct from time to time, upon reasonable notice. All uses by LICENSEE of the DCCI Marks shall inure to the benefit of DCCI and shall not create any right, title or interest in such DCCI Marks for LICENSEE. Except as provided for herein and as provided by law, LICENSEE shall make no other use whatsoever of the DCCI Property. Any packaging or other material created by LICENSEE further to this Agreement or otherwise relating to DCCI or its properties is subject to the written approval of DCCI; provided that such packaging and other material will be deemed approved by DCCI if DCCI does not give written notice of objection thereto within three (3) business days of receiving such written packaging or other written material from LICENSEE. Without limiting the foregoing, LICENSEE shall not reverse assemble, reverse compile, reverse engineer, or disassemble, the DCCI Software or DCCI Hardware; or rent, lease, modify, merge, create derivative works from, incorporate within any other software, copy or transfer copies of, the DCCI Property, or license or sublicense the DCCI Property, in whole or in part to any third party. In all uses of the DCCI Property, LICENSEE shall display any copyright, trademark or other notices directly by DCCI, and shall conform to all criteria for use furnished by DCCI (which DCCI will furnish to LICENSEE no later than August 1, 2000). 5. PRESS RELEASES/PROMOTION/CONFIDENTIALITY. Any and all press releases or public announcements referring to Orchestrations, the business relationship between DCCI and LICENSEE or the subject matter of this Agreement shall be subject to the prior approval in writing of DCCI and Licensee. Without limiting the foregoing, any use by LICENSEE of the Orchestrations or the DCCI Property not specifically authorized herein, must be approved in writing in advance by DCCI. LICENSEE shall keep the terms of this Agreement and all DCCI technology not known to the general public confidential and not disclose them to any third party without the prior consent in writing of DCCI. 6. REPRESENTATIONS AND WARRANTIES/INDEMNITIES. DCCI and LICENSEE each represent and warrant that it has the right to enter into this Agreement and grant the rights herein granted, and that the person executing this Agreement is duly authorized to do so. DCCI represents and warrants that materials supplied to LICENSEE by DCCI hereunder will not violate the rights of any third party. Without limiting the foregoing, DCCI agrees to indemnify LICENSEE against claims from any unrelated third parties relating to any damage such third party suffers resulting from its use of any DCCI Hardware or DCCI Software authorized hereunder, including without limitation, transmissions of viruses, corruption of data or interference with systems or computer commands. LICENSEE warrants and represents that the Orchestrations and all DCCI Property will be used by LICENSEE solely in accordance with the terms and conditions of the Agreement, and will not be used in a way that reflects negatively on DCCI or the DCCI Marks or that violates any third party rights or any state, local or federal laws or other laws or regulations, including without limitation any FCC or FTC regulations. LICENSEE further warrants and represents that the DCCI Property shall not be adapted, reproduced, distributed or disclosed to any third party without the prior consent in writing of DCCI, except as provided herein. As between LICENSEE and DCCI, LICENSEE shall be solely responsible for (i) LICENSEE's owned or controlled Linked Site(s), including, without limitation, the accuracy of all addresses thereof; and (ii) the integrity and non-infringement of content at LICENSEE's owned or controlled Linked Site(s) and any sites linked thereto and in Licensee's Publication(s) (including, without limitation, all non-commercial, editorial and advertising content). Each party shall indemnify and hold the other harmless from and against any claims, suits or proceedings brought by or on behalf of any third party unaffiliated with the indemnified party, arising out of or relating to any breach of any representation, warranty or agreement by the indemnifying party herein including, without limitation all damages, losses, civil and criminal penalties and fines, costs and expenses including reasonable outside attorneys' fees incurred as a result of any such claims, suits or proceedings. Without limiting the foregoing, LICENSEE will pass through to DCCI (to extent LICENSEE is under law, contract or otherwise entitled to do so) without diminution each and every indemnity and similar protection LICENSEE receives from each and every advertiser and advertising agency or other party who LICENSEE authorizes to use DCCI's technology or who LICENSEE otherwise enters into any agreement or relationship with LICENSEE related to this Agreement. The obligations under this paragraph shall survive the expiration or termination of this Agreement. 7. LIMITED WARRANTIES. Notwithstanding anything to the contrary herein and except as specifically provided herein, the DCCI Software, the DCCI Hardware, all Graphics, all Orchestrations, and the services and materials being furnished by DCCI hereunder are furnished by DCCI under this Agreement "AS IS," without any warranties of any kind, whatsoever, provided that if DCCI is unable to deliver any Orchestration to which LICENSEE is entitled hereunder. DCCI shall authorize one substitute "make-good" Orchestration during the Term for each such undelivered, and the foregoing shall be DCCI's sole obligation and LICENSEE's sole and exclusive remedy for undelivered Orchestrations. In no event shall DCCI be liable for damages or LICENSEE entitled to a refund in such event. Except as otherwise specifically provided herein: LICENSEE ASSUMES TOTAL RESPONSIBILITY AND RISK FOR ITS USE OF THE DCCI SOFTWARE AND DCCI HARDWARE, AND WITH RESPECT TO THE OBTAINING AND USE OF ORCHESTRATIONS: DCCI DOES NOT MAKE, AND EXPRESSLY DISCLAIMS, ANY AND ALL EXPRESS AND IMPLIED WARRANTIES OF ANY KIND WHATSOEVER, INCLUDING, WITHOUT LIMITATION, WARRANTIES REGARDING MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL DCCI BE LIABLE FOR (a) LOST PROFITS OR ANY INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES ARISING OUT OF THE USE OF OR INABILITY TO USE THE DCCI SOFTWARE, DCCI HARDWARE, GRAPHICS AND/OR ORCHESTRATIONS; OR (b) ANY CLAIM ATTRIBUTABLE TO ERRORS, OMISSIONS, OR OTHER INACCURACIES IN THE GRAPHICS, DCCI SOFTWARE OR DCCI HARDWARE. UNDER NO CIRCUMSTANCES SHALL LICENSEE BE ENTITLED TO SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF OR OTHER EQUITABLE REMEDY ARISING OUT OF, OR RELATED TO THE SUBJECT MATTER OF, THIS AGREEMENT (EXCEPT LICENSEE MAY SEEK INJUNCTIVE RELIEF FOR BREACH BY DCCI OF THE EXCLUSIVITY PROVISIONS OF PARAGRAPH D ABOVE), AND LICENSEE HEREBY WAIVES ALL RIGHTS THERETO. ANY LIABILITIES RELATING TO DCCI'S WARRANTY IN PARAGRAPH 6 ABOVE RELATING TO THIRD PARTIES ARE NOT SUBJECT TO THE ABOVE LIMITATIONS FOR SOLELY THE PURPOSE OF INDEMNIFYING LICENSEE AGAINST THIRD PARTY CLAIMS BUT NOT TO PERMIT LICENSEE TO MAKE ANY CLAIM AGAINST DCCI OR ANY AFFILIATED OR RELATED PARTY FOR BREACH OR DEFAULT OF ANY PROVISION OF THIS AGREEMENT BY DCCI. 8. TERMINATION/EXPIRATION. Without limiting any rights or remedies of DCCI, DCCI shall have the right to terminate this Agreement upon thirty (30) days written notice to LICENSEE: (i) in the event LICENSEE materially breaches any of the material terms and conditions set forth herein, including a failure of LICENSEE to submit timely reports and/or payment to DCCI, unless LICENSEE cures such breach, if curable, within ten (10) business days of receipt of written notice of breach from DCCI; (ii) in the event there is a change of ownership of LICENSEE or if LICENSEE should become insolvent; or (iii) to avoid claims of infringement from third parties or other exposure to liability as determined in good faith by DCCI in its sole discretion. Upon such termination (without limitation), and upon expiration of the Term, all rights in the DCCI Property hereunder granted to LICENSEE shall immediately terminate and revert to DCCI and, at DCCI's discretion, return or destroy (and furnish an affidavit evidencing such destruction) all copies of the DCCI Software and other materials or other property in LICENSEE's possession furnished by DCCI hereunder. DCCI reserves the right to direct the public, commencing with the earlier of termination of this Agreement or the sixtieth (60th) day following expiration of the Term, to a destination other than the Linked Site originally associated with any Orchestration, including without limitation, to a notice of non-availability. If commencement of the Term is delayed beyond December 1, 2000 either party may terminate this Agreement by written notice to the other without liability to or on the part of either party; provided LICENSEE will return all DCCI property to DCCI within thirty (30) days of such termination. 9. FORCE MAJEURE. The performance of the parties shall be suspended during any event of force majeure, as such term is commonly understood, except that (i) either party shall have the right to terminate this Agreement in the event any event of force majeure lasts longer than ninety (90) days; and (ii) there shall be no extension of the Term hereof if such extension would conflict with any obligation or agreement of DCCI or LICENSEE or otherwise infringe the rights of any third party. 10. MISCELLANEOUS. To the extent there is any inconsistency between these General Terms and the Principal Terms, the Principal Terms shall govern. LICENSEE shall be responsible for any and all taxes (except for DCCI's income taxes based upon payments of fees hereunder to DCCI) incurred in connection with the grant of rights hereunder, including, without limitation, the exercise by LICENSEE of rights granted hereunder. LICENSEE and DCCI are independent contractors under this Agreement, and nothing herein shall be construed to create a partnership, joint venture or agency relationship between LICENSEE and DCCI. Neither party has any authority to enter into agreements of any kind on behalf of the other party. Neither party may assign this Agreement or any of its rights or delegate any of its duties hereunder without the prior consent in writing of the other party and any purported assignment or delegation without such required consent shall be null and void except to an affiliate of such assignor or to a party acquiring all or substantially all of the stock or assets of the assignor and provided the assignee assumes in writing all of the obligations of the assignor hereunder. This Agreement shall be construed in accordance with the laws of the State of New York. All notices, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given: (i) if mailed by certified mail, postage prepaid, on the date three (3) days following the date of mailing; (ii) if delivered by overnight courier, when received by the addressee or (iii) if sent by confirmed telecommunication, one business day following receipt by the addressee at the address set forth at the beginning of this Agreement, or such other address as either party may specify in writing. The termination or expiration of this Agreement, howsoever occasioned, shall not affect any of the provisions of this Agreement that are expressly or by implication to come into or continue in force after such termination or expiration. This Agreement may be executed in one or more counterpart copies, each of which shall be considered an original, and all of which when taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page by telecopier shall be as effective as delivery of an original manually executed counterpart. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. In the event any provision of this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, the remaining provisions shall remain in full force and effect. In resolving any dispute or construing any provision hereunder, there shall be no presumptions made or inferences drawn (i) because the attorneys for one of the parties drafted the agreement; (ii) because of the drafting history of the agreement; or (iii) because of the inclusion of a provision not contained in a prior draft, or the deletion of a provision contained in a prior draft. Section headings are for convenience only and are not a part of this Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the transactions and matters contemplated hereby, supersede all previous agreements between DCCI and LICENSEE concerning the subject matter, and cannot be amended except by a writing signed by the party to be bound thereby. No party hereto has relied on any statement, representation or promise of any other party or with any other officer, agent, employee or attorney for the other party in executing this Agreement except as expressly stated herein. EX-21.1 29 EXHIBIT 21.1 EXHIBIT 21.1 Subsidiaries of DigitalConvergence.:Com DigitalDemographics.:Com Inc., a Delaware corporation DCCP Inc., a Delaware corporation EX-23.1 30 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our reports dated April 27, 2000 relating to the consolidated financial statements and financial statement schedule of DigitalConvergence.:Com Inc., and reports dated February 29, 2000, except as to Note 11 which is as of April 27, 2000 relating to the financial statements and financial statement schedules of Infotainment Telepictures, Inc. which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Dallas, Texas April 27, 2000 EX-27.1 31 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 45,540 0 32 0 0 45,662 688 218 46,518 732 0 0 47,888 611 (11,246) 46,518 0 1,543 0 1,012 4,437 0 732 (3,977) 0 0 0 0 0 (3,977) (.07) (.07)
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