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EXHIBIT 10.3
EXHIBIT C
NTN COMMUNICATIONS, INC.
EARN OUT OPTION
THIS EARN OUT OPTION (this "Option") is made and entered into as of
April 23, 1999 by and between NTN COMMUNICATIONS, INC., a Delaware corporation
(the "Company"), and Sikander, Inc., a Nevada corporation (the "Optionee").
W I T N E S S E T H
In consideration of the mutual promises and covenants made herein and
the mutual benefits to be derived herefrom, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee the right
and option to purchase, in accordance with the terms and conditions of this
Agreement, an aggregate of 600,000 shares of Common Stock exercisable at $.6250
per share (the "Price"), exercisable prior to the close of business on April 30,
2006 (the "Expiration Date").
2. Vesting and Exercisability of Option. The Option will become vested
and exercisable in accordance with the terms and conditions set forth in
Attachment 1 hereto. In the event of termination of employment of Xxxxxx
Xxxxxxxxxx (other than termination by the Company without cause) with the
Company, the vested portion of this Option may only be exercised by Optionee at
any time prior to 60 days after such termination of employment, and the unvested
portion will immediately terminate and this Option will be of no further force
or effect. If Xx. Xxxxxxxxxx'x employment is terminated for any reason, the
Company shall have no further obligation to use its good faith or best efforts
to maximize the number of shares of Common Stock subject to the Option.
3. Corporate Transaction. In the event of a Corporate Transaction (as
defined below), the Company shall notify the Optionee at least 30 days prior
thereto. To the extent not previously exercised, the Option shall terminate
immediately prior to the consummation of such Corporate Transaction unless the
Company determines otherwise in the exercise of its sole discretion, provided,
however, the Company must permit exercise of the Option prior to its
termination, even if the Option would not otherwise have been exercisable. A
"Corporate Transaction" means a liquidation or dissolution of the Company, a
merger or consolidation of the company with or into another corporation or
entity, a sale of all or substantially all of the assets of the Company.
4. Method of Exercise of Option and Payment of Purchase Price. Each
exercise of the Option shall be by means of a written notice of exercise
delivered to the Company and specifying the number of whole shares with respect
to which the Option is being exercised, together with any written statements
required pursuant to Section 9 below and payment of the Price in full in cash or
by check payable to the order of the Company. The delivery of shares pursuant to
an exercise of this Option will be conditional upon payment by the Optionee of
amounts sufficient to enable the Company to pay all applicable federal, state
and local withholding taxes.
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5. Non-Assignability of Option. The Option and the rights and
privileges conferred hereby are not transferable or assignable and may not be
offered, sold, pledged, hypothecated or otherwise disposed of in any way
(whether by operation of law or otherwise) and shall not be subject to
execution, attachment, garnishment, levy or similar process.
6. Adjustments and Other Rights. The rights of the Optionee hereunder
will be subject to adjustments and modifications in certain circumstances and
upon occurrence of certain events including a reorganization, merger,
combination, recapitalization, reclassification, stock split, reverse stock
split, stock dividend or stock consolidation.
7. Optionee Not A Stockholder. Neither the Optionee nor any other
person entitled to exercise the Option shall have any of the rights or
privileges of a shareholder of the Company. No adjustment will be made for
dividends or other rights for which the record date is prior to the date on
which such stock certificate or certificates are issued even if such record date
is subsequent to the date upon which notice of exercise was delivered and the
tender of payment was accepted.
8. Application of Securities Laws. No shares of Common Stock may be
purchased pursuant to the Option unless and until any then applicable
requirements of the Securities and Exchange Commission, the California
Department of Corporations and any other regulatory agencies, including any
other state securities law commissioners having jurisdiction over the Company or
such issuance, and any exchanges upon which the Common Stock may be listed,
shall have been fully satisfied. The Optionee represents, agrees and certifies
that:
(a) If the Optionee exercises the Option in whole or in part at a
time when there is not in effect under the Securities Act of 1933, as amended
(the "Act"), a registration statement relating to the Common Stock issuable upon
exercise and available for delivery to him a prospectus meeting the requirements
of Section 10(a)(3) of the Act, the Optionee will acquire the Common Stock
issuable upon such exercise for the purpose of investment and not with a view to
resale or distribution and that, as a condition to each such exercise, he or she
will furnish to the Company a written statement to such effect, satisfactory in
form and substance to the Company, which statement also acknowledges that the
Option shares have not been registered under the Act and are "restricted
securities" within the meaning of Rule 144 under the Act and are subject to
restrictions on transfer; and
(b) If and when the Optionee proposes to publicly offer or sell the
Common Stock issued to him upon exercise of the Option, the Optionee will notify
the Company prior to any such offering or sale and will abide by the opinion of
counsel to the Company as to whether and under what conditions and
circumstances, if any, he or she may offer and sell such shares.
The Optionee understands that the certificate or certificates
representing the Common Stock acquired pursuant to the Option may bear a legend
referring to the foregoing matters and any limitations under the Act and state
securities laws with respect to the transfer of such Common Stock, and the
Company may impose stop transfer instructions to implement such limitations, if
applicable.
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9. Notices. Any notice to be given under the terms of this Agreement or
pursuant to the Plan shall be in writing and addressed to the Secretary of the
Company at its principal office and any notice to be given to the Optionee shall
be addressed to him at the address given beneath the Optionee's signature
hereto, or at such other address as either party may hereafter designate in
writing to the other party. Any such notice shall be deemed to have been duly
given when enclosed in a properly sealed envelope addressed as aforesaid,
registered or certified, and deposited (postage and registry or certification
fee prepaid) in a post office or branch post office regularly maintained by the
United States Government.
10. Effect of Agreement. This Agreement shall be assumed by, be binding
upon and inure to the benefit of any successor or successors of the Company to
the extent set forth herein.
11. Laws Applicable to Construction. The Option has been granted,
executed and delivered as of the day and year first above written in Carlsbad,
California, and the interpretation, performance and enforcement of the Option
and this Agreement shall be governed by the internal laws of the State of
California.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by a duly authorized officer and the Optionee has
hereunto set his hand as of the day and year first above written.
NTN COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ XXXXXX XXXXXX
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Secretary
OPTIONEE
SIKANDER, INC.
By: /s/ XXXXXX XXXXXXXXXX
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Xxxxxx Xxxxxxxxxx, President
c/o Sikander, Inc.
0000 Xxxx Xxxxxx
Xxx Xxxxx, XX 00000
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ATTACHMENT 1
METHOD OF DETERMINING NUMBER OF EARN OUT OPTIONS
The maximum number of shares of Common Stock subject to Earn Out
Options (600,000) may be reduced on or before October 31, 2000, should the
revenues received by Buyer by October 31, 2000 attributed to orders for
Internet/game Systems ("Systems") which occurred on or before April 30, 2000
(the "Lease Revenues") be less than $10 million (the "Gross Sales Formula"). In
the event Xx. Xxxxxxxxxx'x employment with Buyer is terminated for any reason
prior to April 30, 2000, the revenues received by Buyer for the purpose of this
calculation shall instead be deemed to be those revenues attributed to orders
which occurred on or prior to 90 days following such termination, but in no
event later than April 30, 2000; provided that the revenues therefrom are
received by Buyer within nine months following such termination but no later
than October 31, 2000. All sales outside of the Hospitality industry will be
subject to the prior approval of Buyer's management. The number of shares of
common stock subject to Earn Out Options may be further reduced over a four year
period based upon the gross margin generated by the Systems (the "Gross Margin
Formula"). The formula for each potential adjustment will be calculated as
follows:
The Gross Sales Formula.
The number of shares of common stock subject to Earn Out Options will
be based upon a formula whereby the number of shares will be equal to [(the
Lease Revenues) divided by ($10 million) times (600,000)]. Thus, if $8 million
of Lease Revenues are received by Buyer on or before October 31, 2000 from
orders occurring on or before April 30, 2000, the number of shares of common
stock subject to Earn Out Options will be calculated as (8/10 x 600,000), or
480,000 shares.
25% of such Options shall be available to Seller at the end of each of
four 12- month periods of time, each being April 30 of the years 2000, 2001,
2002 and 2003.
The Gross Margin Formula
The number of shares of common stock subject to Earn Out Options will
be further subject to the "gross margin" contribution of the revenues from the
systems that were recognized under the Gross Sales Formula, i.e., the same
physical systems will be tracked for ongoing profitability over their general
operating life. At each June 30 after the end of each annual period, a gross
margin calculation, as described below, will be performed to determine the
number of shares of common stock subject to Earn Out Options.
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Each of the four periods will be equal to: [(the calculated gross
margin percentage during that period) divided by (50%)] times [the number of
shares of common stock subject to Earn Out Options]. Thus, if the number of
shares for a given period is 120,000 and the gross margin percentage during that
period is 40%, the Adjusted number of shares subject to Earn Out options for
that period will be (40/50 x 120,000 shares) or 96,000 shares.
Gross Margin will be calculated to be [(Lease Revenues less all direct
costs (the "initial income contribution"), divided by (the number of years of
the lease)] plus (the incremental period's revenues to Buyer from operation of
the Systems) less (the incremental period's operating expenses (see below) from
operation of the Systems)] all divided by [the smaller of: (the Lease Revenues)
divided by (the years of the lease) or ($10 million) divided by (the years of
the lease)].
"Period operating expenses" will consist of all direct operating costs,
including, but not limited to sales commissions, service and maintenance fees
and costs, upgrade costs, communication costs, and license fees.
Thus, if the Lease Revenues were $8 million, the initial income
contribution from the sales portion of the Lease Revenues was $2 million, the
number of years of the lease was 4, the incremental period revenues were
$1,000,000, and the period operating expenses were $600,000, the calculation
would be [(2,000,000/4) + 1,000,000 - 600,000]/[8,000,000/4] or
900,000/2,000,000 or 45%.
The above calculation is based upon a plan of capital expenditures of
not more than $300,000, exclusive of the amounts paid to Sikander and Xx.
Xxxxxxxxxx pursuant to his employment with Buyer. Should the required capital
expenditures to achieve the above-noted targets be greater than $300,000, then
the parties will adjust the formulas on a good-faith basis. All capital
expenditures in excess of $1,000 shall require the prior approval of the Chief
Executive Officer of Buyer.
In the event Xx. Xxxxxxxxxx'x employment is terminated for any reason,
Buyer shall have no obligation to continue any level of performance which would
bring about vesting of the Earn Out Options.
