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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission File Number 0-28676
GRAPHIX ZONE, INC.
(Name of Registrant as specified in its charter)
DELAWARE 33-0697932
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 CORPORATE PARK, SUITE 200
IRVINE, CALIFORNIA 92614
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (including area code): (714) 833-3838
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
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The number of shares outstanding of the registrant's only class of Common
Stock, no par value, was 10,629,978 on November 8, 1996.
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GRAPHIX ZONE, INC.
Table of Contents
Form 10-Q for the Quarterly Period Ended September 30, 1996
PART I: FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Balance Sheet as of September 30, 1996 and June 30, 1996 3
Statements of Operations for the three-month periods
ended September 30, 1996 and 1995 4
Statements of Cash Flow for the three-month periods
ended September 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 13
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAPHIX ZONE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1996 1996
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Assets
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Cash and cash equivalents $ 701,360 $ 1,288,196
Accounts receivable, net 4,814,756 3,867,268
Inventories 890,049 833,700
Other current assets 388,030 281,883
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Total current assets 6,794,195 6,271,047
Property and equipment, net 636,510 653,833
Intangibles, net 807,302 850,186
Other assets, net 670,212 753,619
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$ 8,908,219 $ 8,528,685
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Liabilities and Stockholders' Equity
------------------------------------
Notes payable $ 750,000 $ 750,000
Accounts payable 2,314,480 2,542,806
Accrued royalties 1,387,466 977,764
Accrued liabilities 862,690 1,159,946
Accrued restructuring charge 122,318 573,461
Deferred revenue 172,476 286,701
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Total current liabilities 5,609,430 6,290,678
Other liabilities 72,037 189,278
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Total liabilities 5,681,467 6,479,956
Stockholders' equity
Preferred stock, $.01 par value, 25,000,000
shares authorized, 1,000 and zero issued
and outstanding at September 30, 1996 and
June 30, 1996, respectively 939,950 -
Common stock, $.01 par value, 100,000,000
shares authorized, 10,629,978 and
10,608,748 issued and outstanding at
September 30, 1996 and June 30, 1996,
respectively 40,125,006 40,189,771
Accumulated deficit (37,838,204) (38,141,042)
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Net stockholders' equity 3,226,752 2,048,729
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$ 8,908,219 $ 8,528,685
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See accompanying notes to consolidated financial statements
3
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GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
1996 1995
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Net revenues $ 3,455,135 $ 910,607
Cost of revenues 871,820 487,711
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Gross Margin 2,583,315 422,896
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Operating expenses:
Research and development 843,903 743,020
Sales and marketing 919,452 476,009
General and administrative 747,052 629,591
Restructuring charge (263,831) -
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Total operating expenses 2,246,576 1,848,620
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Operating income (loss) 336,739 (1,425,724)
Interest expense, net (33,901) (18,276)
Other income (expense), net - 5,574
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Net income (loss) $ 302,838 $ (1,438,426)
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Income (loss) per share of common stock $ 0.03 $ (0.33)
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Weighted average common shares 10,617,968 4,373,469
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See accompanying notes to consolidated financial statements
4
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GRAPHIX ZONE, INC.
CONSOLIDATED STATMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
1996 1995
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Cash flows from operating activities:
Net income (loss) $ 302,838 $ (1,438,426)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 228,937 146,728
Provision for sales returns
and doubtful accounts (229,678) -
Amortization of discount on
convertible debentures - 9,595
Stock option and warrant
compensation expense - 67,244
Change in operating assets and
liabilities:
Increase in accounts receivable (717,810) (338,761)
Decrease (increase) in inventories (56,349) 51,199
Increase in other current assets (106,147) (3,416)
Decrease in other assets 40,697 15,686
Decrease in accounts payable (228,326) (284,367)
Increase in accrued royalties 409,702 -
Decrease in accrued liabilities (297,256) (70,676)
Decrease in accrued restructuring charge (451,143) -
Decrease in deferred revenue (114,225) (9,838)
Decrease in other liabilities (117,241) -
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Net cash used in operating
activities (1,336,001) (1,855,032)
Cash flows from investing activities:
Purchase of property and equipment (126,020) (23,620)
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Net cash used in investing
activities (126,020) (23,620)
Cash flows from financing activities:
Payments for redemption of stock (75,062) -
Payments on notes payable - -
Proceeds from exercise of stock options
and warrants 10,297 3,613
Proceeds from preferred stock issuances,
net. 939,950 -
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Net cash provided by
financing activities 875,185 3,613
Net Decrease in cash (586,836) (1,875,039)
Cash and cash equivalents at beginning of
period 1,288,196 1,919,102
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Cash and cash equivalents at end of period $ 701,360 $ 44,063
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Supplemental disclosure of cash flow
information
Cash paid during the period for interest $ 73,028 $ -
See accompanying notes to consolidated financial statements
5
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GRAPHIX ZONE, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) BACKGROUND AND ORGANIZATION
Graphix Zone, Inc. (the "Company") is a Delaware corporation and was
incorporated in January 1996 for the purpose of acquiring Graphix Zone,
Inc., a California corporation (GZ-CA), and StarPress, Inc., a Colorado
corporation (StarPress). The Company is engaged in the development,
production and marketing of CD-ROM and on-line products for the personal
computer industry.
On January 3, 1996 the Company's wholly owned subsidiaries GZ-CA and
StarPress, entered into an Agreement and Plan of Reorganization pursuant to
which both companies would become wholly owned subsidiaries of Graphix
Zone, Inc., a Delaware corporation. All conditions to the merger were met
and on June 28, 1996 the shareholders of both GZ-CA and StarPress approved
the merger (the "Reorganization") which was consummated on that date.
Based upon the capitalization of both GZ-CA and StarPress, at the
consummation of the merger, the former shareholder interests of StarPress
comprised a larger percentage of the outstanding shares of the Company than
the former shareholder interests of GZ-CA, and accordingly StarPress was
deemed the acquiring entity for financial accounting purposes. Accordingly
, the historical financial statements presented herein, prior to the
effective date of the Reorganization are the financial statements of
StarPress. All shares have been adjusted to reflect a .14666 : 1 stock
exchange in connection with the Reorganization.
All references to the "Company" prior to June 28, 1996 relate to StarPress
and Graphix Zone, Inc., a Delaware corporation.
(2) BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes that the disclosures are adequate to make the information
presented not misleading when read in conjunction with the Company's
financial statements for the year ended June 30, 1996 included in the
Company's Annual Report on Form 10-K filed with the Commission. The
financial information presented reflects all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented. Results for the three month period ended September 30, 1996 is
not necessarily indicative of results which may be expected for the full
year.
(3) STOCKHOLDERS' EQUITY
On September 25, 1996, the Company sold 1,000 shares of Series A
Convertible Preferred Stock at $1,000 per share to one accredited investor
in a private equity offering. In addition, the Company granted the
investor a warrant to purchase 69,717 shares of common stock. The
preferred stock is convertible into the Company's common stock, at the
option of the holder, commencing 60 days from the date of issuance based
upon, among other things, the average closing bid price of the Company's
common stock at or near the conversion date. The holder of the preferred
stock is entitled to receive $80 per share per annum which shall be fully
cumulative from the date of issuance. The cash proceeds, net of offering
expenses, were $939,950.
(4) SUBSEQUENT EVENTS
On November 1, 1996, the Company sold 1,525 shares of Series A Convertible
Preferred Stock at $1,000 per share to five accredited investors in a
private equity offering. In addition, the Company granted the investors
warrants to purchase 99,674 shares of common stock. The preferred stock is
convertible into the Company's common stock, at the option of the holders,
commencing 60 days from the date of issuance based upon, among
6
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other things, the average closing bid price of the Company's common stock
at or near the conversion date. The holders of the preferred stock are
entitled to receive $80 per share per annum which shall be fully cumulative
from the date of issuance. The cash proceeds, net of offering expenses,
were $1,072,910.
On June 28, 1996 the Company entered into a loan agreement with Silicon
Valley Bank for a $750,000 loan bearing interest at the bank's prime rate
plus 300 basis points. The loan was originally due on October 31, 1996 and
is secured by all of the Company's assets. As of December 12, 1996 the
Company has repaid $350,000 of the loan and the balance was extended to
December 31, 1996. The Company expects to be repay the balance of the
Silicon Valley Bank loan with proceeds from a multi-million dollar credit
facility which the Company is currently in the process of securing (see
below).
On December 11, 1996, the Company received a proposal from a fund to extend
a multi-million dollar credit facility to the Company. The Company
anticipates securing the credit facility by December 31, 1996. Proceeds
from the credit facility will be used to repay the balance of the loan due
to Silicon Valley Bank, to augment working capital and repay other
indebtedness.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
GENERAL
The Company's business focus and strategy is to become an industry leader
in interactive entertainment. The Company develops and distributes interactive
CD-ROM multimedia products for the growing interactive multimedia segment of the
desktop computer industry. In addition, the Company is developing a network of
Internet music web sites which may create additional revenue streams.
In June 1996, the Company acquired all of the outstanding capital stock of
GZ-CA, a developer and publisher of interactive software titles, in exchange for
5,526,543 shares of the Company's common stock. The total purchase price for
GZ-CA was $23,930,957 (which was determined by the fair market value of GZ-CA
common stock) including acquisition costs of $823,932. The acquisition was
accounted for by the purchase method of accounting.
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Consolidated
Statements of Operations as a percentage of net revenues.
Three Months Three Months
Ended Ended
September 30, 1996 September 30, 1995
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Net revenues 100% 100%
Cost of revenues 25% 54%
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Gross margin 75% 46%
Research and development expenses 24% 82%
Sales and marketing expenses 27% 52%
General and administrative expenses 22% 69%
Restructuring charge (8)% -
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Operating income (loss) 10% (157)%
Interest expense, net 1% 1%
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Net income (loss) 9% (158)%
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NET REVENUES
Net revenues for the three months ended September 30, 1996 increased by
$2,544,528 to $3,455,135 as compared to $910,607 for the three months ended
September 30, 1995. The increase in net revenues of 279% for the quarter ended
September 30, 1996 compared to the same prior year period is a result of the
Reorganization and merger of GZ-CA and StarPress, the acquisition of certain
products from Sony Interactive Entertainment, Inc. (Sony) in November 1995 and
the release of seven new titles in the first three months of fiscal 1997. All
of the aforementioned have increased the Company's catalog of products and
corresponding revenues, particularly the Sony products which accounted for
approximately $1,710,000 of net revenues for the three months ended September
30, 1996.
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The Company's revenues and income may fluctuate periodically as a result of
the timing of new CD-ROM releases, and external factors such as seasonal buying
patterns. The Company grants certain distributors and retailers certain rights
to return unsold inventory. Consequently, although the Company records revenue
upon shipment, it accrues a reserve based on the Company's estimate of expected
returns.
GROSS MARGIN
Gross margin as a percentage of net revenues was 75% for the three months
ended September 30, 1996 compared to 46% for the comparable prior year period.
The increase in gross margin as a percentage of net revenues is primarily a
result of two factors. First, during the latter half of fiscal 1996 and
continuing in the first quarter of fiscal 1997 the Company has decreased per
unit costs as it gained greater experience in the procurement of product
components and has received improved pricing from vendors based upon increased
production volumes associated with the Company's expanded catalog of products.
Second, net revenue for the three months ended September 30, 1996 included
approximately $279,000 of revenue from OEM/bundling deals for which there is no
direct cost of revenue, aside from royalties, associated. Gross margin may
fluctuate depending upon the component costs and royalty structure of the
specific product mix for any given period. Accordingly, the gross margin as a
percentage of net revenues for the three months ended September 30, 1996 may not
be indicative of future period results.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended September 30,
1996 increased by $100,883 to $843,903 as compared to $743,020 for the three
months ended September 30, 1995. Although the dollar expenditures between the
comparable periods were relatively stable, research and development expenditures
as a percentage of net revenues decreased from 82% in the first quarter of
fiscal 1996 to 24% for the first quarter of fiscal 1997. The significant
decrease is a result of the increase in net revenues of $2,544,528 in the first
quarter of fiscal 1997 over the same period from fiscal 1996. Research and
development costs may fluctuate depending upon the number of projects in process
in a particular period and the degree of internally developed versus externally
developed or acquired content in the related projects. In the near term, the
Company expects research and development costs to increase in amount and as a
percentage of net revenues.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the three months ended September 30,
1996 increased by $443,443 to $919,452 and represented 27% of net revenues as
compared to $476,009 and 52% of net revenues for the three months ended
September 30, 1995. The increase in selling and marketing expenses for the
first quarter of fiscal 1997 as compared to the first quarter of fiscal 1996 is
primarily related to increases in personnel as well as increased participation
in cooperative advertising and marketing programs in order to increase product
awareness and sales. The decrease in selling and marketing costs as a
percentage of net revenues for the first quarter of fiscal 1997 compared to the
first quarter of fiscal 1996 is a result of the Company having established the
core infrastructure and personnel in the sales and marketing departments during
the latter part of fiscal 1996 and reaping certain economies of scale as net
revenues increased. If net revenues increase, the Company expects selling and
marketing costs to increase in amount but remain relatively stable as a
percentage of net revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended September
30, 1996 increased by $117,461 to $747,052 and represented 22% of net revenues
compared to $629,591 and 69% of net revenues for the three months ended
September 30, 1995. Although general and administrative expenses increased
modestly in amount, they decreased significantly as a percentage of net revenues
for the first quarter of fiscal 1997 as compared to the first quarter of fiscal
1996. The decrease as a percentage of net revenues is primarily a result of the
increased revenues, resulting in part from the Reorganization and merger of GZ-
CA and StarPress, and the related elimination of certain duplicate
administrative costs including facility rents and accounting personnel. The
Company expects general and administrative expenses to increase in amount in the
near term as the Company continues to develop its infrastructure.
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RESTRUCTURING CHARGE
During the second quarter of fiscal 1996, in anticipation of the
Reorganization, the Company adopted a restructuring plan to enhance overall
competitiveness, productivity and efficiency through the reduction of overhead
costs. The total estimated cost of the restructuring charged to operations
during fiscal 1996 was $1,900,000. During the first quarter of fiscal 1997 the
Company reversed $263,831 of the remaining reserve for restructuring related to
facility and equipment leases for its San Francisco facility, which the Company
has subsequently sub-leased.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash. At September 30,
1996, cash and cash equivalents were $701,360, net working capital was
$1,184,765 and net stockholders' equity was $3,226,752. At June 30, 1996, cash
and cash equivalents were $1,288,196, net working capital deficiency was
$(19,631) and net stockholders' equity was $2,048,729. The decrease in cash and
cash equivalents is primarily a result of the payment of certain obligations
related to the Reorganization and the relatively high concentration of the
revenues for the first quarter of fiscal 1997 occurring in the latter part of
the quarter, offset by the equity infusion of $939,950 discussed below. Cash
used in operations for the three months ended September 30, 1996 was $1,336,001.
Due to substantial up-front costs associated with the development of CD-ROM
titles and Internet web sites, the Company has continually needed to locate
outside sources of liquidity. On September 25, 1996, the Company raised
$939,950, net of offering expenses, through a private equity offering of 1,000
shares of convertible preferred stock and a warrant to purchase 69,717 shares of
common stock to one accredited investor. Additionally, on November 1, 1996, the
Company raised $1,072,910, net of offering expenses, through a private equity
offering of 1,525 shares of convertible preferred stock and warrants to purchase
99,674 shares of common stock to five accredited investors. The proceeds from
the Company's private equity and debt offerings have been and will be used as
working capital to fund the development of future CD-ROM products, royalty
payments on existing titles, expected advance royalty payments to entertainment
content owners for future titles, investment in the Company's Internet strategy
and other costs associated with the continued growth and expansion of the
Company.
On June 28, 1996 the Company entered into a loan agreement with Silicon
Valley Bank for a $750,000 loan bearing interest at the bank's prime rate plus
300 basis points. The loan was originally due on October 31, 1996 and is
secured by all of the Company's assets. As of December 12, 1996 the Company has
repaid $350,000 of the loan and the balance was extended to December 31, 1996.
The Company expects to repay the balance of the Silicon Valley Bank loan with
proceeds from a multi-million dollar credit facility which the Company is
currently in the process of securing (see below).
On December 11, 1996, the Company received a proposal from a fund to extend
a multi-million dollar credit facility to the Company. The Company anticipates
securing the credit facility by December 31, 1996. Proceeds from the credit
facility will be used to repay the balance of the loan due to Silicon Valley
Bank, to augment working capital and repay other indebtedness. Additionally,
the Company is in negotiations with another entity to provide a revolving credit
facility, of up to $2,500,000, based upon a percentage of the Company's accounts
receivable.
The Company's long-term liquidity is principally contingent on its ability
to raise funds through private and public debt and equity offerings and securing
one of the above described credit facilities. Additionally, the Company must
improve the collection period and related aging of its accounts receivables.
Having completed the Reorganization, the Company has and believes it will
continue to generate cost savings thus gradually improving liquidity. The
Company's anticipated liquidity needs are based upon a number of factors,
including the size of the business and related working capital needs, the
extent of CD-ROM and Internet development costs and funding requirements, and
the level of corporate operating costs. The Company believes that, if it can
secure one of the above described credit facilities, its present funding
sources, including the proceeds from the aforementioned private equity
offerings are sufficient to sustain these needs through fiscal 1997.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
On September 25, 1996, and November 1, 1996, the Company sold 2,525
shares of Series A Convertible Preferred Stock for $1,000 per share to
six accredited investors in a private placement pursuant to Sections
4(2) and 4(6) of the Securities Act of 1933 and Regulation D
thereunder. In addition, the Company granted the investors warrants
to purchase up to 169,391 shares of common stock for $4.69 per share.
The holders of Series A Convertible Preferred Stock are entitled to
receive dividends of $80 per share per annum, fully cumulative from
the date of issuance. The cash proceeds of the offering, net of
expenses, were $2,012,860. Tanner Unman Securities acted as placement
agent and was paid a commission of 11 1/2 % of the gross proceeds, and
was reimbursed for certain expenses.
The Series A Convertible Preferred Stock is convertible into shares of
common stock, at the option of the holders, commencing 60 days from
the date of issuance, based on a conversion price equal to the lower
of (a) $3.38 or (b) 80% of the average closing bid price of the
Company's common stock on the five days immediately prior to the
conversion date. As of December 16, 1996, the 2,525 shares of Series
A Convertible Preferred Stock are convertible into 1,137,387 shares of
common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.3 Amended and Restated Certificate of
Designations of Series A Convertible
Preferred Stock of Graphix Zone, Inc., dated
September 13, 1996
3.4 Certificate of Amendment of Amended and
Restated Certificate of Designations of
Series A Convertible Preferred Stock of
Graphix Zone, Inc., dated October 28, 1996
10.29 Form of Stock Subscription Agreement among
the Company and each of six private placement
investors
10.30 Form of Common Stock Purchase Warrants for
shares of the Company's Common Stock among
the Company and each of six private placement
investors.
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10.31 Form of Registration Rights Agreement among
the Company and each of six private placement
investors
10.32 1996 Stock Option Plan, as amended
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on July 1, 1996, under Item
5 - Other Events, with respect to the Reorganization.
12
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: December 16, 1996 GRAPHIX ZONE, INC.
By: /S/NORMAN H. BLOCK
--------------------------------------
Norman H. Block, President, Chief
Operating Officer, Interim Chief
Financial Officer and Principal
Financial and Accounting Officer.
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GRAPHIX ZONE, INC.
AMENDED AND RESTATED
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation Law
of the State of Delaware)
-------------------------
Graphix Zone, Inc., a Delaware corporation (the "Corporation"), in
accordance with the provisions of Section 103 of the General Corporation Law of
the State of Delaware (the "DGCL") DOES HEREBY CERTIFY:
That pursuant to authority vested in the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation, the Board of
Directors of the Corporation, by unanimous written consent, dated September 13,
1996, adopted a resolution providing for the creation of a series of the
Corporation's Preferred Stock, $.01 par value, which series is designated
"Series A Convertible Preferred Stock", which resolution is as follows:
RESOLVED, that pursuant to authority vested in the Board of Directors
of the Corporation by the Certificate of Incorporation, the Board of Directors
does hereby provide for the creation of a series of the Preferred Stock, $.01
par value (hereafter called the "Preferred Stock"), of the Corporation, and to
the extent that the voting powers and the designations, preferences and
relative, participating, optional or other special rights thereof and the
qualifications, limitations or restrictions of such rights have not been set
forth in the Certificate of Incorporation, as amended, of the Corporation, does
hereby fix the same as follows:
SERIES A CONVERTIBLE PREFERRED STOCK
SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall
be designated as "Series A Convertible Preferred Stock" (the "Series A
Convertible Preferred Stock"), and the number of shares constituting the Series
A Convertible Preferred Stock shall be 3,000, and shall not be subject to
increase.
SECTION 2. STATED CAPITAL. The amount to be represented in stated
capital at all times for each share of Series A Convertible Preferred Stock
shall be the sum of (i) $1,000, (ii) to the extent legally available, the
accrued but unpaid dividends on such share of Series A Convertible Preferred
Stock, and (iii) to be determined on at least a quarterly basis, an amount equal
to the accrued and unpaid interest on dividends in arrears through the date of
determination (as provided in Section 4).
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SECTION 3. RANK. All Series A Convertible Preferred Stock shall
rank (i) senior to the Common Stock, $.01 par value (collectively the "Common
Stock"), of the Corporation, now or hereafter issued, as to payment of dividends
and distribution of assets upon liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, and (ii) on a parity with any
additional series of preferred stock of any class which the Board of Directors
or the stockholders may from time to time authorize, both as to payment of
dividends and as to distributions of assets upon liquidation, dissolution, or
winding up of the Corporation, whether voluntary or involuntary.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares
of Series A Convertible Preferred Stock shall be entitled to receive, when, as,
and if declared by the Board of Directors of the Corporation (the "Board of
Directors" or the "Board") out of funds legally available for such purpose,
dividends at the rate of $80.00 per annum per share, and no more, which shall be
fully cumulative, shall accrue without interest (except as otherwise provided
herein as to dividends in arrears) from the date of original issuance and shall
be payable in cash quarterly on January 1, April 1, July 1, and October 1 of
each year commencing January 1, 1997 (except that if any such date is a
Saturday, Sunday, or legal holiday, then such dividend shall be payable on the
next succeeding day that is not a Saturday, Sunday, or legal holiday) to holders
of record as they appear on the stock books of the Corporation on such record
dates, not more than 20 nor less than 10 days preceding the payment dates for
such dividends, as shall be fixed by the Board. Dividends on the Series A
Convertible Preferred Stock shall be paid in cash or, subject to the limitations
in Section 4(b) hereof, shares of Common Stock of the Corporation or any
combination of cash and shares of Common Stock, at the option of the Corporation
as hereinafter provided. The amount of the dividends payable per share of Series
A Convertible Preferred Stock for each quarterly dividend period shall be
computed by dividing the annual dividend amount by four. The amount of dividends
payable for the initial dividend period and any period shorter than a full
quarterly dividend period shall be computed on the basis of a 360-day year of 12
30-day months. Dividends not paid on a payment date, whether or not such
dividends have been declared, will bear interest at the rate of 14% per annum or
at such lesser rate as is legally permitted under applicable law, until paid. No
dividends or other distributions, other than dividends payable solely in shares
of Common Stock or other capital stock of the Corporation ranking junior as to
dividends to the Series A Convertible Preferred Stock (collectively, the "Junior
Dividend Stock"), shall be paid or set apart for payment on any shares of Junior
Dividend Stock, and no purchase, redemption, or other acquisition shall be made
by the Corporation of any shares of Junior Dividend Stock unless and until all
accrued and unpaid dividends on the Series A Convertible Preferred Stock and
interest on dividends in arrears at the rate specified herein shall have been
paid or declared and set apart for payment.
If at any time any dividend on any capital stock of the Corporation
ranking senior as to dividends to the Series A Convertible Preferred Stock (the
"Senior Dividend Stock") shall be in arrears, in whole or in part, no dividend
shall be paid or declared and set apart for payment on the Series A Convertible
Preferred Stock unless and until all accrued and unpaid dividends with respect
to the Senior Dividend Stock, including the full dividends for the then current
dividend period, shall have been paid or declared and set apart for payment,
without interest. No full dividends shall be paid or declared and set apart for
payment on any class or series or the Corporation's capital stock ranking, as to
dividends, on a parity with the Series A Convertible Preferred Stock (the
"Parity
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Dividend Stock") for any period unless all accrued but unpaid dividends (and
interest on dividends in arrears at the rate specified herein) have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series A Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series A Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series A Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series A
Convertible Preferred Stock (and interest on dividends in arrears at the rate
specified herein) and the Parity Dividend Stock shall be paid or declared and
set apart for payment pro rata, so that the amount of dividends paid or declared
and set apart for payment per share on the Series A Convertible Preferred Stock
and the Parity Dividend Stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of Series A
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 4 shall not
be deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(b) If the Corporation elects in the exercise of its sole discretion
to issue shares of Common Stock in payment of dividends on the Series A
Convertible Preferred Stock, the Corporation shall issue and dispatch, or cause
to be issued and dispatched, to each holder of such shares a certificate
representing the number of whole shares of Common Stock arrived at by dividing
the per share Computed Price of such shares of Common Stock into the total
amount of cash dividends such holder would be entitled to receive if the
aggregate dividends on the Series A Convertible Preferred Stock held by such
holder which are being paid in shares of Common Stock were being paid in cash;
PROVIDED, HOWEVER, that if certificates representing shares of Common Stock are
issued and dispatched to holders of Series A Convertible Preferred Stock
subsequent to the third trading day after a dividend payment date, the
percentage used to calculate the Computed Price will be reduced by one
percentage point for each trading day after the third trading day following such
dividend payment date to the date of dispatch of shares of Common Stock. No
fractional shares of Common Stock shall be issued in payment of dividends. In
lieu thereof, the Corporation may issue a number of shares of Common Stock to
each holder which reflects a rounding up to the next highest whole number of
shares of Common Stock or may pay cash. The Corporation shall not exercise its
right to issue shares of Common Stock in payment of dividends on Series A
Convertible Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held in the Corporation's
treasury, is insufficient to pay the portion of such dividends to be
paid in shares of Common Stock;
(ii) the issuance or delivery of shares of Common Stock as a dividend
payment would require registration with or approval of any governmental
authority under any law or regulation, and such registration or approval
has not been effected or obtained;
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(iii) the shares of Common Stock to be issued as a dividend payment
have not been authorized for listing, upon official notice of issuance,
on any securities exchange or market on which the Common Stock is then
listed; or have not been approved for quotation if the Common Stock is
traded in the over-the-counter market;
(iv) the Computed Price (determined without regard to the proviso
to the definition thereof) is less than the par value of the shares of
Common Stock;
(v) the shares of Common Stock (A) cannot be sold or transferred
without restriction by unaffiliated holders who receive such shares of
Common Stock as a dividend payment or (B) are no longer listed on a
national securities exchange, on the Nasdaq National Market or the
Nasdaq SmallCap Market; or
(vi) the issuance of shares of Common Stock in payment of dividends
on Series A Convertible Preferred Stock held by any Restricted Person
(as defined in Section 9(a) hereof) would result in any Restricted
Person beneficially owning more than 4.9% of the Common Stock,
determined as provided in the proviso to the second sentence of Section
9(a) hereof.
Shares of Common Stock issued in payment of dividends on Series A
Convertible Preferred Stock pursuant to this Section shall be, and for all
purposes shall be deemed to be, validly issued, fully paid and nonassessable
shares of Common Stock of the Corporation; the issuance and delivery thereof is
hereby authorized; and the dispatch thereof will be, and for all purposes shall
be deemed to be, payment in full of the cumulative dividends to which holders
are entitled on the applicable dividend payment date.
"Computed Price" of shares of Common Stock on any date means 100
percent of the arithmetic average of the per share Closing Price (as defined in
Section 9(b)) of the Common Stock on the five consecutive trading days ending on
the trading day immediately preceding the applicable dividend payment date;
PROVIDED HOWEVER, THAT, notwithstanding the foregoing, in no event shall the
Computed Price be less than $.01 per share.
(c) Notwithstanding any other provision of this Section 4, the
Corporation may elect by written notice mailed to the holders of the Series A
Convertible Preferred Stock at their addresses appearing on the records of the
Corporation not later than the payment date for such dividend not to declare or
make payment of the amount of any quarterly dividend to the holders of shares of
Series A Convertible Preferred Stock on the date therefor provided in Section
4(a), in which case, the accrued and unpaid dividends shall be taken into
account at the time of conversion of shares of Series A Convertible Preferred
Stock as provided in Section 9 and the Corporation shall have no further right
to pay or declare and set aside for payment such quarterly dividends not so
declared or paid on such payment date unless the Corporation declares and pays
dividends in an amount equal to 117.65 percent of the amount of the dividends
not so declared or paid on such payment date and otherwise in accordance with
Sections 4(a) and 4(b). Such dividends not so declared shall not bear interest.
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(d) The Corporation shall not pay or declare and set apart for such
payment any dividend on shares of Common Stock, Junior Dividend Stock or Junior
Liquidation Stock (as defined herein) other than (1) dividends on shares of
Common Stock solely in the form of additional shares of Common Stock, (2)
dividends on Junior Dividend Stock solely in the form of shares of Common Stock
or additional shares of Junior Dividend Stock or (3) dividends on Junior
Liquidation Stock solely in the form of shares of Common Stock or additional
shares of Junior Liquidation Stock unless contemporaneously therewith, the
Corporation shall pay or declare and set apart for payment dividends on the
shares of Series A Convertible Preferred Stock in an amount per share of Series
A Convertible Preferred Stock equal to the aggregate amount of dividends the
holder of such share of Series A Convertible Preferred Stock would otherwise
have been entitled to receive had such holder converted such share of Series A
Convertible Preferred Stock in accordance with Section 9(a) (but without regard
to the limitations on conversion contained in the proviso to the second sentence
of Section 9(a) or in Section 9(d)) into shares of Common Stock as if the
Conversion Date (as defined herein) were the earlier of (x) the record date for
the payment of such dividend on shares of Common Stock, Junior Dividend Stock or
Junior Liquidation Stock, as the case may be, and (y) the trading day prior to
the date on which ex-dividend trading in the Common Stock, Junior Dividend Stock
or Junior Liquidation Stock, as the case may be, begins with respect to such
dividend thereon.
(e) Neither the Corporation nor any subsidiary of the Corporation
shall redeem, repurchase or otherwise acquire in any one transaction or series
of related transactions any shares of Common Stock, Junior Dividend Stock or
Junior Liquidation Stock if the number of shares so repurchased, redeemed or
otherwise acquired in such transaction or series of related transactions is more
than either (x) 5.0% of the number of shares of Common Stock, Junior Dividend
Stock or Junior Liquidation Stock, as the case may be, outstanding immediately
prior to such transaction or series of related transactions or (y) 1% of the
number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation
Stock, as the case may be, outstanding immediately prior to such transaction or
series of related transactions if such transaction or series of related
transactions is with any one person or group of affiliated persons, unless the
Corporation or such subsidiary offers to purchase from each holder of shares of
Series A Convertible Preferred Stock at the time of such redemption, repurchase
or acquisition the same percentage of such holder's shares of Series A
Convertible Preferred Stock as the percentage of the number of outstanding
shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as
the case may be, to be so redeemed, repurchased or acquired at a purchase price
per share of Series A Convertible Preferred Stock equal to the product obtained
by multiplying (1) the number of shares of Common Stock into which such share of
Series A Convertible Preferred Stock could be converted in accordance with
Section 9(a) (but without regard to the limitations on conversion contained in
the proviso to the second sentence of Section 9(a)) on the date of purchase of
such share of Series A Convertible Preferred Stock times (2) the product of (x)
Conversion Percentage and (y) Computed Price of one share of Common Stock on the
date of purchase of such share of Series A Convertible Preferred Stock.
(f) Neither the Corporation nor any subsidiary of the Corporation
shall (1) make any tender offer or exchange offer (a "Tender Offer") for
outstanding shares of Common Stock unless the Corporation contemporaneously
therewith makes an offer or (2) enter into an agreement regarding a Tender Offer
for outstanding shares of Common Stock by any person other than the Corporation
or any subsidiary of the Corporation unless such person agrees with the
Corporation to
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make an offer, in either such case to each holder of outstanding shares of
Series A Convertible Preferred Stock to purchase the same percentage of shares
of Series A Convertible Preferred Stock held by such holder as the percentage of
outstanding shares of Common Stock offered to be purchased in such Tender Offer
at a price per share of Series A Convertible Preferred Stock equal to the
product obtained by multiplying (1) the number of shares of Common Stock into
which such share of Series A Convertible Preferred Stock could be converted in
accordance with Section 9(a) (but without regard to the limitations on
conversion contained in the proviso to the second sentence of Section 9(a)) on
the date of purchase of such share of Series A Convertible Preferred Stock times
(2) 117.65 percent of the cash price (or other consideration) per share of
Common Stock offered in such Tender Offer.
SECTION 5. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series A Convertible Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets constitute stated
capital or surplus of any nature, an amount per share of Series A Convertible
Preferred Stock equal to the sum of (i) all dividends accrued and unpaid thereon
to the date of final distribution to such holders, (ii) accrued and unpaid
interest on dividends in arrears to the date of distribution at the rate
specified in Section 4(a), and (iii) $1,000.00 (collectively, "the Liquidation
Preference"), and no more, before any payment shall be made or any assets
distributed to the holders of Common Stock or any other class or series of the
Corporation's capital stock ranking junior as to liquidation rights to the
Series A Convertible Preferred Stock (collectively, the "Junior Liquidation
Stock"); PROVIDED, HOWEVER, that such rights shall accrue to the holders of
Series A Convertible Preferred Stock only in the event that the Corporation's
payments with respect to the liquidation preference of the holders of capital
stock of the Corporation ranking senior as to liquidation rights to the Series A
Convertible Preferred Stock (the "Senior Liquidation Stock") are fully met.
After the liquidation preferences of the Senior Liquidation Stock are fully met,
the entire assets of the Corporation available for distribution shall be
distributed ratably among the holders of the Series A Convertible Preferred
Stock and any other class or series of the Corporation's capital stock having
parity as to liquidation rights with the Series A Convertible Preferred Stock
(the "Parity Liquidation Stock") in proportion to the respective preferential
amounts to which each is entitled (but only to the extent of such preferential
amounts). After payment in full of the liquidation price of the shares of the
Series A Convertible Preferred Stock and the Parity Liquidation Stock, the
holders of such shares shall not be entitled to any further participation in any
distribution of assets by the Corporation. Neither a consolidation or merger of
the Corporation with another corporation nor a sale or transfer of all or part
of the Corporation's assets for cash, securities, or other property in and of
itself will be considered a liquidation, dissolution, or winding up of the
Corporation.
SECTION 6. NO MANDATORY REDEMPTION. The shares of Series A
Convertible Preferred Stock shall not be subject to mandatory redemption by the
Corporation.
SECTION 7. NO SINKING FUND. The shares of Series A Convertible
Preferred Stock shall not be subject to the operation of a purchase, retirement,
or sinking fund.
SECTION 8. NO OPTIONAL REDEMPTION. The shares of Series A
Convertible Preferred Stock shall not be subject to redemption at the option of
the Corporation.
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SECTION 9. CONVERSION.
(a) CONVERSION AT OPTION OF HOLDER. (i) Subject to the limitations
set forth in the legends to appear on certificates for the shares of Series A
Convertible Preferred Stock as provided in Section 9(a)(ii), the holders of the
Series A Convertible Preferred Stock may, upon surrender of the certificates
therefor, convert any or all of their shares of Series A Convertible Preferred
Stock into fully paid and nonassessable shares of Common Stock and such other
securities and property as hereinafter provided. Commencing on the respective
dates following issuance of shares of Series A Convertible Preferred Stock (such
date of initial issuance being referred to herein as the "Issuance Date") shown
on the certificates for shares of Series A Convertible Preferred Stock and at
any time thereafter to and including the day prior to the Mandatory Conversion
Date, each share of Series A Convertible Preferred Stock may be converted at the
principal executive offices of the Corporation, the office of any transfer agent
for the Series A Convertible Preferred Stock, if any, the office of any transfer
agent for the Common Stock or at such other office or offices, if any, as the
Board of Directors may designate, initially into such number of fully paid and
nonassessable shares of Common Stock (calculated as to each conversion to the
nearest 1/100th of a share) determined by dividing (x) the sum of (i) the
Conversion Amount, (ii) accrued but unpaid dividends to the Conversion Date on
the share of Series A Convertible Preferred Stock being converted, and (iii)
accrued but unpaid interest on the dividends on the share of Series A
Convertible Preferred Stock being converted in arrears to the Conversion Date by
(y) the lower of (1) the product of the Conversion Percentage TIMES the
arithmetic average of the Closing Price of the Common Stock on the five
consecutive trading days immediately preceding the Conversion Date or (2) the
Closing Price on the trading day prior to the first issuance of any share of
Series A Convertible Preferred Stock (subject to equitable adjustments for stock
splits, stock dividends, combinations, recapitalizations, reclassifications and
similar events occurring on or after the date of filing of this Certificate of
Designations with the Secretary of State of the State of Delaware), in each case
subject to adjustment as hereinafter provided (the "Conversion Rate"); PROVIDED,
HOWEVER, that in no event shall any holder be entitled to convert any shares of
Series A Convertible Preferred Stock in excess of that number of shares of
Series A Convertible Preferred Stock upon conversion of which the sum of (1) the
number of shares of Common Stock beneficially owned by such holder and any
person whose beneficial ownership of shares of Common Stock would be aggregated
with such holder's beneficial ownership of shares of Common Stock for purposes
of Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Regulation 13D-G thereunder (each a "Restricted Person" and
collectively, the "Restricted Persons") (other than shares of Common Stock
deemed beneficially owned through the ownership of unconverted shares of Series
A Convertible Preferred Stock and unexercised Warrants) and (2) the number of
shares of Common Stock issuable upon the conversion of the number of shares of
Series A Convertible Preferred Stock with respect to which the determination in
this proviso is being made, would result in beneficial ownership by any
Restricted Person of more than 4.9% of the outstanding shares of Common Stock.
For purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and Regulation 13D-G thereunder, except as otherwise provided in clause (1)
of the proviso to the immediately preceding sentence. The "Conversion Price"
shall be equal to the Conversion Amount divided by the Conversion Rate.
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(ii) Each certificate for shares of Series A Convertible Preferred
Stock shall, until such time as such legend, by its terms, no longer applies,
contain one of the following legends as agreed in writing by the initial holder
of such shares of Series A Convertible Preferred Stock at the time of original
issuance thereof:
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER HEREOF
UNTIL ON OR AFTER THE 60TH DAY FOLLOWING THE ORIGINAL ISSUANCE THEREOF."
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER HEREOF
UNTIL ON OR AFTER THE 90TH DAY FOLLOWING THE ORIGINAL ISSUANCE THEREOF."
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER HEREOF
UNTIL ON OR AFTER THE 120TH DAY FOLLOWING THE ORIGINAL ISSUANCE THEREOF."
Any new certificate issued upon transfer of any shares of Series A Convertible
Preferred Stock or, in connection with a conversion of shares of Series A
Convertible Preferred Stock, to evidence the unconverted balance of shares of
Series A Convertible Preferred Stock shall bear the same legend as the
certificate surrendered to the Corporation in connection herewith, if
applicable.
(b) CERTAIN DEFINITIONS.
As used herein, the "Closing Price" of any security on any date shall
mean the closing bid price of such security on such date on the principal
securities exchange or market on which such security is traded.
As used herein, the "Conversion Amount" initially shall be equal to
$1,000.00, subject to adjustment as hereinafter provided.
As used herein, "Conversion Date" shall mean the date on which the
notice of conversion is actually received by the Corporation, in case of a
conversion at the option of the holder pursuant to Section 9(a).
As used herein, "Conversion Percentage" shall mean 85 percent, except
that, I fin connection with a particular conversion of shares of Series A
Convertible Preferred Stock, the Corporation fails to issue and deliver the
certificates for the Common Stock issuable upon such conversion to the holder
converting such shares pursuant to the first sentence of paragraph 6 of
Section 9(c) hereof within five (5) business days after surrender of
certificates representing such shares, then the percentage stated above in this
paragraph shall be reduced with respect to the conversion of such shares by one
percentage point for each day following the third business day after such
surrender of certificates representing such shares of Series A Convertible
Preferred Stock for conversion to (but excluding) the date the Corporation
delivers to such holder the certificates for the shares of Common Stock issued
upon such conversion.
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As used herein, "Registration Statement" shall mean the Registration
Statement required to be filed by the Corporation with the SEC pursuant to
Section 2(a) of the Registration Rights Agreement.
As used herein, "SEC" shall mean the United States Securities and
Exchange Commission.
As used herein, "Registration Rights Agreement" shall mean the
Registration Rights Agreement between the Corporation and the original holder of
the Series A Convertible Preferred Stock.
(c) OTHER PROVISIONS. Notwithstanding anything in this Section 9 to
the contrary, no change in the Conversion Amount shall actually be made until
the cumulative effect of the adjustments called for by this Section 9 since the
date of the last change in the Conversion Amount would change the Conversion
Amount by more than 1%. However, once the cumulative effect would result in such
a change, then the Conversion Rate shall actually be changed to reflect all
adjustments called for by this Section 9 and not previously made.
The holders of shares of Series A Convertible Preferred Stock at the
close of business on the record date for any dividend payment to holders of
Series A Convertible Preferred Stock shall be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after such dividend payment record date
or the Corporation's default in payment of the dividend due on such dividend
payment date; PROVIDED, HOWEVER, that the holder of shares of Series A
Convertible Preferred Stock surrendered for conversion during the period between
the close of business on any record date for a dividend payment and the opening
of business on the corresponding dividend payment date shall, promptly after
receipt, return to the Corporation the dividend payable on such shares on such
dividend payment date if such dividend shall have been paid by the Corporation
on such dividend payment date. A holder of shares of Series A Convertible
Preferred Stock on a record date for a dividend payment who (or whose
transferee) tenders any of such shares for conversion into shares of Common
Stock on or after such dividend payment date will receive the dividend payable
by the Corporation on such shares of Series A Convertible Preferred Stock on
such date, and the converting holder need not include payment of the amount of
such dividend upon surrender of shares of Series A Convertible Preferred Stock
for conversion. Except as provided above, no adjustment shall be made in respect
of cash dividends on Common Stock or Series A Convertible Preferred Stock that
may be accrued and unpaid at the date of surrender for conversion.
The right of the holders of Series A Convertible Preferred Stock to
convert their shares shall be exercised by delivering to the Corporation or its
agent, as provided above, a written notice, duly signed by or on behalf of the
holder, stating the number of shares of Series A Convertible Preferred Stock to
be converted. Promptly, but in no event later than ten business days after
delivery of a notice of conversion, such holder shall surrender for such purpose
to the Corporation or its agent, as provided above, certificates representing
shares to be converted, duly endorsed in blank or accompanied by proper
instruments of transfer. If such holder shall fail to deliver certificates
representing shares to be converted in such form on or prior to such tenth
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business day, such notice of conversion shall not be effective, unless otherwise
agreed by the Corporation, but such failure shall not affect such holder's right
to convert such shares at a date after the date such notice of conversion was
given. The Corporation shall pay any tax arising in connection with any
conversion of shares of Series A Convertible Preferred Stock except that the
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery upon conversion of
shares of Common Stock or other securities or property in a name other than that
of the holder of the shares of the Series A Convertible Preferred Stock being
converted, and the Corporation shall not be required to issue or deliver any
such shares or other securities or property unless and until the person or
persons requesting the issuance thereof shall have paid to the Corporation the
amount of any such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
The Corporation (and any successor corporation) shall take all action
necessary so that a number of shares of the authorized but unissued Common Stock
(or common stock in the case of any successor corporation) sufficient to provide
for the conversion of the Series A Convertible Preferred Stock outstanding upon
the basis hereinbefore provided are at all times reserved by the Corporation (or
any successor corporation), free from preemptive rights, for such conversion,
subject to the provisions of the next succeeding paragraph. If the Corporation
shall issue any securities or make any change in its capital structure which
would change the number of shares of Common Stock into which each share of the
Series A Convertible Preferred Stock shall be convertible as herein provided,
the Corporation shall at the same time also make proper provision so that
thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the
outstanding Series A Convertible Preferred Stock on the new basis. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all of the outstanding shares of Series A
Convertible Preferred Stock, the Corporation promptly shall seek 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.
In case of any consolidation or merger of the Corporation with any
other corporation (other than a wholly-owned subsidiary of the Corporation) in
which the Corporation is not the surviving corporation, or in case of any sale
or transfer of all or substantially all of the assets of the Corporation, or in
the case of any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property, the Corporation
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series A Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series A
Convertible Preferred Stock into the kind and amount of shares of stock and
other securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of the number of shares of Common Stock
into which such shares of Series A Convertible Preferred Stock could have been
converted immediately prior to the effective date of such consolidation, merger,
sale, transfer, or share exchange. If, in connection with any such
consolidation, merger, sale, transfer, or share exchange, each holder of shares
of Common Stock is entitled to elect to receive either securities, cash, or
other assets upon completion of such transaction, the Corporation shall provide
or cause to be provided to each holder of Series A Convertible Preferred Stock
the right to elect the securities, cash, or other assets into which the Series A
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Convertible Preferred Stock held by such holder shall be convertible after
completion of any such transaction on the same terms and subject to the same
conditions applicable to holders of the Common Stock (including, without
limitation, notice of the right to elect, limitations on the period in which
such election shall be made, and the effect of failing to exercise the
election). The Corporation shall not effect any such transaction unless the
provisions of this paragraph have been complied with. The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers, or
share exchanges.
If a holder shall have given a notice of conversion of shares of
Series A Convertible Preferred Stock, upon surrender of certificates
representing shares of Series A Convertible Preferred Stock for conversion, the
Corporation shall issue and deliver to such person at an address within the
United States specified by such person certificates for the Common Stock
issuable upon such conversion within three business days after such surrender of
certificates and the person converting shall be deemed to be the holder of
record of the Common Stock issuable upon such conversion, and all rights with
respect to the shares surrendered shall forthwith terminate except the right to
receive the Common Stock or other securities, cash, or other assets as herein
provided. If a holder shall have given a notice of conversion as provided
herein, the Corporation's obligation to issue and deliver the certificates for
Common Stock shall be absolute and unconditional, irrespective of the absence of
any action by the converting holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment against any
person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Corporation to the holder of record,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the holder of any obligation to the Corporation, and
irrespective of any other circumstance with might otherwise limit such
obligation of the Corporation to the holder in connection with such conversion.
If the Corporation fails to issue and deliver the certificates for the Common
Stock to the holder converting shares of Series A Convertible Stock pursuant to
the first sentence of this paragraph as and when required to do so, in addition
to any other liabilities the Corporation may have hereunder and under applicable
law, the Corporation shall pay or reimburse such holder on demand for all out-
of-pocket expenses including, without limitation, fees and expenses of legal
counsel incurred by such holders as a result of such failure.
No fractional shares of Common Stock shall be issued upon conversion
of Series A Convertible Preferred Stock but, in lieu of any fraction of a share
of Common Stock which would otherwise be issuable in respect of the aggregate
number of such shares surrendered for conversion at one time by the same holder,
the Corporation at its option (a) may pay in cash an amount equal to the product
of (i) the arithmetic average of the Closing Price of a share of Common Stock on
the three consecutive trading days ending on the trading day immediately
preceding the Conversion Date and (ii) such fraction of a share or (b) may issue
an additional share of Common Stock.
The Conversion Amount shall be adjusted from time to time under
certain circumstances, subject to the provisions of the first three sentences of
the first paragraph of this Section 9(c), as follows:
(i) In case the Corporation shall issue rights or warrants on a pro
rata basis to all holders of the Common Stock entitling such holders to
subscribe for or purchase Common Stock on
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the record date referred to below at a price per share less than the average
daily Closing Prices of the Common Stock on the 30 consecutive business days
commencing 45 business days before the record date (the "Current Market Price")
excluding, however, any rights issued pursuant to the Rights Agreement, then in
each such case the Conversion Amount in effect on such record date shall be
adjusted in accordance with the formula
C1 = C x O + N
-----
O + N x P
-----
M
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the record
date.
N = the number of additional shares of Common Stock issuable pursuant
to the exercise of such rights or warrants.
P = the offering price per share of the additional shares (which
amount shall include amounts received by the Corporation in
respect of the issuance and the exercise of such rights or
warrants).
M = the Current Market Price per share of Common Stock on the record
date.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants. If
any or all such rights or warrants are not so issued or expire or terminate
before being exercised, the Conversion Amount then in effect shall be readjusted
appropriately.
(ii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Junior Stock (as hereinafter defined) evidences
of its indebtedness or assets (including securities, but excluding any warrants
or subscription rights referred to in subparagraph (i) above and any dividend or
distribution paid in cash out of the retained earnings of the Corporation), then
in each such case the Conversion Amount then in effect shall be adjusted in
accordance with the formula
C1 = C x M
-----
M - F
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Market Price per share of Common Stock on the record
date mentioned below.
F = the aggregate amount of such cash dividend and/or the fair market
value on the record date of the assets or securities to be
distributed divided by the number of shares of Common Stock
outstanding on the record date. The Board of Directors shall
determine such fair market value, which determination shall be
conclusive.
12
<PAGE>
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution.
For purposes of this subparagraph (ii), "Junior Stock" shall include any class
of capital stock ranking junior as to dividends or upon liquidation to the
Series A Convertible Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to the
fifth paragraph of this Section 9(c), the holder of any Series A Convertible
Preferred Stock thereafter surrendered for conversion shall become entitled to
receive securities, cash, or assets other than Common Stock, the number or
amount of such securities or property so receivable upon conversion shall be
subject to adjustment from time to time in a manner and on terms nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in subparagraphs (i) to (iii) above.
Except as otherwise provided above in this Section 9, no adjustment in
the Conversion Amount shall be made in respect of any conversion for share
distributions or dividends theretofore declared and paid or payable on the
Common Stock.
Whenever the Conversion Amount is adjusted as herein provided, the
Corporation shall send to each transfer agent, if any, for the Series A
Convertible Preferred Stock and the Common Stock, and to the principal
securities exchange, if any, on which the Series A Convertible Preferred Stock
and the Common Stock is traded, or the Nasdaq National Market if the Series A
Convertible Preferred Stock or Common Stock is admitted for a quotation thereon,
a statement signed by the Chairman of the Board, the President, or any Vice
President of the Corporation and by its Treasurer or its Secretary or an
Assistant Secretary stating the adjusted Conversion Amount determined as
provided in this Section 9, and any adjustment so evidenced, given in good
faith, shall be binding upon all stockholders and upon the Corporation. Whenever
the Conversion Amount is adjusted, the Corporation will give notice by mail to
the holders of record of Series A Convertible Preferred Stock, which notice
shall be made within 15 days after the effective date of such adjustment and
shall state the adjustment and the Conversion Amount. Notwithstanding the
foregoing notice provisions, failure by the Corporation to give such notice or a
defect in such notice shall not affect the binding nature of such corporate
action of the Corporation.
Whenever the Corporation shall propose to take any of the actions
specified in the fifth paragraph of this Section 9(c) or in subparagraphs (i) or
(ii) of the eighth paragraph of this Section 9(c) which would result in any
adjustment in the Conversion Amount under this Section 9(c), the Corporation
shall cause a notice to be mailed at least 20 days prior to the date on which
the books of the Corporation will close or on which a record will be taken for
such action, to the holders of record of the outstanding Series A Convertible
Preferred Stock on the date of such notice. Such notice shall specify the action
proposed to be taken by the Corporation and the date as of which holders of
record of the Common Stock shall participate in any such actions or be entitled
to exchange their Common Stock for securities or other property, as the case may
be. Failure by the Corporation to mail the notice or any defect in such notice
shall not affect the validity of the transaction.
13
<PAGE>
Notwithstanding any other provision of this Section 9, no adjustment
in the Conversion Amount need be made (a) for a transaction referred to in
subparagraphs (i) or (ii) of the eighth paragraph of this Section 9(c) if
holders of Series A Convertible Preferred Stock are to participate in the
transaction or distribution on a basis and with notice that the Board of
Directors determines such transaction to be fair to the holders of the Series A
Convertible Preferred Stock and appropriate in light of the basis on which
holders of the Common Stock or, in the case of a transaction referred to in said
subparagraph (ii), holders of Junior Stock participate in the transaction; (b)
for sales of Common Stock pursuant to a plan for reinvestment of dividends and
interest, PROVIDED that the purchase price in any such sale is at least equal to
the fair market value of the Common Stock at the time of such purchase, or
pursuant to any plan adopted by the Corporation for the benefit of its
employees, directors, or consultants; or (c) after such time as a holder of
shares of Series A Convertible Preferred Stock becomes entitled to receive only
cash upon conversion of such shares (in which case no interest shall accrue on
the amount of such cash for any period prior to the date which is three business
days after surrender of the certificates for such shares for conversion).
(d) MANDATORY CONVERSION. So long as the Corporation shall be in
compliance in all material respects with its obligations to the holders of the
Series A Convertible Preferred Stock (including its obligations under the
Registration Rights Agreement and the provisions of this Certificate of
Designations) and so long as the Registration Statement shall be effective (or
all the shares of Common Stock into which shares of Series A Convertible
Preferred Stock then outstanding are convertible may be sold by each holder of
record of such shares of Series A Convertible Preferred Stock within a period of
three months under Rule 144), on the date which is 730 days after the Issuance
Date (the "Mandatory Conversion Date") all of the shares of Series A Convertible
Preferred Stock then outstanding shall be converted, in accordance with the
provisions, and subject to the limitations, of Section 9(a), into shares of
Common Stock to the extent the same are at such time convertible into shares of
Common Stock. On the Mandatory Conversion Date, the Corporation shall mail by
first class mail or otherwise deliver to each holder of Series A Convertible
Preferred Stock a notice (a "Section 9(d) Notice"), which shall state (1) the
number of shares of Series A Convertible Preferred Stock held by such holder
which have been converted into shares of Common Stock in accordance with this
Section 9(d) and (2) the Mandatory Conversion Date. If the Corporation shall
give a Section 9(d) Notice, then, unless theretofore converted by the holder in
accordance herewith, and so long as the Registration Statement shall remain
effective on the Mandatory Conversion Date (or all the shares of Common Stock
into which shares of Series A Convertible Preferred Stock then outstanding are
convertible may be sold by each holder of record of such shares of Series A
Convertible Preferred Stock within a period of three months under Rule 144) and
the Corporation shall be in compliance in all material respects with its
obligations to the holders of the Series A Convertible Preferred Stock
(including its obligations under the Registration Rights Agreements and the
provisions of this Certificate of Designations) on the Mandatory Conversion
Date, then on the Mandatory Conversion Date properly set forth therein, all
shares of Series A Convertible Preferred Stock which, on the Mandatory
Conversion Date are convertible in accordance with Section 9(a) hereof, shall be
converted into such number of shares of Common Stock as shall be determined
pursuant to this Section 9 as if the conversion of such number of shares of
Series A Convertible Preferred Stock were made by the holders thereof in
accordance herewith and as if the Mandatory Conversion Date were the Conversion
Date. Upon the surrender of certificates for shares of Series A Convertible
Preferred Stock by the holder after a Section 9(d)
14
<PAGE>
Notice is given, the Corporation shall issue and, within three trading days
after such surrender, deliver to or upon the order of such holder that number of
shares of Common Stock as shall be issuable in respect to the conversion of the
number of shares of Series A Convertible Preferred Stock converted, together
with accrued and unpaid dividends thereon to the date of conversion and accrued
and unpaid interest on dividends on such shares which are in arrears, into
Common Stock as shall be determined in accordance herewith.
SECTION 9. VOTING RIGHTS. Except as otherwise required by law or
expressly provided herein, shares of Series A Convertible Preferred Stock shall
not be entitled to vote on any matter.
The affirmative vote or consent of the holders of a majority of the
outstanding shares of the Series A Convertible Preferred Stock, voting
separately as a class, will be required for (1) any amendment, alteration, or
repeal, whether by merger or consolidation or otherwise, of the Corporation's
Certificate of Incorporation if the amendment, alteration, or repeal materially
and adversely affects the powers, preferences, or special rights of the Series A
Convertible Preferred Stock, or (2) the creation and issuance of any Senior
Dividend Stock or Senior Liquidation Stock; PROVIDED, HOWEVER, that any increase
in the authorized preferred stock of the Corporation or the creation and
issuance of any stock which is both Junior Dividend Stock and Junior Liquidation
Stock or any other capital stock of the Corporation ranking on a parity with the
Series A Convertible Preferred Stock shall not be deemed to affect materially
and adversely such powers, preferences, or special rights.
SECTION 10. OUTSTANDING SHARES. For purposes of this Certificate of
Designations, all shares of Series A Convertible Preferred Stock shall be deemed
outstanding except (i) from the date of surrender of certificates representing
shares of Series A Convertible Preferred Stock for conversion into Common Stock,
all shares of Series A Convertible Preferred Stock converted into Common Stock
and (ii) from the date of registration of transfer, all shares of Series A
Convertible Preferred Stock held of record by the Corporation or any subsidiary
or Affiliate (as defined herein) of the Corporation. For the purposes of this
Certificate of Designations, "Affiliate" means any person directly or indirectly
controlling or controlled by or under direct or indirect common control with the
Corporation. "Control" is the power to direct the management and policies of a
person, directly or through one or more intermediaries, whether through the
ownership of voting securities, by contract, or otherwise.
IN WITNESS WHEREOF, Graphix Zone, Inc. has caused its corporate seal
to be hereunto affixed and this certificate to be signed by Charles R.
Cortright, Jr., its President, as of the 13th day of September, 1996.
By: /S/CHARLES R. CORTRIGHT, JR.
--------------------------------------------
Charles R. Cortright, Jr., President
15
<PAGE>
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
GRAPHIX ZONE, INC.
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
--------------------
Graphix Zone, Inc., a Delaware corporation (the "Corporation"), hereby
certifies that the following resolution was adopted by the Board of Directors of
the Corporation as required by Section 151 of the General Corporation Law of the
State of Delaware at a meeting of the Board of Directors held on October 28,
1996:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of the Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation of the Corporation, the Board of Directors hereby amends the
Amended and Restated Certificate of Designations of Series A Convertible
Preferred Stock (the "Certificate of Designations"), such amendments to be
effected as follows:
1. By deleting Section 4(c) of the Certificate of Designations and
substituting in lieu thereof the following:
(c) Notwithstanding any other provision of this Section 4, the
Corporation may elect by written notice mailed to the holders of the Series
A Convertible Preferred Stock at their addresses appearing on the records
of the Corporation not later than the payment date for such dividend not to
declare or make payment of the amount of any quarterly dividend to the
holders of shares of Series A Convertible Preferred Stock on the date
therefor provided in Section 4(a), in which case, the accrued and unpaid
dividends shall be taken into account at the time of conversion of shares
of Series A Convertible Preferred Stock as provided in Section 9 and the
Corporation shall have no further right to pay or declare and set aside for
<PAGE>
payment such quarterly dividends not so declared or paid on such payment
date unless the Corporation declares and pays dividends in an amount equal
to 125 percent of the amount of the dividends not so declared or paid on
such payment date and otherwise in accordance with Sections 4(a) and 4(b).
Such dividends not so declared shall not bear interest.
2. By deleting Section 4(f) of the Certificate of Designations in
its entirety and substituting in lieu thereof the following:
(f) Neither the Corporation nor any subsidiary of the Corporation
shall (1) make any tender offer or exchange offer (a "Tender Offer") for
outstanding shares of Common Stock unless the Corporation contemporaneously
therewith makes an offer or (2) enter into an agreement regarding a Tender
Offer for outstanding shares of Common Stock by any person other than the
Corporation or any subsidiary of the Corporation unless such person agrees
with the Corporation to make an offer, in either such case to each holder
of outstanding shares of Series A Convertible Preferred Stock to purchase
the same percentage of shares of Series A Convertible Preferred Stock held
by such holder as the percentage of outstanding shares of Common Stock
offered to be purchased in such Tender Offer at a price per share of Series
A Convertible Preferred Stock equal to the product obtained by multiplying
(1) the number of shares of Common Stock into which such share of Series A
Convertible Preferred Stock could be converted in accordance with Section
9(a) (but without regard to the limitations on conversion contained in the
proviso to the second sentence of Section 9(a)) on the date of purchase of
such share of Series A Convertible Preferred Stock times (2) 125 percent of
the cash price (or other consideration) per share of Common Stock offered
in such Tender Offer.
3. By deleting Section 9(a)(ii) of the Certificate of Designations
in its entirety and substituting in lieu thereof the following:
(ii) Each certificate for shares of Series A Convertible Preferred
Stock shall, until such time as such legend, by its terms, no longer
applies, contain one of the following legends as agreed in writing by the
initial holder of such shares of Series A Convertible Preferred Stock at
the time of original issuance thereof:
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER
HEREOF UNTIL ON OR AFTER THE 60TH DAY FOLLOWING THE ORIGINAL ISSUANCE
OF ANY SHARES OF THIS SERIES OF PREFERRED STOCK."
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER
HEREOF UNTIL ON OR AFTER THE 90TH DAY FOLLOWING THE ORIGINAL ISSUANCE
OF ANY SHARES OF THIS SERIES OF PREFERRED STOCK."
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER
HEREOF UNTIL ON OR AFTER THE 120TH DAY FOLLOWING THE
2
<PAGE>
ORIGINAL ISSUANCE OF ANY SHARES OF THIS SERIES OF PREFERRED STOCK."
Any new certificate issued upon transfer of any shares of Series A
Convertible Preferred Stock or, in connection with a conversion of shares
of Series A Convertible Preferred Stock, to evidence the unconverted
balance of shares of Series A Convertible Preferred Stock shall bear the
same legend as the certificate surrendered to the Corporation in connection
herewith, if applicable.
4. By deleting the definition of "Conversion Percentage" contained
in Section 9(b) of the Certificate of Designations in its entirety and
substituting in lieu thereof the following:
As used herein, "Conversion Percentage" shall mean 80 percent, except
that if, in connection with a particular conversion of shares of Series A
Convertible Preferred Stock, the Corporation fails to issue and deliver the
certificates for the Common Stock issuable upon such conversion to the
holder converting such shares pursuant to the first sentence of paragraph 6
of Section 9(c) hereof within five (5) business days after surrender of
certificates representing such shares, then the percentage stated above in
this paragraph shall be reduced with respect to the conversion of such
shares by one percentage point for each day following the third business
day after such surrender of certificates representing such shares of Series
A Convertible Preferred Stock for conversion to (but excluding) the date
the Corporation delivers to such holder the certificates for the shares of
Common Stock issued upon such conversion.
IN WITNESS WHEREOF, this Certificate of Amendment is executed on
behalf of the Corporation by its President as of the 29th day of October, 1996.
/S/NORMAN H. BLOCK
----------------------------------------
Norman H. Block, President
3
<PAGE>
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT, dated as of the date of acceptance set
forth below, by and between GRAPHIX ZONE, INC., a Delaware corporation, with
headquarters located at 42 Corporate Park, Suite 200, Irvine, California 92606
(the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration provided
by Regulation D under the Securities Act of 1933, as amended (the "1933 Act");
and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, shares of non-voting, convertible preferred
stock of the Company which will be convertible into shares of Common Stock, $.01
par value (the "Common Stock"), of the Company and in connection therewith to
receive warrants to purchase shares of Common Stock, subject to acceptance of
this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. AGREEMENT TO SUBSCRIBE; WARRANTS; PURCHASE PRICE.
(a) SUBSCRIPTION. The undersigned hereby agrees to purchase from the
Company the number of shares (the "Preferred Shares") of Series A Convertible
Preferred Stock, $.01 par value (the "Preferred Stock"), of the Company set
forth on the signature page of this Agreement at the price per share and for the
aggregate purchase price set forth on the signature page of this Agreement. The
Preferred Shares shall have the rights, designations and terms as set forth in
the Amended and Restated Certificate of Designations attached hereto as ANNEX
I-A, as amended by the form of Certificate of Amendment of Amended and Restated
Certificate of Designations attached hereto as ANNEX I-B (collectively, the
"Certificate of Designations"), and the Buyer hereby agrees that certificates
for a number of Preferred Shares equal to one third of the total number of
Preferred Shares shall bear each of the three legends set forth in Section
9(a)(ii) of the terms of the Preferred Stock in the Certificate of Designations.
The purchase price for the Preferred Shares shall be payable in United States
Dollars in immediately available funds. In addition to issuance of the
Preferred Shares, the Company shall issue to the Buyer on the Closing Date (as
herein defined) warrants to purchase shares of Common Stock, such warrants to be
in the form attached hereto as ANNEX II (the "Warrants"). The number of shares
of Common Stock initially
<PAGE>
purchasable upon exercise of the Warrants to be issued to the Buyer on the
Closing Date shall be the quotient obtained by dividing (1) the number of shares
of Common Stock into which the number of Preferred Shares to be issued to the
Buyer on the Closing Date would be convertible on the Closing Date, if the
Preferred Shares were convertible on the Closing Date, by (2) five (5). The
shares of Common Stock issuable upon conversion of the Preferred Shares are
referred to herein as the "Conversion Shares." The shares of Common Stock
issuable upon exercise of the Warrants are referred to herein as the "Warrant
Shares." The Conversion Shares and the Warrant Shares are referred to herein
collectively as the "Common Shares." The Common Shares and the Preferred Shares
are referred to herein collectively as the "Shares." The Shares and the
Warrants are referred to herein collectively as the "Securities."
(b) FORM OF PAYMENT. The Buyer shall pay the purchase price for the
Preferred Shares by delivering good funds in United States Dollars to the escrow
agent (the "Escrow Agent") identified in the Joint Escrow Instructions attached
hereto as ANNEX III (the "Joint Escrow Instructions"). Such delivery of funds
shall be made against delivery by the Company of the certificates for the
Preferred Shares registered in the name of the Buyer. Promptly following
payment by the Buyer to the Escrow Agent of the purchase price of the Preferred
Shares, but in no event later than the Closing Date, the Company shall deliver
certificates for the Preferred Shares and Warrants, registered in the name of
the Buyer, to the Escrow Agent. By signing this Agreement, the Buyer and the
Company each agrees to all of the terms and conditions of, and becomes a party
to, the Joint Escrow Instructions, all of the provisions of which are
incorporated herein by this reference as if set forth in full.
(c) METHOD OF PAYMENT. Payment of the purchase price for the
Preferred Shares shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For Further Credit to A/C#37179446
for credit to the account of Brian W. Pusch Attorney
Escrow Account
Reference: [Name of Buyer]/Graphix
Not later than 4:00 p.m., New York City time, on the date which is three New
York Stock Exchange trading day after the Company shall have accepted this
Agreement and returned a signed counterpart of this Agreement to the Buyer, the
Buyer shall deposit with the Escrow Agent the aggregate purchase price for the
Preferred Shares.
-2-
<PAGE>
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
(a) The Buyer is purchasing the Preferred Shares and the Warrants for
its own account for investment only and not with a view towards the public sale
or distribution thereof;
(b) The Buyer is an "accredited investor" as that term is defined in
Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3);
(c) All subsequent offers and sales of the Securities by the Buyer
shall be made pursuant to registration of the Securities being offered and sold
under the 1933 Act or pursuant to an exemption from registration;
(d) The Buyer understands that the Preferred Shares and Warrants are
being offered and sold, and the Common Shares are being offered, to it in
reliance on specific exemptions from the registration requirements of United
States federal and state securities laws and that the Company is relying upon
the truth and accuracy of, and the Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set
forth herein and in the Prospective Purchaser Questionnaire, a true and accurate
copy of which has been delivered by the Buyer to the Company (the
"Questionnaire"), in order to determine the availability of such exemptions and
the eligibility of the Buyer to acquire the Preferred Shares and the Warrants
and to receive an offer of the Common Shares;
(e) The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Preferred Shares and the
Warrants and the offer of the Common Shares which have been requested by the
Buyer. The Buyer and its advisors, if any, have been afforded the opportunity
to ask questions of the Company and have received complete and satisfactory
answers to any such inquiries. Without limiting the generality of the
foregoing, the Buyer has had the opportunity to obtain and to review the
following documents: (1) the Company's Registration Statement on Form S-4
(Registration No. 333-02642) filed with the Securities and Exchange Commission
(the "SEC") on March 25, 1996, (2)(A) the Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1995 of Graphix Zone, Inc., a California corporation
("GZ"), (B) GZ's Quarterly Reports on Form 10-QSB for the fiscal quarters ended
September 30, 1995, December 31, 1995 and March 31, 1996, (C) GZ's Current
Reports on Form 8-K, dated August 4, 1995, January 3, 1996 and February 2, 1996,
and (D) GZ's definitive Proxy Statement for its 1995 Annual Meeting of
Shareholders, and (3)(A) the Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1995 of StarPress, Inc., a Colorado
-3-
<PAGE>
corporation ("SP" and together with GZ, the "Predecessor Registrants"), (B) SP's
Quarterly Reports on Form 10-QSB for the fiscal quarters ended September 30,
1995, December 31, 1995 and March 31, 1996, (C) SP's Current Reports on Form
8-K, dated December 1, 1995 and January 3, 1996, and (D) SP's definitive Proxy
Statement for its 1995 Annual Meeting of Shareholders, in each case as filed
with the SEC. The Buyer understands that its investment in the Securities
involves a high degree of risk;
(f) The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Shares; and
(g) This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with,
the Buyer that:
(a) CONCERNING THE SECURITIES. The Securities have been duly
authorized and the Preferred Shares, when issued and paid for in accordance with
this Agreement, and the Common Shares, when issued upon conversion of the
Preferred Shares or exercise of the Warrants, as the case may be, will be duly
and validly issued, fully paid and non-assessable and will not subject the
holder thereof to personal liability by reason of being such holder. There are
no preemptive rights of any stockholder of the Company, as such, to acquire any
of the Shares. The Common Stock is listed for trading on the Nasdaq SmallCap
Market ("Nasdaq") and (1) the Company and the Common Stock meet the criteria for
continued listing and trading on Nasdaq; (2) the Company has not been notified
since January 1, 1994 by the National Association of Securities Dealers, Inc.
("NASD") of any failure or potential failure to meet the criteria for continued
listing and trading on Nasdaq (except for the notices dated February 22, 1995,
March 16, 1995 and April 13, 1995 regarding a potential failure that has been
rectified by the Company, and the notice dated October 24, 1996, regarding the
tardiness of the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996, copies of which have been furnished to the Buyer by the Company
prior to the execution and delivery of this Agreement by the Buyer) and (3) no
suspension of trading in the Common Stock is in effect.
(b) SUBSCRIPTION AGREEMENT; REGISTRATION RIGHTS AGREEMENT; WARRANTS.
This Agreement, the Registration Rights Agreement, the form of which is attached
hereto as ANNEX IV (the
-4-
<PAGE>
"Registration Rights Agreement") and the Warrants, have been duly and validly
authorized by the Company, this Agreement has been duly executed and delivered
on behalf of the Company and this Agreement is and the Registration Rights
Agreement and the Warrants, when executed and delivered by the Company, will be,
valid and binding agreements of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of equity
and to bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditors' rights generally.
(c) NON-CONTRAVENTION. The execution and delivery of this Agreement,
the Registration Rights Agreement and the Warrants by the Company and the
consummation by the Company of the issuance of the Preferred Shares and the
Warrants and the other transactions contemplated by this Agreement, the
Registration Rights Agreement and the terms of the Preferred Stock and the
Warrants do not and will not conflict with or result in a breach by the Company
of any of the terms or provisions of, or constitute a default under, the
certificate of incorporation or by-laws of the Company, or any indenture,
mortgage, deed of trust or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
or any applicable law, rule or regulation or any applicable decree, judgment or
order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any of its properties or assets.
(d) APPROVALS. No authorization, approval or consent of or filing
with any court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market or the stockholders of the Company is
required to be obtained by the Company for the issuance and sale of the
Securities as contemplated by this Agreement, the Preferred Stock and the
Warrants, other than (1) listing of the Common Shares on Nasdaq and (2) the
requirements of any applicable blue sky laws.
(e) SEC REPORTING STATUS AND FILINGS. Each of the Company and the
Predecessor Registrants has filed with the SEC all reports and other information
required to be filed under Sections 13(a), 14 and 15(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), except that the Company has
not filed with the SEC its Annual Report on Form 10-K for the fiscal year ended
June 30, 1996. Since June 30, 1995, the Company and the Predecessor Registrants
have not filed any reports or other information with the SEC pursuant to
Sections 13(a), 14 and 15(d) of the 1934 Act other than the reports and other
information identified in Section 2(e) hereof.
(f) INFORMATION PROVIDED. The information provided by or on behalf
of the Company to the Buyer and referred to in Section 2(e) of this Agreement
does not contain any untrue statement of a material fact or omit to state any
material fact
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<PAGE>
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
(g) ABSENCE OF CERTAIN CHANGES. Since June 30, 1995, there has been
no material adverse change and no material adverse development in the business,
properties, operations, financial condition, results of operations or prospects
of the Company, except as disclosed in the documents referred to in Section 2(e)
hereof.
(h) ABSENCE OF LITIGATION. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board or body pending
or, to the knowledge of the Company or any of its subsidiaries, threatened
against or affecting the Company or any of its subsidiaries, wherein an
unfavorable decision, ruling or finding would have a material adverse effect on
the properties, business, condition (financial or other), results of operations
or prospects of the Company and its subsidiaries taken as a whole or the
transactions contemplated by this Agreement or any of the documents contemplated
hereby or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of such other documents.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the
Preferred Shares and the Warrants have not been and are not being registered
under the provisions of the 1933 Act and, except as provided in the Registration
Rights Agreement, the Common Shares have not been and are not being registered
under the 1933 Act, and may not be transferred unless (A) subsequently
registered thereunder or (B) the Buyer shall have delivered to the Company an
opinion of counsel, reasonably satisfactory in form, scope and substance to the
Company, to the effect that the Shares or the Warrants to be sold or transferred
may be sold or transferred pursuant to an exemption from such registration; (2)
any sale of the Shares or the Warrants made in reliance on Rule 144 promulgated
under the 1933 Act may be made only in accordance with the terms of said Rule
and further, if said Rule is not applicable, any such resale of Shares or
Warrants under circumstances in which the seller, or the person through whom the
sale is made, may be deemed to be an underwriter, as that term is used in the
1933 Act, may require compliance with some other exemption under the 1933 Act or
the rules and regulations of the SEC thereunder; and (3) neither the Company nor
any other person is under any obligation to register the Shares (other than
pursuant to the Registration Rights Agreement) or the Warrants under the 1933
Act or to comply with the terms and conditions of any exemption thereunder
(other than pursuant to Section 4(d) hereof and pursuant to the Registration
Rights Agreement).
(b) RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that, in
addition to the legend on certificates for the
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Preferred Shares contemplated by Section 1(a) hereof and Section 9(a)(ii) of the
Certificate of Designations, the certificates for the Preferred Shares and the
Warrants and, until such time as the Common Shares have been registered under
the 1933 Act as contemplated by the Registration Rights Agreement, the
certificates for the Common Shares, may bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of the certificates for the Shares):
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be sold,
transferred or assigned in the absence of an effective registration
statement for the securities under the Securities Act of 1933, as
amended, or an opinion of counsel that registration is not required
under said Act.
(c) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter
into the Registration Rights Agreement on or before the Closing Date.
(d) FORM D. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to the
Buyer promptly after such filing. The Buyer agrees to cooperate with the
Company in connection with such filing and, upon request of the Company, to
provide all information relating to the Buyer reasonably required for such
filing.
(e) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before the
Closing Date, the Company shall file a Nasdaq SmallCap Market Notification Form
for Listing of Additional Shares for the Common Shares with Nasdaq and shall
provide evidence of such filing to the Buyer. So long as the Buyer beneficially
owns any of the Preferred Shares, the Warrants or the Common Shares, the Company
shall file all reports required to be filed with the SEC pursuant to Section 13
or 15(d) of the 1934 Act and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.
(f) USE OF PROCEEDS. The Company will use the proceeds from the sale
of the Preferred Shares and the Warrants for the Company's internal working
capital purposes and not for the purpose of any investment in or loan to any
other corporation, partnership, enterprise or other person; PROVIDED, HOWEVER,
that the proceeds may be used for loans to companies which are wholly-owned
subsidiaries at all times when such loans are outstanding or for acquisitions of
other entities for cash.
(g) BLUE SKY LAWS. On or before the Closing Date, the Company shall
take such action as shall be necessary to qualify,
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<PAGE>
or to obtain an exemption for, the Preferred Shares and the Warrants for sale to
the Buyer pursuant to this Agreement and the Common Shares for issuance to the
Buyer on conversion of the Preferred Shares and on exercise of the Warrants
under such of the securities or "blue sky" laws of jurisdictions in the United
States as shall be applicable to the sale of the Preferred Shares to the Buyer
pursuant to this Agreement and the issuance of the Common Shares to the Buyer on
conversion of the Preferred Shares. The Company shall furnish copies of all
filings, applications, orders and grants or confirmations of exemptions relating
to such securities or "blue sky" laws on or prior to the Closing Date.
(h) CERTAIN EXPENSES. Whether or not any closing occurs, the Company
shall pay or reimburse the Buyer for all reasonable legal fees and expenses of
counsel to the Buyer for the preparation and negotiation of, and closing under,
this Agreement (but not to exceed $5,000). The obligations of the Company under
the provisions of this Section 4(h) shall be in addition to the obligation of
the Company for expenses under the Registration Rights Agreement.
(i) CERTAIN FUTURE FINANCINGS. The Company shall not issue any
equity securities or securities convertible into, exchangeable for or otherwise
entitling the holder to acquire, any equity securities of the Company (the "New
Equity Securities") (i) prior to the date which is 120 days after September 25,
1996 without the prior written consent of the Buyer and (ii) for a period of one
year on or after the date which is 120 days after September 25, 1996, without
giving the Buyer the first right to acquire the New Equity Securities at
substantially the same terms at which the New Equity Securities are to be
offered to other investors; PROVIDED, HOWEVER, that nothing in this paragraph
shall prohibit the Company from issuing securities (x) as part of a transaction
involving a strategic alliance, collaboration, joint venture or partnership
arrangement of the Company, (y) pursuant to compensation plans for employees,
directors, officers, advisers or consultants of the Company or (z) upon exercise
of conversion, exchange, purchase or similar rights issued, granted or given by
the Company and outstanding as of the date of this Agreement.
(j) CONVERSION PRICE. The Closing Price on the trading day prior to
the first issuance of any share of Series A Convertible Preferred Stock for
purposes of clause (2) of Section 9(a) of the Certificate of Designations shall
be deemed to be $3.375.
(k) LIMITATION ON CERTAIN SALES OF COMMON SHARES. The Buyer agrees
(1) that for a period of sixty (60) days after the Closing Date, the Buyer shall
not make open market sales of any Common Shares and (2) following the date which
is sixty (60) days after the Closing Date, except as hereinafter provided, the
Buyer shall not make open market sales of Common Shares in excess of an amount
equal to the product obtained by multiplying (1) the
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quotient obtained by dividing (A) the aggregate purchase price shown on the
signature page of this Agreement by (B) $100,000 TIMES (2) 8,000 Common Shares
(the amount of such product to be subject to equitable adjustment from time to
time for stock splits, stock dividends, combinations, capital reorganizations
and similar events relating to the Common Stock occurring on or after the date
of this Agreement) during any period of thirty (30) consecutive days ending on
the date of such sale, unless otherwise agreed to in advance by the Company.
Notwithstanding the foregoing, any Common Shares issued on conversion of the
Preferred Shares on the basis of the price of the Common Stock specified in
clause (y)(2) of the second sentence of Section 9(a)(i) of the Certificate of
Designations and set forth in Section 4(j) may be sold without regard to the
foregoing restriction. Notwithstanding the foregoing limitation, the Buyer
shall be permitted to tender all or any portion of the Common Shares in
connection with any tender offer or exchange offer for outstanding shares of
Common Stock.
(l) ANNUAL REPORT ON FORM 10-K. The Company hereby agrees that it
will file its Annual Report on Form 10-K for the fiscal year ended June 30, 1996
not later than November 5, 1996.
5. TRANSFER AGENT INSTRUCTIONS; CONVERSION PROCEDURE.
(a) TRANSFER AGENT INSTRUCTIONS. Promptly following the delivery by
the Buyer of the aggregate purchase price for the Preferred Shares in accordance
with Section 1(c) hereof, and prior to the Closing Date, the Company will
irrevocably instruct its transfer agent to issue certificates for the Common
Shares from time to time upon conversion of the Preferred Shares and exercise of
the Warrants in such amounts as specified from time to time to the transfer
agent in the conversion certificates surrendered in connection with such
conversions and referred to in Section 5(b) of this Agreement or required by the
Certificate of Designations or in the subscription forms attached to the
Warrants, as the case may be, such certificates to bear the restrictive legend
specified in Section 4(b) of this Agreement prior to registration of the Common
Shares under the 1933 Act, registered in the name of the Buyer or its nominee
and in such denominations to be specified by the Buyer in connection with each
conversion of Preferred Shares or exercise of the Warrants, as the case may be.
The Company warrants that no instruction other than such instructions referred
to in this Section 5 and stop transfer instructions to give effect to Section
4(a) hereof prior to registration of the Common Shares under the 1933 Act will
be given by the Company to the transfer agent and that the Common Shares shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement. Nothing in this Section 5(a) shall
affect in any way the Buyer's obligations and agreement to comply with all
applicable securities laws upon resale of the Shares and to comply with the
terms and conditions of the Certificate of Designations. If the Buyer provides
the Company
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<PAGE>
with an opinion of counsel reasonably satisfactory in form, scope and substance
to the Company that registration of a resale by the Buyer of any of the
Securities in accordance with clause (1)(B) of Section 4(a) of this Agreement is
not required under the 1933 Act, the Company shall permit the transfer of such
Securities and, in the case of the Common Shares, instruct the Company's
transfer agent to issue upon transfer promptly, but in no event later than three
business days after receipt of such opinion, one or more share certificates in
such name or names and in such denominations as specified by the Buyer. The
provisions of Section 3(n) of the Registration Rights Agreement shall supersede
this Section 5(a) once said Section 3(n) becomes applicable.
(b) CONVERSION PROCEDURE. In connection with the exercise of
conversion rights relating to the Preferred Shares, if the Common Shares
issuable upon conversion of the Preferred Shares have not been registered for
resale under the 1933 Act prior to such conversion, the Buyer or any
subsequent holder of the Preferred Shares shall, in addition to any other
requirement imposed by the terms of the Preferred Shares as set forth in the
Certificate of Designations, complete, sign and furnish to the Company a
conversion certificate in the form attached hereto as ANNEX V.
6. STOCK DELIVERY INSTRUCTIONS.
The certificates for the Preferred Shares and the Warrants shall be
delivered by the Company to the Escrow Agent pursuant to Section 1(b) hereof on
a delivery against payment basis at the closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Preferred Shares and
issuance of the Warrants (the "Closing Date") shall be 12:00 noon, New York City
time, on the date which is three New York Stock Exchange trading days after the
date on which the Buyer has deposited the purchase price for the Preferred
Shares with the Escrow Agent in accordance with Section 1(c) hereof, or such
other mutually agreed to time. The closing shall occur on the Closing Date at
the offices of the Escrow Agent.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell the
Preferred Shares and to issue the Warrants to the Buyer pursuant to this
Agreement is conditioned upon:
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
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(b) Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the purchase price for the Preferred
Shares in accordance with Section 1(c) hereof; and
(c) The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement and in the Questionnaire as
if made on the Closing Date and the performance by the Buyer on or before the
Closing Date of all covenants and agreements of the Buyer required to be
performed on or before the Closing Date.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Shares and the Warrants on the Closing Date is conditioned upon:
(a) Delivery by the Company to the Escrow Agent of the certificate
for the Preferred Shares and the Warrants in accordance with this Agreement;
(b) The accuracy on the Closing Date of the representations and
warranties of the Company contained in this Agreement as if made on the Closing
Date and the performance by the Company on or before the Closing Date of all
covenants and agreements of the Company required to be performed on or before
such Closing Date; and
(c) Receipt by the Buyer on the Closing Date of an opinion of counsel
for the Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in ANNEX VI attached hereto.
10. GOVERNING LAW; MISCELLANEOUS.
(a) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of California.
(b) This Agreement may be executed in counterparts and by the parties
hereto on separate counterparts, all of which together shall constitute one and
the same instrument. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such party.
(c) The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.
(d) If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
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<PAGE>
(e) No failure or delay by any party in exercising any right or
remedy under this Agreement or otherwise, and no course of dealing between the
parties, shall operate as a waiver thereof or amendment of this Agreement, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or exercise of any other right or
power.
(f) Neither this Agreement nor any term thereof (including this
paragraph) may be amended, changed, waived, discharged or terminated unless such
amendment, change, waiver, discharge or termination is in writing signed by the
party to be charged with enforcement.
(g) Any notices required or permitted to be given under the terms of
this Agreement shall be sent by mail or delivered personally (which shall
include telephone line facsimile transmission) or by courier and shall be
effective five days after being placed in the mail, if mailed, or upon receipt,
if delivered personally or by courier, in each case addressed to a party at such
party's address shown in the introductory paragraph or on the signature page of
this Agreement (facsimile number 714-833-3990, in the case of the Company, and
as set forth on the signature page hereof, in the case of the Buyer) or such
other address as a party shall have provided by notice to the other party in
accordance with this provision. The Buyer hereby designates as its address and
telephone line facsimile transmission number for any notice required or
permitted to be given to the Buyer pursuant to the Certificate of Designations
or the Registration Rights Agreement the address and telephone line facsimile
transmission number set forth on the signature page hereof, until the Buyer
shall by notice to the Company designate another address or telephone line
facsimile transmission number for such purpose.
(h) The Buyer shall have the right to assign its rights and
obligations under this Agreement with respect to the purchase of all or any
portion of the Preferred Shares and the Warrants to another investment fund,
provided such assignee, by written instrument duly executed by such assignee,
assumes all obligations of the Buyer hereunder with respect to the purchase of
the portion of the Preferred Shares and the Warrants so assigned and makes the
same representations and warranties with respect thereto as the Buyer makes in
this Agreement, whereupon the Buyer shall be relieved of any further
obligations, responsibilities and liabilities with respect to the purchase of
all or the portion of the Preferred Shares and the Warrants the obligation for
the purchase of which has been so assigned. In the case of any such assignment,
the Company shall agree in writing with such assignee to make available to such
assignee the benefits of the Registration Rights Agreement with respect to the
Common Shares issuable on conversion of the Preferred Shares and exercise of the
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Warrants with respect to which the purchase under this Agreement has been so
assigned.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
or one of its officers thereunto duly authorized as of the date set forth below.
NUMBER OF SHARES:
PRICE PER SHARE: $1,000.00
AGGREGATE PURCHASE PRICE:
NAME OF BUYER:
SIGNATURE
----------------------------
Title:
-------------------------------
Date:
-------------------------------
Address:
----------------------------
----------------------------
----------------------------
----------------------------
Facsimile Number:
------------------------------
This Agreement has been accepted as of the date set forth below.
GRAPHIX ZONE, INC.
By:
------------------------
Title:
---------------------
Date:
---------------------
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ANNEX II
TO
SUBSCRIPTION
AGREEMENT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.
Right to Purchase _______ Shares
of Common Stock of Graphix Zone,
Inc.
GRAPHIX ZONE, INC.
COMMON STOCK PURCHASE WARRANT
GRAPHIX ZONE, INC., a Delaware corporation (the "Company"), hereby
certifies that, for value received, ________________________ or registered
assigns (the "Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time after the date
hereof, and before 5:00 p.m., New York City time, on the Expiration Date (as
hereinafter defined), _______ fully paid and nonassessable shares of Common
Stock, $.01 par value per share, of the Company at a purchase price per share
equal to the Purchase Price (as hereinafter defined). The number of such shares
of Common Stock and the Purchase Price are subject to adjustment as provided in
this Warrant.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Business Day" as used herein shall mean a day on
which the New York Stock Exchange is open for business.
(b) The term "Common Stock" includes the Company's Common
Stock, $.01 par value per share, as authorized on the date hereof, and
any other securities into which or for which the Common Stock may be
converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
(c) The term "Company" shall include Graphix Zone, Inc., a
Delaware corporation, and any corporation that shall
<PAGE>
succeed to or assume the obligation of Graphix Zone, Inc. hereunder.
(d) The term "Expiration Date" refers to ___________ __, 1999.
(e) The term "Other Securities" refers to any stock (other than
Common Stock) and other securities of the Company or any other person
(corporate or otherwise) which the Holder of this Warrant at any time
shall be entitled to receive, or shall have received, on the exercise of
this Warrant, in lieu of or in addition to Common Stock, or which at any
time shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 4.
(f) The term "Purchase Price" shall mean $5.00, subject to
adjustment as provided in this Warrant.
1. EXERCISE OF WARRANT.
1.1 EXERCISE AT OPTION OF HOLDER. (a) This Warrant may be
exercised by the Holder hereof in full or in part at any time or from time to
time during the exercise period specified in the first paragraph hereof until
the Expiration Date by surrender of this Warrant and the subscription form
annexed hereto (duly executed) by such Holder, to the Company at its principal
office, accompanied by payment, in cash or by certified or official bank check
payable to the order of the Company in the amount obtained by multiplying (a)
the number of shares of Common Stock designated by the Holder in the
subscription form by (b) the Purchase Price then in effect. On any partial
exercise the Company will forthwith issue and deliver to or upon the order of
the Holder hereof a new Warrant or Warrants of like tenor, in the name of the
Holder hereof or as such Holder (upon payment by such Holder of any applicable
transfer taxes) may request, providing in the aggregate on the face or faces
thereof for the purchase of the number of shares of Common Stock for which such
Warrant or Warrants may still be exercised.
(b) Notwithstanding any other provision of this Warrant, in no
event shall the Holder be entitled at any time to purchase a number of shares of
Common Stock on exercise of this Warrant in excess of that number of shares upon
purchase of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and any person whose beneficial ownership of
shares of Common Stock would be aggregated with such holder's beneficial
ownership of shares of Common Stock for purposes of Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation
13D-G thereunder (each a "Restricted Person" and collectively, the "Restricted
Persons") (other than shares of Common Stock deemed beneficially owned through
the ownership of the unexercised portion of this Warrant and shares of Preferred
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Stock beneficially owned by all Restricted Persons) and (2) the number of shares
of Common Stock issuable upon exercise of the portion of this Warrant with
respect to which the determination in this sentence is being made, would result
in beneficial ownership by any Restricted Person of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and Regulation 13D-G thereunder, except as otherwise
provided in clause (1) of the immediately preceding sentence.
1.2 NET ISSUANCE. Notwithstanding anything to the contrary
contained in Section 1.1, the Holder may elect to exercise this Warrant in whole
or in part by receiving shares of Common Stock equal to the net issuance value
(as determined below) of this Warrant, or any part hereof, upon surrender of
this Warrant at the principal office of the Company together with notice of such
election, in which event the Company shall issue to the Holder a number of
shares of Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Common Stock to be issued to
the Holder
Y = the number of shares of Common Stock as to which
this Warrant is to be exercised
A = the current fair market value of one share of Common
Stock calculated as of the last trading day
immediately preceding the exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of one share of Common
Stock as of a specified date shall mean the average of the closing bid prices of
the Common Stock on the principal securities market on which the Common Stock
may at the time be traded over a period of five Business Days consisting of the
day as of which the current fair market value of a share of Common Stock is
being determined (or if such day is not a Business Day, the Business Day next
preceding such day) and the four consecutive Business Days prior to such day.
If on the date for which current fair market value is to be determined the
Common Stock is not eligible for trading on any securities market, the current
fair market value of one share of Common Stock shall be the highest price per
share which the Company could then obtain from a willing buyer (not a current
employee or director) for shares of Common Stock sold by the Company, from
authorized but unissued shares, as determined in good faith by the Board of
Directors of the Company,
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unless prior to such date the Company has become subject to a merger,
acquisition or other consolidation pursuant to which the Company is not the
surviving party, in which case the current fair market value of the Common Stock
shall be deemed to be the value received by the holders of the Company's Common
Stock for each share thereof pursuant to the Company's acquisition.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon
as practicable after the exercise of this Warrant, and in any event within three
days thereafter, the Company at its expense (including the payment by it of any
applicable issue or stamp taxes) will cause to be issued in the name of and
delivered to the Holder hereof, or as such Holder (upon payment by such Holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which such Holder shall be entitled on such exercise, in such
denominations as may be requested by such Holder, plus, in lieu of any
fractional share to which such Holder would otherwise be entitled, cash equal to
such fraction multiplied by the then current fair market value (as determined in
accordance with subsection 1.2) of one full share, together with any other stock
or other securities any property (including cash, where applicable) to which
such Holder is entitled upon such exercise pursuant to Section 1 or otherwise.
3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time, all the
holders of Common Stock (or Other Securities) shall have received, or (on or
after the record date fixed for the determination of stockholders eligible to
receive) shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property
(other than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of
earnings or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate
rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder of this Warrant, on the
exercise hereof as provided in Section 1, shall be entitled to receive the
amount of stock and other securities and property (including cash in the cases
referred to in subdivisions (b) and (c) of this Section 3) which such Holder
would hold on the date of such exercise if on the date hereof the Holder had
been the holder of record of the number of shares of Common Stock called for on
the face of this
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<PAGE>
Warrant and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and all such other or
additional stock and other securities and property (including cash in the case
referred to in subdivisions (b) and (c) of this Section 3) receivable by the
Holder as aforesaid during such period, giving effect to all adjustments called
for during such period by Section 4.
4. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
In case at any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person, or (c)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, as a condition of such reorganization,
consolidation, merger, sale or conveyance, the Company shall give at least 30
days notice to the Holder of such pending transaction whereby the Holder shall
have the right to exercise this Warrant prior to any such reorganization,
consolidation, merger, sale or conveyance. Any exercise of this Warrant
pursuant to notice under this paragraph shall be conditioned upon the closing of
such reorganization, consolidation, merger, sale or conveyance which is the
subject of the notice and the exercise of this Warrant shall not be deemed to
have occurred until immediately prior to the closing of such transaction.
5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that the
Company shall (i) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 5.
The Holder of this Warrant shall thereafter, on the exercise hereof as provided
in Section 1, be entitled to receive that number of shares of Common Stock
determined by multiplying the number of shares of Common Stock which would be
issuable on such exercise as of immediately prior to such issuance by a fraction
of which (i) the numerator is the Purchase Price in effect immediately prior to
such issuance and (ii) the denominator is the Purchase Price in effect on the
date of such exercise.
6. FURTHER ASSURANCES. The Company will take all action that
may be necessary or appropriate in order that the
-5-
<PAGE>
Company may validly and legally issue fully paid and nonassessable shares of
stock, free from all taxes, liens and charges with respect to the issue thereof,
on the exercise of all or any portion of this Warrant from time to time
outstanding.
7. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company 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 on, or 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, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company
or any transfer of all or substantially all of the assets of the Company
to or consolidation or merger of the Company with or into any other
person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up, and (iii) the amount and character of
any stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall also state that the action in question or
the record date is subject to the effectiveness of a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), or a
favorable vote of stockholders if either is required. Such notice shall be
mailed at least ten days prior to the date specified in such notice on which any
such action is to be taken or the record date, whichever is earlier.
8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF
WARRANTS. The Company will at all times reserve and keep
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<PAGE>
available, solely for issuance and delivery on the exercise of this Warrant, all
shares of Common Stock (or Other Securities) from time to time issuable on the
exercise of this Warrant.
9. TRANSFER OF WARRANT. This Warrant shall inure to the
benefit of the successors to and assigns of the Holder. This Warrant and all
rights hereunder, in whole or in part, is registrable at the office or agency of
the Company referred to below by the Holder hereof in person or by his duly
authorized attorney, upon surrender of this Warrant properly endorsed.
10. REGISTER OF WARRANTS. The Company shall maintain, at the
principal office of the Company (or such other office as it may designate by
notice to the Holder hereof), a register in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each successor and prior owner of such Warrant.
The Company shall be entitled to treat the person in whose name this Warrant is
so registered as the sole and absolute owner of this Warrant for all purposes.
11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon
the surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 10, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for purchase hereunder, each
of such new Warrants to represent the right to subscribe for and purchase such
number of shares as shall be designated by said Holder hereof at the time of
such surrender.
12. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
13. WARRANT AGENT. The Company may, by written notice to the
Holder, appoint an agent having an office in the United States of America, for
the purpose of issuing Common Stock (or Other Securities) on the exercise of
this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section
11, and replacing this Warrant pursuant to Section 12, or any of the foregoing,
and thereafter any such issuance, exchange or replacement, as the case may be,
shall be made at such office by such agent.
14. REMEDIES. The Company stipulates that the remedies at law
of the Holder of this Warrant in the event of any default
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<PAGE>
or threatened default by the Company in the performance of or compliance with
any of the terms of this Warrant are not and will not be adequate, and that such
terms may be specifically enforced by a decree for the specific performance of
any agreement contained herein or by an injunction against a violation of any of
the terms hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision of this Warrant, in the absence of
affirmative action by the Holder hereof to purchase Common Stock, and no mere
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of such Holder for the Purchase Price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
16. NOTICES, ETC. All notices and other communications from
the Company to the registered Holder of this Warrant shall be mailed by first
class certified mail, postage prepaid, at such address as may have been
furnished to the Company in writing by such Holder or at the address shown for
such Holder on the register of Warrants referred to in Section 10.
17. INVESTMENT REPRESENTATIONS. By acceptance of this Warrant,
the Holder represents to the Company that this Warrant is being acquired for the
Holder's own account and for the purpose of investment and not with a view to,
or for sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling the Warrant or the Common Stock issuable
upon exercise of the Warrant. The Holder acknowledges that the Holder has been
afforded the opportunity to meet with the management of the Company and to ask
questions of, and receive answers from, such management and the Company's
counsel about the business and affairs of the Company and concerning the terms
and conditions of the offering of this Warrant, and to obtain any additional
information, to the extent that the Company possessed such information or could
acquire it without unreasonable effort or expense, necessary to verify the
accuracy of the information otherwise obtained by or furnished to the Holder
hereof in connection with the offering of this Warrant. The Holder asserts that
it may be considered to be a sophisticated investor, is familiar with the risks
inherent in speculative investments such as in the Company, has such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits and risks of the investment in this Warrant and the Common
Stock issuable upon exercise of this Warrant, and is able to bear the economic
risk of the investment. By acceptance of this Warrant, the Holder represents to
the Company that it is an "accredited investor" as that term is defined in Rule
501 of the General Rules and Regulations under the 1933 Act by reason of Rule
501(a)(3). The Holder acknowledges and agrees that this Warrant and, except as
otherwise provided in the Registration Rights Agreement, dated
-8-
<PAGE>
as of September __, 1996, between the Company and _______ (the "Registration
Rights Agreement"), the Common Stock issuable upon exercise of this Warrant (if
any) have not been (and at the time of acquisition by the Holder, will not have
been or will not be), registered under the Securities Act or under the
securities laws of any state, in reliance upon certain exemptive provisions of
such statutes. The Holder recognizes and acknowledges that such claims of
exemption are based, in part, upon the representations of the Holder contained
herein. The Holder further recognizes and acknowledges that because this
Warrant and, except as provided in the Registration Rights Agreement, the Common
Stock issuable upon exercise of this Warrant (if any) are unregistered, they may
not be eligible for resale, and may only be resold in the future pursuant to an
effective registration statement under the Securities Act and any applicable
state securities laws, or pursuant to a valid exemption from such registration
requirements. Unless the shares of Common Stock have theretofore been
registered for resale under the Securities Act, the Company may require, as a
condition to the issuance of Common Stock upon the exercise of this Warrant (i)
in the case of an exercise in accordance with Section 1.1 hereof, a confirmation
as of the date of exercise of the Holder's representations pursuant to this
Section 17, or (ii) in the case of an exercise in accordance with Section 1.2
hereof, an opinion (in form and substance reasonably satisfactory to the
Company) of counsel reasonably satisfactory to the Company that the shares of
Common Stock to be issued upon such exercise may be issued without registration
under the Securities Act.
18. LEGEND. Unless theretofore registered for resale under the
Securities Act, each certificate for shares issued upon exercise of this Warrant
shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended.
The securities have been acquired for investment and may not be
sold, transferred or assigned in the absence of an effective
registration statement for the securities under the Securities Act
of 1933, as amended, or an opinion of counsel that registration is
not required under said Act.
19. MISCELLANEOUS. This Warrant and any terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement or such change, waiver, discharge
or termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the internal laws of the State of California.
The headings in this Warrant are for purposes of reference only, and shall not
limit or otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision.
-9-
<PAGE>
IN WITNESS WHEREOF, Graphix Zone, Inc. has caused this Warrant to
be executed on its behalf by one of its officers thereunto duly authorized.
Dated: , 1996 GRAPHIX ZONE, INC.
By ___________________________
Name:
Title:
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<PAGE>
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO GRAPHIX ZONE, INC.
1. The undersigned Holder of the attached original, executed Warrant
hereby elects to exercise its purchase right under such Warrant with respect to
______________ shares of Common Stock, as defined in the Warrant, of Graphix
Zone, Inc., a Delaware corporation (the "Company").
2. The undersigned Holder (check one):
_____ (a) elects to pay the aggregate purchase price for such shares of
Common Stock (the "Exercise Shares") (i) by lawful money of the
United States or the enclosed certified or official bank check
payable in United States dollars to the order of the Company in
the amount of $___________, or (ii) by wire transfer of United
States funds to the account of the Company in the amount of
$____________, which transfer has been made before or
simultaneously with the delivery of this Form of Subscription
pursuant to the instructions of the Company;
or
_____ (b) elects to receive shares of Common Stock having a value equal to
the value of the Warrant calculated in accordance with Section 1.2
of the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the undersigned or
in such other names as is specified below:
Name: _____________________________________
Address: _____________________________________
_____________________________________
Dated:____________ ___, _____ ____________________________
(Signature must conform to name
of Holder as specified on the
face of the Warrant)
____________________________
____________________________
(Address)
<PAGE>
ANNEX IV
TO
SUBSCRIPTION
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of October __, 1996 (this
"Agreement"), is made by and between GRAPHIX ZONE, INC., a Delaware corporation
(the "Company"), and the person named on the signature page hereto (the "Initial
Investor").
W I T N E S S E T H:
WHEREAS, in connection with the Subscription Agreement, dated as of
October __, 1996, between the Initial Investor and the Company (the
"Subscription Agreement"), the Company has agreed, upon the terms and subject to
the conditions of the Subscription Agreement, to issue and sell to the Initial
Investor _______ shares (the "Preferred Shares") of Preferred Stock of the
Company as provided in the Subscription Agreement, which shares of Preferred
Stock are convertible into shares (the "Conversion Shares") of Common Stock,
$.01 par value (the "Common Stock"), of the Company, and warrants (the
"Warrants") to purchase shares (the "Warrant Shares") of Common Stock; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Conversion Shares and the Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investor" means the Initial Investor and any transferee or
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and
<PAGE>
pursuant to Rule 415 under the Securities Act or any successor rule providing
for offering securities on a continuous basis ("Rule 415"), and the declaration
or ordering of effectiveness of such Registration Statement by the United States
Securities and Exchange Commission (the "SEC").
(iii) "Registrable Securities" means the Conversion Shares, the
Warrant Shares and any shares of Common Stock issuable to any Investor as a
dividend on Preferred Shares.
(iv) "Registration Statement" means a registration statement of the
Company under the Securities Act.
(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
(c) Capitalized terms defined in the introductory paragraph or the
recitals to this Agreement shall have the respective meanings therein provided.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Subscription Agreement.
2. REGISTRATION.
(a) MANDATORY REGISTRATION. The Company shall prepare, and on or
prior to the date which is 15 days after the date of the closing under the
Subscription Agreement (the "Closing Date"), file with the SEC a Registration
Statement on Form S-1 covering at least _______* shares of Common Stock as
Registrable Securities, and which Registration Statement shall state that, in
accordance with Rule 416 under the Securities Act, such Registration Statement
also covers such indeterminate number of additional shares of Common Stock as
may become issuable upon conversion of the Preferred Shares and exercise of the
Warrants to prevent dilution resulting from stock splits, stock dividends or
similar transactions or by reason of changes in the conversion price of the
Preferred Shares and the exercise price of the Warrants in accordance with the
respective terms thereof. If at any time the number of shares of Common Stock
included in the Registration Statement required to be filed as provided in the
first sentence of this Section 2(a) shall be insufficient to cover the number of
shares of Common Stock issuable on conversion in full of the unconverted
Preferred Shares and the unexercised Warrants, then promptly, but in no event
later than 15 days after such insufficiency shall occur, the Company shall file
with the SEC an additional Registration Statement on Form S-1 (which shall
- -------------------------
* Insert total number of shares issuable upon (1) exercise of Warrants into
number of shares equal to the conversion shares set forth in (2) divided by
5 and (2) conversion of the Preferred Stock at lesser of (x) 80% of average
closing bid prices for 5 trading days or (y) $3.375.
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<PAGE>
not constitute a post-effective amendment to the Registration Statement required
to be filed pursuant to the first sentence of this Section 2(a)) or other
applicable form covering such number of shares of Common Stock as shall be
sufficient to permit such conversion and exercise. For all purposes of this
Agreement (other than Section 2(c) hereof) such additional Registration
Statement shall be deemed to be the Registration Statement required to be filed
by the Company pursuant to Section 2(a) of this Agreement, and the Company and
the Investors shall have the same rights and obligations (other than Section
2(c) hereof) with respect to such additional Registration Statement as they
shall have with respect to the initial Registration Statement required to be
filed by the Company pursuant to this Section 2(a).
(b) CERTAIN OFFERINGS. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Investors who hold a majority in interest of the Registrable Securities subject
to such underwritten offering shall have the right to select one legal counsel
and an investment banker or bankers and manager or managers to administer the
offering, which investment banker or bankers or manager or managers shall be
reasonably satisfactory to the Company. The Investors who hold the Registrable
Securities to be included in such underwriting shall pay all underwriting
discounts and commissions and other fees and expenses of such investment banker
or bankers and manager or managers so selected in accordance with this Section
2(b) (other than fees and expenses relating to registration of Registrable
Securities under federal or state securities laws, which are payable by the
Company pursuant to Section 5 hereof) with respect to their Registrable
Securities and the fees and expenses of such legal counsel so selected by the
Investors.
(c) PAYMENTS BY THE COMPANY. If the Registration Statement covering
the Registrable Securities which is required to be filed by the Company pursuant
to Section 2(a) hereof is not effective within 60 days after the Closing Date,
then the Company will make payments to the Initial Investor in such amounts and
at such times as shall be determined pursuant to this Section 2(c). The amount
to be paid by the Company to the Initial Investor shall be determined as of each
Computation Date, and such amount shall be equal to (1) in the case of the first
Computation Date, two percent (2%), and (2) in the case of the second
Computation Date and each Computation Date thereafter, three percent (3%), in
each case of the aggregate subscription price paid by the Initial Investor for
the Preferred Shares and the Warrants pursuant to the Subscription Agreement
(each, a "Periodic Amount"); PROVIDED, HOWEVER, that if any Computation Date is
less than 30 days subsequent to another Computation Date, then the Periodic
Amount payable on the later Computation Date shall be pro rated. The Periodic
Amount shall be paid by the Company within five business days after each
Computation Date and shall be payable in cash; PROVIDED, HOWEVER, that the
Company may elect in lieu of payment
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<PAGE>
of any Periodic Amount in cash to deliver to the Initial Investor shares of
Common Stock having an Aggregate Market Value equal to the amount of the
Periodic Amount if, but only if, such shares are freely tradable by the Initial
Investor without any restriction under the Securities Act or any state
securities or "blue sky" law. In addition to any other rights or remedies the
Initial Investor may have under this Agreement, the Initial Investor shall have
the right from time to time to provide written notice to the Escrow Agent
appointed pursuant to the Joint Escrow Instructions, in accordance with Section
1(b) of the Joint Escrow Instructions, with a copy to the Company, whereupon in
each such instance the Initial Investor shall be entitled to release of a
portion of the funds held by the Escrow Agent to be applied to amounts due from
the Company hereunder.
As used in this Section 2(c), the following terms shall have the
following meanings:
"Aggregate Market Value" of any shares of Common Stock as of any
Computation Date means the product obtained by multiplying (a) such number of
shares of Common Stock times (b) the Average Market Price of the Common Stock
for the Measurement Period for such Computation Date.
"Average Market Price" of any security for any period shall be
computed as the arithmetic average of the closing bid of such security for each
trading day in such period on the principal trading market for such security, as
reported by such market.
"Computation Date" means (1) the date which is 60 days after the
Closing Date, unless the Registration Statement theretofore has been declared
effective by the SEC, (2) if the Registration Statement has not theretofore been
declared effective by the SEC, each date which is 30 days after a Computation
Date and (3) if the Registration Statement has not been declared effective by
the SEC within 60 days after the Closing Date, the date on which the
Registration Statement is declared effective by the SEC.
"Measurement Period" means the period of five consecutive trading days
for the Common Stock ending on (or, if such Computation Date is not a trading
day, on the last trading day preceding) each Computation Date.
(d) PIGGY-BACK REGISTRATIONS. If at any time the Company shall
determine to prepare and file with the SEC a Registration Statement relating to
an offering for its own account or the account of others under the Securities
Act any of its equity securities, other than on Form S-4 or Form S-8 or their
then equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each Investor who is entitled to registration rights under Section 2(a)
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<PAGE>
hereof written notice of such determination and if, within twenty (20) days
after receipt of such notice, such Investor shall so request in writing, the
Company shall include in such Registration Statement all or any part of the
Registrable Securities such Investor requests to be registered, except that if,
in connection with any underwritten public offering for the account of the
Company the managing underwriter(s) thereof shall impose a limitation on the
number of shares of Common Stock (which limitation may be the exclusion of all
shares of Common Stock proposed to be included for all selling stockholders)
which may be included in the Registration Statement because, in such
underwriter(s)' judgment, such limitation is necessary to effect an orderly
public distribution, then the Company shall be obligated to include in such
Registration Statement only such limited portion, if any, of the Registrable
Securities with respect to which such Investor has requested inclusion
hereunder. Any exclusion of Registrable Securities shall be made pro rata among
the Investors seeking to include Registrable Securities, in proportion to the
number of Registrable Securities sought to be included by such Investors;
PROVIDED, HOWEVER, that the Company shall not exclude any Registrable Securities
unless the Company has first excluded all outstanding securities the holders of
which are not entitled by right to inclusion of securities in such Registration
Statement; and PROVIDED FURTHER, HOWEVER, that, after giving effect to the
immediately preceding proviso, any exclusion of Registrable Securities shall be
made pro rata with holders of other securities having the right to include such
securities in the Registration Statement. No right to registration of
Registrable Securities under this Section 2(d) shall be construed to limit any
registration required under Section 2(a) hereof. The obligations of the Company
under Section 2(a) hereof may be waived by Investors holding a majority in
interest of the Registrable Securities and shall expire after the Company has
afforded the opportunity for the Investors to exercise registration rights under
Section 2(a) hereof for two registrations; PROVIDED, HOWEVER, that any Investor
who shall have had any Registrable Securities excluded from any Registration
Statement in accordance with this Section 2(d) shall be entitled to include in
an additional Registration Statement filed by the Company the Registrable
Securities so excluded.
(e) ELIGIBILITY FOR FORM S-3. The Company shall file all reports
required to be filed by the Company with the SEC in a timely manner so as to
become eligible for the use of Form S-3 at the earliest possible date and so as
to maintain such eligibility for the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration
of the Registrable Securities, the Company shall:
(a) use its best efforts to cause the Registration Statement to become
effective as soon as reasonably possible after such filing, and keep the
Registration Statement effective
-5-
<PAGE>
pursuant to Rule 415 at all times until the later of (1) in the case of any
Registrable Securities, the earlier of (i) such date as is three years after the
Closing Date and (ii) the date on which all Registrable Securities have been
sold by the Investors under circumstances in which the buyers may resell such
Registrable Securities without registration under the Securities Act and, (2) in
the case of Registrable Securities that are Warrant Shares, the later of (i) the
date which is three years after the date such Registration Statement if first
ordered effective by the SEC (but in no event later than the date on which all
Registrable Securities that are Warrant Shares have been sold by the Investors
under circumstances in which the buyers may resell the Registrable Securities
that are Warrant Shares without registration under the Securities Act), in case
the Warrants have been exercised in full on a net exercise basis and (ii) the
date which is three years after the latest exercise of the Warrants for cash
(but in no event later than the date on which all Registrable Securities that
are Warrant Shares have been sold by the Investors under circumstances in which
the buyers may resell the Registrable Securities that are Warrant Shares without
registration under the Securities Act) (the "Termination Date"), which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading; PROVIDED, HOWEVER, that, subject to the
conditions set forth in Section 4(a) below, each Investor may notify the Company
in writing that it wishes to exclude all or a portion of its Registrable
Securities from such Registration Statement;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times until the
Termination Date, and, during such period, comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities of
the Company covered by the Registration Statement until such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof as set forth in the
Registration Statement;
(c) furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel, (1) promptly after the same
is prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
each letter written by or on behalf of the Company to the SEC or the staff of
the SEC and each item of correspondence from the SEC or the staff of the SEC
-6-
<PAGE>
relating to such Registration Statement (other than any portion of any thereof
which contains information for which the Company has sought confidential
treatment) and (2) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such other securities or
blue sky laws of such jurisdictions as the Investors who hold a majority in
interest of the Registrable Securities being offered reasonably request, (ii)
prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof at all
times until the Termination Date, (iii) take such other actions as may be
necessary to maintain such registrations and qualifications in effect at all
times until the Termination Date and (iv) take all other actions reasonably
necessary or advisable to qualify the Registrable Securities for sale in such
jurisdictions; PROVIDED, HOWEVER, that the Company shall not be required in
connection therewith or as a condition thereto to (I) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (II) subject itself to general taxation in any such
jurisdiction, (III) file a general consent to service of process in any such
jurisdiction, (IV) provide any undertakings that cause more than nominal expense
or burden to the Company or (V) make any change in its charter or by-laws, which
in each case the Board of Directors of the Company determines to be contrary to
the best interests of the Company and its stockholders;
(e) in the event Investors who hold a majority in interest of the
Registrable Securities being offered in the offering select underwriters for the
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering;
(f) as promptly as practicable after becoming aware of such event,
notify each Investor of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement to correct such untrue statement or
omission, and deliver such number of copies of such supplement or
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<PAGE>
amendment to each Investor as such Investor may reasonably request;
(g) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of any stop order or other suspension of effectiveness of the
Registration Statement at the earliest possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the Investors who hold a majority in interest of the
Registrable Securities being sold to review the Registration Statement and all
amendments and supplements thereto a reasonable period of time prior to their
filing with the SEC, and shall not file any document in a form to which such
counsel reasonably objects;
(i) make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement;
(j) at the request of the Investors who hold a majority in interest of
the Registrable Securities being sold, furnish on the date that Registrable
Securities are delivered to an underwriter for sale in connection with the
Registration Statement (i) a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given in an
underwritten public offering, addressed to the underwriters and the Investors;
(k) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by any such Investor or underwriter
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably necessary to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; PROVIDED, HOWEVER, that
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or
-8-
<PAGE>
other information which the Company determines in good faith to be confidential,
and of which determination the Inspectors are so notified, unless (i) the
disclosure of such Records is necessary to avoid or correct a misstatement or
omission in any Registration Statement, (ii) the release of such Records is
ordered pursuant to a subpoena or other order from a court or government body of
competent jurisdiction or (iii) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement. The Company shall not be required to disclose any
confidential information in such Records to any Inspector until and unless such
Inspector shall have entered into confidentiality agreements (in form and
substance satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 3(k). Each Investor agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential. The Company shall hold in confidence and
shall not make any disclosure of information concerning an Investor provided to
the Company pursuant to Section 4(e) hereof unless (i) disclosure of such
information is necessary to comply with federal or state securities laws, (ii)
the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other order from a court
or governmental body of competent jurisdiction or (iv) such information has been
made generally available to the public other than by disclosure in violation of
this or any other agreement. The Company agrees that it shall, upon learning
that disclosure of such information concerning an Investor is sought in or by a
court or governmental body of competent jurisdiction or through other means,
give prompt notice to such Investor, at its expense, to undertake appropriate
action to prevent disclosure of, or to obtain a protective order for, such
information;
(l) use its best efforts either to (i) cause all the Registrable
Securities covered by the Registration Statement to be listed on a national
securities exchange and on each additional national securities exchange on which
similar securities issued by the Company are then listed, if any, if the listing
of such Registrable Securities is then permitted under the rules of such
exchange or (ii) secure designation of all the Registrable Securities covered by
the Registration Statement as a National Association of Securities Dealers
Automated Quotations System ("NASDAQ") "national market system security" within
the meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the quotation of the Registrable
Securities on the NASDAQ National Market System (so long as the Company is able
to meet the criteria therefor) or, if, despite the Company's best efforts to
satisfy the preceding clause (i) or (ii), the Company is unsuccessful in
satisfying the
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<PAGE>
preceding clause (i) or (ii), to secure listing on a national securities
exchange or NASDAQ authorization and quotation for such Registrable Securities
and, without limiting the generality of the foregoing, to arrange for at least
two market makers to register with the National Association of Securities
Dealers, Inc. ("NASD") as such with respect to such Registrable Securities;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered and the managing underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts as the case may be, as the managing underwriter or underwriters, if
any, or the Investors may reasonably request and registered in such names as the
managing underwriter or underwriters, if any, or the Investors may request; and,
within three business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel selected by the Company to deliver, to
the transfer agent for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement) an
instruction in the form attached hereto as EXHIBIT 1 (without substantive
additions thereto) and an opinion of such counsel in the form attached hereto as
EXHIBIT 2 (without substantive additions thereto); and
(o) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the Registration Statement;
4. OBLIGATIONS OF THE INVESTORS. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least ten (10)
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor (the "Requested Information") if any of such Investor's
Registrable
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<PAGE>
Securities are eligible for inclusion in the Registration Statement. If within
five (5) business days prior to the filing date the Company has not received the
Requested Information from an Investor (a "Non-Responsive Investor"), then the
Company may file the Registration Statement without including Registrable
Securities of such Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or managers of such underwriting and legal expenses of
the underwriters applicable with respect to its Registrable
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<PAGE>
Securities, in each case to the extent not payable by the Company pursuant to
the terms of this Agreement.
5. EXPENSES OF REGISTRATION. All expenses, other than underwriting
fees, discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 3, including,
without limitation, all registration, listing and qualifications fees, printers
and accounting fees and the fees and disbursements of counsel for the Company
and the Investors, shall be borne by the Company; PROVIDED, HOWEVER, that the
Investors shall bear the fees and out-of-pocket expenses of the one legal
counsel selected by the Investors pursuant to Section 2(b) hereof.
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act, any underwriter (as defined in the
Securities Act) for the Investors, the directors, if any, of such underwriter
and the officers, if any, of such underwriter, and each person, if any, who
controls any such underwriter within the meaning of the Securities Act or the
Exchange Act (each, an "Indemnified Person"), against any losses, claims,
damages, expenses or liabilities (joint or several) incurred (collectively,
"Claims") to which any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such Claims (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any of the following statements, omissions or violations in the
Registration Statement, or any post-effective amendment thereof, or any
prospectus included therein: (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act,
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<PAGE>
the Exchange Act or any state securities law (the matters in the foregoing
clauses (i) through (iii) being, collectively, "Violations"). Subject to the
restrictions set forth in Section 6(d) with respect to the number of legal
counsel, the Company shall reimburse the Investors and each such underwriter or
controlling person, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (I) shall not apply to a Claim arising out of
or based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by any Indemnified Person or
underwriter for such Indemnified Person expressly for use in connection with the
preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (II) with respect to any preliminary prospectus
shall not inure to the benefit of any such person from whom the person asserting
any such Claim purchased the Registrable Securities that are the subject thereof
(or to the benefit of any person controlling such person) if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected in the prospectus, as then amended or supplemented, if such
prospectus was timely made available by the Company pursuant to Section 3(c)
hereof; and (III) shall not apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.
(b) In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to indemnify and hold harmless, to
the same extent and in the same manner set forth in Section 6(a), the Company,
each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and such Investor will reimburse
any legal or other expenses
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<PAGE>
reasonably incurred by them in connection with investigating or defending any
such Claim; PROVIDED, HOWEVER, that the indemnity agreement contained in this
Section 6(b) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Investor, which
consent shall not be unreasonably withheld; PROVIDED, FURTHER, HOWEVER, that the
Investor shall be liable under this Section 6(b) for only that amount of a Claim
as does not exceed the amount, if any, by which (1) the net proceeds to such
Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement exceed (2) the purchase price paid by such Investor for
the Registrable Securities sold by such Investor pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing by such
persons expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
Indemnified Person or the Indemnified Party, as the case may be; PROVIDED,
HOWEVER, that an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel, with the fees and expenses to be paid by the
indemnifying party, if, in the reasonable opinion of counsel retained by the
indemnifying party, the representation by such counsel of the Indemnified Person
or Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. The Company shall pay for only one separate legal counsel for the
Investors; such legal counsel shall be
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<PAGE>
selected by the Investors holding a majority in interest of the Registrable
Securities included in the Registration Statement to which the Claim relates.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action. The indemnification required
by this Section 6 shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as such expense, loss, damage
or liability is incurred and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; PROVIDED, HOWEVER, that (a) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 6, (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation and (c) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144") the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon written request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
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<PAGE>
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the
Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to transferees or assignees of all or
any portion of such securities only if: (a) the Investor agrees in writing with
the transferee or assignee to assign such rights, and a copy of such agreement
is furnished to the Company within a reasonable time after such assignment, (b)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (i) the name and address of such transferee or
assignee and (ii) the securities with respect to which such registration rights
are being transferred or assigned, (c) immediately following such transfer or
assignment the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and applicable state securities
laws, and (d) at or before the time the Company received the written notice
contemplated by clause (b) of this sentence the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold a majority in interest of the Registrable Securities. Any amendment or
waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission or other means)
or sent by certified mail, return receipt requested, properly addressed and with
proper postage pre-paid (i) if to the Company, at Graphix Zone, Inc., 42
Corporate Park, Suite 200, Irvine, California 92606, Attention: President
(telephone line facsimile No. (714) 833-3990), and (ii) if to any Investor, at
such address as such Investor shall have provided in writing to the Company, or
at such other address as each such party furnishes by notice given in accordance
with this Section 11(b), and shall be effective, when personally delivered,
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<PAGE>
upon receipt and, when so sent by certified mail, four days after deposit with
the United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of California applicable to agreements
made and to be performed entirely within such State. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(i) The Company acknowledges that any failure by the Company to
perform its obligations under this Agreement, including, without limitation, the
Company's obligations under Section 3(n), or any delay in such performance could
result in both direct and consequential damages to the Investors and the Company
agrees that, in addition to any other liability the Company may have by reason
of any such failure or delay, the Company shall be liable for all direct and
consequential damages caused by any such failure or delay. So long as the
Company files a Registration Statement in a timely manner as required by
Sections 2(a) and 3(a) and uses its best efforts to obtain effectiveness of such
Registration Statement and otherwise complies with its obligations under this
Agreement with respect to such Registration Statement, the Company shall not be
deemed to be
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<PAGE>
in breach of this Agreement by reason of delay in the effectiveness of such
Registration Statement arising from any review thereof by the staff of the SEC,
it being understood and agreed that in such case the Company shall not be liable
to any Investor for consequential damages under this Section 11(i) but that in
such circumstances the Company shall be obligated to make payments pursuant to
Section 2(c) of this Agreement.
(j) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
GRAPHIX ZONE, INC.
By
---------------------------------
Name:
Title:
INITIAL INVESTOR:
-----------------------------------
By
---------------------------------
Name:
Title:
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<PAGE>
EXHIBIT 1
TO
REGISTRATION
RIGHTS
AGREEMENT
[Company Letterhead]
[Name and address of Transfer Agent]
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and direction
to you [(1) to transfer or re-register the certificates for the shares of Common
Stock, $.01 par value (the "Common Stock"), of Graphix Zone, Inc., a Delaware
corporation (the "Company"), represented by certificate numbers _______ and
_______ for an aggregate of _______ shares (the "Outstanding Shares") of Common
Stock presently registered in the name of [Name of Investor] upon surrender of
such certificate to you, notwithstanding the legend appearing on such
certificates, (2)]* to issue shares (the "Conversion Shares") of Common Stock to
or upon the order of the holder from time to time on conversion of the shares
(the "Preferred Shares") of Series A Convertible Preferred Stock, $.01 par
value, of the Company, issued by the Company upon surrender to you for
conversion of certificates for Preferred Shares and a properly completed and
duly executed Notice of Conversion in the form enclosed herewith and (3) to
issue shares (the "Warrant Shares") of Common Stock on exercise of the Common
Stock Purchase Warrants (the "Warrants") to or upon the order of the registered
holder from time to time upon surrender to you by such registered holder for
exercise of Warrants and a properly completed and duly executed form of
subscription in the form enclosed herewith. [The transfer or re-registration of
the certificates for the Outstanding Shares by you should be made at such time
as you are requested to do so by the record holder of the Outstanding Shares.
The certificate issued upon such transfer or re-registration should be
registered in such name as requested by the holder of record of the certificate
surrendered to you and should not bear any legend which would restrict the
transfer of the shares represented thereby. In addition, you are hereby
directed to remove any stop-transfer instruction relating to the Outstanding
Shares.]* Certificates for the Conversion Shares and the Warrant Shares should
not bear any restrictive legend and should not be subject to any stop-transfer
restriction.
Contemporaneous with the delivery of this letter, the Company is
delivering to you an opinion of ____________________ as
- -------------------------
* Omit if no conversions of Preferred Stock or no exercises of Warrants have
occurred before SEC registration is declared effective.
1-1
<PAGE>
to registration of [the Outstanding Shares,]* the Conversion Shares and the
Warrants Shares under the Securities Act of 1933, as amended.
Should you have any questions concerning this matter, please contact
me.
Very truly yours,
GRAPHIX ZONE, INC.
By:
-------------------------------
Name:
Title:
- -------------------------
* Omit if no conversions of Preferred Stock or no exercises of Warrants have
occurred before SEC registration is declared effective.
1-2
<PAGE>
EXHIBIT 2
TO
REGISTRATION
RIGHTS
AGREEMENT
[LETTERHEAD OF SNELL & WILMER L.L.P.]
[DATE]
U. S. Stock Transfer Corporation
1745 Gardena Avenue
Glendale, California 91204-2991
GRAPHIX ZONE, INC.
SHARES OF COMMON STOCK
Ladies and Gentlemen:
We are counsel to Graphix Zone, Inc., a Delaware corporation (the
"Company"), and we understand that [NAME OF INVESTOR] (the "Holder") has
purchased from the Company (1) an aggregate of _____ shares (the "Preferred
Shares") of the Company's Series A Convertible Preferred Stock, $.01 par value
(the "Preferred Stock") convertible into shares of Common Stock, $.01 par value
(the "Common Stock"), and warrants to purchase shares of Common Stock (the
"Warrants"). The Preferred Shares and the Warrants were purchased by the Holder
pursuant to a Subscription Agreement, dated as of October ___, 1996, between the
Holder and the Company (the "Subscription Agreement"). Pursuant to a
Registration Rights Agreement, dated as of October ___, 1996, between the
Company and the Holder (the "Registration Rights Agreement") entered into in
connection with the purchase by the Holder of the Preferred Shares and the
Warrants pursuant to the Subscription Agreement, the Company agreed with the
Holder, among other things, to register for resale by the Holder shares (the
"Common Shares") of Common Stock issuable upon conversion of the Preferred
Shares and on exercise of the Warrants under the Securities Act of 1933, as
amended (the "Securities Act"), upon the terms provided in the Registration
Rights Agreement. In connection with the exercise by the Holder of its
registration rights under the Registration Rights Agreement, on ___________, the
Company filed a Registration Statement on Form S-1 (File No. 333-_________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the Common Shares, which names the Holder as a selling
stockholder thereunder. [IF NOTICE FROM SEC IS AVAILABLE: THE COMPANY HAS
RECEIVED A NOTICE FROM THE SEC THAT THE REGISTRATION STATEMENT HAS BEEN DECLARED
EFFECTIVE. A COPY OF SUCH NOTICE IS ATTACHED HERETO.]
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As counsel for the Company and for purposes of this opinion, we have
made such legal and factual examinations and inquiries as we have deemed
advisable and have examined, among other things, originals or copies identified
to our satisfaction as being true copies, of those corporate records,
certificates, documents and other instruments which, in our judgment, we
considered necessary or appropriate to enable us to render the opinion expressed
below. For these purposes, we have relied upon certificates provided by public
officials and by officers of the Company as to certain factual matters and have
made no independent investigation thereof. We have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals,
the conformity to the original documents of documents submitted to us as
certified or photostatic copies, and the authenticity of the originals of the
latter documents.
Based on the foregoing, we are of the opinion that the Registration
Statement covering the Common Shares has become effective under the Securities
Act, and to our knowledge, no stop orders suspending the effectiveness of the
Registration Statement have been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Securities Act.
The opinion set forth above is effective as of the date hereof and is
subject to change and qualification by reason of change of law and
circumstances, lapse of time and other matters. We express no opinion as to
rights, obligations or other matters subsequent to the date hereof, and we
assume no obligation to advise you or any other person or entity of any changes
to our opinion subsequent to the date hereof. This opinion is being furnished to
you solely for your information in connection with the above-referenced
transaction. Accordingly, this opinion may not be used, circulated, filed,
quoted from or otherwise referred to or relied upon for any other purpose
without our express prior written consent.
Very truly yours,
SNELL & WILMER L.L.P.
cc: [NAME OF INVESTOR]
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GRAPHIX ZONE, INC.
1996 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of this 1996 Stock Option Plan
("Plan") of Graphix Zone, Inc., a Delaware corporation ("Company"), is to
provide the Company with a means of attracting and retaining the services of
highly motivated and qualified directors and key personnel. The Plan is intended
to advance the interests of the Company by affording to key employees and
directors, upon whose skill, judgment, initiative and efforts the Company is
largely dependent for the successful conduct of its business, an opportunity for
investment in the Company and the incentives inherent in stock ownership in the
Company. In addition, the Plan contemplates the opportunity for investment in
the Company by employees of companies that do business with the Company. For
purposes of this Plan, the term Company shall include subsidiaries, if any, of
the Company.
2. LEGAL COMPLIANCE. It is the intent of the Plan that all options
granted under it ("Options") shall be either "Incentive Stock Options" ("ISOs"),
as such term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended ("Code"), or non-qualified stock options ("NQOs"); provided, however,
ISOs shall be granted only to employees of the Company. An Option shall be
identified as an ISO or an NQO in writing in the document or documents
evidencing the grant of the Option. All Options that are not so identified as
ISOs are intended to be NQOs. In addition, the Plan provides for the grant of
NQOs to employees of companies that do business with the Company. It is the
further intent of the Plan that it conform in all respects with the requirements
of Rule 16b-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended ("Rule 16b-3"). To the extent that any aspect
of the Plan or its administration shall at any time be viewed as inconsistent
with the requirements of Rule 16b-3 or, in connection with ISOs, the Code, such
aspect shall be deemed to be modified, deleted or otherwise changed as necessary
to ensure continued compliance with such provisions.
3. ADMINISTRATION OF THE PLAN.
3.1 PLAN COMMITTEE. The Plan shall be administered by a
committee ("Committee"). The members of the Committee shall be appointed from
time to time by the Board of Directors of the Company ("Board") and shall
consist of not less than two (2) nor more than five (5) persons who shall be
directors of the Company.
3.2 GRANTS OF OPTIONS BY THE COMMITTEE. In accordance with the
provisions of the Plan, the Committee, by resolution, shall select those
eligible persons to whom Options shall be granted ("Optionees"); shall determine
the time or times at which each Option shall be granted, whether an Option is an
ISO or an NQO and the number of shares to be subject to each Option; and shall
fix the time and manner in which the Option may be exercised, the Option
exercise price, and the Option period. The Committee shall determine the form of
option agreement to evidence the foregoing terms and conditions of each Option,
which need not be identical, in the form provided
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for in SECTION 7. Such option agreement may include such other provisions as the
Committee may deem necessary or desirable, so long as such provisions are
consistent with the Plan, the Code and Rule 16b-3.
3.3 COMMITTEE PROCEDURES. The Committee from time to time may
adopt such rules and regulations for carrying out the purposes of the Plan as it
may deem proper and in the best interests of the Company. The Committee shall
keep minutes of its meetings and records of its actions. A majority of the
members of the Committee shall constitute a quorum for the transaction of any
business by the Committee. The Committee may act at any time by an affirmative
vote of a majority of those members voting. Such vote may be taken at a meeting
(which may be conducted in person or by any telecommunication medium) or by
written consent of Committee members without a meeting.
3.4 FINALITY OF COMMITTEE ACTION. The Committee shall resolve
all questions arising under the Plan and option agreements entered into pursuant
to the Plan. Each determination, interpretation, or other action made or taken
by the Committee shall be final and conclusive and binding on all persons,
including, without limitation, the Company, its shareholders, the Committee and
each of the members of the Committee, and the directors, officers and employees
of the Company, including Optionees and their respective successors in interest.
3.5 NON-LIABILITY OF COMMITTEE MEMBERS. No Committee member
shall be liable for any action or determination made by him or her in good faith
with respect to the Plan or any Option granted under it.
3.6 COMMITTEE NQOS.
(a) Beginning July 1, 1996, and on each July 1
thereafter, each member of the Committee on such date shall be automatically
granted an NQO ("Committee NQO") to purchase 25,000 shares of the Company's
Common Stock (as defined in SECTION 5).
(b) Except as expressly authorized by this SECTION 3.6,
members of the Committee are not otherwise eligible to participate in the Plan.
(c) Upon the grant of a Committee NQO to a Committee
member, the Committee member shall receive a written option agreement
substantially in the form provided for in SECTION 7. Such Committee member shall
not be an "Optionee" as defined in SECTION 3.2 of the Plan.
(d) The exercise price for each Committee NQO granted
under this Section shall be one hundred percent (100%) of the Fair Market Value
(as defined in SECTION 8) of the Company's Common Stock (as defined in SECTION
5) on the date of grant. Each Committee NQO granted under this Section shall be
for a term of five years and shall be subject to earlier termination as
hereinafter provided.
(e) A Committee NQO granted under this Section may be
exercised in whole or consecutive installments, cumulative or otherwise, during
its term; provided, however, that
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Committee NQOs shall vest and become exercisable according to the following
schedule: one-half (1/2) of the amount granted shall vest six (6) months
following the grant and one-half (1/2) of the amount granted shall vest twelve
(12) months following the grant. In addition, Committee NQOs granted under this
Section are subject to the rights and obligations of Optionees, as provided in
SECTION 11 of the Plan; provided, however, that the "stock swap feature"
provided for in SECTION 11.3 of the Plan shall be available with respect to all
Committee NQOs granted under this Section.
(f) Committee NQOs granted under this Section shall be
subject to the exercise and non-transferability terms of SECTION 14 of the Plan.
In the event of the termination of service on the Board by the holder of any
Committee NQO granted under this Section, then the outstanding vested Committee
NQOs of such holder shall expire two (2) years after such termination, or their
stated expiration date, whichever occurs first. Any non-vested Committee NQO
shall expire upon termination of service on the Board.
(g) The Committee has the full power, discretion and
authority to interpret and administer the Plan in a manner consistent with the
Plan's provisions. However, the Committee does not have the power to (i)
determine eligibility to receive Committee NQOs or determine the number, price,
vesting period or timing of Committee NQOs to be granted under the Plan or (ii)
take any action that would result in the Committee NQOs not being treated as
"formula awards" within the meaning of Rule 16b-3(c)(ii).
4. BOARD POWER TO AMEND, SUSPEND, OR TERMINATE THE PLAN. The Board
may, from time to time, make such changes in or additions to the Plan as it may
deem proper and in the best interests of the Company and its shareholders. The
Board may also suspend or terminate the Plan at any time, without notice, and in
its sole discretion. Notwithstanding the foregoing, no such change, addition,
suspension, or termination by the Board shall (i) materially impair any option
previously granted under the Plan without the express written consent of the
optionee; or (ii) materially increase the number of shares subject to the Plan,
materially increase the benefits accruing to optionees under the Plan,
materially modify the requirements as to eligibility to participate in the Plan
or alter the method of determining the option exercise price described in
SECTION 8, without shareholder approval.
5. SHARES SUBJECT TO THE PLAN. For purposes of the Plan, the
Committee is authorized to grant Options and Committee NQOs for up to 2,500,000
shares of the Company's common stock ("Common Stock"), or the number and kind of
shares of stock or other securities which, in accordance with SECTION 13, shall
be substituted for such shares of Common Stock or to which such shares shall be
adjusted. The Committee is authorized to grant Options (including replacement
Options as contemplated in Section 3.2) and Committee NQOs under the Plan with
respect to such shares. Any or all unsold shares subject to an Option which for
any reason expires or otherwise terminates (excluding shares returned to the
Company in payment of the exercise price for additional shares) may again be
made subject to grant under the Plan.
6. OPTIONEES. Options shall be granted only to members of the Board
and to full-time elected or appointed officers or other full-time key employees
of the Company or employees of companies that do business with the Company
designated by the Committee from time to time as Optionees, including, without
limitation, members of the Board who are also full-time officers or key
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employees at the time of grant. Except as provided in Section 3.6, in no event,
however, may a member of the Committee be granted an Option under the Plan. Any
Optionee may hold more than one option to purchase Common Stock, whether such
option is an Option held pursuant to the Plan or otherwise. An Optionee who is
an employee of the Company ("Employee Optionee") and who holds an Option must
remain a continuous full or part-time employee of the Company from the time of
grant of the Option to him until the time of its exercise, except as provided in
SECTION 10.3.
7. GRANTS OF OPTIONS. The Committee shall have the sole discretion to
grant Options under the Plan and to determine whether any Option shall be an ISO
or an NQO. The terms and conditions of Options granted under the Plan may differ
from one another as the Committee, in its absolute discretion, shall determine
as long as all Options granted under the Plan satisfy the requirements of the
Plan. Upon determination by the Committee that an Option is to be granted to an
Optionee, a written option agreement evidencing such Option shall be given to
the Optionee, specifying the number of shares subject to the Option, the Option
exercise price, whether the Option is an ISO or an NQO, and the other individual
terms and conditions of such Option. Such option agreement may incorporate
generally applicable provisions from the Plan, a copy of which shall be provided
to all Optionees at the time of their initial grants under the Plan. The Option
shall be deemed granted as of the date specified in the grant resolution of the
Committee, and the option agreement shall be dated as of the date of such
resolution. Notwithstanding the foregoing, any Option granted to an officer,
director or 10% beneficial owner for purposes of Section 16 of the Securities
Exchange Act of 1934, as amended ("Section 16 of the 1934 Act"), shall be
conditioned upon the Optionee's agreement not to sell the shares of Common Stock
underlying the Option for at least six (6) months after the date of grant.
8. OPTION EXERCISE PRICE. The price per share to be paid by the
Optionee at the time an ISO is exercised shall not be less than one hundred
percent (100%) of the Fair Market Value (as hereinafter defined) of one share of
the optioned Common Stock on the date on which the Option is granted. No ISO may
be granted under the Plan to any person who, at the time of such grant, owns
(within the meaning of Section 424(d) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or of any parent thereof, unless the exercise price of such ISO is
at least equal to one hundred and ten percent (110%) of Fair Market Value on the
date of grant. The price per share to be paid by the Optionee at the time an NQO
is exercised shall not be less than eighty-five percent (85%) of the Fair Market
Value on the date on which the NQO is granted, as determined by the Committee.
For purposes of the Plan, the "Fair Market Value" of a share of the Company's
Common Stock as of a given date shall be: (i) the closing price of a share of
the Company's Common Stock on the principal exchange on which shares of the
Company's Common Stock are then trading, if any, on the day immediately
preceding such date, or, if shares were not traded on such date, then on the
next preceding trading day during which a sale occurred; or (ii) if the
Company's Common Stock is not traded on an exchange but is quoted on Nasdaq or a
successor quotation system, (1) the last sales price (if the Common Stock is
then listed as a National Market Issue under the Nasdaq National Market System)
or (2) the closing representative bid price (in all other cases) for the Common
Stock on the day immediately preceding such date as reported by Nasdaq or such
successor quotation system; or (iii) if the Company's Common Stock is not
publicly traded on an exchange and not quoted on Nasdaq or a successor quotation
system, the closing bid price for the Common Stock on such date as determined in
good faith by the Committee; or (iv) if the Company's Common Stock is not
publicly traded, the fair
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market value established by the Committee acting in good faith. In addition,
with respect to any ISO, the Fair Market Value on any given date shall be
determined in a manner consistent with any regulations issued by the Secretary
of the Treasury for the purpose of determining fair market value of securities
subject to an ISO plan under the Code.
9. CEILING OF ISO GRANTS. The aggregate Fair Market Value (determined
at the time any ISO is granted) of the Common Stock with respect to which an
Optionee's ISOs, together with incentive stock options granted under any other
plan of the Company and any parent, are exercisable for the first time by such
Optionee during any calendar year shall not exceed $100,000. In the event that
an Optionee holds such incentive stock options that become first exercisable
(including as a result of acceleration of exercisability under the Plan) in any
one year for shares having a Fair Market Value at the date of grant in excess of
$100,000, then the most recently granted of such ISOs, to the extent that they
are exercisable for shares having an aggregate Fair Market Value in excess of
such limit, shall be deemed to be NQOs.
10. DURATION, EXERCISABILITY, AND TERMINATION OF OPTIONS.
10.1 OPTION PERIOD. The option period shall be determined by the
Committee with respect to each Option granted. In no event, however, may the
option period exceed ten (10) years from the date on which the Option is
granted, or five (5) years in the case of a grant of an ISO to an Optionee who
is a ten percent (10%) shareholder at the date on which the Option is granted as
described in SECTION 8.
10.2 EXERCISABILITY OF OPTIONS. Each Option shall be exercisable
in whole or in consecutive installments, cumulative or otherwise, during its
term as determined in the discretion of the Committee.
10.3 TERMINATION OF OPTIONS DUE TO TERMINATION OF EMPLOYMENT,
DISABILITY, OR DEATH OF OPTIONEE; TERMINATION FOR "CAUSE", OR RESIGNATION IN
VIOLATION OF AN EMPLOYMENT AGREEMENT. All Options granted under the Plan to any
Employee Optionee shall terminate and may no longer be exercised if the Employee
Optionee ceases, at any time during the period between the grant of the Option
and its exercise, to be an employee of the Company; provided, however, that the
Committee may alter the termination date of the Option if the Optionee transfers
to an affiliate of the Company. Notwithstanding the foregoing, (i) if the
Employee Optionee's employment with the Company shall have terminated for any
reason (other than involuntary dismissal for "cause" or voluntary resignation in
violation of any agreement to remain in the employ of the Company, including,
without limitation, any such agreement pursuant to SECTION 15), he may, at any
time before the expiration of three (3) months after such termination or before
expiration of the Option, whichever shall first occur, exercise the Option (to
the extent that the Option was exercisable by him on the date of the termination
of his employment); (ii) if the Employee Optionee's employment shall have
terminated due to disability (as defined in Section 22(e)(3) of the Code and
subject to such proof of disability as the Committee may require), such Option
may be exercised by the Employee Optionee (or by his guardian(s), or
conservator(s), or other legal representative(s)) before the expiration of
twelve (12) months after such termination or before expiration of the Option,
whichever shall first occur (to the extent that the Option was exercisable by
him on the date of the termination of his employment); (iii) in the event of the
death of the Employee Optionee, an Option exercisable by him
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at the date of his death shall be exercisable by his legal representative(s),
legatee(s), or heir(s), or by his beneficiary or beneficiaries so designated by
him as permitted by SECTION 14, as the case may be, within twelve (12) months
after his death or before the expiration of the Option, whichever shall first
occur (to the extent that the Option was exercisable by him on the date of his
death); and (iv) if the Employee Optionee's employment is terminated for "cause"
or in violation of any agreement to remain in the employ of the Company,
including, without limitation, any such agreement pursuant to SECTION 15, he
may, at any time before the expiration of thirty (30) days after such
termination or before the expiration of the Option, whichever shall first occur,
exercise the Option (to the extent that the Option was exercisable by him on the
date of termination of his employment). For purposes of the Plan, "cause" may
include, without limitation, any illegal or improper conduct (1) which injures
or impairs the reputation, goodwill, or business of the Company; (2) which
involves the misappropriation of funds of the Company, or the misuse of data,
information, or documents acquired in connection with employment by the Company;
or (3) which violates any other directive or policy promulgated by the Company.
A termination for "cause" may also include any resignation in anticipation of
discharge for "cause" or resignation accepted by the Company in lieu of a formal
discharge for "cause."
11. MANNER OF OPTION EXERCISE; RIGHTS AND OBLIGATIONS OF OPTIONEES.
11.1 WRITTEN NOTICE OF EXERCISE. An Optionee may elect to
exercise an Option in whole or in part, from time to time, subject to the terms
and conditions contained in the Plan and in the agreement evidencing such
Option, by giving written notice of exercise to the Company at its principal
executive office.
11.2 CASH PAYMENT FOR OPTIONED SHARES. If an Option is exercised
for cash, such notice shall be accompanied by a cashier's or personal check, or
money order, made payable to the Company for the full exercise price of the
shares purchased.
11.3 STOCK SWAP FEATURE. At the time of the Option exercise, and
subject to the discretion of the Committee to accept payment in cash only, the
Optionee may determine whether the total purchase price of the shares to be
purchased shall be paid solely in cash or by transfer from the Optionee to the
Company of previously acquired shares of Common Stock, or by a combination
thereof. In the event that the Optionee elects to pay the total purchase price
in whole or in part with previously acquired shares of Common Stock, the value
of such shares shall be equal to their Fair Market Value on the date of
exercise, determined by the Committee in the same manner used for determining
Fair Market Value at the time of grant for purposes of SECTION 8.
11.4 INVESTMENT REPRESENTATION FOR NON-REGISTERED SHARES AND
LEGALITY OF ISSUANCE. The receipt of shares of Common Stock upon the exercise of
an Option shall be conditioned upon the Optionee (or any other person who
exercises the Option on his or her behalf as permitted by SECTION 10.3)
providing to the Committee a written representation that, at the time of such
exercise, it is the intent of such person(s) to acquire the shares for
investment only and not with a view toward distribution. The certificate for
unregistered shares issued for investment shall be restricted by the Company as
to transfer unless the Company receives an opinion of counsel satisfactory to
the Company to the effect that such restriction is not necessary under then
pertaining law. The providing of such representation and such restrictions on
transfer shall not, however, be
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required upon any person's receipt of shares of Common Stock under the Plan in
the event that, at the time of grant of the Option relating to such receipt or
upon such receipt, whichever is the appropriate measure under applicable federal
or state securities laws, the shares subject to the Option shall be (i) covered
by an effective and current registration statement under the Securities Act of
1933, as amended, and (ii) either qualified or exempt from qualification under
applicable state securities laws. The Company shall, however, under no
circumstances be required to sell or issue any shares under the Plan if, in the
opinion of the Committee, (i) the issuance of such shares would constitute a
violation by the Optionee or the Company of any applicable law or regulation of
any governmental authority, or (ii) the consent or approval of any governmental
body is necessary or desirable as a condition of, or in connection with, the
issuance of such shares.
11.5 SHAREHOLDER RIGHTS OF OPTIONEE. Upon exercise, the Optionee
(or any other person who exercises the Option on his behalf as permitted by
SECTION 10.3) shall be recorded on the books of the Company as the owner of the
shares, and the Company shall deliver to such record owner one or more duly
issued stock certificates evidencing such ownership. No person shall have any
rights as a shareholder with respect to any shares of Common Stock covered by an
Option granted pursuant to the Plan until such person shall have become the
holder of record of such shares. Except as provided in SECTION 13, no
adjustments shall be made for cash dividends or other distributions or other
rights as to which there is a record date preceding the date such person becomes
the holder of record of such shares.
11.6 HOLDING PERIODS FOR TAX PURPOSES. The Plan does not provide
that an Optionee must hold shares of Common Stock acquired under the Plan for
any minimum period of time. Optionees are urged to consult with their own tax
advisors with respect to the tax consequences to them of their individual
participation in the Plan.
12. SUCCESSIVE GRANTS. Successive grants of Options may be made to any
Optionee under the Plan.
13. ADJUSTMENTS.
(a) If the outstanding Common Stock shall be hereafter
increased or decreased, or changed into or exchanged for a different number or
kind of shares or other securities of the Company or of another corporation, by
reason of a recapitalization, reclassification, reorganization, merger,
consolidation, share exchange, or other business combination in which the
Company is the surviving parent corporation, stock split-up, combination of
shares, or dividend or other distribution payable in capital stock or rights to
acquire capital stock, appropriate adjustment shall be made by the Committee in
the number and kind of shares for which Options may be granted under the Plan.
In addition, the Committee shall make appropriate adjustment in the number and
kind of shares as to which outstanding and unexercised Options shall be
exercisable, to the end that the proportionate interest of the holder of the
Option shall, to the extent practicable, be maintained as before the occurrence
of such event. Such adjustment in outstanding Options shall be made without
change in the total price applicable to the unexercised portion of the Option
but with a corresponding adjustment in the exercise price per share.
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(b) In the event of the dissolution or liquidation of the
Company, any outstanding and unexercised Options shall terminate as of a future
date to be fixed by the Committee.
(c) In the event of a Reorganization (as hereinafter defined),
then,
(i) If there is no plan or agreement with respect to the
Reorganization ("Reorganization Agreement"), or if the Reorganization Agreement
does not specifically provide for the adjustment, change, conversion, or
exchange of the outstanding and unexercised Options for cash or other property
or securities of another corporation, then any outstanding and unexercised
Options shall terminate as of a future date to be fixed by the Committee; or
(ii) If there is a Reorganization Agreement, and the
Reorganization Agreement specifically provides for the adjustment, change,
conversion, or exchange of the outstanding and unexercised Options for cash or
other property or securities of another corporation, then the Committee shall
adjust the shares under such outstanding and unexercised Options, and shall
adjust the shares remaining under the Plan which are then available for the
issuance of Options under the Plan if the Reorganization Agreement makes
specific provisions therefor, in a manner not inconsistent with the provisions
of the Reorganization Agreement for the adjustment, change, conversion, or
exchange of such Options and shares.
(d) The term "Reorganization" as used in this SECTION 13 shall
mean any reorganization, merger, consolidation, share exchange, or other
business combination pursuant to which the Company is not the surviving parent
corporation after the effective date of the Reorganization, or any sale or lease
of all or substantially all of the assets of the Company. Nothing herein shall
require the Company to adopt a Reorganization Agreement, or to make provision
for the adjustment, change, conversion, or exchange of any Options, or the
shares subject thereto, in any Reorganization Agreement which it does adopt.
(e) The Committee shall provide to each Optionee then holding
an outstanding and unexercised Option not less than thirty (30) calendar days'
advanced written notice of any date fixed by the Committee pursuant to this
SECTION 13 and of the terms of any Reorganization Agreement providing for the
adjustment, change, conversion, or exchange of outstanding and unexercised
Options. Except as the Committee may otherwise provide, each Optionee shall have
the right during such period to exercise his Option only to the extent that the
Option was exercisable on the date such notice was provided to the Optionee.
Any adjustment to any outstanding ISO pursuant to this
SECTION 13, if made by reason of a transaction described in Section 424(a) of
the Code, shall be made so as to conform to the requirements of that Section and
the regulations thereunder. If any other transaction described in Section 424(a)
of the Code affects the Common Stock subject to any unexercised ISO theretofore
granted under the Plan (hereinafter for purposes of this SECTION 13 referred to
as the "old option"), the Board of Directors of the Company or of any surviving
or acquiring corporation may take such action as it deems appropriate, in
conformity with the requirements of that Code Section and the regulations
thereunder, to substitute a new option for the old option, in order to make the
new option, as nearly as may be practicable, equivalent to the old option, or to
assume the old option.
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(f) No modification, extension, renewal, or other change in any
Option granted under the Plan may be made, after the grant of such Option,
without the Optionee's consent, unless the same is permitted by the provisions
of the Plan and the Option agreement. In the case of an ISO, Optionees are
hereby advised that certain changes may disqualify the ISO from being considered
as such under Section 422 of the Code, or constitute a modification, extension,
or renewal of the ISO under Section 424(h) of the Code.
(g) All adjustments and determinations under this SECTION 13
shall be made by the Committee in good faith in its sole discretion.
14. NON-TRANSFERABILITY OF OPTIONS. An Option shall be exercisable
only by the Optionee, or in the event of his disability, by his guardian(s),
conservator(s), or other legal representative(s), during the Optionee's
lifetime. In the event of the death of the Optionee, an Option shall be
exercisable by his legal representative(s), legatee(s), or heir(s), as the case
may be, or by such person(s) as he may designate as his beneficiary or
beneficiaries in a signed statement included as a part of the option agreement.
No Option shall be transferable by the Optionee, either voluntarily or
involuntarily, except by will or the laws of descent and distribution except in
the case of an ISO, pursuant to a court order that would otherwise satisfy the
requirements to be a domestic relations order as defined in Section 414(p)(1)(B)
of the Code if the order satisfied Section 414(p)(1)(A) of the Code
notwithstanding that such an order relates to the transfer of a stock option
rather than an interest in an employee benefit plan. Any attempt to exercise,
transfer or otherwise dispose of an interest in an Option in contravention of
the terms and conditions of the Plan, or of the Option agreement for the Option,
shall immediately void the Option.
15. CONTINUED EMPLOYMENT. As determined in the sole discretion of the
Committee at the time of grant and if so stated in a writing signed by the
Company, each Option may have as a condition the requirement of an Employee
Optionee to remain in the employ of the Company, or of its affiliates, and to
render to it his or her exclusive service, at such compensation as may be
determined from time to time by it, for a period not to exceed the term of the
Option, except for earlier termination of employment by or with the express
written consent of the Company or on account of disability or death. The failure
of any Employee Optionee to abide by such agreement as to any Option under the
Plan may result in the termination of all of his or her then outstanding Options
granted pursuant to the Plan. Neither the creation of the Plan nor the granting
of Option(s) under it shall be deemed to create a right in an Employee Optionee
to continued employment with the Company, and each such Employee Optionee shall
be and shall remain subject to discharge by the Company as though the Plan had
never come into existence. Except as specifically provided by the Committee in
any particular case, the loss of existing or potential profit in options granted
under this Plan shall not constitute an element of damages in the event of
termination of the employment of an employee even if the termination is in
violation of an obligation of the Company to the employee by contract or
otherwise.
16. TAX WITHHOLDING. The exercise of any Option granted under the Plan
is subject to the condition that if at any time the Company shall determine, in
its discretion, that the satisfaction of withholding tax or other withholding
liabilities under any federal, state or local law is necessary or desirable as a
condition of, or in connection with, such exercise or a later lapsing of time or
restrictions on or disposition of the shares of Common Stock received upon such
exercise, then in
9
<PAGE>
such event, the exercise of the Option shall not be effective unless such
withholding shall have been effected or obtained in a manner acceptable to the
Company. When an Optionee is required to pay to the Company an amount required
to be withheld under applicable income tax laws in connection with the exercise
of any Option, the Optionee may, subject to the approval of the Committee
(provided such approval has not been disapproved at any time after the election
is made) satisfy the obligation, in whole or in part, by electing to have the
Company withhold shares of Common Stock having a value equal to the amount
required to be withheld. The value of the Common Stock withheld pursuant to the
election shall be determined by the Committee, in accordance with the criteria
set forth in SECTION 8, with reference to the date the amount of tax to be
withheld is determined. The Optionee shall pay to the Company in cash any amount
required to be withheld that would otherwise result in the withholding of a
fractional share. The election by an Optionee who is a director, officer or 10%
beneficial owner of the Company within the meaning of Section 16 of the 1934
Act, to be effective, must meet all of the requirements of Section 16 of the
1934 Act and the rules and regulations thereunder.
17. TERM OF PLAN.
17.1 EFFECTIVE DATE. The Plan shall become effective as of
January 17, 1996.
17.2 TERMINATION DATE. Except as to options previously granted
and outstanding under the Plan, the Plan shall terminate at midnight on January
17, 2006 and no Option shall be granted after that time. Options then
outstanding may continue to be exercised in accordance with their terms. The
Plan may be suspended or terminated at any earlier time by the Board within the
limitations set forth in SECTION 4.
18. NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to amend, modify, or rescind any previously approved compensation
plans, programs or options entered into by the Company. This Plan shall be
construed to be in addition to and independent of any and all such other
arrangements. Neither the adoption of the Plan by the Board nor the submission
of the Plan to the shareholders of the Company for approval shall be construed
as creating any limitations on the power or authority of the Board to adopt,
with or without shareholder approval, such additional or other compensation
arrangements as the Board may from time to time deem desirable.
19. GOVERNING LAW. The Plan and all rights and obligations under it
shall be construed and enforced in accordance with the laws of the State of
California.
20. INFORMATION TO OPTIONEES. Optionees under the Plan who do not
otherwise have access to financial statements of the Company will receive the
Company's financial statements at least annually.
10
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 701,360
<SECURITIES> 0
<RECEIVABLES> 4,814,756
<ALLOWANCES> 0
<INVENTORY> 890,049
<CURRENT-ASSETS> 6,794,195
<PP&E> 636,510
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,908,219
<CURRENT-LIABILITIES> 5,609,430
<BONDS> 0
0
939,950
<COMMON> 40,125,006
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,226,752
<SALES> 3,455,135
<TOTAL-REVENUES> 3,455,135
<CGS> 871,820
<TOTAL-COSTS> 871,820
<OTHER-EXPENSES> 2,246,576
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,901
<INCOME-PRETAX> 302,838
<INCOME-TAX> 0
<INCOME-CONTINUING> 302,838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302,838
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0
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