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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________
Commission File Number 0-28676
GRAPHIX ZONE, INC.
(Name of Registrant as specified in its charter)
Delaware 33-0697932
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 Corporate Park, Suite 200
Irvine, California 92614
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (including area code): (714) 833-3838
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
---- ----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. /X/
The issuer's revenues for its most recent fiscal year were $7,182,046.
Based on the last sale price, the aggregate market value of the voting
stock held by non-affiliates of the registrant on October 4, 1996 was
$41,162,939.
The number of shares outstanding of the registrant's only class of Common
Stock, no par value, was 10,622,553 on October 4, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on December 12, 1996 are incorporated herein by
reference into Part III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company was formed in January 1996 for the purpose of acquiring Graphix
Zone, Inc., a California corporation (GZ-CA), and StarPress, Inc. (StarPress)
in reverse triangular mergers pursuant to a "Reorganization Agreement"
entered into by both GZ-CA and StarPress on January 3, 1996 (the
"Reorganization"). On June 28, 1996, the Reorganization was consummated, and
GZ-CA and StarPress became wholly-owned subsidiaries of the Company. Both
GZ-CA and StarPress had been publishers of entertainment-oriented interactive
multimedia software. The Company will carry on the business of both these
companies as it pursues a long-term strategy of becoming a leading provider
of interactive entertainment and multimedia products and services. To this
end, the Company is also pursuing a focused Internet strategy. Through its
WILMA live music venue site and its CD-ROM LEGENDS sites, the Company is now
a provider and packager of music content on the Internet.
The Company develops, publishes and distributes personal computer-based
interactive entertainment and multimedia products (or "New Media") for consumer
markets. The Company's products have been characterized by highly entertaining
and informative experiences in which computer users may interact with a variety
of compelling media from popular sources. The Company is perhaps best known for
its interactive music CD-ROM titles, but has also developed, published and
distributed other entertainment and "edutainment" oriented titles, as well as
reference and personal productivity titles including health, travel and other
genres. The Company views CD-ROM as simply one of the current and future
technologies that can be exploited for delivery of interactive entertainment
products. The Company intends to pursue new optical disc formats as they become
commercially viable, such as Digital Video Disc (DVD), which is capable of
containing in excess of two hours of compressed video content along with other
digital information.
The Company is currently in the process of establishing a network of Internet
music web sites designed to bring "break-out" musicians, established groups and
solo artists, venues, music fans, retailers, talent agencies and other music
insiders together in an interactive format. The Company believes that the
Internet and other online delivery systems have the potential to become a
primary vehicle for the delivery of music and other interactive entertainment
products to consumers.
The Company entered the interactive music market in June 1994 with the
introduction of p INTERACTIVE, featuring the recording artist formerly known as
Prince. This was followed in February 1995 with HIGHWAY 61 INTERACTIVE,
featuring Bob Dylan. In 1995, the Company entered into a contract with Herbie
Hancock to develop a series of interactive jazz titles. The first of these
titles, LIVING JAZZ, was released in September 1996. A CD-ROM based on the work
of country music artist Willie Nelson was also released in September 1996, as
was UNDER THE COVERS which explores the 1960's rock music scene through the lens
of legendary rock photographer Henry Diltz. Furthermore, the Company is in
negotiations with numerous other musical artists.
The Company has also developed the interactive content for enhanced CDs.
Enhanced CDs and CD-Extra discs contain the audio tracks of a typical compact
disc, but also contain interactive software content that can be accessed via the
CD-ROM drive of a multimedia PC. The Company's first enhanced CD featured the
work of acclaimed composer John Williams. It contained the only released
version of Williams' Academy Award nominated sound track for the film NIXON and
was the first film soundtrack released exclusively with interactive content.
The Company recently developed another enhanced CD, ALMIGHTY SOUL: BOB MARLEY,
the formative years, featuring rare and previously unpublished tracks from the
late reggae artist. The Company is developing an enhanced CD with a track by
the group Hole taken from THE CROW: CITY OF ANGELS sound track and new
interactive content based on the film and comic book series.
The Company also develops and publishes entertainment and "edutainment" CD-
ROM titles, including its first title, The GUIDED TOUR OF MULTIMEDIA, which was
released in its second edition in October 1995. The Company is developing and
publishing a series of entertainment titles based on the America's Funniest Home
Videos television show, The first title in this series, LIGHTS! CAMERA!
INTERACTION! was released in October 1995. TRAVIS JETT'S REEL EXTREME CD-ROoM,
the second title in the America's Funniest Home Video series, featuring teen
heart-throb Jonathon Jackson, was released in June 1996. The Company
collaborated with multiple Academy Award winning director Oliver Stone to
produce an interactive CD-ROM based on the film NIXON. NIXON: THE CD-ROM was
also released in June 1996. The Company also publishes and distributes
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THE HALDEMAN DIARIES and PORTRAITS OF AMERICAN PRESIDENTS. Additionally, the
Company is distributing and selling WHEEL OF FORTUNE and JEOPARDY, based on
the popular television shows, and CNN: FACES OF CONFLICT, an interactive
CD-ROM featuring first-hand personal accounts from countries torn apart by
war, hostility and discord, and CNN: TIME CAPSULE 1995, featuring the top
news stories of 1995. Other new releases published and distributed by the
Company in 1996 are Popular Sciences' OCEAN VOYAGER and Highlights
PUZZLEMANIA. The Company also developed and published two new releases in
1996 in the travel genre: EXPERIENCE HAWAII and THE ULTIMATE GUIDE TO
ADVENTURE TRAVEL. The Company currently offers 44 multimedia CD-ROM and
software titles.
The Company looks for opportunities outside the music and entertainment
arenas which have strategic significance. For example, in the third quarter of
fiscal 1996 the Company released, in partner with EarthLink Network, Inc., an
all-in-one Internet access product. This project allowed the Company to begin
building relationships with Netscape and EarthLink. It also tied in to the
Company's Internet strategy, which was in its early formative stages at that
point.
Prior to the Reorganization, StarPress had developed health and personal
productivity software titles, and GZ-CA had operated marketing services and
multimedia productions departments. The Company has discontinued these
activities (although it will continue to publish and distribute the already-
developed health and personal productivity titles), and has disposed of the
Bulgarian subsidiary that performed some of StarPress' software development
work.
ENTERTAINMENT CD-ROM INDUSTRY
The desktop multimedia industry has been rapidly expanding in recent years
due to technological improvements in hardware and software combined with price
decreases in hardware. Because desktop multimedia is now relatively inexpensive
on both the Windows and Macintosh platforms, it is readily available to
virtually every business or home consumer in the market for a computer. Computer
sales to the home consumer markets now exceed computer sales to the corporate
markets, reflecting widespread non-business computer use. The Company believes
this significant shift has created growing demand for CD-ROM titles at retail
through existing hardware and software channels. The Company also believes that
its interactive music titles have helped to open the retail music channel, a
non-traditional channel for CD-ROMs.
Most computers sold today are already "multimedia enabled," with a CD-ROM
drive, sound board, speakers and modem included. During 1994 and 1995, many new
CD-ROM titles were published and introduced into the software market, creating a
strong demand for CD-ROM drives as hardware additions to computers. Over 52
million CD-ROM titles were estimated to have been purchased in 1995. The
installed base of CD-ROM drives was estimated to have reached 41 million by the
end of 1995.
INTERNET MUSIC INDUSTRY
The Internet is a global collection of computer networks, linking millions of
public and private computers around the world. Historically, the Internet was
used by academic institutions and government agencies to exchange information
and send and receive electronic mail. A number of factors, including the
proliferation of communication-enabled personal computers, the availability of
intuitive, graphical software and wide accessibility to an increasingly robust
network infrastructure, have allowed widespread access to the Internet at a
rapidly declining cost and have facilitated the emergence of the worldwide web,
a client/server system of hyper-linked, multimedia databases. The worldwide web
enables non-technical users to easily access information on the Internet and
enables individuals or organizations to offer textual, graphical and other
information directly to end-users. Further, it enables delivery of graphic
images, animation, motion video and sound. Commerce and various types of
collaborative communication are also enabled via the Internet and the World Wide
Web. Internet usage has been rapidly increasing in recent years. The number of
Internet users worldwide was estimated to be approximately 56 million at the end
of 1995, with that number expected to increase to 200 million by the year 2000.
An October 1995 CommerceNet/Nielsen Internet Demographics survey indicated that
approximately 18 million people in the U.S. and Canada had used the web during
the three month period prior to the survey.
BUSINESS STRATEGY
The Company believes that the combination of GZ and StarPress makes the
Company stronger than either company could have been on its own, and better able
to exploit opportunities in the multimedia industry (including the Internet).
Its specific strategies are the following:
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BECOME AN INDUSTRY LEADER IN THE INTERACTIVE ENTERTAINMENT MARKET. The
Company is seeking to become an industry leader in interactive entertainment by
developing interactive entertainment software titles with content obtained from
highly visible and popular sources. The Company believes interactive
entertainment will continue to grow in popularity because of the appeal of
combining video, CD-quality sound, animation, text, graphics and other material
in interactive contexts such as gaming, educational explorations, information
gathering and entertainment experiences. By producing quality interactive
software with popular, high-profile content for its initial products, the
Company intends to capitalize on this potentially large market, create name
recognition and attract other top names in the entertainment industry. The
Company's first entertainment releases, p INTERACTIVE and HIGHWAY 61
INTERACTIVE, have received significant critical acclaim.
LEVERAGE REPUTATION DEVELOPED BY MUSIC TITLES. The Company's music CD-ROM
titles have brought the Company considerable recognition as a result of the high
quality and many innovative features of those products. The Company believes
this notoriety will open doors in the entertainment industry, allowing the
Company access to the high-profile content that should help sell CD-ROM titles.
Although the Company's reputation was built with music titles, it intends to
exploit this reputation in order to obtain popular content from all facets of
the entertainment industry. The Company has successfully pursued contractual
relationships with companies such as ABC Productions, Cinergi Productions,
Warner Brothers Music, Sony Music, and Willie Nelson Productions as well as
negotiations in progress with numerous other artists. The Company recently
entered into a relationship with ICM to further enhance its access to key
entertainment properties.
ESTABLISH AND EXPLOIT INTERNET WEB SITES. The Company intends to leverage its
reputation as a leader in interactive music by establishing a network of music-
related Internet web sites. The Company believes it can generate revenue through
(1) advertising, (2) sales of Internet access software, web space and music
related software to musicians and bands seeking discovery, promotion and
exposure, (3) sales of the Company's music and other CD-ROMs, (4) sales of
concert tickets, and (5) sales of music-related merchandise.
The Company's Internet strategy calls for the development of a high volume
site in which music fans are attracted by legendary artists as well as the
opportunity to discover emerging talent. Bands, musicians and other music sites
already represent thousands of independent web sites on the Internet. The
Company intends to attract visitors of these sites into its Internet music
network thus making it easier for talent to be discovered and entertainment to
be found. Fresh content and live events will encourage repeat visits by
consumers. As consumers return again and again to the sites, their "profile" is
developed in such a way that the network of web sites can suggest new web sites
and provide quick links to favorite sites based on past preferences and
responses. Music industry insiders are expected to be drawn to the site because
of the commercial opportunities for discovery of new talent, up-to-date
information, and observation of trends. By keeping an eye on the need for
synergy between fans, artists and music industry insiders, and the need for
momentum and widespread awareness of the site, the Company plans to obtain the
critical mass necessary to its network of music sites the first entertainment
megasite on the Internet.
DEVELOP CONTENT FOR CD-EXTRA DISC FORMAT. The Company has developed the
interactive content for enhanced CDs from Bob Marley, the NIXON sound track and
THE CROW sound track. Other projects under negotiation are expected to be
developed for a similar technology called CD-Extra. The purpose of both of
these optical disc formats is to allow for interactive content playable by
computers while at the same time including audio tracks to be played either by a
computer or a home stereo system. These are not only good revenue generating
opportunities for the Company (it receives per unit royalties on enhanced CD and
CD-Extra sales), they help the Company build relationships with artists, record
labels and entertainment industry giants. These relationships are very
significant for the Company's CD-ROM and Internet strategies. Furthermore, the
ability to play the discs in home stereo systems provides an easier entry for
the Company's products into traditional music distribution channels.
CONTINUE TO DISTRIBUTE NON-ENTERTAINMENT TITLES. The Company has a library of
approximately forty health, personal productivity and travel titles that it will
continue to distribute. The Company recently entered in a distribution agreement
with GT Interactive Software Corp. ("GT"), one of the largest software
distributors. GT has what the Company believes is the best distribution in the
mass merchant channels (e.g., Target, WalMart, K-Mart), and should enable the
Company's products to be far more widely distributed than they had been
previously.
SELECTIVELY PURSUE OTHER OPPORTUNITIES. The Company will pursue opportunities
outside the music and entertainment arenas when they have strategic
significance. For example, the Company's all-in-one Internet access product,
released in the
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third quarter of Fiscal 1996, allowed the Company to begin building
relationships with Netscape and EarthLink, two key companies in the Internet
industry.
USE BUNDLING TO ENHANCE MARKETING AND DISTRIBUTION. Through its long-standing
relationships with major multimedia hardware companies, the Company expects to
create large bundling opportunities for its CD-ROM and CD-Extra titles.
Furthermore, it is believed that DVD format discs will present future bundling
opportunities. By exploiting these relationships and aggressively pursuing
bundling opportunities, GZ believes it can attain additional distribution of its
titles and market penetration for the PC and Macintosh platforms. GZ currently
has bundling arrangements with Compaq, Sirius, Camintonn/ZRAM, Syncronys
Softcorp and IDG Books.
MUSIC CD-ROM PRODUCTS
GZ-CA entered the entertainment CD-ROM market with the introduction of p
INTERACTIVE in June 1994 with the cooperation of Warner Brothers Music. The
critical acclaim accorded this product attracted the attention of Sony Music
Entertainment and Bob Dylan, who provided the content for HIGHWAY 61
INTERACTIVE, which was introduced in February 1995. The Company believes these
CD-ROMs have set the standard for a new form of entertainment, interactive
music, built around the growing installed base of multimedia computers.
Together these titles have received dozens of awards.
The Company intends to continue to develop CD-ROMs with an innovative
interface that abandons the traditional, linear look of many CD-ROM products.
For example, the look and feel of many of the Company's early releases included
an unbounded, experiential navigation system that had no main menu or home
screen, with the objective of making the user forget that a computer was being
used. Symbols that accurately represented the entertainer were used as
interactive icons and transitions. The Company's goal is to remain in the
artistic lead and set multimedia entertainment trends that deliver content in
fresh, entertaining and compelling ways. CD-ROMs may contain songs, music
videos, playable audio files, celebrity interviews, insights into the artist's
personal life, biographical articles, video puzzles, 3D imagery, discovery
challenges and the ability to create interactive music. All CD-ROMs will contain
links to the Company's Internet music web sites. The Company entered into an
agreement to develop a series of jazz CD-ROMs with Grammy and Academy Award
winner Herbie Hancock. The first jazz CD-ROM called LIVING JAZZ was released in
September 1996. The Company also released in September 1996 UNDER THE COVERS, a
CD-ROM on the Los Angeles music scene featuring the photography of legendary
rock photographer Henry Diltz and the music of such bands as Crosby, Stills and
Nash and The Doors. Further, the Company released WILLIE in September 1996
based on the life and music of legendary singer, songwriter and composer Willie
Nelson.
ENHANCED CD PRODUCTS
As a result of the recognition it has gained through its music CD-ROM titles,
the Company has had opportunities to develop enhanced CDs (and intends to
develop for a similar format in the future called CD-Extra), which are audio CDs
that also contain multimedia computer content. Enhanced CDs play like any other
audio compact disc when placed in an audio CD player, and play like a CD-ROM
when placed in the CD-ROM drive of a multimedia PC. Graphix Zone has developed
an enhanced CD of the NIXON sound track, The Crow sound track and a Bob Marley
title in this format titled ALMIGHTY SOUL: BOB MARLEY -- the formative years.
This Bob Marley enhanced CD contains unreleased songs, including the rarest Bob
Marley recording of all, SELASSIE IS THE CHAPEL. The Company believes that many
artists and record labels will be eager to utilize unused space on music CDs by
adding interactive content that helps create interest and provide an
entertainment and cultural context for the music. These discs open up
distribution opportunities through traditional music channels and avail the
company the opportunity for per disc royalties. The Company intends to provide
online links to its network of Internet music web sites through these discs as
well.
ENTERTAINMENT CD-ROM PRODUCTS
In addition to music CD-ROMs, the Company intends to develop and distribute
entertainment titles of many other types. Pursuant to an agreement with ABC
Productions, GZ-CA developed a title based on the hit television show, America's
Funniest Home Videos, which was released in October 1995. A second CD-ROM based
on America's Funniest Home Videos entitled TRAVIS JETT'S REEL EXTREME VIDEO CD-
RoOM was released in June 1996 and features teen heart-throb Jonathon Jackson.
Pursuant to an agreement with Cinergi Pictures Entertainment, Inc., the Company
developed and release in June 1996 a CD-ROM based on the Oliver Stone film,
NIXON. In August 1996 the Company released an entertainment CD-ROM based on the
cult film, THE CROW. The Company publishes and distributes titles featuring
such household names
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as Wheel of Fortune, Jeopardy, MTV's Beavis and Butthead, CNN, ABC News,
Highlights, Popular Science, the Improv, Caroline's, Playboy, Sports
Illustrated, Willy Wabbit, Charles Kuralt, Bobcat Goldthwaite, World Book
Encyclopedia and ESPN. The Company has also entered into an agreement to
develop an entertainment CD-ROM based on the cult film, THE CROW. The
Company will continue to seek content with high name recognition for a
variety of entertainment titles.
OTHER SOFTWARE PRODUCTS
GZ-CA has published and distributed THE GUIDED TOUR OF MULTIMEDIA since May
1993. This title was developed as a joint project between GZ and Multimedia
World/PC World magazines and is currently in its 2nd edition. THE GUIDED TOUR
OF MULTIMEDIA is an interactive multimedia tutorial and reference for beginners
and experts which includes text, sound, graphics, video and animation, with over
15 hours of content providing an overview and understanding of multimedia
basics, technical fundamentals, hardware and software and guidelines for
creating a multimedia production.
StarPress brought to the Reorganization a library of 21 titles of the health,
personal productivity and travel genres. Although the Company does not intend to
develop any additional titles of these types, it will continue to publish and
distribute the titles in its library so long as there is demand for them.
The Company intends to take advantage of software publishing opportunities in
areas of strategic significance outside the entertainment genre when those
opportunities seem to present opportunities for significant revenue, enhanced
strategic relationships or increased brand recognition. The Company's all-in-
one Internet access product, which is a collection of Internet software
including Netscape Navigator 2.0, Internet Phone and other third-party modules
was released in 1996 by the Company. The Company produced tutorial,
installation and presentation aspects of the software bundle and published the
title in conjunction with EarthLink, Inc. The Company believes the product
release meets each of the strategic and tactical criteria mentioned above and is
currently in negotiation to produce a similar title with another Internet access
provider.
SOFTWARE MARKETING AND DISTRIBUTION
The Company's CD-ROM products are distributed through established CD-ROM
distribution channels throughout the world, i.e., computer and software retail
outlets, and multimedia bundling, where the Company has strong industry
contacts, as well as in music, mass merchandise and other retail stores. The
Company believes that its music and other entertainment CD-ROM titles offer an
opportunity to greatly expand CD-ROM sales into nontraditional retail channels
of distribution such as "superstores," mass merchants and record stores. The
Company has established its own internal sales and distribution force enabling
increased distribution of its CD-ROM products.
The Company believes that in-house sales and distribution has facilitated
strong relationships with buyers and distributors. The Company is known for its
strong marketing abilities, with strong backgrounds in computer products
marketing. The marketing group has been carefully assembled to include experts
in consumer electronics marketing, retailing, software marketing, and high
technology public relations. It is entering into electronic direct marketing via
the online virtual store, e-mail newsletters, and innovative targeted
advertising. The Company combines high quality production, "brand name"
entertainment content and aggressive sales and marketing in an effort to ensure
the greatest possible success for its titles.
On March 13, 1996, the Company entered into a Distribution Agreement with GT.
The Company believes that GT's distribution capabilities in mass merchandise
retail stores such as Target and WalMart are the strongest in the industry, and
that this alliance will broaden distribution of the Company's CD-ROM products.
In connection with the execution of this Distribution Agreement, the Company
issued to GT a warrant to purchase up to 800,000 shares of Common Stock for a
per share exercise price of $5.125. GT has exercised the warrant with respect
to 80,000 of the shares. The Company is registering for resale the remainder of
Common Stock underlying GT's warrant.
The Company expects commercial success of its products due in part to the
demonstrated popularity of the content and entertainment properties it chooses
for its titles. The Company believes, going forward, that the popularity of the
artists, films, television shows, and other media properties, combined with
quality production should generate sales levels at least sufficient to recover
costs and generate positive gross margin. However, the entertainment marketplace
is unpredictable, and
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the Company cannot predict the popularity of any particular title, even if
the content is "brand name" and the title receives considerable critical
acclaim.
CD-ROM DEVELOPMENT AND PRODUCTION
The development of an interactive software product requires the integration
and management of a complex combination of talent ranging from the highly
creative to the very technical. The Company has assembled a core group of
experienced people and state-of-the-art computer hardware and software tools to
facilitate this process.
An interactive multimedia entertainment product begins with a team of
creative writers and artists who prepare written treatments, flowcharts,
outlines, design documents, scripts and storyboards as required to internally
communicate the concept, flow, content, media and interaction. Production is
managed by a producer who coordinates with the technical programmers to assure
acceptable image quality within the defined performance limits of the targeted
playback systems. This is followed by the task of organizing, gathering,
preparing and editing the media such as the video clips, sound recordings and
voice-overs, photographs, drawings and printed matter. This work is done by
researchers, writers, editors, graphic artists, videographers, audio
specialists, animators and production assistants. The producer coordinates
concurrent activity by artists who create artwork for the various screens and
interfaces that comprise the interactive experience and over which the media is
displayed. For entertainment products, musical artists, record companies, film
studios and other copyright owners are expected to supply a considerable amount
of broadcast quality digital video and audio.
All of the media elements are organized by the Company's programmers with
authoring software tools used to insert the media, assemble the modules and
define the interactivity. Through a series of trials, tests and troubleshooting
procedures, the program code is refined so that it functions as specified in the
design document. When the software development is complete, the entire digital
file is packaged onto a large hard drive. If the product is to be distributed as
a CD-ROM, this data file is processed through Company owned CD-ROM formatting
equipment which generates a single "one-off" CD-ROM. Several of these discs are
produced for purposes of further testing. After all the final editing is
completed, a "golden master" CD-ROM is made to be used for manufacturing in high
volumes at third party facilities.
INTERNET MUSIC SITE
The Company is developing a modularized group of related Internet web sites
which the Company believes will bring together emerging musicians and bands,
music fans, music venues, record labels, talent agencies and other "industry
insiders." Within the Company's site there will be modules in which visitors
can view or download music, graphics and, in some cases, videos from music
"legends" as well as new artists seeking recognition, obtain concert information
and, eventually, purchase tickets, upload their own music, and purchase CD's and
cassette tapes, the Company's interactive music titles and other CD-ROMs and
other music-related merchandise.
The Company has established certain components of its music site. WILMA is
the concert information site. Visitors to the WILMA site can access a broad
range of information about thousands of clubs and other secondary concert
venues. Available information includes concert and performance schedules, venue
information, reviews, directions to venues and ticket prices. Additionally, the
Company has entered into an agreement with Lycos to use its search engine to
provide search capabilities for information on music and entertainment elsewhere
on the Internet.
CD-ROM MANUFACTURING
The Company does not have any facilities for manufacturing or duplicating CD-
ROMs in high volumes and uses outside suppliers for its production quantities.
There are a number of duplication facilities that are capable of satisfying the
Company's needs, and the Company will generally select duplication facilities
based on price and service.
COMPETITION
The interactive software publishing business is extremely competitive, with
the number of publishers and titles expanding dramatically each year.
Competition comes from four sources: (1) large established publishers (and often
distributors) such as Electronic Arts, Davidson Broderbund, The Learning
Company, Compton's NewMedia and Interplay Productions; (2) smaller publishers
such as Sanctuary Woods and 7th Level; (3) very small independent developers who
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develop product but rarely distribute; and (4) large entertainment companies who
are entering the field such as Time Warner, Turner, Sony and Disney. The
Company is presently in the second category, with the goal of moving up to the
first category (the top tier of publishers). While the Company does not
dominate market share of CD-ROMs title sales as a whole, the Company believes it
is the leader in CD-ROMs based on popular entertainment content, be it from
music, film, video, television or publishing genres. Although some of the large
entertainment companies may be establishing their own production groups now or
in the future, the vast majority of entertainment content is controlled by or
dependent upon individuals or entities outside the grasp of those large
companies. Of the large entertainment companies that are forming interactive
production groups, some, such as Sony, have already begun disbanding the effort,
while others, such as Disney, have discovered that interactive software
publishing is not a trivial task and have hired outside development companies.
The Company believes that the principal competitive factors in its market are
brand recognition, ease of use, comprehensiveness and over-all quality.
Although the Company believes that its products compete favorably with respect
to the factors outlined above, there can be no assurance that the Company will
be able to compete successfully against current and future sources of
competition or that the competitive pressures faced by the Company will not have
a material adverse effect on the Company's business, results of operations and
financial condition.
The market for Internet products and services is highly competitive, and this
competition is expected to continue to increase significantly. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The Company competes with other providers of Internet
music services, including IUMA and NIIK. In the future, the Company may
encounter competition from providers of Internet entertainment products and
services that incorporate music content into their offerings. Many of the
Company's existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical and marketing
resources than the Company.
INTELLECTUAL PROPERTY
The Company relies on copyright and trademark protection and non-disclosure
agreements to protect its intellectual property. The Company has no patents,
pending or otherwise, relating to any of its products. The Company's logo and
the name Graphix Zone-Registered Trademark- have been registered as service
marks with the United States Patent and Trademark Office. The Company claims
copyright protection for all of its multimedia and CD-ROM materials. The Company
intends to pursue registration of its copyrights and other trademarks and
service marks as advised by counsel.
The Company will not own the copyrights to all of the video, audio and
related content it obtains from copyright owners in order to create its CD-ROMs
and certain other entertainment titles and which it intends to include in its
Internet music sites. The Company will claim copyright on and seek to protect
the material it creates in developing these titles and the Internet sites,
subject to the terms of the Company's agreements with the copyright owners. It
must obtain, and will continue to seek, rights to use video, audio and related
content from the copyright owners.
EMPLOYEES
As of September 27, 1996, the Company had 67 full-time employees of whom 17
were employed in administration and finance, 20 in sales and marketing and 30 in
multimedia development and related computer services. Many of the Company's
employees are highly skilled, and the Company's continued success depends in
part upon the ability to attract and retain such employees. In an effort to
attract and retain such employees, the Company offers employee benefit programs
which it believes are competitive and sufficient to attract qualified employees.
In critical areas, the Company has utilized consultants and contract personnel
to fill temporary needs or to fill open positions until permanent employees
could be recruited. The Company has never experienced a work stoppage, none of
its employees is represented by a labor organization, and the Company considers
its employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 17,000 square feet of office, multimedia
production, showroom and theater space in two separate buildings located in
Irvine, California and approximately 2,700 square feet of office and production
space in a building located in Venice, California. The Company plans to lease
additional space in the Irvine, California area, as necessary. The Company also
subleases approximately 12,000 square feet of office space in San Francisco,
California, which was the old StarPress headquarters. Because the Company has
consolidated the combined operations of StarPress and GZ-CA in Irvine, the
Company is attempting to sublease the San Francisco space.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware
of any material pending or threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant Graphix Zone, Inc., a Delaware corporation, did not
submit any matters to a vote of security holders. However, the registrant is
the successor to Graphix Zone, Inc., a California corporation, and StarPress,
Inc., a Colorado corporation. The following is the information required
under Item 4 of Form 10-K for Graphix Zone, Inc., a California corporation,
and StarPress, Inc., a Colorado corporation :
Graphix Zone, Inc., a California corporation:
(a) Special Meeting of Shareholders of Graphix Zone, Inc., a
California corporation, was held on June 27, 1996.
(b) Omitted pursuant to Instruction 3 to Item 4 of Form 10-K.
(c) PROPOSAL ONE: Approval of the combination of Graphix Zone,
Inc., a Californian corporation, and StarPress, Inc., a Colorado
corporation, pursuant to an Agreement and Plan of Reorganization
dated January 3, 1996:
For Against Abstain
------------ --------------- -------------------
3,910,813 4,350 3,560
(d) Not applicable
StarPress, Inc., a Colorado corporation:
(a) Special Meeting of Shareholders of StarPress, Inc., a Colorado
corporation, was held on June 27, 1996.
(b) Omitted pursuant to Instruction 3 to Item 4 of Form 10-K.
(c) PROPOSAL ONE: Approval of the combination of StarPress, Inc.,
a Colorado corporation, and Graphix Zone, Inc., a California
corporation, pursuant to an Agreement and Plan of Reorganization
dated January 3, 1996:
For Against Abstain
------------ --------------- -------------------
20,835,744 2,500 372,739
(d) Not applicable
9
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Graphix Zone, Inc.'s common stock began trading on July 1, 1996 on the
Nasdaq - SmallCap Market under the symbol GZON. Prior to July 1, 1996 the
Company's wholly owned subsidiary GZ-CA traded on the Nasdaq - SmallCap
Market under the symbol GZON. Prior to July 1, 1996 the Company's wholly
owned subsidiary StarPress traded on National Association of Securities
Dealers Electronic Bulletin Board under the symbol GTBR. The following
tables set forth the range of high and low closing prices for the common
stock of GZ-CA and StarPress, the Company's wholly owned subsidiaries, for
the fiscal quarters indicated.
GZ-CA Year ended June 30, 1996 High Low
- --------------------------------------------------------------------------------
First fiscal quarter $ 11.125 $ 5.000
Second fiscal quarter 8.875 4.500
Third fiscal quarter 6.875 4.750
Fourth fiscal quarter 8.000 4.875
GZ-CA Year ended June 30, 1995 High Low
- --------------------------------------------------------------------------------
First fiscal quarter $ 5.500 $ 3.375
Second fiscal quarter 4.875 3.375
Third fiscal quarter 5.625 3.500
Fourth fiscal quarter 5.375 2.375
StarPress Year ended June 30, 1996 High Low
- --------------------------------------------------------------------------------
First fiscal quarter $ 9.375 $ 3.409
Second fiscal quarter 7.671 3.146
Third fiscal quarter 6.392 3.835
Fourth fiscal quarter 5.966 4.262
StarPress Year ended June 30, 1995 High Low
- --------------------------------------------------------------------------------
First fiscal quarter $ 13.637 $ 3.409
Second fiscal quarter 8.523 0.426
Third fiscal quarter 7.458 0.426
Fourth fiscal quarter 7.245 2.131
HOLDERS OF RECORD
At June 30, 1996 the Company had approximately 262 stockholders of
record of the Company's common stock.
DIVIDENDS
The Company has never paid any cash dividends on its common stock and
does not intend to pay any cash dividends in the foreseeable future. In
addition, the terms of the Company's senior credit facility restrict the
ability of the Company to pay cash dividends.
10
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1996 1995 1994 1993 1992
(In thousands, except per share data) --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $ 7,182 $ 2,171 $ 244 $ - $ -
Gross profit 3,986 333 77 - -
Net loss $ 23,519 $ 10,916 $ 2,773 $ 839 $ 94
- ----------------------------------------------------------------------------------------------------------------------
Per Share Data (1):
Net loss $ 5.05 $ 7.76 $ 3.15 $ 3.04 $ 0.39
Weighted average shares outstanding 4,661 1,407 881 276 244
- ----------------------------------------------------------------------------------------------------------------------
Balance sheet Data :
Working capital (deficit) $ (20) $ (277) $ 296 $ (696) (98)
Total assets 8,529 3,771 3,852 126 4
Shareholders' equity (deficit) $ 2,049 $ 939 $ 3,039 $ (591) (94)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Share and per share data have been adjusted to reflect a .14666 : 1 stock
exchange in connection with the Reorganization.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly and pro-forma quarterly
consolidated financial information for the Company's last four quarters. The
pro-forma quarterly consolidated financial information is based upon the results
of operations of the Company's wholly owned subsidiaries, GZ-CA and StarPress,
combined and adjusted as if the Reorganization occurred at the beginning of
fiscal 1996. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Year ended June 30, 1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
(In thousands, except per share data) -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 911 $ 1,065 $ 1,952 $ 3,254 $ 7,182
Gross margin 423 42 1,281 2,240 3,986
Net loss (1,438) (4,597) (960) (16,524) (23,519)
Loss per share $ (0.33) $ (1.00) $ (0.21) $ (3.27) $ (5.05)
- ---------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1996 (Pro-forma)
Net revenues $ 1,634 $ 1,388 $ 2,529 $ 3,650 $ 9,201
Gross margin 710 (554) 1,695 2,423 4,274
Net income (loss) (1,876) (7,195) (2,377) 354 (11,094)
Income (loss) per share (.18) (.71) (.23) .03 (1.09)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
ITEM 7. 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.
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.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 44.5% 84.7% 68.4%
-------- -------- --------
Gross margin 55.5% 15.3% 31.6%
Research and development expense 28.0% 93.6% 272.2%
Sales and marketing expense 41.4% 115.0% 344.0%
General and administrative expense 36.3% 144.6% 540.0%
Restructuring charge 26.4% - -
Acquired in-process technology 249.7% 129.4% -
-------- -------- --------
Operating loss (326.3)% (467.3)% (1,124.6)%
Interest expense, net 1.1% 35.4% 12.4%
-------- -------- --------
Net loss (327.4)% (502.7)% (1,137.0)%
-------- -------- --------
-------- -------- --------
</TABLE>
NET REVENUES
Net revenues for fiscal 1996 increased by $5,010,712 to $7,182,046 from
$2,171,334 in fiscal 1995. The increase in net revenues of 230.8% from
fiscal 1995 to fiscal 1996 is primarily due to the acquisition of StarPress
Multimedia, Inc. in June 1995 and the acquisition of certain products from
Sony Interactive Entertainment, Inc. in November 1995. Both acquisitions
increased the Company's catalog of products and corresponding revenues. Net
revenues for fiscal 1995 increased $1,927,436 to $2,171,334 from $243,898 in
fiscal 1994. The increase in net revenues of 790.3% from fiscal 1994 to
fiscal 1995 is primarily a result of the Company having first introduced its
products and begun developing its distributor network mid way through fiscal
1994. The Company expects revenues to increase during fiscal 1997 as
revenues from both GZ-CA's and StarPress's catalog of products will be
reflected in the results of operations for the entire year. Additonally, the
Company expects to release several new titles during fiscal 1997.
12
<PAGE>
Approximately 66% of the Company's net revenues for fiscal 1996 were
derived from three customers. GT Interactive, Tech Data Corporation and
Navarre Corporation individually accounted for 27%, 24% and 15% of net
revenues, respectively. Approximately 58% of the Company's net revenues for
fiscal 1995 were derived from three customers. Tech Data Corporation, Ingram
Micro and Kenyon Capital Ltd. Individually accounted for 36%, 12% and 10% of
net revenues, respectively.
The Company's revenues may fluctuate periodically as a result of the
timing of new CD-ROM releases as well as external factors such as seasonal
buying patterns for CD-ROM titles. The Company grants certain distributors
and retailers limited rights to exchange product and price protection on
unsold merchandise. The Company establishes a reserve for price adjustments
and estimated returns at the time the related revenue is recognized. As of
June 30, 1996, the Company has accrued approximately $1,039,000 in reserves
for product returns.
GROSS MARGIN
Gross margin as a percentage of net revenues during fiscal 1996
increased to 55.5% from 15.3% in fiscal 1995. The increase in gross margin
percentage from fiscal 1995 to 1996 is primarily a result of fiscal 1995 cost
of revenues including approximately $608,000 of amortization and write-offs
of product development costs. These charges represented a significantly
larger proportional share of net revenues in fiscal 1995 than similar charges
included in fiscal 1996 cost of revenues. Additionally, during fiscal 1995
the Company was able to decrease per unit product costs as it gained
experience in the procurement of product components. Gross margin as
percentage of net revenues during fiscal 1995 decreased to 15.3% from 31.6%
in fiscal 1994. The decrease in gross margin percentage from fiscal 1994 to
1995 was due to the amortization and write-offs of product development costs
included in fiscal 1995 cost of revenues, as discussed above.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by $23,445 to $2,008,614 in
fiscal 1996 from $2,032,059 in fiscal 1995 and represented 28.0% and 93.6% of
net revenues, respectively. The relatively stable expense related to
research and development and decrease as a percentage of net revenues were
primarily a result of the Company not directly incurring research and
development costs and instead shifting all research and development
activities to GZ-CA in the third quarter of fiscal 1996 in anticipation of
the Reorganization. For financial statement reporting purposes the expenses
incurred by GZ-CA are not reflected in the Company's results of operations.
In the near term the Company expects research and development costs, as
compared to fiscal 1996, to increase in both amount and as a percentage of
net revenues.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses during fiscal 1996 increased to
$2,973,569 from $2,498,488 and $839,111 during fiscal 1995 and 1994,
respectively. The increase in sales and marketing expenses is primarily
related to increases in personnel as well as increased participation in
cooperative advertising and marketing programs to further penetrate and
promote products in traditional and alternative channels. The Company
expects selling and marketing expenses to continue to increase in dollar
amount in the future. As a percentage of net revenues, selling and marketing
expenses during fiscal 1996 decreased to 41.4% from 115.0% and 344.0% in
fiscal 1995 and 1994, respectively. The decrease as a percentage of net
revenues is primarily due to significant increases in revenues and only
moderate increases in selling and marketing expenses. As revenues increase,
the Company expects selling and marketing expenses to decrease as a
percentage of net revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses during fiscal 1996 decreased to
$2,606,670 from $3,139,507 during fiscal 1995. The decrease is primarily as
result of the curtailment of certain administrative functions and decrease in
personnel in anticipation of the Reorganization. Additionally, certain
recurring administrative costs including facility rents for the second half
of fiscal 1996 were reserved for and included in restructuring charge
discussed below. General and administrative expenses during fiscal 1995
increased to $3,139,507 from 1,317,070 during fiscal 1994. The increase was
a result of several factors including financial consulting fees of $554,000,
amortization of debenture financing costs of $176,000 and write-off of the
unrealizable balance of goodwill resulting from the acquisition of a
subsidiary of $91,000. General and administrative expenses during fiscal
1996 decreased as a percentage of net revenues to 36.3% from 144.6% and
540.0% during fiscal 1995 and 1994, respectively. The decrease is primarily
as result of a significant increase in revenues and only moderate increases
13
<PAGE>
in general and administrative expenses. The Company expects general and
administrative expenses to increase in amount in the near term as the Company
continues to develop the infrastructure to facilitate continued growth.
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. The charge principally
reflects severance costs resulting from a reduction of a significant portion
of the Company's workforce, write-down of excess furniture and equipment and
office facilities and write-offs of assembled workforce and goodwill arising
from the Company's acquisition of StarPress Multimedia, Inc. in June 1995.
ACQUIRED IN-PROCESS TECHNOLOGY
As a result of the Company acquiring GZ-CA in June 1996 and StarPress
Multimedia, Inc. in June 1995 the Company wrote-off $17,935,000 and
$2,810,000 of acquired research and development costs in fiscal 1996 and
1995, respectively. These costs are considered non-recurring expenses.
The Company is not able to determine if any such costs will be incurred in
the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash. At June 30, 1996,
cash and cash equivalents was $1,288,196, net working capital deficiency was
$19,631 and net shareholders' equity was $2,048,729. At June 30, 1995, cash
and cash equivalents were $1,919,102, net working capital deficiency was
$277,374 and net shareholders' equity was $939,408. The decrease in cash and
cash equivalents from the prior fiscal year was primarily due to the funding
of fiscal year operating losses offset by cash and cash equivalents acquired
in the acquisition of GZ-CA. Cash used in operating activities during fiscal
1996 and 1995 were $7,082,940 and $4,979,232, respectively.
Due to historical losses and 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. In September
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 October 31, 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 498,368 shares of common
stock to five accredited investors. The Company intends to use the proceeds
from the October 31, 1996 private equity offering to satisfy its bank note
payable of $750,000 upon its maturity on November 7, 1996. Pursuant to the
Reorganization, during the second half of fiscal 1996 prior to the closing of
the Reorganization, GZ-CA had provided the Company with approximately
$5,869,000 of cash and working capital which was primarily raised through its
own private equity offerings in fiscal 1996. The proceeds from the Company's
private equity and debt offerings and funds provided by GZ-CA 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.
As the Company continues to focus its resources on the development and
publishing of interactive multimedia products (CD-ROM publishing and Internet
web sites), the costs, including capital expenditures, associated with such
development have been and will continue to be considerable and will be
incurred before any significant related revenue is realized. The Company has
an equipment purchase line of credit with a leasing company to finance
computer equipment aggregating up to $250,000. As of June 30, 1996, $198,850
remained available for future equipment acquisitions. This credit line gives
the Company added flexibility to either purchase or lease necessary equipment.
The Company's long-term liquidity is principally contingent on its
ability to raise funds through private and public debt and equity offerings.
Having completed the Reorganization, the Company believes it will generate
greater revenues and significant cost savings thus improving overall
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 its present funding sources, including the proceeds from the
aforementioned private equity offerings, are sufficient to sustain these
needs through fiscal 1997, including the satisfaction of the $750,000 bank
note payable maturing on November 7, 1996.
14
<PAGE>
NEW ACCOUNTING STANDARDS
STOCK COMPENSATION. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (Statement No.123), issued in
October 1995 and effective for fiscal years beginning after December 15,
1995, encourages, but does not require, a fair value based method of
accounting for employee stock options or similar equity instruments.
Statement No. 123 allows an entity to elect to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APBO No. 25), but requires pro
forma disclosures to net earnings and earning per share as if the fair-value
based method of accounting had been applied. The Company expects to adopt
Statement No. 123 in fiscal 1997, though the Company currently expects to
elect to continue to measure compensation cost under APBO No. 25 and comply
with the pro forma disclosure requirements of statement No. 123. If the
Company makes this election, Statement No. 123 will have no impact on the
Company's financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and schedule appear in a
separate section of this Annual Report on Form 10-K beginning on page F-1 and
S-1, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item for the Company's directors and
executive officers will be contained in the Company's Proxy Statement for its
1996 Annual Meeting of Shareholders to be held on December 12, 1996 (the
"Proxy Statement") and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by reference.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1 Certificate of Incorporation of the Registrant. (1)
3.2 Bylaws of the Registrant (1)
10.1 Agreement and Plan of Reorganization, dated
January 3, 1996, between Graphix Zone, Inc., a
California corporation ("GZ-CA"),
15
<PAGE>
and StarPress Inc., a Colorado corporation
(formerly Great Bear Technologies Incorporated)
("StarPress"). (1)
10.2 Exchange Agreement, dated as of June 9, 1995, by and
among, StarPress Multimedia, Inc. and the StarPress
stockholders. (1)
10.3 1996 Stock Option Plan of Registrant (the "1996
Plan"). (1)
10.4 Form of Non-Qualified Stock Option Agreement
pertaining to the 1996 Plan. (1)
10.5 Form of Incentive Stock Option Agreement pertaining
to the 1996 Plan. (1)
10.6 Distribution Agreement dated March 13, 1996, by and
among GZ-CA, StarPress and GT Interactive Software
Corp., a Delaware corporation ("GTIS"). (1)
10.7 Keep-Well Agreement dated March 13, 1996 by and
among GZ-CA, GTIS and the Registrant. (1)
10.8 Common Stock Purchase Warrant for 800,000 shares of
GZ-CA Common Stock dated March 13, 1996 by GZ-CA in
favor of GTIS. (1)
10.9 Registration Rights Agreement dated March 13, 1996,
by and between GZ-CA and GTIS. (1)
10.10 Form of Registration Rights Agreement dated February,
2, 1996, entered into by and among GZ-CA and each
of the accredited investors that purchased Units,
consisting of one share of GZ-CA Common Stock and a
warrant to purchase one additional share of GZ-CA
Common Stock for every three shares of GZ-CA Common
Stock purchased, in GZ-CA's 1996 private placement
offering, pursuant to which an aggregate of 1,449,
378 shares of GZ-CA Common Stock and warrants to
purchase an additional 483,135 shares of GZ-CA
Common Stock (the "1996 Private Placement Warrants")
were issued and sold. (1)
10.11 Form of Warrant Agreement dated February 2, 1996,
entered into by and among GZ-CA and each of the
holders of the 1996 Private Placement Warrants. (1)
10.12 Office Building Lease dated October 10, 1990,
between GZ-CA and Masaaki & Fumiko Nakaoka, as
amended. (1)
10.13 Office Building Lease dated September 13, 1994,
between GZ-CA and Pan Pacific Investments, as
amended by First, Second and Third Amendments. (1)
10.14 Warrant Agreements dated January 31, 1994 and
February 28, 1994 between GZ-CA and Frank Cutler. (1)
10.15 Registration Rights Agreements dated January 31,
1994 and
16
<PAGE>
February 28, 1994, among GZ-CA, Frank
Cutler, James Cutler, Jr. and Gregory A. Brown. (1)
10.16 Non-Qualified Stock Option dated July 1, 1994
granted by GZ-CA to Frank Cutler. (1)
10.17 Non-Qualified Stock Option dated January 26, 1995,
granted by GZ-CA to John and Anne Aber. (1)
10.18 Non-Qualified Stock Option dated January 26, 1995,
granted by GZ-CA to John Aber. (1)
10.19 Non-Qualified Stock Option dated January 26, 1995,
granted by GZ-CA to Anne Aber. (1)
10.20 Non-Qualified Stock Option dated January 26, 1995,
granted by GZ-CA to Thomas and Honor Vandeveer. (1)
10.21 Form of StarPress 9% Convertible Subordinated
Debentures with Warrant Agreements. (1)
10.22 Sublease Agreement, dated August 13, 1995 by and
between StarPress and International Business
Machines Corporation. (1)
10.23 Joint Venture Agreement, dated March 31, 1995, by
and between Olivetti Systems and Networks Holdings
N.V. and StarPress Multimedia, Inc. (1)
10.24 Employment Agreement between StarPress and Ronald S.
Posner dated June 23, 1995. (1)
10.25 Employment Agreement dated as of April 18, 1996
between Registrant and Charles R. Cortright, Jr. (1)
10.26 Employment Agreement dated as of April 18, 1996
between Registrant and Angela Aber Cortright. (1)
10.27 Asset Purchase Agreement, dated November 1, 1995 by
and between Sony Interactive Entertainment Inc. and
StarPress. (1)
10.28 Business Loan Agreement, dated June 26, 1996 by and
between Silicon Valley Bank and GZ-CA.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP with respect to
StarPress' financial statements.
Reports on Form 8-K
None.
- ---------------------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-4
dated March 25, 1996 (Registration No. 333-2642) and incorporated
herein by reference.
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRAPHIX ZONE, INC.
Dated: October 09, 1996 By: /S/CHARLES R. CORTRIGHT, JR.
----------------------------------
Charles R. Cortright, Jr., Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ------------------------------------------ --------------------------------------- ----------------
<S> <C> <C>
/S/Ronald S. Posner Chairman of the Board and Director October 9, 1996
- ------------------------------------------
Ronald S. Posner
/S/Charles R. Cortright, Jr. Chief Executive Officer and Director October 9, 1996
- ------------------------------------------
Charles R. Cortright, Jr. (Principal Executive Officer)
/S/Angela C. Cortright Executive Vice President and Director October 9, 1996
- ------------------------------------------
Angela C. Cortright
/S/Norman H. Block Chief Operating Officer October 9, 1996
- ------------------------------------------
Norman H. Block
/S/Frank E. Murnane Chief Financial Officer October 9, 1996
- ------------------------------------------
Frank E. Murnane (Principal Financial and Accounting
Officer)
/S/C. Richard Kramlich Director October 9, 1996
- ------------------------------------------
C. Richard Kramlich
/S/Thomas C.K. Yuen Director October 9, 1996
- ------------------------------------------
Thomas C.K. Yuen
/S/Doug Glen Director October 9, 1996
- ------------------------------------------
Doug Glen
</TABLE>
18
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
GRAPHIX ZONE, INC.
ITEM PAGE
---- ----
Independent Auditors' Reports ....................................... F-2
Consolidated Balance Sheets ......................................... F-4
Consolidated Statements of Operations ............................... F-5
Consolidated Statements of Shareholders' Equity (Deficiency) ........ F-6
Consolidated Statements of Cash Flows ............................... F-7
Notes to Consolidated Financial Statements .......................... F-9
Schedule II - Valuation and Qualifying Accounts...................... S-1
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Graphix Zone, Inc.:
We have audited the accompanying consolidated balance sheet of Graphix Zone,
Inc. and subsidiaries as of June 30, 1996 and the related consolidated
statements of operations, shareholders' equity and cash flows for the year
then ended. In connection with our audit of the consolidated financial
statements, we have also audited the financial statement schedule for the
year ended June 30, 1996 as listed in the accompanying index. These
consolidated financial statements and financial schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Graphix
Zone, Inc. and subsidiaries as of June 30, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the year ended June 30, 1996, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
Orange County, California
August 22, 1996, except as to
note 19 which is as of
October 15, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
StarPress, Inc.:
We have audited the accompanying consolidated balance sheets of StarPress,
Inc. (formerly Great Bear Technology Incorporated) as of June 30, 1995 and
1994, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. Our audits also included the
financial statement schedule listed in the Index at Item 8. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of StarPress, Inc.
at June 30, 1995 and 1994, and the consolidated results of its operations and
its cash flows for the years then ended, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming StarPress Inc. will continue as a going concern. The Company has
incurred operating losses since inception. This condition raises substantial
doubt about its ability to continue as a going concern. In addition, the
Company has recorded capitalized product development costs and intangible
assets in its consolidated balance sheet at June 30, 1995. The Company must
generate substantial revenue and net income in future periods to realize the
carrying value of these assets. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of these uncertainties.
Ernst and Young LLP
Walnut Creek, California
August 18, 1995
F-3
<PAGE>
GRAPHIX ZONE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,288,196 $ 1,919,102
Accounts Receivable, net of allowance for doubtful
accounts of $640,194 in 1996 and $177,183 in 1995 3,867,268 295,323
Inventories 833,700 208,789
Prepaid expenses and other current assets 281,883 131,341
------------ ------------
Total current assets 6,271,047 2,554,555
Property and equipment, net 653,833 706,830
Intangibles 850,186 271,686
Other assets, net 753,619 238,266
------------ ------------
$ 8,528,685 $ 3,771,337
------------ ------------
------------ ------------
LIABILITES AND SHAREHOLDERS' EQUITY
Notes payable $ 750,000 $ -
Convertible debentures - 185,585
Current installments of obligations under capital leases 100,409 -
Accounts payable 2,617,806 996,131
Accrued royalties 977,764 140,769
Accrued liabilities 984,537 1,432,174
Accrued restructuring charge 573,461 -
Deferred revenue 286,701 77,270
------------ ------------
Total current liabilities 6,290,678 2,831,929
Other liabilities 189,278 -
------------ ------------
Total liabilities 6,479,956 2,831,929
Shareholders' equity
Preferred stock, $.01 par value, 25,000,000 shares
authorized, no shares issued or outstanding - -
Common stock, $.01 par value, 100,000,000 shares
authorized, 10,608,748 and 4,321,780 issued and
outstanding in 1996 and 1995, respectively 40,189,771 15,561,790
Accumulated deficit (38,141,042) (14,622,382)
------------ ------------
Net shareholders' equity 2,048,729 939,408
------------ ------------
Commitments and contingencies
Subsequent event
$ 8,528,685 $ 3,771,337
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net revenues $ 7,182,046 $ 2,171,334 $ 243,898
Cost of revenues 3,195,934 1,838,699 166,861
------------ ------------ -----------
Gross margin 3,986,112 332,635 77,037
Operating expenses:
Research and development 2,008,614 2,032,059 663,983
Sales and marketing 2,973,569 2,498,488 839,111
General and administrative 2,606,670 3,139,507 1,317,070
Restructuring charge 1,900,000 - -
Acquired in-process technology 17,934,863 2,810,000 -
------------ ------------ -----------
Total operating expenses 27,423,716 10,480,054 2,820,164
------------ ------------ -----------
Operating loss (23,437,604) (10,147,419) (2,743,127)
Interest expense, net (81,056) (783,507) (53,367)
Other income (expense), net - 14,529 23,343
------------ ------------ -----------
Net loss $(23,518,660) $(10,916,397) $(2,773,151)
------------ ------------ -----------
------------ ------------ -----------
Loss per share of common stock $ (5.05) $ (7.76) $ (3.15)
------------ ------------ -----------
------------ ------------ -----------
Weighted average common shares 4,661,401 1,406,688 880,716
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Net
Common Stock Shareholders'
------------ Accumulated Equity
Shares Amount Deficit (Deficiency)
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, June 30, 1993 510,100 $ 341,551 $ (932,834) $ (591,283)
Common stock issued for acquisition of Logatronix, Inc. 153,260 (12,412) - (12,412)
Common stock issued in private placement, net 503,729 4,205,714 - 4,205,714
Common stock issued upon conversion of notes payable 75,774 775,000 - 775,000
Stock option and warrant compensation - 181,180 - 181,180
Common stock issued for acquisition of MicroBase, Inc. 98,079 1,253,906 - 1,253,906
Net loss - - (2,773,151) (2,773,151)
---------- ----------- ------------ ------------
Balance, June 30, 1994 1,340,942 6,744,939 (3,705,985) 3,038,954
Common stock issued for acquisition of StarPress
Multimedia, Inc. 1,935,539 1,649,682 - 1,649,682
Common stock issued in private placement, net 381,316 3,081,451 - 3,081,451
Detachable warrants issued in connection with
convertible debentures and notes payable - 1,059,796 - 1,059,796
Common stock issued upon conversion of debentures 319,132 2,200,278 - 2,200,278
Common stock issued upon exercise of warrants 301,753 20,575 - 20,575
Common stock issued for services 43,118 158,500 - 158,500
Stock option compensation - 720,351 - 720,351
Notes receivable for purchase of common stock - (73,782) - (73,782)
Net loss - - (10,916,397) (10,916,397)
---------- ----------- ------------ ------------
Balance, June 30, 1995 4,321,800 15,561,790 (14,622,382) 939,408
Common stock issued upon conversion of debentures 24,932 195,180 - 195,180
Common stock issued upon exercise of warrants 52,995 3,613 - 3,613
Common stock issued upon exercise of options 300,260 134,879 - 134,879
Common stock issued for acquisition of assets 172,059 292,852 - 292,852
Stock option compensation - 195,682 - 195,682
Common stock issued in satisfaction of obligations 85,159 80,000 - 80,000
Common stock issued for services 125,000 618,750 - 618,750
Common stock issued for acquisition of GZ-CA 5,526,543 23,107,025 - 23,107,025
Net loss - - (23,518,660) (23,518,660)
---------- ----------- ------------ ------------
Balance, June 30, 1996 10,608,748 $40,189,771 $(38,141,042) $ 2,048,729
---------- ----------- ------------ ------------
---------- ----------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows form operating activities:
Net loss $(23,518,660) $(10,916,397) $(2,773,151)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 349,769 95,067 95,223
Amortiztion and write-down of intangible assets - 1,680,046 -
Aquired in-process technology 17,934,863 2,810,000 -
Provision for sales returns and doubtful accounts 221,000 398,000 -
Provision for inventory reserve 90,000 - -
Amortization of discount on convertible debentures - 579,122 -
Stock option and warrant compensation expense 195,682 853,851 181,180
Restructuring charge 1,900,000 - -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (3,926,851) (619,476) 7,132
Decrease (increase) in inventories 251,246 (4,447) (39,220)
Decrease (increase) in prepaid expenses and other current assets 424,507 71,981 (48,764)
Decrease (increase) in other assets (59,679) 54,691 (26,695)
Increase (decrease) in accounts payable (162,490) (593,782) 52,400
Increase in accrued royalties 360,857 - -
Increase (decrease) in accrued liabilities (612,483) 594,842 136,701
Increase in accrued restructuring (484,031) - -
Increase (decrease) in deferred revenue (46,670) 17,270 60,000
------------ ------------ -----------
Net cash used in operating activities (7,082,940) (4,979,232) (2,355,194)
Cash flows from investing activities:
Purchase of property and equipment (42,000) (226,727) (270,772)
Proceeds from sale of property and equipment 97,360 - -
Software development costs - - (427,723)
Acquisition of StarPress Multimedia, Inc. - (337,000) -
Acquisistion of DMT assets (20,890) - -
Net cash acquired from purchase of GZ-CA 6,854,357 - -
------------ ------------ -----------
Net cash provided by (used in) investing activites 6,888,827 (563,727) (698,495)
Cash flows from financing activities:
Release of restricted cash from escrow - 592,700 -
Proceeds from convertible of notes payable - 2,766,537 975,000
Proceeds from notes payable to related parties - 300,000 147,000
Payments on notes payable to related parties - (222,000) (602,500)
Proceeds from notes payable - 265,000 -
Payments on notes payable (575,285) (243,000) -
Payments on convertible notes payable - - (200,000)
Proceeds from exercise of stock options 134,879 - -
Proceeds from exercise of warrants 3,613 20,575 -
Proceeds from common stock issuances, net - 3,081,451 3,613,014
------------ ------------ -----------
Net cash (used in) provided by financing activities (436,793) 6,561,263 3,932,514
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net increase in cash (630,906) 1,018,304 878,825
Cash and cash equivalents at beginning of year 1,919,102 900,798 21,973
------------ ------------ -----------
Cash and cash equivalents at end of year $ 1,288,196 $ 1,919,102 $ 900,798
------------ ------------ -----------
------------ ------------ -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 86,635 $ 140,251 $ 64,073
------------ ------------ -----------
------------ ------------ -----------
Supplemental disclosure of noncash investing and financing activities:
Common stock issued in connection with acquisitions and services $ 24,018,627 $ 1,674,682 $ 1,253,906
------------ ------------ -----------
------------ ------------ -----------
Conversion of convertible debentures and notes payable to common stock $ 195,180 $ 2,200,278 $ 775,000
------------ ------------ -----------
------------ ------------ -----------
Common stock issued in satisfaction of obligations $ 80,000 $ - $ -
------------ ------------ -----------
------------ ------------ -----------
Proceeds from issuance of common stock held in escrow as restricted cash $ - $ - $ 592,700
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
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 (see
note 8).
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.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Graphix Zone, Inc., a Delaware corporation, and its wholly owned
subsidiaries GZ-CA and StarPress. All material inter-company balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized from CD-ROM sales upon shipment. The Company grants
certain distributors limited rights to exchange product and price
protection on unsold merchandise. The Company establishes a reserve for
price adjustments and estimated returns at the time the related revenue is
recognized.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments purchased with an original
maturity of three months or less. Cash equivalents include bank demand
deposits and money market funds.
INVENTORIES
Inventories are comprised primarily of CD-ROM products and packaging
materials and are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is computed on a straight-line basis over estimated useful lives
of two to seven years. Equipment held under capital leases and leasehold
F-9
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful life of the related asset.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs related to the development of certain
software products. In accordance with Statement of Financial Accounting
Standards No. 86, capitalization of costs began when technological
feasibility was established and ended when the product was available for
general release to customers. Capitalized software development costs as of
June 30, 1996 and 1995 include amounts capitalized pursuant to the
acquisitions described in note 8.
Amortization is computed on an individual product basis and is recognized
over the greater of the remaining economic lives of each product or the
ratio that current gross revenues for a product bear to the total of
current and anticipated revenues for that product, commencing when the
products became available for general release to customers. Software
development costs are generally being amortized over a three-year period.
The Company continually assesses the recoverability of software development
costs by comparing the carrying value of individual products to their net
realizable value.
The Company incurred amortization expense for software development costs of
$214,731, $720,340 and $68,097 in 1996, 1995 and 1994, respectively.
INTANGIBLE ASSETS
The Company accounts for goodwill and other intangible assets at the lower
of amortized cost or fair value. Goodwill represents the excess of
purchase price over fair value of net assets acquired. Goodwill and other
intangibles are amortized on a straight-line basis over the expected
periods to be benefited (generally two to five years). The Company
assesses the recoverability of intangible assets by determining whether the
amortization of the intangible asset balance over its remaining life can be
recovered through projected un-discounted cash flows. The amount of
goodwill impairment, if any, is measured based on projected discounted cash
flows using a discount rate reflecting the Company's average cost of funds.
ROYALTY EXPENSE
Royalty expense is recognized based upon actual net product sales in
accordance with the terms of the related royalty agreement. Royalty
advances are capitalized and expensed when earned. The Company
periodically reviews the realizability of capitalized royalty advances and
expenses such advances which it determines may not be realized from future
sales. Royalty expenses are included in cost of revenues in the
accompanying consolidated statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosure about Fair Value of Financial Instruments"
(SFAS 107). SFAS 107 requires all entities to disclose the fair value of
financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate
fair value. SFAS 107 defines fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. As June 30, 1996 the carrying value of all
financial instruments approximates fair value.
LONG-LIVED ASSETS
During fiscal 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for
F-10
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (Statement 121) which establishes accounting standards for the
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill either to be held or disposed of.
The adoption of Statement 121 did not have a material impact on the
Company's financial position or results of operations.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounted principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the balance
sheets and revenues and expenses for the periods. Actual results could
differ significantly from those estimates.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Statement 109 generally provides that deferred tax
assets and liabilities be recognized for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities and expected benefits of utilizing net operating loss carry-
forwards. A valuation allowance is required to reduce the potential
deferred tax asset when it is more likely than not that all or some portion
of the potential deferred tax asset will not be realized due to the lack of
expected future taxable income. The impact on deferred taxes of changes in
tax rates and laws, if any, are applied to the years during which temporary
differences are expected to be settled, and are reflected in the financial
statements in the period of enactment.
LOSS PER SHARE OF COMMON STOCK
Loss per share of common stock is based on the weighted average number of
outstanding shares of common stock during the period. Common stock
equivalents are not included in the computation because their effect would
be anti-dilutive. Primary loss per share approximates fully diluted loss
per share for all periods presented. All shares used in the calculation of
loss per share of Common Stock have been adjusted to reflect a .14666 : 1
stock exchange in connection with the Reorganization.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
(2) INVENTORIES
Inventories consisted of the following:
June 30,
--------
1996 1995
---------- ----------
Finished goods $479,747 $180,519
Components 353,953 28,270
---------- ----------
$833,700 $208,789
---------- ----------
---------- ----------
F-11
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
---------- ----------
<S> <C> <C>
Computer and office equipment $ 824,474 $ 805,285
Furniture and fixtures 174,760 65,843
Computer software 101,287 38,910
Equipment held under capital lease obligations 100,575 -
---------- ----------
Accumulated depreciation and amortization (547,263) (203,208)
---------- ----------
$ 653,833 $ 706,830
---------- ----------
---------- ----------
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets consist of the following:
June 30,
--------
1996 1995
---------- ----------
Assembled workforce $ 185,000 $ 240,000
Goodwill 560,186 122,872
Other 105,000 -
---------- ----------
Accumulated amortization - (91,186)
---------- ----------
$ 850,186 $ 271,686
---------- ----------
---------- ----------
(5) OTHER ASSETS
Other assets consist of the following:
June 30,
--------
1996 1995
---------- ----------
Capitalized software development costs $ 238,342 $ 662,024
Capitalized warrant valuation (see note 13) 312,000 -
Other 221,477 -
---------- ----------
Accumulated amortization (18,200) (423,758)
---------- ----------
$ 753,619 $ 238,266
---------- ----------
---------- ----------
(6) NOTES PAYABLE
On October 27, 1995 the Company borrowed $750,000 under a loan agreement
with Silicon Valley Bank. The note bore interest at the bank's prime rate
plus 150 basis points. The note was secured by all of the Company's assets
excluding the Sony assets (see note 8) and matured on February 24, 1996.
In connection with the loan agreement, the Company also issued a warrant to
Silicon Valley Bank to purchase 6,160 shares of the Company's common stock
at an exercise price of $8.52 per share. The warrant expires on October
27, 2000. On June 28, 1996 GZ-CA paid down the Company's existing loan
with Silicon Valley bank and simultaneously entered into a new 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 is due on
November 7, 1996 (as amended, see note 19) and is secured by all of the
Company's assets. GZ-CA issued a
F-12
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
warrant to Silicon Valley Bank to purchase 20,000 shares of GZ-CA's Common
Stock at an exercise price of $5.625 per share. The warrant expires on
June 26, 2001.
In July, September, October and November 1993, the Company sold an
aggregate of 19 1/2 units (the "Bridge Units"), each consisting of: (1) a
one-year promissory note having an aggregate original principal amount of
$50,000 bearing interest at a rate of 12% per annum ("Bridge Note") and (2)
a four-year warrant which entitles the holder to purchase 3,667 shares of
the Company's common stock, at a purchase price of $7.84 per share ("Bridge
Warrant"). The Bridge Units were offered at a purchase price of $50,000
per Unit. The Bridge Notes were payable upon maturity one year from the
date of issuance and bore interest at a rate of 12% per annum. Certain
holders of the Bridge Notes converted the principal amount of the Bridge
Notes into subscriptions for securities in the Company's 1993/1994 private
placement offering (see note 10). Bridge Notes amounting to $775,000 were
converted to stock in the private placement of common stock during the year
ended June 30, 1994.
(7) BORROWINGS UNDER LINE OF CREDIT
The Company had a line of credit with a bank which allowed borrowings of up
to $200,000 with interest at the bank's prime rate plus 1.50% (12% at June
30, 1995). Borrowings under the line of credit were secured by
certificates of deposit in the same amount. As of June 30, 1995, the
Company had borrowed $200,000 under the line of credit. On July 1, 1995,
this amount was repaid using the certificates of deposit at which time the
line of credit expired.
The Company has an equipment line of credit with a leasing company to
finance computer equipment aggregating up to $250,000. As of June 30,
1996, $198,850 remained available for future equipment acquisitions.
(8) ACQUISITIONS AND TRANSACTIONS
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. In connection
with the acquisition, the Company also issued 125,000 shares of common
stock to its investment banker. In addition, the Company assumed all
outstanding options and warrants of GZ-CA to purchase shares of the
Company's common stock. The acquisition was accounted for by the purchase
method of accounting.
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. An allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
Allocation of Amortization
Description Purchase Price (Useful Life)
----------- -------------- -------------
<S> <C> <C>
In-process technology charged to operations $ 17,934,863 N/A
Product development costs 89,390 3 years
Assembled workforce 185,000 3 years
Goodwill 459,310 3 years
Net assets assumed 5,262,394 N/A
-------------
Purchase price $ 23,930,957
-------------
-------------
</TABLE>
On April 22, 1996, the Company entered into an Asset Purchase Agreement
with Digital Media Theory, Inc. ("DMT"). The Company purchased from DMT
certain assets which consisted of an Internet computer database; equipment
contracts and supplies; and rights, title and interest to intellectual
property. The purchase price for these assets consisted of 36,000 shares
of the Company's common stock valued at $176,887 and a promissory note for
F-13
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
$23,099. Acquisition costs were $20,890. The acquisition was accounted
for by the purchase method of accounting.
The total purchase price of $220,876 was allocated as follows:
<TABLE>
<CAPTION>
Allocation of Amortization
Description Purchase Price (Useful Life)
----------- -------------- -------------
<S> <C> <C>
Goodwill $ 100,876 5-years
Computer database 75,000 5 years
Trademarks and covenant not to compete 30,000 2-5 years
Furniture and equipment 15,000 3-5 years
--------------
Purchase price $ 220,876
--------------
--------------
</TABLE>
On November 1, 1995, the Company purchased from Sony Interactive
Entertainment, Inc. ("Sony") certain products and other assets which
consisted of 14 products currently in distribution or production and
related finished goods inventory, prepaid royalties, certain accounts
receivable and furniture and equipment. The purchase price for these
assets consisted of 136,059 shares of the Company's common stock (which
were valued using the per share price determined by independent appraisal)
valued at $115,965 and a promissory note of $561,781 which bore interest at
the prime rate as quoted by Chemical Bank, and was secured by the assets
acquired. The promissory note was paid in full on February 2, 1996. The
acquisition was accounted for by the purchase method of accounting.
The total purchase price of $677,746 was allocated as follows:
<TABLE>
<CAPTION>
Allocation of Amortization
Description Purchase Price (Useful Life)
----------- -------------- -------------
<S> <C> <C>
Prepaid royalties $ 311,000 N/A
Finished goods inventory 132,457 3 years
Product development costs 125,417 3 years
Furniture and equipment 100,000 3 years
Accounts receivable 8,872 N/A
--------------
Purchase price $ 677,746
--------------
--------------
</TABLE>
In June 1995, the Company acquired all of the outstanding capital stock of
StarPress Multimedia, Inc., a developer and publisher of interactive
software titles, in exchange for 1,935,539 shares of the Company's common
stock (which were valued using the per share price determined by an
independent appraisal). StarPress Multimedia, Inc. had acquired iTravel
International Ltd. ("iTravel"), a developer located in Seattle, Washington,
on March 31, 1995 for 180,000 shares of common stock of StarPress
Multimedia, Inc. StarPress assumed StarPress Multimedia, Inc.'s
obligations to issue additional shares of common stock to former iTravel
shareholders. In April and May 1996, 71,258 additional shares of the
Company's common stock were issued to meet this commitment. In addition,
the Company issued options to purchase 34,318 shares of common stock at a
price of $8.52 per share (vested immediately and exercisable for three
years) for outside financing expenses directly related to the acquisition
and assumed all outstanding options and warrants of StarPress Multimedia,
Inc. to purchase shares of the Company's common stock The acquisition was
accounted for by the purchase method of accounting.
The total purchase price for StarPress Multimedia, Inc. was $2,011,682,
based upon an independent appraisal (including acquisition costs of
$362,000). An allocation of the purchase price is as follows:
F-14
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Allocation of Amortization
Description Purchase Price (Useful Life)
----------- -------------- -------------
<S> <C> <C>
In-process technology charged to operations $ 2,810,000 N/A
Product development costs 110,000 3 years
Assembled workforce 240,000 3 years
Goodwill 31,686 3 years
Net liabilities assumed (1,180,004)
--------------
Purchase price $ 2,011,682
--------------
--------------
</TABLE>
The following unaudited summary presents the pro forma consolidated results
of operations of the Company as if the acquisitions of GZ-CA and StarPress
Multimedia, Inc. had occurred at the beginning of each respective period
presented, exclusive of the write-offs of $17,934,863 and $2,810,000 of in-
process technology related to the GZ-CA and Starpress Multimedia, Inc.
acquisitions in fiscal 1996 and 1995, respectively. These pro forma
results have been prepared for comparative purposes only an do not purport
to be indicative of what would have occurred had the acquisition been made
as of the first day of the fiscal years presented or the results which may
occur in the future.
For the year ended June 30,
Pro Forma (unaudited) 1996 1995
--------------------- ---- ----
Net revenues $ 9,201,414 $ 6,743,161
Net loss 11,093,818 19,901,976
Net loss per share $ 1.09 $ 2.87
(9) RESTRUCTURING CHARGE
During the second quarter of fiscal year 1996, the Company adopted a
restructuring plan to enhance overall competitiveness, productivity and
efficiency through the reduction of overhead costs. The plan included the
elimination of the Company's in-house software research and development
activities. Total estimated restructuring costs of $1,950,000 were
recorded in the second quarter of fiscal 1996, $50,000 of which was
reversed in the fourth quarter due to changes in the underlying estimates.
The charge principally reflects severance costs resulting from a reduction
of a significant portion of the Company's workforce of $777,492, write-down
and disposal of excess furniture and equipment and office facilities of
$946,103, and write-offs of assembled workforce and goodwill of $226,405
arising from the Company's acquisition of StarPress Multimedia, Inc. in
June 1995. At June 30, 1996 $573,461 of accrued restructuring cost
remained outstanding. The amount remaining principally represents unpaid
severance costs and outstanding lease payments on unused office facilities
through fiscal 1999.
Pursuant to the above restructuring plan, on April 2, 1996, the Company
entered an agreement pursuant to which PolarCap, LLC, owned and operated by
Douglas D. Cole a former director and chief executive officer of the
Company, acquired 100% equity ownership of Logatronix, Ltd. (Great Bear -
Bulgaria), formally a wholly owned subsidiary of the Company based in
Sofia, Bulgaria, and certain other assets of the Company. The purchase
price consisted of a $40,000 promissory note, a contingent payment in the
event of the sale or other transfer of any of the Great Bear - Bulgaria
stock by PolarCap, LLC, a contingent payment in the event of the collection
of certain receivables transferred to PolarCap, LLC in the acquisition, and
the assumption by PolarCap, LLC of certain Great Bear - Bulgaria
liabilities.
F-15
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
(10) SHAREHOLDERS' EQUITY
COMMON STOCK
Between December 29, 1993 and February 15, 1994 ("fiscal 1994 private
placement"), the Company sold 39.51 units at a purchase price of $150,000
per unit in a private placement. Each unit consisted of 14,666 shares of
common stock and 4,400 warrants to purchase common stock at an exercise
price of $17.05 per share. None of the proceeds were allocated to these
warrants as their value was not considered significant. Of the proceeds of
$5,927,000, $775,000 related to the conversion of Bridge Notes (see note
6), $946,286 was used to pay expenses of the offering, $592,700 was held in
escrow pending registration of the stock, which was released from escrow in
fiscal 1995, and $3,613,014 was received by the Company in cash.
Immediately following the closing of the private placement, $200,000 was
used to pay down the remaining Bridge Note holders.
As compensation to the Company's investment banker in connection with the
fiscal 1994 private placement, the Company issued a five-year option to
purchase 3.95 units at $150,000 per unit. Each unit consists of options to
purchase 14,666 shares of common stock and warrants to purchase 4,400
shares of common stock (total of 57,950 shares under options and 17,385
shares under warrants). The units are identical to the units sold in the
private placement, except that these warrants are not redeemable by the
Company.
CONVERTIBLE SUBORDINATED DEBENTURES AND BRIDGE LOANS
During March 1995, the Company raised net proceeds of $2,766,537 (net of
offering costs of $165,963) through the issuance of convertible
subordinated debentures with detachable common stock warrants (the
"Debentures"). The net proceeds of the offering were allocated between the
Debentures and the warrants ($1,806,741 and $959,796), respectively) based
on their relative fair values. The Debentures bore interest at a rate of
9% per annum and were convertible at a price of $8.52 per share under
certain circumstances. As of June 30, 1995, Debentures with a carrying
balance of $2,200,278 had been converted into 319,132 shares of common
stock. On July 31, 1995, the remaining $185,585 of Debentures were
converted into 24,932 shares of common stock.
During fiscal year 1995, the Company borrowed $300,000 from certain
officers and shareholders of the Company and $265,000 from outside
investors. In consideration for such loans, the Company paid interest at a
rate of 9% per annum and issued warrants to purchase 25,134 shares of
common stock with the same terms and conditions as the warrants issued in
the debenture offering. All of the above loans were repaid with proceeds
from the Debentures offering.
STOCK WARRANTS
Pursuant to the merger of GZ-CA and SP (see note 1) the Company assumed all
outstanding warrants of GZ-CA. The following summarizes the outstanding
warrants and underlying shares of common stock, exercise price per share of
common stock and the expiration date:
Common stock shares Exercise Price Expiration Date
------------------- -------------- ---------------
116,667 $ 2.50 5/31/99
120,000 $ 3.90 6/30/99
15,000 $ 3.63 6/05/00
483,135 $ 4.125 2/02/99
720,000 $ 5.125 2/28/01
20,000 $ 5.625 6/26/01
In October 1995, the Company issued a warrant to purchase up to 6,160
shares of Common Stock to a lender ("Lender's Warrant") in connection
with a business loan. The exercise price of the Lender's Warrant is
$8.52 per share
F-16
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
and the Lender's Warrant may be exercised at any time prior to
October 27, 2000.
In connection with the issuance of the Debentures, discussed above, each
Debenture holder was issued a warrant to purchase shares of the Company's
common stock at a purchase price of $.48 per share. Warrants to purchase a
total of 329,614 shares were issued in connection with the Debentures.
In September 1994, the Company issued warrants to purchase up to 82,130
shares of Common Stock to two financial consultants ("Financial
Consultants' Warrants") in connection with services provided to the
Company. The exercise price of the Financial Consultants' Warrants is
$10.23 per share and they may be exercised until thirty (30) days after
the registration of the shares underlying the Financial Consultants'
Warrants.
In June 1994, the Company issued a warrant ("Consultant's Warrant") to
purchase up to 72,481 shares of Common Stock to a consultant in connection
with services provided to the Company. The exercise price of the
Consultant's Warrant is $6.32 per share and they may be exercised at any
time prior to June 30, 1997.
In connection with the fiscal 1994 private placement a total of 191,236
warrants (including the agent's unit purchase option of 17,385) were
issued. Each warrant entitles the holder thereof to purchase one share of
common stock at an exercise price of $17.05 per share and expires on
December 29, 1999. The number of shares and exercise price are subject to
adjustment upon the occurrence of specified events. These warrants are
redeemable by the Company, at any time upon 30 days written notice, at a
price of $22.16 per warrant, provided that the average closing price or
average closing bid price of the common stock as reported by the principal
exchange on which the common stock is traded for 30 consecutive trading
days ending 10 days prior to the date on which the notice of redemption is
given exceeds $22.16 and provided further that the stock underlying the
warrants may be publicly sold without restriction under the Securities and
Exchange Acts at the time notice of redemption is given.
In connection with the Bridge Notes issued in fiscal 1994 (see note 6), the
Company issued warrants to purchase 71,497 shares of the Company's common
stock at an exercise price of $7.84 per share which expire on July 20,
1997. These warrants do not entitle holders to any rights of a shareholder
of the Company, and are redeemable by the Company at $.68 per warrant under
certain circumstances.
In addition, the Company has warrants outstanding with a shareholder (see
note 15) to purchase 7,333 shares of common stock. These warrants have the
same terms as the bridge warrants discussed above.
STOCK OPTION PLANS
The Company's 1996 Stock Option Plan (the "Plan") is administered by a
committee of the Board of Directors ("Committee") which determines the
recipients and terms of the options granted. All stock option plans of the
Company's wholly owned subsidiaries, GZ-CA and SP have been assumed by the
Plan. The Plan provides for the grant of incentive stock options ("ISOs")
and non-qualified stock options ("NQOs") for up to 2,500,000 shares of
common stock. Terms of the Plan require that ISOs granted must have an
exercise price of not less than 100% of the fair market value of the
Company's common stock on the date of grant and must be exercised within
ten years from grant date. NQOs granted under the Plan must have an
exercise price of not less than 85% of the fair market value of the
Company's common stock on the date of grant and the option period may not
exceed five years. The Plan also includes automatic annual grants of NQOs
to purchase 25,000 shares of common stock to each member of the Committee
at an exercise price equal to 100% of the fair market value on the date of
grant. The Committee NQOs vest and are exercisable at the rate of 50%
following six months from date of grant and 50% following twelve months
following date of grant.
A summary of the stock option activity under the Plan is as follows:
F-17
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
Number of Price per Share
Shares
----------- -----------------
Outstanding at June 30, 1993 - $ -
Options granted 67,904 .34 - 12.78
Options exercised - -
Options canceled (1,467) .50
----------- -----------------
Outstanding at June 30, 1994 66,437 .34 - 12.78
Options granted 46,613 .007 - 4.77
Options exercised (1,467) 1.70
Options canceled (16,238) 1.70 - 12.78
Assumed from StarPress Multimedia, Inc. 279,414 .25 - .78
----------- -----------------
Outstanding at June 30, 1995 374,759 .007 - 12.78
Options granted 517,710 .01 - 1.02
Options exercised (300,260) .01 - .72
Options canceled (396,647) .04 - 1.875
Assumed from GZ-CA 314,050 .01 - 7.50
----------- -----------------
Outstanding at June 30, 1996 509,612
-----------
-----------
As of June 30, 1996, approximately 486,403 stock options under the Plan
were exercisable at prices of $.01 to $12.78 per share.
During 1996, the Company accelerated the vesting period of certain stock
options granted to an officer of the Company resulting in a new measurement
date of such options. The exercise price of the options was below the fair
market value on the date of acceleration. Accordingly, earned compensation
of $195,682 has been recorded for the difference between the option
exercise price and fair market value on the date of acceleration.
NON-QUALIFIED STOCK OPTIONS
In July 1994, the Company entered into an agreement for certain
professional services in exchange for certain monetary consideration. In
addition, the Company granted non-qualified options to purchase 250,000
shares of the Company's common stock at an exercise price of $3.43 per
share (the fair market value of the Company's common stock on the date of
grant). The options vest in various increments over a ten-year period
subject to certain accelerating events. Pursuant to the agreement, the
option holder shall be granted additional options ("New Options") to
purchase shares of the Company's common stock in amounts so that the shares
of common stock issuable under all options granted to the holder equals 5%
of the Company's then issued and outstanding common stock. The New Options
will have terms similar to the original options, except that the exercise
price will approximate fair market value on the date of grant of the New
Options.
During fiscal 1995, the Company granted various non-qualified stock options
to purchase an aggregate of 106,679 shares of the Company's common stock at
exercise prices ranging from $3.43 to $4.25 per share (the fair market
value of the Company's common stock on the respective date of grant).
Options for 56,679 shares were granted to certain related parties. The
remainder were granted to consultants and other individuals providing
assistance to the Company. The options vest at various times through their
expiration in ten years from the date of grant subject to certain
accelerating events.
Certain directors, officers and consultants of the Company were granted
non-qualified stock options to purchase 121,581 and 88,374 shares of the
Company's Common Stock during the years ended June 30, 1995 and 1994,
respectively. These options vested immediately upon grant at exercise
prices ranging from $.007 to $8.52 per share. Compensation expense of
$720,351 and $181,180 related to the issuance of these stock options was
recorded for the years ended June 30, 1995 and 1994, respectively.
A summary of the stock option activity for all non-qualified options is as
follows:
F-18
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
Number of Price per Share
Shares
--------- -----------------
Outstanding at June 30, 1993 36,665 $ 10.23
Options granted 146,323 .34 - 8.52
--------- -----------------
Outstanding at June 30, 1994 182,988 .34 - 10.23
Options granted 121,581 .007 - 8.52
--------- -----------------
Outstanding at June 30, 1995 304,569 .007 -10.23
Assumed from GZ-CA 119,179 3.43
--------- -----------------
Outstanding at June 30, 1996 423,748 .007 - 10.23
--------- -----------------
--------- -----------------
As of June 30, 1996, approximately 86,679 stock options pursuant to non-
qualified stock option grants were exercisable at prices of $3.43 to $3.50
per share.
(11) INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes an the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
June 30, 1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 6,867,000 $ 5,800,000
Reserves not currently deductible 698,000 150,000
Less valuation allowance (7,565,000) (5,760,000)
------------ ------------
Total deferred tax assets - 190,000
------------ ------------
------------ ------------
Deferred tax liability:
Identified intangible assets - (190,000)
------------ ------------
------------ ------------
The valuation allowance for deferred tax assets as of June 30, 1996 was
$7,565,000. The net change in the total valuation allowance for the year
ended June 30, 1996 was an increase of $1,805,000.
Reconciliation of the Federal statutory rate to the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal statutory rate (34.0)% (34.0)%
State income taxes, net (6.1) (6.1)
Write-off of acquired in-process technology for which no tax
benefit is recognized 30.6 10.3
Net operating loss carryforward with no tax benefit recognized 9.5 29.8
------ ------
- -
------ ------
------ ------
</TABLE>
As of June 30, 1996, the Company had a net operating loss carryforward for
Federal and state income tax purposes
F-19
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
of approximately $18,275,000 and $10,644,000, respectively, which is
available to offset future Federal taxable income. The net operating loss
carryforwards, if not utilized, will expire in 2005 through 2011. Pursuant
to the merger of GZ-CA and StarPress, the utilization of the net operating
loss carryforwards may be limited due to restrictions imposed under the
Federal and state laws due to change in ownership rules and regulations.
(12) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office, production facilities and certain equipment
under non-cancelable operating and capital lease agreements which provide
for total future minimum annual lease payments as follows:
Year ending Operating Capital
June 30, Leases Leases
-------- ------ ------
1997 $ 478,972 $ 105,041
1998 177,525 -
1999 149,949 -
---------- ----------
---------- ----------
Total minimum lease payments 806,446 105,041
Less amount representing interest - 4,632
---------- ----------
Present value of minimum lease payments $ 806,446 $ 100,409
---------- ----------
---------- ----------
Total rental expense, including month-to-month rentals, approximated
$248,000, $230,000 and $87,000 in 1996, 1995 and 1994, respectively.
ROYALTIES
The Company has entered into agreements with major music production and
entertainment companies to produce interactive music, educational and
entertainment CD-ROM titles. These agreements obligate the Company to pay
royalties, as specified in the agreements, based on the sales of the CD-
ROMs and certain guarantees.
LEGAL MATTERS
The Company is involved with certain legal proceedings and other claims
arising in the normal course of business. In the opinion of the Company's
management, the liability, if any, resulting from such litigation would not
have a material adverse affect on the Company's consolidated financial
position or results of operations.
(13) DISTRIBUTION AGREEMENT
On March 13, 1996 the Company entered into a distribution agreement ("the
Agreement") with GT Interactive Software Corp. (GT). In connection with
the execution of the Agreement, the Company issued to GT a warrant to
purchase up to 800,000 shares of common stock for a per share exercise
price of $5.125. As of June 30, 1996 GT exercised 80,000 shares with
respect to the warrant. The Company has agreed to register of the common
stock underlying the warrant at the request of GT. The warrant was valued
at $312,000, management's estimate of fair value at the date of its
issuance. The warrant is being amortized over the five year life of the
distribution agreement.
(14) SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company had sales to three major customers which represented
approximately 27%, 24% and 15% of 1996 revenues and 36%, 12% and 10% of
1995 revenues. At June 30, 1996 and 1995, accounts receivable included
F-20
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
approximately $3,134,000 and $236,000 due from these major customers.
(15) RELATED PARTY TRANSACTIONS
On March 21, 1996 GZ-CA advanced an aggregate of $110,162 to two executive
officers and one senior staff member of the Company in order to exercise
certain vested stock options under the Company's stock option plan. These
advances are secured by promissory notes, bear interest at the rate of 6%
per annum and due on or before termination of employment with the Company.
As of June 30, 1996, $94,062 remained outstanding under these notes.
Certain officers and major shareholders of the Company are affiliated with
companies which provide various shipping, warehousing , consulting , legal
and accounting services to the Company. The cost of these services were
$47,975 and $376,090 for the years ended June 30, 1995 and 1994,
respectively.
In March 1994, the Company entered into a financial advisory agreement with
Maroon Bells Capital Partners, Inc. ("MBC"), whereby MBC agreed to provide
certain financial advisory services to the Company for a period of six
months, for up to $10,000 per month, plus commissions in the event that MBC
introduced transactions or acquisitions to the Company. A former director
and shareholder of the Company is a partner in MBC. The Company recorded
expenses to MBC of $60,000 for the year ended June 30, 1994.
In July 1993, the Company borrowed $50,000 from a shareholder of the
Company in the form of a promissory note providing for 12% interest. In
September 1993, the Company borrowed $92,000 from an officer of the Company
in the form of a promissory note providing for 12% interest, and the
Company granted warrants relating to the promissory note to purchase 7,333
shares at $7.84 per share. Both of these notes and the related accrued
interests were paid in full in January 1994.
(16) PROFIT SHARING PLAN
The Company and its wholly owned subsidiaries maintain three pretax savings
and profit sharing plans under Section 401(k) of the Internal Revenue Code.
Under all plans, eligible employees are able to contribute from 1% to 15%
of their compensation. Under the plan maintained by GZ-CA, the Company
makes a matching contribution of certain amounts contributed by the
employee and may, at its discretion, make additional contributions to the
plan, up to a maximum of 15% of the employee's compensation. Under the two
plans maintained by StarPress, one of which was assumed pursuant to the
acquisition of StarPress Multimedia, Inc. (see note 8), the Company does
not make any matching contributions. The Company is currently in the
process of consolidating the three plans into one plan.
(17) JOINT VENTURE
In connection with a joint venture agreement with Olivetti Telemedia,
the Company is obligated to invest an additional $450,000 in cash and
contribute intellectual property which the joint venture has valued at
$1,000,000. The cash is to be contributed based upon needs of the joint
venture as requested by the joint venture's governing board. On February
26, 1996, the Company received a letter from Olivetti Telemedia requesting
that the Company become current on its cash contribution obligations to
the joint venture. The parties are currently in negotiations regarding
this request. The maximum amount of cash that the Company could owe to
the joint venture entity is $450,000. As of June 30, 1996 the Company
had accrued and expensed $100,000 of this total maximum amount. The
Company does not expect it will be required to contribute material
amounts to the joint venture beyond the $100,000 accrued as of June 30,
1996.
(18) LIQUIDITY
As of June 30, 1996, the Company had a net working capital deficiency of
$19,631. In addition, the Company has incurred significant losses from
operations during 1996 and 1995. However, subsequent to June 30, 1996, the
Company raised $939,950, net of offering expenses, from a private
F-21
<PAGE>
GRAPHIX ZONE, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
equity offerings (see note 19). Management believes that cash from
operations, supplemented by the proceeds of these private equity offerings,
will be adequate to support the Company's working capital needs through
the year ending June 30, 1997, as well to satisfy the bank note payable
(see note 6) upon its maturity.
(19) SUBSEQUENT EVENTS
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 closing price of the Company's common
stock at or near the conversion date. The holder of the Preferred Stock
is entitled to receive $80.00 per annum which shall be fully cumulative
from the date of issuance. The cash proceeds, net of offering expenses,
were $939,950.
On October 31, 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 498,368 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 other things, the closing price of the Company's common
stock at or near the conversion date. The holders of the Preferred Stock
are entitled to receive $80.00 per annum which shall be fully cumulative
from the date of issuance. The cash proceeds, net of offering expenses,
were $1,072,910.
The Company's $750,000 note payable with Silicon Valley Bank, as
described at note 6, was originally due on October 31, 1996. The loan
was extended to November 7, 1996 and is expected to be repaid from the
proceeds received by the Company from the October 31, 1996 issuance of
1,525 shares of Series A convertible preferred stock as described above.
F-22
<PAGE>
SCHEDULE II
GRAPHIX ZONE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended June 30,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, beginning of year $ 177 $ - $ -
Additions charged to expense 384 154 -
Additions from acquisitions 79 23 -
Balance, end of year $ 640 $ 177 $ -
- ----------------------------------------------------------------------------------------------------
ALLOWANCE FOR SALES RETURNS AND DISCOUNTS
Balance, beginning of year $ 501 $ - $ -
Net additions (reductions) charged (credited) to sales (163) 244 -
Additions from acquisitions 511 257 -
Balance, end of year $ 849 $ 501 $ -
- ----------------------------------------------------------------------------------------------------
ALLOWANCE FOR COOPERATIVE ADVERTISING FUNDS
Balance, beginning of year $ 165 $ - $ -
Net additions (reductions) charged (credited) to sales and
marketing expense 26 165 -
Balance, end of year $ 191 $ 165 $ -
- ----------------------------------------------------------------------------------------------------
</TABLE>
S-1
<PAGE>
- --------------------------------------------------------------------------------
GRAPHIX ZONE, INC.
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . . 5
2. LOAN AND TERMS OF PAYMENT. . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Bridge Loan . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 [Intentionally omitted.]. . . . . . . . . . . . . . . . . . . . 5
2.3 Interest Rates, Payments, and Calculations. . . . . . . . . . . 5
2.4 Crediting Payments. . . . . . . . . . . . . . . . . . . . . . . 6
2.5 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 Additional Costs. . . . . . . . . . . . . . . . . . . . . . . . 6
2.7 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. CONDITIONS OF LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 Conditions Precedent to Advance . . . . . . . . . . . . . . . . 7
4. CREATION OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . 8
4.1 Grant of Security Interest. . . . . . . . . . . . . . . . . . . 8
4.2 Delivery of Additional Documentation Required . . . . . . . . . 8
4.3 Right to Inspect. . . . . . . . . . . . . . . . . . . . . . . . 8
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 8
5.1 Due Organization and Qualification. . . . . . . . . . . . . . . 8
5.2 Due Authorization; No Conflict. . . . . . . . . . . . . . . . . 8
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . . 8
5.4 Bona Fide Accounts. . . . . . . . . . . . . . . . . . . . . . . 8
5.5 Merchantable Inventory. . . . . . . . . . . . . . . . . . . . . 9
5.6 Name; Location of Chief Executive Office. . . . . . . . . . . . 9
5.7 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.8 No Material Adverse Change in Financial Statements. . . . . . . 9
5.9 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.10 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . 9
5.11 Environmental Condition . . . . . . . . . . . . . . . . . . . . 9
5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.13 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.14 Government Consents . . . . . . . . . . . . . . . . . . . . . . 10
5.15 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 10
6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 10
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.2 Government Compliance . . . . . . . . . . . . . . . . . . . . . 10
6.3 Financial Statements, Reports, Certificates . . . . . . . . . . 10
6.4 Inventory; Returns. . . . . . . . . . . . . . . . . . . . . . . 10
6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.7 Principal Depository. . . . . . . . . . . . . . . . . . . . . . 11
6.8 Warrant to Purchase Stock and Registration Rights Agreement . . 11
6.10 Registration of Intellectual Property Rights. . . . . . . . . . 11
6.11 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . 12
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7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.1 Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.2 Change in Business. . . . . . . . . . . . . . . . . . . . . . . 12
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . . 12
7.4 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.5 Encumbrances. . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.8 Transactions with Affiliates. . . . . . . . . . . . . . . . . . 12
7.9 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . 13
7.10 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.11 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . . . . 13
8.2 Covenant Default. . . . . . . . . . . . . . . . . . . . . . . . 13
8.3 Material Adverse Change . . . . . . . . . . . . . . . . . . . . 13
8.4 Attachment. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.5 Insolvency. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.6 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . 14
8.7 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . 14
8.8 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.9 Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.10 Misrepresentations. . . . . . . . . . . . . . . . . . . . . . . 14
9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . 14
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . 14
9.2 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . 15
9.3 Accounts Collection.. . . . . . . . . . . . . . . . . . . . . . 16
9.4 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.5 Bank's Liability for Collateral . . . . . . . . . . . . . . . . 16
9.6 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . 16
9.7 Demand; Protest . . . . . . . . . . . . . . . . . . . . . . . . 16
10. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . 17
12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 17
12.1 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . 17
12.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 17
12.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . 17
12.4 Severability of Provisions. . . . . . . . . . . . . . . . . . . 18
12.5 Amendments in Writing, Integration. . . . . . . . . . . . . . . 18
12.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 18
12.7 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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This LOAN AND SECURITY AGREEMENT is entered into as of June 26, 1996, by
and between SILICON VALLEY BANK ("Bank") and GRAPHIX ZONE, INC., a California
corporation ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" means the Advance under the Bridge Loan Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors and partners.
"Bank Expenses" means all reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Bridge Loan Facility" means the facility under which Borrower
may request Bank to loan the Committed Loan Amount as specified in Section 2.1.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date the conditions precedent set forth
in Section 3 are satisfied and the Advance is made.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A attached
hereto.
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"Comfort Letters" means letters, in a form and substance
satisfactory to Bank, determined in its sole discretion, evidencing the intent
of the Borrower's venture capitalists to continue their financial support of
Borrower.
"Committed Loan Amount" means Seven Hundred Fifty Thousand
Dollars ($750,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Equity Infusion" means the receipt by Borrower of cash proceeds
from the sale of its capital stock or Subordinated Debt, other than in a
nonfinancing transaction to employees, officers, directors or consultants of the
Borrower.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including
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any returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above, and Borrower's Books relating to any of
the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means October 31, 1996.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the date of this Agreement and
disclosed in the Schedule;
(c) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(d) Subordinated Debt.
"Permitted Investment" means:
(a) Investments existing on the Date of this Agreement
disclosed in the Schedule; and
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<PAGE>
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and
(iii) certificates of deposit maturing no more than one (1) year from the date
of investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the date of this Agreement and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, PROVIDED the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, PROVIDED that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment; and
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) and (c) above, PROVIDED that any extension, renewal or replacement
Lien shall be limited to the property encumbered by the existing Lien and the
principal amount of the indebtedness being extended, renewed or refinanced does
not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
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<PAGE>
2. LOAN AND TERMS OF PAYMENT
2.1 BRIDGE LOAN.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank will loan to Borrower the Committed Loan Amount on the Closing
Date. The Bridge Loan Facility will be used to provide temporary working
capital to Borrower.
(b) Interest shall accrue on the Committed Loan Amount from the
Closing Date at the rate specified in Section 2.3(a), and shall be payable
monthly on the twenty-sixth day of the month through the month in which the term
of the Bridge Loan Facility expires. The Committed Loan Amount and any accrued
and unpaid interest and other unpaid charges shall be payable on the Maturity
Date.
(c) When Borrower desires the Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m. California
time, on the Business Day that the Advance is to be made. Such notification
shall be promptly confirmed by a Payment/Advance Form in substantially the form
of EXHIBIT B hereto. Bank shall be entitled to rely on any telephonic notice
given by a person who Bank reasonably believes to be a Responsible Officer, and
Borrower shall indemnify and hold Bank harmless for any damages or loss suffered
by Bank as a result of such reliance. Bank will credit the amount of the
Advance to Borrower's deposit account.
2.2 [Intentionally omitted.]
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in Section 2.3(b), the
Advance shall bear interest, on the average daily balance thereof, at a rate
equal to three percentage (3%) points above the Prime Rate.
(b) DEFAULT RATE. All Obligations shall bear interest, from
and after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and payable on
the twenty-fifth calendar day of each month during the term hereof. Bank shall,
at its option, charge such interest, all Bank Expenses, and all Periodic
Payments against any of Borrower's deposit accounts or against the Committed
Line, in which case those amounts shall thereafter accrue interest at the rate
then applicable hereunder. Any interest not paid when due shall be compounded
by becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following
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<PAGE>
Business Day. Whenever any payment to Bank under the Loan Documents would
otherwise be due (except by reason of acceleration) on a date that is not a
Business Day, such payment shall instead be due on the next Business Day, and
additional fees or interest, as the case may be, shall accrue and be payable for
the period of such extension.
2.5 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. A Facility Fee equal to Ten Thousand Dollars
($10,000), which fee shall be due on the date of this Agreement and shall be
fully earned and non-refundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's customary
fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and
for each appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents; and
(c) BANK EXPENSES. Upon the date hereof, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 ADDITIONAL COSTS. In case any change in any law, regulation,
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail which statement shall be deemed
true and correct absent manifest error.
2.7 TERM. This Agreement shall become effective on the Closing Date
and, subject to Section 12.7, shall continue in full force and effect for a term
ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the
right to terminate its obligation to make the Advance under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO ADVANCE. The obligation of Bank to make
the Advance is subject to the conditions precedent that:
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<PAGE>
(a) Bank shall have received, in form and substance satisfactory
to Bank, the following:
(i) this Agreement;
(ii) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;
(iii) a collateral assignment and patent mortgage;
(iv) Comfort Letters;
(v) repayment in full and in cash of all outstanding
obligations, (including, but not limited to, payments of principal and accrued
interest) under that certain Business Loan Agreement by and between Bank and
StarPress, Inc. dated as of October 27, 1995;
(vi) Guaranty by StarPress, Inc. and Graphix Zone, Inc.,
a Delaware corporation;
(vii) collateral assignment, patent mortgage and security
agreement by StarPress, Inc.;
(viii) evidence of a satisfactory audit of the Borrower's
and StarPress, Inc's Accounts;
(ix) financing statements (Forms UCC-1);
(x) insurance certificate;
(xi) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof;
(xii) timely receipt of the Payment/Advance Form as
provided in Section 2.1; and
(xiii) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of the
Payment/Advance Form and on the effective date of the Advance, and no Event of
Default shall have occurred and be continuing, or would result from the Advance.
The making of the Advance shall be deemed to be a representation and warranty by
Borrower on the date of the Advance as to the accuracy of the facts referred to
in this Section 3.1(b).
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Bank
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
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4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ACCOUNTS. The Accounts are bona fide existing
obligations. The property giving rise to such Accounts has been delivered to
the account debtor or to the account debtor's agent for immediate shipment to
and unconditional acceptance by the account debtor. Borrower has not received
notice of actual or imminent Insolvency Proceeding of any account debtor.
5.5 MERCHANTABLE INVENTORY. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed
in the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
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5.9 SOLVENCY. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 ENVIRONMENTAL CONDITION. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the releasing, or otherwise
disposing of hazardous waste or hazardous substances into the environment.
5.12 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.15 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates
or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
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6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
Borrower shall deliver to Bank: (i) as soon as available, but in
any event within forty-five (45) days after the end of each month, a company
prepared consolidated balance sheet and income statement covering Borrower's
consolidated operations during such period, certified by a Responsible Officer;
(ii) as soon as available, but in any event within ninety (90) days after the
end of Borrower's fiscal year, audited consolidated financial statements of
Borrower prepared in accordance with GAAP, consistently applied, together with
an unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (iii) within five (5) days
upon becoming available, copies of all statements, reports and notices sent or
made available generally by Borrower to its security holders or to any holders
of Subordinated Debt and all reports on Form 10-K and 10-Q filed with the
Securities and Exchange Commission; (iv) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower or
any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (v) such
budgets, sales projections, operating plans or other financial information as
Bank may reasonably request from time to time.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement.
Borrower shall promptly notify Bank of all returns and recoveries and of all
disputes and claims, where the return, recovery, dispute or claim involves more
than Fifty Thousand Dollars ($50,000).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain
insurance relating to Borrower's ownership and use of the Collateral in amounts
and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon
Bank's request, Borrower shall deliver to Bank certified copies of such policies
of insurance and evidence of the
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payments of all premiums therefor. All proceeds payable under any such
policy shall, at the option of Bank, be payable to Bank for application to
the Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 WARRANT TO PURCHASE STOCK AND REGISTRATION RIGHTS AGREEMENT.
Borrower shall deliver to Bank as soon as possible, but, in any event, within
fifteen (15) days of the date of this Agreement, a duly executed and authorized
Warrant to Purchase Stock in the form of Exhibit C attached hereto and a
registration rights agreement providing for registration rights for the shares
issuable under the Warrant in a form and substance satisfactory to Bank.
6.9 STARPRESS, INC. MERGER. Borrower shall provide to Bank as soon
as possible but, in any event by July 31, 1996, evidence, in a form and
substance satisfactory to Bank, of the completion of the reorganization
transaction involving the Borrower and StarPress, Inc.
6.10 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS. Borrower shall
register or cause to be registered (to the extent not already registered) with
the United States Patent and Trademark Office or the United States Copyright
Office, as applicable, those intellectual property rights listed on Exhibits A,
B and C to the Collateral Assignment, Patent Mortgage and Security Agreement
delivered to Bank by Borrower in connection with this Agreement within
thirty (30) days of the date of this Agreement. Borrower shall register or
cause to be registered with the United States Patent and Trademark Office or the
United States Copyright Office, as applicable, those additional intellectual
property rights developed or acquired by Borrower from time to time in
connection with any product prior to the sale or licensing of such product to
any third party, including without limitation revisions or additions to the
intellectual property rights listed on such Exhibits A, B and C. Borrower shall
execute and deliver such additional instruments and documents from time to time
as Bank shall reasonably request to perfect Bank's security interest in such
additional intellectual property rights.
6.11 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make the Advance, Borrower will
not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; (iii) Transfers of worn-out or obsolete Equipment or new Equipment
financed by other vendors.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto) or suffer a material change in Borrower's ownership.
Borrower will not, without thirty (30) days prior written notification to Bank,
relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person except the
reorganization transaction contemplated in Section 6.8 herein.
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7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock, except for payments made to the Borrower's shareholders in connection
with such shareholder's exercise of their dissenters rights, in an aggregate
amount the repayment of which will not require the Borrower to solicit funds
from equity investors..
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act or violate any law or regulation,
which violation could have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral, or
permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay the principal of, or
any interest on, the Advance when due and payable; or fails to pay any portion
of any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by Borrower
of an invoice for such other Obligations;
8.2 COVENANT DEFAULT. If Borrower fails to perform any obligation
under Section 6.7, 6.8, 6.9 or 6.10 or violates any of the covenants contained
in Article 7 of this Agreement, or fails or neglects to perform, keep, or
observe any other material term, provision, condition, covenant, or agreement
contained in
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this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured,
has failed to cure such default within ten (10) days after Borrower receives
notice thereof or any officer of Borrower becomes aware thereof; provided,
however, that if the default cannot by its nature be cured within the ten
(10) day period or cannot after diligent attempts by Borrower be cured within
such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period
(which shall not in any case exceed thirty (30) days) to attempt to cure such
default, and within such reasonable time period the failure to have cured
such default shall not be deemed an Event of Default (provided that no
Advance will be required to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advance will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within ten (10) days (provided
that no Advance will be made prior to the dismissal of such Insolvency
Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no Advance
will be made prior to the satisfaction or stay of such judgment); or
8.9 GUARANTY. Any guaranty of all or a portion of the Obligations
ceases for any reason to be in full force and effect, or any guarantor fails to
perform any obligation under any guaranty of all or a portion of the
Obligations, or any material misrepresentation or material misstatement exists
now or hereafter in any warranty or representation set forth in any guaranty of
all or a portion of the Obligations or in any certificate delivered to Bank in
connection with such guaranty.
8.10 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by
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any Responsible Officer pursuant to this Agreement or to induce Bank to enter
into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge in order to exercise any of Bank's rights or remedies provided
herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or
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employees) as Borrower's true and lawful attorney to: (a) send requests for
verification of Accounts or notify account debtors of Bank's security
interest in the Accounts; (b) endorse Borrower's name on any checks or other
forms of payment or security that may come into Bank's possession; (c) sign
Borrower's name on any invoice or bill of lading relating to any Account,
drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) make, settle,
and adjust all claims under and decisions with respect to Borrower's policies
of insurance; and (e) settle and adjust disputes and claims respecting the
accounts directly with account debtors, for amounts and upon terms which Bank
determines to be reasonable; provided Bank may exercise such power of
attorney to sign the name of Borrower on any of the documents described in
Section 4.2 regardless of whether an Event of Default has occurred. The
appointment of Bank as Borrower's attorney in fact, and each and every one of
Bank's rights and powers, being coupled with an interest, is irrevocable
until all of the Obligations have been fully repaid and performed and Bank's
obligation to provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. At any time from the date of this
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of
the following: (a) make payment of the same or any part thereof; (b) set up
such reserves under the Revolving Facility as Bank deems necessary to protect
Bank from the exposure created by such failure; or (c) obtain and maintain
insurance policies of the type discussed in Section 6.6 of this Agreement,
and take any action with respect to such policies as Bank deems prudent. Any
amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable
rate hereinabove provided, and shall be secured by the Collateral. Any
payments made by Bank shall not constitute an agreement by Bank to make
similar payments in the future or a waiver by Bank of any Event of Default
under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
Section 9207 of the Code, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for
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financial statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be personally delivered or sent by a
recognized overnight delivery service, certified mail, postage prepaid,
return receipt requested, or by telefacsimile to Borrower or to Bank, as the
case may be, at its addresses set forth below:
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If to Borrower: Graphix Zone, Inc.
42 Corporate Park, Suite 200
Irvine, CA 92714
Attn: Mr. Norm Block
FAX: (415) 833-3990
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Ms. Kathleen Borie
FAX: (415) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
17
<PAGE>
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
GRAPHIX ZONE, INC.
By:
------------------------------------
Title:
------------------------------------
By:
------------------------------------
Title:
------------------------------------
SILICON VALLEY BANK
By:
------------------------------------
Title:
------------------------------------
19
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
20
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
---------------------
FAX#: (408) 496-2426 TIME:
---------------------
- --------------------------------------------------------------------------------
FROM:
--------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
----------------------------------------------------------
PHONE NUMBER:
------------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
------------------------- ------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- ------------------------------- ----------------------------------------
PRINCIPAL INCREASE (ADVANCE) $
-------------------------------------------
PRINCIPAL PAYMENT (ONLY) $
-------------------------------------------
INTEREST PAYMENT (ONLY) $
-------------------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
-------------------------------------------
OTHER INSTRUCTIONS:
-------------------------------------------------------------
- --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respects as of the date of the
telephone request for and Advance confirmed by this Borrowing Certificate;
provided, however, that those representations and warranties expressly referring
to another date shall be true, correct and complete in all material respects as
of such date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ----------------------------------- ----------------------------
Authorized Requester Phone #
- ----------------------------------- ----------------------------
Received By (Bank) Phone #
---------------------------------------------
Authorized Signature (Bank)
- --------------------------------------------------------------------------------
21
<PAGE>
EXHIBIT C
WARRANT TO PURCHASE STOCK
22
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Graphix Zone, Inc. Bank:Silicon Valley Bank
- --------------------------------------------------------------------------------
LOAN TYPE. This is a Variable Rate, Bridge Loan Facility of a principal amount
up to $750,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working
Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Bridge Loan
------------
Amount paid to Borrower directly: $750,000
Undisbursed Funds $
----------
Principal $
----------
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $
----------
$10,000 Loan Fee
$ Accounts Receivable Audit Fee
--------
Other Charges Paid in Cash: $
----------
$ TBD UCC Search Fees
--------
$ TBD UCC Filing Fees
--------
$ TBD Patent Filing Fees
--------
$ TBD Trademark Filing Fees
--------
$ TBD Copyright Filing Fees
--------
$ TBD Outside Counsel Fees and Expenses (Estimate)
--------
Total Charges Paid in Cash $
----------
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered _____________the amount of any loan payment.
If the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF JUNE 26, 1996.
BORROWER:
- ----------------------------------
- ----------------------------------
Authorized Officer
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: Graphix Zone, Inc. BANK: Silicon Valley Bank
- --------------------------------------------------------------------------------
INSURANCE REQUIREMENTS. Graphix Zone, Inc. ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be canceled or diminished
without a minimum of twenty (20) days' prior
written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Bank. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of June 26, 1996, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement. The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 26,
1996.
GRANTOR:
GRAPHIX ZONE, INC.
x
----------------------------------
Authorized Officer
- -------------------------------------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
----------------------------- -----------------
AGENT'S NAME:
-----------------------------------------------------------------
INSURANCE COMPANY:
------------------------------------------------------------
POLICY NUMBER:
----------------------------------------------------------------
EFFECTIVE DATES:
--------------------------------------------------------------
COMMENTS:
---------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
- -------------------------------------------------------------------------------
BORROWER: Graphix Zone, Inc.
- -------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of Graphix Zone, Inc.
(the "Corporation"), HEREBY CERTIFY that the Corporation is organized and
existing under and by virtue of the laws of the State of California.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and
complete copies of the Articles of Incorporation and Bylaws of the Corporation,
each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and held, at which a quorum was present and voting (or by other duly
authorized corporate action in lieu of a meeting), the following resolutions
were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
- -------------------------------------------------------------------------------
- ---------------------- ----------------------- -------------------------
- ---------------------- ----------------------- -------------------------
- ---------------------- ----------------------- -------------------------
- ---------------------- ----------------------- -------------------------
- ---------------------- ----------------------- -------------------------
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of June 26, 1996 (the "Loan
Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory note or notes
of the Corporation, on Lender's forms, at such rates of interest and on such
terms as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of the Corporation to Bank, and also to execute and deliver to
Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion of
the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
1
<PAGE>
ISSUE WARRANTS. To issue warrants to purchase the Corporation's capital
stock, and to reserve for issuance of shares of the Corporation's common stock
under the warrants for such series and number, and on such terms, as an officer
of the Corporation shall deem appropriate.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set forth opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on June 25, 1996 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X
--------------------------------
Attachments:
1. Articles of Incorporation
2. By-Laws
2
<PAGE>
COLLATERAL ASSIGNMENT, PATENT MORTGAGE
AND SECURITY AGREEMENT
This Collateral Assignment, Patent Mortgage and Security Agreement is made
as of June 26, 1996, by and between GRAPHIX ZONE, a California corporation
("Assignor"), and SILICON VALLEY BANK, a California banking corporation
("Assignee").
RECITALS
A. Assignee has agreed to lend to Assignor certain funds (the "Loan"),
and Assignor desires to borrow such funds from Assignee pursuant to the terms of
a Loan and Security Agreement of even date herewith (the "Loan Agreement").
B. In order to induce Assignee to make the Loan, Assignor has agreed to
assign certain intangible property to Assignee for purposes of securing the
obligations of Assignor to Assignee.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. ASSIGNMENT, PATENT MORTGAGE AND GRANT OF SECURITY INTEREST. As
collateral security for the prompt and complete payment and performance of all
of Borrower's present or future indebtedness, obligations and liabilities to
Assignee, Assignor hereby assigns, transfers, conveys and grants a security
interest and mortgage to Assignee, as security, in and to Assignor's entire
right, title and interest in, to and under the following (all of which shall
collectively be called the "Collateral"):
(a) Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret, now or hereafter existing, created, acquired or
held, including without limitation those set forth on EXHIBIT A attached hereto
(collectively, the "Copyrights");
(b) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
(c) Any and all design rights which may be available to Assignor now
or hereafter existing, created, acquired or held;
(d) All patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same, including without limitation
the patents and patent applications set forth on EXHIBIT B attached hereto
(collectively, the "Patents");
(e) Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Assignor connected with and symbolized by
such trademarks, including without limitation those set forth on EXHIBIT C
attached hereto (collectively, the "Trademarks");
(f) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
1
<PAGE>
(g) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights; and
(h) All amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and
(i) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE
CONSTRUED AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE
ASSIGNOR'S OBLIGATIONS TO ASSIGNEE UNDER THE LOAN AGREEMENT.
2. AUTHORIZATION AND REQUEST. Assignor authorizes and requests that the
Register of Copyrights and the Commissioner of Patents and Trademarks record
this conditional assignment.
3. COVENANTS AND WARRANTIES. Assignor represents, warrants, covenants
and agrees as follows:
(a) Assignor is now the sole owner of the Collateral, except for
non-exclusive licenses granted by Assignor to its customers in the ordinary
course of business and joint venture partnership arrangements related to certain
of the Collateral as disclosed in writing to Bank;
(b) Performance of this Assignment does not conflict with or result
in a breach of any agreement to which Assignor is party or by which Assignor is
bound, except to the extent that certain intellectual property agreements
prohibit the assignment of the rights thereunder to a third party without the
licensor's or other party's consent and this Assignment constitutes an
assignment;
(c) During the term of this Assignment, Assignor will not transfer or
otherwise encumber any interest in the Collateral, except for non-exclusive
licenses granted by Assignor in the ordinary course of business or as set forth
in this Assignment;
(d) To its knowledge, each of the Patents is valid and enforceable,
and no part of the Collateral has been judged invalid or unenforceable, in whole
or in part, and no claim has been made that any part of the Collateral violates
the rights of any third party;
(e) Assignor shall promptly advise Assignee of any material change in
the composition of the Collateral, including but not limited to any subsequent
ownership right of the Assignor in or to any Trademark, Patent or Copyright not
specified in this Assignment;
(f) Assignor shall (i) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Assignee in writing of material infringements detected and
(iii) not allow any Trademarks, Patents or Copyrights to be abandoned, forfeited
or dedicated to the public without the written consent of Assignee, which shall
not be unreasonably withheld, unless Assignor determines that reasonable
business practices suggest that abandonment is appropriate.
(g) Assignor shall promptly register the most recent version of any
of Assignor's Copyrights, if not so already registered, and shall, from time to
time, execute and file such other instruments, and take such further actions as
Assignee may reasonably request from time to time to perfect or continue the
perfection of Assignee's interest in the Collateral;
2
<PAGE>
(h) This Assignment creates, and in the case of after acquired
Collateral, this Assignment will create at the time Assignor first has rights in
such after acquired Collateral, in favor of Assignee a valid and perfected first
priority security interest in the Collateral in the United States securing the
payment and performance of the obligations evidenced by the Note upon making the
filings referred to in clause (i) below;
(i) To its knowledge, except for, and upon, the filing with the
United States Patent and Trademark office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests and assignment created hereunder,
and except as has been already made or obtained, no authorization, approval or
other action by, and no notice to or filing with, any U.S. governmental
authority or U.S. regulatory body is required either (i) for the grant by
Assignor of the security interest granted hereby or for the execution, delivery
or performance of this Assignment by Assignor in the U.S. or (ii) for the
perfection in the United States or the exercise by Assignee of its rights and
remedies hereunder;
(j) All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is accurate
and complete in all material respects.
(k) Assignor shall not enter into any agreement that would materially
impair or conflict with Assignor's obligations hereunder without Assignee's
prior written consent, which consent shall not be unreasonably withheld.
Assignor shall not permit the inclusion in any material contract to which it
becomes a party of any provisions that could or might in any way prevent the
creation of a security interest in Assignor's rights and interests in any
property included within the definition of the Collateral acquired under such
contracts, except that certain contracts may contain anti-assignment provisions
that could in effect prohibit the creation of a security interest in such
contracts.
(l) Upon any executive officer of Assignor obtaining actual knowledge
thereof, Assignor will promptly notify Assignee in writing of any event that
materially adversely affects the value of any Collateral, the ability of
Assignor to dispose of any Collateral or the rights and remedies of Assignee in
relation thereto, including the levy of any legal process against any of the
Collateral.
4. ASSIGNEE'S RIGHTS. Assignee shall have the right, but not the
obligation, to take, at Assignor's sole expense, any actions that Assignor is
required under this Assignment to take but which Assignor fails to take, after
fifteen (15) days' notice to Assignor. Assignor shall reimburse and indemnify
Assignee for all reasonable costs and reasonable expenses incurred in the
reasonable exercise of its rights under this section 4.
5. INSPECTION RIGHTS. Assignor hereby grants to Assignee and its
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable written notice to Assignor, any of Assignor's plants
and facilities that manufacture, install or store products (or that have done so
during the prior six-month period) that are sold utilizing any of the
Collateral, and to inspect the products and quality control records relating
thereto upon reasonable written notice to Assignor and as often as may be
reasonably requested.
6. FURTHER ASSURANCES; ATTORNEY IN FACT.
(a) On a continuing basis, Assignor will make, execute,
acknowledge and deliver, and file and record in the proper filing and
recording places in the United States, all such instruments, including
appropriate financing and continuation statements and collateral agreements
and filings with the United States Patent and Trademark Office and the
Register of Copyrights, and take all such action as may reasonably be deemed
necessary or advisable, or as requested by
3
<PAGE>
Assignee, to perfect Assignee's security interest in all Copyrights, Patents
and Trademarks and otherwise to carry out the intent and purposes of this
Collateral Assignment, or for assuring and confirming to Assignee the grant
or perfection of a security interest in all Collateral.
(b) Assignor hereby irrevocably appoints Assignee as Assignor's
attorney-in-fact, with full authority in the place and stead of Assignor and in
the name of Assignor, from time to time in Assignee's discretion, to take any
action and to execute any instrument which Assignee may deem necessary or
advisable to accomplish the purposes of this Collateral Assignment, including
(i)
to modify, in its sole discretion, this Collateral Assignment without first
obtaining Assignor's approval of or signature to such modification by amending
Exhibit A, Exhibit B and Exhibit C, thereof, as appropriate, to include
reference to any right, title or interest in any Copyrights, Patents or
Trademarks acquired by Assignor after the execution hereof or to delete any
reference to any right, title or interest in any Copyrights, Patents or
Trademarks in which Assignor no longer has or claims any right, title or
interest, (ii) to file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Assignor where permitted by law and (iii)
after the occurrence of an Event of Default, to transfer the Collateral into the
name of Bank or a third party to the extent permitted under the California
Uniform Commercial Code.
7. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default under the Assignment:
(a) An Event of Default occurs under the Loan Agreement; or
(b) Assignor breaches any warranty or agreement made by Assignor in
this Assignment and, as to any breach that is capable of cure, Assignor fails to
cure such breach within five (5) days of the occurrence of such breach.
8. REMEDIES. Upon the occurrence and continuance of an Event of Default,
Assignee shall have the right to exercise all the remedies of a secured party
under the California Uniform Commercial Code, including without limitation the
right to require Assignor to assemble the Collateral and any tangible property
in which Assignee has a security interest and to make it available to Assignee
at a place designated by Assignee. Assignee shall have a nonexclusive, royalty
free license to use the Copyrights, Patents and Trademarks to the extent
reasonably necessary to permit Assignee to exercise its rights and remedies upon
the occurrence of an Event of Default. Assignor will pay any expenses
(including reasonable attorneys' fees) incurred by Assignee in connection with
the exercise of any of Assignee's rights hereunder, including without limitation
any expense incurred in disposing of the Collateral. All of Assignee's rights
and remedies with respect to the Collateral shall be cumulative.
9. INDEMNITY. Assignor agrees to defend, indemnify and hold harmless
Assignee and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement, and (b) all
losses or expenses in any way suffered, incurred, or paid by Assignee as a
result of or in any way arising out of, following or consequential to
transactions between Assignee and Assignor, whether under this Assignment or
otherwise (including without limitation reasonable attorneys' fees and
reasonable expenses), except for losses arising from or out of Assignee's gross
negligence or willful misconduct.
10. REASSIGNMENT. At such time as Assignor shall completely satisfy
all of the obligations secured hereunder, Assignee shall execute and deliver
to Assignor all deeds, assignments and other instruments as may be necessary
or proper to revest in Assignor full title to
4
<PAGE>
the property assigned hereunder, subject to any disposition thereof which may
have been made by Assignee pursuant hereto.
11. COURSE OF DEALING. No course of dealing, nor any failure to exercise,
nor any delay in exercising any right, power or privilege hereunder shall
operate as a waiver thereof.
12. ATTORNEYS' FEES. If any action relating to this Assignment is brought
by either party hereto against the other party, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements.
13. AMENDMENTS. This Assignment may be amended only by a written
instrument signed by both parties hereto.
14. COUNTERPARTS. This Assignment may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
15. CALIFORNIA LAW AND JURISDICTION; JURY WAIVER. This Assignment shall
be governed by the laws of the State of California, without regard for choice of
law provisions. Assignor and Assignee consent to the exclusive jurisdiction of
any state or federal court located in Santa Clara County, California. ASSIGNOR
AND ASSIGNEE EACH WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE LOAN AGREEMENT, THIS
ASSIGNMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the
day and year first above written.
Address of Assignor: ASSIGNOR:
42 Corporate Park, Suite 200 GRAPHIX ZONE, INC.
Irvine, CA 92714
Attn: Mr. Norman Block By:
-------------------------------
Title:
----------------------------
Address of Assignee: ASSIGNEE:
1731 Embarcadero Road, Suite 220 SILICON VALLEY BANK
Palo Alto, CA 94303
Attn: Ms. Kathleen Borie By:
-------------------------------
Title:
----------------------------
5
<PAGE>
EXHIBIT A
Copyrights
Registration Registration
Description Number Date Co-Owner
- ----------- ------------ ------------ ----------
The Artist Formerly Known as Prince PA763373 04/05/95 Graphix
(represented by a symbol) Zone, Inc.
<PAGE>
EXHIBIT B
Patents
NONE
<PAGE>
EXHIBIT C
Trademarks
Application
Serial No. Filing Date
- ----------- -----------
74-498,215 03/08/94
Registration No. Registration Date
- ---------------- -----------------
1,741,853 12/22/92
1,741,851 12/22/92
<PAGE>
COLLATERAL ASSIGNMENT, PATENT MORTGAGE
AND SECURITY AGREEMENT
This Collateral Assignment, Patent Mortgage and Security Agreement is made
as of June 26, 1996, by and between STARPRESS, INC., a Colorado corporation
("Assignor"), and SILICON VALLEY BANK, a California banking corporation
("Assignee").
RECITALS
A. Assignee has agreed to lend to Graphix Zone, Inc. (the "Borrower")
certain funds (the "Loan"), and Borrower desires to borrow such funds from
Assignor pursuant to the terms of a Loan and Security Agreement of even date
herewith (the "Loan Agreement").
B. In order to induce Assignee to make the Loan to Borrower, Assignor has
agreed to assign certain intangible property to Assignee for purposes of
securing the obligations of Borrower to Assignee.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. ASSIGNMENT, PATENT MORTGAGE AND GRANT OF SECURITY INTEREST. As
collateral security for the prompt and complete payment and performance of all
of Borrower's present or future indebtedness, obligations and liabilities to
Assignee, Assignor hereby assigns, transfers, conveys and grants a security
interest and mortgage to Assignee, as security, in and to Assignor's entire
right, title and interest in, to and under the following (all of which shall
collectively be called the "Collateral"):
(a) Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret, now or hereafter existing, created, acquired or
held, including without limitation those set forth on EXHIBIT A attached hereto
(collectively, the "Copyrights");
(b) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
(c) Any and all design rights which may be available to Assignor now
or hereafter existing, created, acquired or held;
(d) All patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same, including without limitation
the patents and patent applications set forth on EXHIBIT B attached hereto
(collectively, the "Patents");
(e) Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Assignor connected with and symbolized by
such trademarks, including without limitation those set forth on EXHIBIT C
attached hereto (collectively, the "Trademarks");
(f) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not the
obligation, to sue for
1
<PAGE>
and collect such damages for said use or infringement of the intellectual
property rights identified above;
(g) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights; and
(h) All amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and
(i) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE
CONSTRUED AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE
ASSIGNOR'S OBLIGATIONS TO ASSIGNEE UNDER THE LOAN AGREEMENT.
2. AUTHORIZATION AND REQUEST. Assignor authorizes and requests that the
Register of Copyrights and the Commissioner of Patents and Trademarks record
this conditional assignment.
3. COVENANTS AND WARRANTIES. Assignor represents, warrants, covenants
and agrees as follows:
(a) Assignor is now the sole owner of the Collateral, except for
non-exclusive licenses granted by Assignor to its customers in the ordinary
course of business and joint venture partnership arrangements related to certain
of the Collateral as disclosed in writing to Bank;
(b) Performance of this Assignment does not conflict with or result
in a breach of any agreement to which Assignor is party or by which Assignor is
bound, except to the extent that certain intellectual property agreements
prohibit the assignment of the rights thereunder to a third party without the
licensor's or other party's consent and this Assignment constitutes an
assignment;
(c) During the term of this Assignment, Assignor will not transfer or
otherwise encumber any interest in the Collateral, except for non-exclusive
licenses granted by Assignor in the ordinary course of business or as set forth
in this Assignment;
(d) To its knowledge, each of the Patents is valid and enforceable,
and no part of the Collateral has been judged invalid or unenforceable, in whole
or in part, and no claim has been made that any part of the Collateral violates
the rights of any third party;
(e) Assignor shall promptly advise Assignee of any material change in
the composition of the Collateral, including but not limited to any subsequent
ownership right of the Assignor in or to any Trademark, Patent or Copyright not
specified in this Assignment;
(f) Assignor shall (i) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Assignee in writing of material infringements detected and
(iii) not allow any Trademarks, Patents or Copyrights to be abandoned, forfeited
or dedicated to the public without the written consent of Assignee, which shall
not be unreasonably withheld, unless Assignor determines that reasonable
business practices suggest that abandonment is appropriate.
2
<PAGE>
(g) Assignor shall promptly register the most recent version of any
of Assignor's Copyrights, if not so already registered, and shall, from time to
time, execute and file such other instruments, and take such further actions as
Assignee may reasonably request from time to time to perfect or continue the
perfection of Assignee's interest in the Collateral;
(h) This Assignment creates, and in the case of after acquired
Collateral, this Assignment will create at the time Assignor first has rights in
such after acquired Collateral, in favor of Assignee a valid and perfected first
priority security interest in the Collateral in the United States securing the
payment and performance of the obligations evidenced by the Note upon making the
filings referred to in clause (i) below;
(i) To its knowledge, except for, and upon, the filing with the
United States Patent and Trademark office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests and assignment created hereunder,
and except as has been already made or obtained, no authorization, approval or
other action by, and no notice to or filing with, any U.S. governmental
authority or U.S. regulatory body is required either (i) for the grant by
Assignor of the security interest granted hereby or for the execution, delivery
or performance of this Assignment by Assignor in the U.S. or (ii) for the
perfection in the United States or the exercise by Assignee of its rights and
remedies hereunder;
(j) All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is accurate
and complete in all material respects.
(k) Assignor shall not enter into any agreement that would materially
impair or conflict with Assignor's obligations hereunder without Assignee's
prior written consent, which consent shall not be unreasonably withheld.
Assignor shall not permit the inclusion in any material contract to which it
becomes a party of any provisions that could or might in any way prevent the
creation of a security interest in Assignor's rights and interests in any
property included within the definition of the Collateral acquired under such
contracts, except that certain contracts may contain anti-assignment provisions
that could in effect prohibit the creation of a security interest in such
contracts.
(l) Upon any executive officer of Assignor obtaining actual knowledge
thereof, Assignor will promptly notify Assignee in writing of any event that
materially adversely affects the value of any Collateral, the ability of
Assignor to dispose of any Collateral or the rights and remedies of Assignee in
relation thereto, including the levy of any legal process against any of the
Collateral.
4. ASSIGNEE'S RIGHTS. Assignee shall have the right, but not the
obligation, to take, at Assignor's sole expense, any actions that Assignor is
required under this Assignment to take but which Assignor fails to take, after
fifteen (15) days' notice to Assignor. Assignor shall reimburse and indemnify
Assignee for all reasonable costs and reasonable expenses incurred in the
reasonable exercise of its rights under this section 4.
5. INSPECTION RIGHTS. Assignor hereby grants to Assignee and its
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable written notice to Assignor, any of Assignor's plants
and facilities that manufacture, install or store products (or that have done so
during the prior six-month period) that are sold utilizing any of the
Collateral, and to inspect the products and quality control records relating
thereto upon reasonable written notice to Assignor and as often as may be
reasonably requested.
3
<PAGE>
6. FURTHER ASSURANCES; ATTORNEY IN FACT.
(a) On a continuing basis, Assignor will make, execute, acknowledge
and deliver, and file and record in the proper filing and recording places in
the United States, all such instruments, including appropriate financing and
continuation statements and collateral agreements and filings with the United
States Patent and Trademark Office and the Register of Copyrights, and take all
such action as may reasonably be deemed necessary or advisable, or as requested
by Assignee, to perfect Assignee's security interest in all Copyrights, Patents
and Trademarks and otherwise to carry out the intent and purposes of this
Collateral Assignment, or for assuring and confirming to Assignee the grant or
perfection of a security interest in all Collateral.
(b) Assignor hereby irrevocably appoints Assignee as Assignor's
attorney-in-fact, with full authority in the place and stead of Assignor and in
the name of Assignor, from time to time in Assignee's discretion, to take any
action and to execute any instrument which Assignee may deem necessary or
advisable to accomplish the purposes of this Collateral Assignment, including
(i)
to modify, in its sole discretion, this Collateral Assignment without first
obtaining Assignor's approval of or signature to such modification by amending
Exhibit A, Exhibit B and Exhibit C, thereof, as appropriate, to include
reference to any right, title or interest in any Copyrights, Patents or
Trademarks acquired by Assignor after the execution hereof or to delete any
reference to any right, title or interest in any Copyrights, Patents or
Trademarks in which Assignor no longer has or claims any right, title or
interest, (ii) to file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Assignor where permitted by law and (iii)
after the occurrence of an Event of Default, to transfer the Collateral into the
name of Bank or a third party to the extent permitted under the California
Uniform Commercial Code.
7. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default under the Assignment:
(a) An Event of Default occurs under the Loan Agreement; or
(b) Assignor breaches any warranty or agreement made by Assignor in
this Assignment and, as to any breach that is capable of cure, Assignor fails to
cure such breach within five (5) days of the occurrence of such breach.
8. REMEDIES. Upon the occurrence and continuance of an Event of Default,
Assignee shall have the right to exercise all the remedies of a secured party
under the California Uniform Commercial Code, including without limitation the
right to require Assignor to assemble the Collateral and any tangible property
in which Assignee has a security interest and to make it available to Assignee
at a place designated by Assignee. Assignee shall have a nonexclusive, royalty
free license to use the Copyrights, Patents and Trademarks to the extent
reasonably necessary to permit Assignee to exercise its rights and remedies upon
the occurrence of an Event of Default. Assignor will pay any expenses
(including reasonable attorneys' fees) incurred by Assignee in connection with
the exercise of any of Assignee's rights hereunder, including without limitation
any expense incurred in disposing of the Collateral. All of Assignee's rights
and remedies with respect to the Collateral shall be cumulative.
9. INDEMNITY. Assignor agrees to defend, indemnify and hold harmless
Assignee and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement, and (b) all
losses or expenses in any way suffered, incurred, or paid by Assignee as a
result of or in any way arising out of, following or consequential to
transactions between Assignee and Assignor, whether under this Assignment or
otherwise (including without limitation reasonable
4
<PAGE>
attorneys' fees and reasonable expenses), except for losses arising from or out
of Assignee's gross negligence or willful misconduct.
10. REASSIGNMENT. At such time as Assignor shall completely satisfy all
of the obligations secured hereunder, Assignee shall execute and deliver to
Assignor all deeds, assignments and other instruments as may be necessary or
proper to revest in Assignor full title to the property assigned hereunder,
subject to any disposition thereof which may have been made by Assignee pursuant
hereto.
11. COURSE OF DEALING. No course of dealing, nor any failure to exercise,
nor any delay in exercising any right, power or privilege hereunder shall
operate as a waiver thereof.
12. ATTORNEYS' FEES. If any action relating to this Assignment is brought
by either party hereto against the other party, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements.
13. AMENDMENTS. This Assignment may be amended only by a written
instrument signed by both parties hereto.
14. COUNTERPARTS. This Assignment may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
15. CALIFORNIA LAW AND JURISDICTION; JURY WAIVER. This Assignment shall
be governed by the laws of the State of California, without regard for choice of
law provisions. Assignor and Assignee consent to the exclusive jurisdiction of
any state or federal court located in Santa Clara County, California. ASSIGNOR
AND ASSIGNEE EACH WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE LOAN AGREEMENT, THIS
ASSIGNMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the
day and year first above written.
Address of Assignor: ASSIGNOR:
42 Corporate Park, Suite 200 STARPRESS, INC.
Irvine, California 92714
Attn: Mr. Norm Block By:
-------------------------------------
Title:
----------------------------------
Address of Assignee: ASSIGNEE:
1731 Embarcadero Road, Suite 220 SILICON VALLEY BANK
Palo Alto, CA 94303
Attn: Ms. Kathleen Borie By:
-------------------------------------
Title:
----------------------------------
5
<PAGE>
EXHIBIT A
Copyrights
Registration/ Registration/
Application Application
Description Number Date
- ----------- ------------ ------------
<PAGE>
EXHIBIT B
Patents
Registration/ Registration/
Application Application
Description Number Date
- ----------- ------------ ------------
<PAGE>
EXHIBIT C
Trademarks
Registration/ Registration/
Application Application
Description Number Date
- ----------- ------------ ------------
<PAGE>
UNCONDITIONAL GUARANTY
(Graphix Zone, Inc., a Delaware corporation)
For and in consideration of the loan by SILICON VALLEY BANK ("Bank") to
Graphix Zone, Inc., a California corporation ("Borrower"), which loan is made
pursuant to a Loan and Security Agreement of even date herewith between Borrower
and Bank (the "Agreement"), the undersigned guarantor ("Guarantor") hereby
unconditionally and irrevocably guarantees the prompt and complete payment of
all amounts that Borrower owes to Bank and performance by Borrower of the
Agreement and any other agreements between Borrower and Bank, as amended from
time to time (collectively referred to as the "Agreements"), in strict
accordance with their respective terms.
1. If Borrower does not perform its obligations in strict accordance
with the Agreements, Guarantor shall immediately pay all amounts due thereunder
(including, without limitation, all principal, interest, and fees) and otherwise
to proceed to complete the same and satisfy all of Borrower's obligations under
the Agreements.
2. The obligations hereunder are independent of the obligations of
Borrower, and a separate action or actions may be brought and prosecuted against
Guarantor whether action is brought against Borrower or whether Borrower be
joined in any such action or actions. Guarantor waives the benefit of any
statute of limitations affecting its liability hereunder or the enforcement
thereof, to the extent permitted by law. Guarantor's liability under this
Guaranty is not conditioned or contingent upon the genuineness, validity,
regularity or enforceability of the Agreements.
3. Guarantor authorizes Bank, without notice or demand and without
affecting its liability hereunder, from time to time to (a) renew, extend, or
otherwise change the terms of the Agreements or any part thereof; (b) take and
hold security for the payment of this Guaranty or the Agreements, and exchange,
enforce, waive and release any such security; and (c) apply such security and
direct the order or manner of sale thereof as Bank in its sole discretion may
determine.
4. Guarantor waives any right to require Bank to (a) proceed against
Borrower or any other person; (b) proceed against or exhaust any security held
from Borrower; or (c) pursue any other remedy in Bank's power whatsoever. Bank
may, at its election, exercise or decline or fail to exercise any right or
remedy it may have against Borrower or any security held by Bank, including
without limitation the right to foreclose upon any such security by judicial or
nonjudicial sale, without affecting or impairing in any way the liability of
Guarantor hereunder. Guarantor waives any defense arising by reason of any
disability or other defense of Borrower or by reason of the cessation from any
cause whatsoever of the liability of Borrower. Guarantor waives any setoff,
defense or counterclaim that Borrower may have against Bank. Guarantor waives
any defense arising out of the absence, impairment or loss of any right of
reimbursement or subrogation or any other rights against Borrower. Until all of
the amounts that Borrower owes to Bank have been paid in full, Guarantor shall
have no right of subrogation or reimbursement for claims arising out of or in
connection with this Guaranty, contribution or other rights against Borrower,
and Guarantor waives any right to enforce any remedy that Bank now has or may
hereafter have against Borrower. Guarantor waives all rights to participate in
any security now or hereafter held by Bank. Guarantor waives all presentments,
demands for performance, notices of nonperformance, protests, notices of
protest, notices of dishonor, and notices of acceptance of this Guaranty and of
the existence, creation, or incurring of new or additional indebtedness.
Guarantor assumes the responsibility for being and keeping itself informed of
the financial condition of Borrower and of all other circumstances bearing upon
the risk of nonpayment of any indebtedness or nonperformance of any obligation
of Borrower, warrants to Bank that it will keep so informed, and agrees that
absent a request for particular information by Guarantor, Bank shall have no
duty to advise Guarantor of information known to Bank regarding such condition
or any such circumstances. Guarantor waives
1
<PAGE>
the benefits of California Civil Code sections 2809, 2810, 2819, 2845, 2847,
2848, 2849, 2850, 2899 and 3433.
5. Guarantor acknowledges that, to the extent Guarantor has or may have
certain rights of subrogation or reimbursement against Borrower for claims
arising out of this Guaranty, those rights may be impaired or destroyed if Bank
elects to proceed against any real property security of Borrower by non-judicial
foreclosure. That impairment or destruction could, under certain judicial cases
and based on equitable principles of estoppel, give rise to a defense by
Guarantor against its obligations under this Guaranty. Guarantor waives that
defense and any others arising from Bank's election to pursue non-judicial
foreclosure. Without limiting the generality of the foregoing, Guarantor waives
any and all benefits and defenses under California Code of Civil Procedure
Sections 580a, 580b, 580d and 726, to the extent they are applicable.
6. If Borrower becomes insolvent or is adjudicated bankrupt or files a
petition for reorganization, arrangement, composition or similar relief under
any present or future provision of the United States Bankruptcy Code, or if such
a petition is filed against Borrower, and in any such proceeding some or all of
any indebtedness or obligations under the Agreements are terminated or rejected
or any obligation of Borrower is modified or abrogated, or if Borrower's
obligations are otherwise avoided for any reason, Guarantor agrees that
Guarantor's liability hereunder shall not thereby be affected or modified and
such liability shall continue in full force and effect as if no such action or
proceeding had occurred. This Guaranty shall continue to be effective or be
reinstated, as the case may be, if any payment must be returned by Bank upon the
insolvency, bankruptcy or reorganization of Borrower, Guarantor, any other
guarantor, or otherwise, as though such payment had not been made.
7. Any indebtedness of Borrower now or hereafter held by Guarantor is
hereby subordinated to any indebtedness of Borrower to Bank; and such
indebtedness of Borrower to Guarantor shall be collected, enforced and received
by Guarantor as trustee for Bank and be paid over to Bank on account of the
indebtedness of Borrower to Bank but without reducing or affecting in any manner
the liability of Guarantor under the other provisions of this Guaranty.
8. Guarantor agrees to pay a reasonable attorneys' fee and all other
costs and expenses which may be incurred by Bank in the enforcement of this
Guaranty. No terms or provisions of this Guaranty may be changed, waived,
revoked or amended without Lender's prior written consent. Should any provision
of this Guaranty be determined by a court of competent jurisdiction to be
unenforceable, all of the other provisions shall remain effective. This
Guaranty, together with any agreements (including without limitation any
security agreements or any pledge agreements) executed in connection with this
Guaranty, embodies the entire agreement among the parties hereto with respect to
the matters set forth herein, and supersedes all prior agreements among the
parties with respect to the matters set forth herein. No course of prior
dealing among the parties, no usage of trade, and no parol or extrinsic evidence
of any nature shall be used to supplement, modify or vary any of the terms
hereof. There are no conditions to the full effectiveness of this Guaranty.
Bank may assign this Guaranty without in any way affecting Guarantor's liability
under it. This Guaranty shall inure to the benefit of Bank and its successors
and assigns. This Guaranty is in addition to the guaranties of any other
guarantors and any and all other guaranties of Borrower's indebtedness or
liabilities to Bank.
9. Guarantor represents and warrants to Bank that (i) Guarantor has
taken all necessary and appropriate action to authorize the execution, delivery
and performance of this Guaranty, (ii) execution, delivery and performance of
this Guaranty do not conflict with or result in a breach of or constitute a
default under Guarantor's Articles of Incorporation or Bylaws or other
organizational documents or agreements to which it is party or by which it is
bound, and (iii) this Guaranty constitutes a valid and binding obligation,
enforceable against Guarantor in accordance with its terms.
2
<PAGE>
10. Guarantor covenants and agrees that Guarantor shall do all of the
following:
10.1 Guarantor shall maintain its corporate existence, remain in
good standing in Delaware and continue to qualify in each jurisdiction in which
the failure to so qualify could have a material adverse effect on the financial
condition, operations or business of Guarantor. Guarantor shall maintain in
force all licenses, approvals and agreements, the loss of which could have a
material adverse effect on its financial condition, operations or business.
10.2 Guarantor shall comply with all statutes, laws, ordinances,
directives, orders, and government rules and regulations to which it is subject
if non-compliance with such laws could adversely affect the financial condition,
operations or business of Guarantor.
10.3 At any time and from time to time Guarantor shall execute and
deliver such further instruments and take such further action as may reasonably
be requested by Bank to effect the purposes of this Agreement.
11. To secure all obligations owing under this Guaranty, Guarantor
grants Bank a security interest in the property described on attached EXHIBIT A.
Guarantor shall execute such documents and take such actions as Bank may request
to perfect the security interest granted in this Guaranty.
12. This Guaranty shall be governed by the laws of the State of
California, without regard to conflicts of laws principles. GUARANTOR WAIVES
ANY RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING
OUT OF THIS GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. Guarantor submits to the exclusive jurisdiction of the state
and federal courts located in Santa Clara County, California.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty
as of this 26th day of June, 1996.
GRAPHIX ZONE, INC., a Delaware
corporation
By:
------------------------------------
Title:
---------------------------------
3
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Guarantor
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Guarantor's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Guarantor's books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Guarantor
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Guarantor, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by Guarantor and Guarantor's books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Guarantor's books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter acquired;
all trade secret rights, including all rights to unpatented inventions,
know-how, operating manuals, license rights and agreements and confidential
information, now owned or hereafter acquired; all mask work or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired; all claims for damages by way of any past, present and future
infringement of any of the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
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CORPORATE RESOLUTION TO GUARANTEE
- --------------------------------------------------------------------------------
GUARANTOR: GRAPHIX ZONE, INC., A DELAWARE CORPORATION
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of Graphix Zone, Inc.,
a Delware corporation (the "Corporation"), HEREBY CERTIFY that the Corporation
is organized and existing under and by virtue of the laws of the State of
Delaware.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation
duly called and held, at which a quorum was present and voting (or by other duly
authorized corporate action in lieu of a meeting), the following resolutions
were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
- ------------------------ ------------------------ ------------------------
- ------------------------ ------------------------ ------------------------
- ------------------------ ------------------------ ------------------------
- ------------------------ ------------------------ ------------------------
- ------------------------ ------------------------ ------------------------
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
GUARANTEE INDEBTEDNESS. To guarantee amounts borrowed from time to time
from Silicon Valley Bank ("Bank") by Graphix Zone, Inc., a California
corporation ("Borrower") pursuant to that certain Loan and Security Agreement
between Bank and Borrower dated as of June 26, 1996, as amended from time to
time (the "Loan Agreement").
EXECUTE GUARANTY. To execute and deliver to Bank the guaranty of the
Corporation (the "Guaranty"), on Bank's forms, and also to execute and deliver
to Bank one or more renewals, extensions, modifications, consolidations, or
substitutions therefor.
GRANT SECURITY. To grant a security interest to Bank in the Collateral,
if any, described in the Guaranty, which security interest shall secure all of
the Corporation's obligations under the Guaranty.
FURTHER ACTS. To do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements as they may in their discretion deem reasonably necessary or proper
in order to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in
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full force and effect and Bank may rely on these Resolutions until written
notice of their revocation shall have been delivered to and received by Bank.
Any such notice shall not affect any of the Corporation's agreements or
commitments in effect at the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on June 26, 1996, and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X
-------------------------------
- --------------------------------------------------------------------------------
2
<PAGE>
UNCONDITIONAL GUARANTY
(StarPress, Inc.)
For and in consideration of the loan by SILICON VALLEY BANK ("Bank") to
Graphix Zone, Inc., a California corporation ("Borrower"), which loan is made
pursuant to a Loan and Security Agreement of even date herewith between Borrower
and Bank (the "Agreement"), the undersigned guarantor ("Guarantor") hereby
unconditionally and irrevocably guarantees the prompt and complete payment of
all amounts that Borrower owes to Bank and performance by Borrower of the
Agreement and any other agreements between Borrower and Bank, as amended from
time to time (collectively referred to as the "Agreements"), in strict
accordance with their respective terms.
1. If Borrower does not perform its obligations in strict accordance with
the Agreements, Guarantor shall immediately pay all amounts due thereunder
(including, without limitation, all principal, interest, and fees) and otherwise
to proceed to complete the same and satisfy all of Borrower's obligations under
the Agreements.
2. The obligations hereunder are independent of the obligations of
Borrower, and a separate action or actions may be brought and prosecuted against
Guarantor whether action is brought against Borrower or whether Borrower be
joined in any such action or actions. Guarantor waives the benefit of any
statute of limitations affecting its liability hereunder or the enforcement
thereof, to the extent permitted by law. Guarantor's liability under this
Guaranty is not conditioned or contingent upon the genuineness, validity,
regularity or enforceability of the Agreements.
3. Guarantor authorizes Bank, without notice or demand and without
affecting its liability hereunder, from time to time to (a) renew, extend, or
otherwise change the terms of the Agreements or any part thereof; (b) take and
hold security for the payment of this Guaranty or the Agreements, and exchange,
enforce, waive and release any such security; and (c) apply such security and
direct the order or manner of sale thereof as Bank in its sole discretion may
determine.
4. Guarantor waives any right to require Bank to (a) proceed against
Borrower or any other person; (b) proceed against or exhaust any security held
from Borrower; or (c) pursue any other remedy in Bank's power whatsoever. Bank
may, at its election, exercise or decline or fail to exercise any right or
remedy it may have against Borrower or any security held by Bank, including
without limitation the right to foreclose upon any such security by judicial or
nonjudicial sale, without affecting or impairing in any way the liability of
Guarantor hereunder. Guarantor waives any defense arising by reason of any
disability or other defense of Borrower or by reason of the cessation from any
cause whatsoever of the liability of Borrower. Guarantor waives any setoff,
defense or counterclaim that Borrower may have against Bank. Guarantor waives
any defense arising out of the absence, impairment or loss of any right of
reimbursement or subrogation or any other rights against Borrower. Until all of
the amounts that Borrower owes to Bank have been paid in full, Guarantor shall
have no right of subrogation or reimbursement for claims arising out of or in
connection with this Guaranty, contribution or other rights against Borrower,
and Guarantor waives any right to enforce any remedy that Bank now has or may
hereafter have against Borrower. Guarantor waives all rights to participate in
any security now or hereafter held by Bank. Guarantor waives all presentments,
demands for performance, notices of nonperformance, protests, notices of
protest, notices of dishonor, and notices of acceptance of this Guaranty and of
the existence, creation, or incurring of new or additional indebtedness.
Guarantor assumes the responsibility for being and keeping itself informed of
the financial condition of Borrower and of all other circumstances bearing upon
the risk of nonpayment of any indebtedness or nonperformance of any obligation
of Borrower, warrants to Bank that it will keep so informed, and agrees that
absent a request for particular information by Guarantor, Bank shall have no
duty to advise Guarantor of information known to Bank regarding such condition
or any such circumstances. Guarantor waives
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the benefits of California Civil Code sections 2809, 2810, 2819, 2845, 2847,
2848, 2849, 2850, 2899 and 3433.
5. Guarantor acknowledges that, to the extent Guarantor has or may have
certain rights of subrogation or reimbursement against Borrower for claims
arising out of this Guaranty, those rights may be impaired or destroyed if Bank
elects to proceed against any real property security of Borrower by non-judicial
foreclosure. That impairment or destruction could, under certain judicial cases
and based on equitable principles of estoppel, give rise to a defense by
Guarantor against its obligations under this Guaranty. Guarantor waives that
defense and any others arising from Bank's election to pursue non-judicial
foreclosure. Without limiting the generality of the foregoing, Guarantor waives
any and all benefits and defenses under California Code of Civil Procedure
Sections 580a, 580b, 580d and 726, to the extent they are applicable.
6. If Borrower becomes insolvent or is adjudicated bankrupt or files a
petition for reorganization, arrangement, composition or similar relief under
any present or future provision of the United States Bankruptcy Code, or if such
a petition is filed against Borrower, and in any such proceeding some or all of
any indebtedness or obligations under the Agreements are terminated or rejected
or any obligation of Borrower is modified or abrogated, or if Borrower's
obligations are otherwise avoided for any reason, Guarantor agrees that
Guarantor's liability hereunder shall not thereby be affected or modified and
such liability shall continue in full force and effect as if no such action or
proceeding had occurred. This Guaranty shall continue to be effective or be
reinstated, as the case may be, if any payment must be returned by Bank upon the
insolvency, bankruptcy or reorganization of Borrower, Guarantor, any other
guarantor, or otherwise, as though such payment had not been made.
7. Any indebtedness of Borrower now or hereafter held by Guarantor is
hereby subordinated to any indebtedness of Borrower to Bank; and such
indebtedness of Borrower to Guarantor shall be collected, enforced and received
by Guarantor as trustee for Bank and be paid over to Bank on account of the
indebtedness of Borrower to Bank but without reducing or affecting in any manner
the liability of Guarantor under the other provisions of this Guaranty.
8. Guarantor agrees to pay a reasonable attorneys' fee and all other
costs and expenses which may be incurred by Bank in the enforcement of this
Guaranty. No terms or provisions of this Guaranty may be changed, waived,
revoked or amended without Lender's prior written consent. Should any provision
of this Guaranty be determined by a court of competent jurisdiction to be
unenforceable, all of the other provisions shall remain effective. This
Guaranty, together with any agreements (including without limitation any
security agreements or any pledge agreements) executed in connection with this
Guaranty, embodies the entire agreement among the parties hereto with respect to
the matters set forth herein, and supersedes all prior agreements among the
parties with respect to the matters set forth herein. No course of prior
dealing among the parties, no usage of trade, and no parol or extrinsic evidence
of any nature shall be used to supplement, modify or vary any of the terms
hereof. There are no conditions to the full effectiveness of this Guaranty.
Bank may assign this Guaranty without in any way affecting Guarantor's liability
under it. This Guaranty shall inure to the benefit of Bank and its successors
and assigns. This Guaranty is in addition to the guaranties of any other
guarantors and any and all other guaranties of Borrower's indebtedness or
liabilities to Bank.
9. Guarantor represents and warrants to Bank that (i) Guarantor has taken
all necessary and appropriate action to authorize the execution, delivery and
performance of this Guaranty, (ii) execution, delivery and performance of this
Guaranty do not conflict with or result in a breach of or constitute a default
under Guarantor's Articles of Incorporation or Bylaws or other organizational
documents or agreements to which it is party or by which it is bound, and
(iii) this Guaranty constitutes a valid and binding obligation, enforceable
against Guarantor in accordance with its terms.
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<PAGE>
10. Guarantor covenants and agrees that Guarantor shall do all of the
following:
10.1 Guarantor shall maintain its corporate existence, remain in good
standing in Delaware and continue to qualify in each jurisdiction in which the
failure to so qualify could have a material adverse effect on the financial
condition, operations or business of Guarantor. Guarantor shall maintain in
force all licenses, approvals and agreements, the loss of which could have a
material adverse effect on its financial condition, operations or business.
10.2 Guarantor shall comply with all statutes, laws, ordinances,
directives, orders, and government rules and regulations to which it is subject
if non-compliance with such laws could adversely affect the financial condition,
operations or business of Guarantor.
10.3 At any time and from time to time Guarantor shall execute and
deliver such further instruments and take such further action as may reasonably
be requested by Bank to effect the purposes of this Agreement.
11. To secure all obligations owing under this Guaranty, Guarantor grants
Bank a security interest in the property described on attached EXHIBIT A.
Guarantor shall execute such documents and take such actions as Bank may request
to perfect the security interest granted in this Guaranty.
12. This Guaranty shall be governed by the laws of the State of
California, without regard to conflicts of laws principles. GUARANTOR WAIVES
ANY RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING
OUT OF THIS GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. Guarantor submits to the exclusive jurisdiction of the state
and federal courts located in Santa Clara County, California.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as
of this 26th day of June, 1996.
STARPRESS, INC.
By: ____________________________________
Title:__________________________________
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<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Guarantor
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Guarantor's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Guarantor's books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Guarantor
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Guarantor, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by Guarantor and Guarantor's books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Guarantor's books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
4
<PAGE>
CORPORATE RESOLUTION TO GUARANTEE
- ------------------------------------------------------------------------------
GUARANTOR: STARPRESS, INC.
- ------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of StarPress, Inc. (the
"Corporation"), HEREBY CERTIFY that the Corporation is organized and existing
under and by virtue of the laws of the State of California.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation
duly called and held, at which a quorum was present and voting (or by other duly
authorized corporate action in lieu of a meeting), the following resolutions
were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
- ----------------- --------------------- ---------------------------
- ----------------- --------------------- ---------------------------
- ----------------- --------------------- ---------------------------
- ----------------- --------------------- ---------------------------
- ----------------- --------------------- ---------------------------
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
GUARANTEE INDEBTEDNESS. To guarantee amounts borrowed from time to time
from Silicon Valley Bank ("Bank") by Graphix Zone, Inc. ("Borrower") pursuant to
that certain Loan and Security Agreement between Bank and Borrower dated as of
June 26, 1996, as amended from time to time (the "Loan Agreement").
EXECUTE GUARANTY. To execute and deliver to Bank the guaranty of the
Corporation (the "Guaranty"), on Bank's forms, and also to execute and deliver
to Bank one or more renewals, extensions, modifications, consolidations, or
substitutions therefor.
GRANT SECURITY. To grant a security interest to Bank in the Collateral, if
any, described in the Guaranty, which security interest shall secure all of the
Corporation's obligations under the Guaranty.
FURTHER ACTS. To do and perform such other acts and things, to pay any and
all fees and costs, and to execute and deliver such other documents and
agreements as they may in their discretion deem reasonably necessary or proper
in order to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been
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delivered to and received by Bank. Any such notice shall not affect any of
the Corporation's agreements or commitments in effect at the time notice is
given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on June 26, 1996, and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X
-------------------------------
- ------------------------------------------------------------------------------
2
<PAGE>
SUBORDINATION AGREEMENT
This Subordination Agreement is made as of June 26, 1996, by and between
Graphix Zone, Inc. ("Creditor"), and Silicon Valley Bank ("Bank").
RECITALS
A. StarPress, Inc. ("BORROWER") has requested and/or obtained certain
loans or other credit accommodations from Bank to Borrower which are or may be
from time to time secured by assets and property of Borrower.
B. Creditor has extended loans or other credit accommodations to
Borrower, and/or may extend loans or other credit accommodations to Borrower
from time to time.
C. In order to induce Bank to extend credit to Borrower and, at any time
or from time to time, at Bank's option, to make such further loans, extensions
of credit, or other accommodations to or for the account of Borrower, or to
purchase or extend credit upon any instrument or writing in respect of which
Borrower may be liable in any capacity, or to grant such renewals or extension
of any such loan, extension of credit, purchase, or other accommodation as Bank
may deem advisable, Creditor is willing to subordinate: (i) all of Borrower's
indebtedness and obligations to Creditor, whether presently existing or arising
in the future (the "SUBORDINATED DEBT") to all of Borrower's indebtedness and
obligations to Bank; and (ii) all of Creditor's security interests, if any, to
all of Bank's security interests in the Borrower's property.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Creditor subordinates to Bank any security interest or lien that
Creditor may have in any property of Borrower. Notwithstanding the respective
dates of attachment or perfection of the security interest of Creditor and the
security interest of Bank, the security interest of Bank in the Collateral, as
defined in the Loan and Security Agreement, of even date herewith, between
Borrower and Bank (the "LOAN AGREEMENT"), shall at all times be prior to the
security interest of Creditor.
2. All Subordinated Debt is subordinated in right of payment to all
obligations of Borrower to Bank now existing or hereafter arising, together with
all costs of collecting such obligations (including attorneys' fees), including,
without limitation, all interest accruing after the commencement by or against
Borrower of any bankruptcy, reorganization or similar proceeding, and all
obligations under the Loan Agreement (the "SENIOR DEBT").
3. Creditor will not demand or receive from Borrower (and Borrower will
not pay to Creditor) all or any part of the Subordinated Debt, by way of
payment, prepayment, setoff, lawsuit or otherwise, nor will Creditor exercise
any remedy with respect to the Collateral, nor will Creditor commence, or cause
to commence, prosecute or participate in any administrative, legal or equitable
action against Borrower, for so long as any portion of the Senior Debt remains
outstanding. The foregoing notwithstanding, Creditor shall be entitled to
receive each regularly scheduled payment of interest that constitutes
Subordinated Debt, provided that an Event of Default, as defined in the Loan
Agreement, has not occurred and is not continuing and would not exist
immediately after such payment.
4. Creditor shall promptly deliver to Bank in the form received (except
for endorsement or assignment by Creditor where required by Bank) for
application to the Senior Debt any payment, distribution, security or proceeds
received by Creditor with respect to the Subordinated Debt other than in
accordance with this Agreement.
5. In the event of Borrower's insolvency, reorganization or any case or
proceeding under any bankruptcy or insolvency law or laws relating to the relief
of debtors, these provisions shall remain in full force
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and effect, and Bank's claims against Borrower and the estate of Borrower
shall be paid in full before any payment is made to Creditor.
6. For so long as any of the Senior Debt remains unpaid, Creditor
irrevocably appoints Bank as Creditor's attorney-in-fact, and grants to Bank a
power of attorney with full power of substitution, in the name of Creditor or in
the name of Bank, for the use and benefit of Bank, without notice to Creditor,
to perform at Bank's option the following acts in any bankruptcy, insolvency or
similar proceeding involving Borrower:
(i) To file the appropriate claim or claims in respect of the
Subordinated Debt on behalf of Creditor if Creditor does not do so prior to 30
days before the expiration of the time to file claims in such proceeding and if
Bank elects, in its sole discretion, to file such claim or claims; and
(ii) To accept or reject any plan of reorganization or arrangement on
behalf of Creditor and to otherwise vote Creditor's claims in respect of any
Subordinated Debt in any manner that Bank deems appropriate for the enforcement
of its rights hereunder.
7. Creditor shall immediately affix a legend to the instruments
evidencing the Subordinated Debt stating that the instruments are subject to the
terms of this Agreement. No amendment of the documents evidencing or relating
to the Subordinated Debt shall directly or indirectly modify the provisions of
this Agreement in any manner which might terminate or impair the subordination
of the Subordinated Debt or the subordination of the security interest or lien
that Creditor may have in any property of Borrower. By way of example, such
instruments shall not be amended to (i) increase the rate of interest with
respect to the Subordinated Debt, or (ii) accelerate the payment of the
principal or interest or any other portion of the Subordinated Debt.
8. This Agreement shall remain effective for so long as Borrower owes
any amounts to Bank under the Loan Agreement or otherwise. If, at any time
after payment in full of the Senior Debt any payments of the Senior Debt must
be disgorged by Bank for any reason (including, without limitation, the
bankruptcy of Borrower), this Agreement and the relative rights and
priorities set forth herein shall be reinstated as to all such disgorged
payments as though such payments had not been made and Creditor shall
immediately pay over to Bank all payments received with respect to the
Subordinated Debt to the extent that such payments would have been prohibited
hereunder. At any time and from time to time, without notice to Creditor,
Bank may take such actions with respect to the Senior Debt as Bank, in its
sole discretion, may deem appropriate, including, without limitation,
terminating advances to Borrower, increasing the principal amount, extending
the time of payment, increasing applicable interest rates, renewing,
compromising or otherwise amending the terms of any documents affecting the
Senior Debt and any collateral securing the Senior Debt, and enforcing or
failing to enforce any rights against Borrower or any other person. No such
action or inaction shall impair or otherwise affect Bank's rights hereunder.
Creditor waives the benefits, if any, of Civil Code Sections 2809, 2810,
2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433.
9. This Agreement shall bind any successors or assignees of Creditor and
shall benefit any successors or assigns of Bank. This Agreement is solely for
the benefit of Creditor and Bank and not for the benefit of Borrower or any
other party. Creditor further agrees that if Borrower is in the process of
refinancing a portion of the Senior Debt with a new lender, and if Bank makes a
request of Creditor, Creditor shall agree to enter into a new subordination
agreement with the new lender on substantially the terms and conditions of this
Agreement.
10. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
instrument.
11. This Agreement shall be governed by and construed in accordance with
the laws of the State of California, without giving effect to conflicts of laws
principles. Creditor and Bank submit to the exclusive jurisdiction of the state
and federal courts located in Santa Clara County, California. CREDITOR AND BANK
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
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BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN.
12. This Agreement represents the entire agreement with respect to the
subject matter hereof, and supersedes all prior negotiations, agreements and
commitments. Creditor is not relying on any representations by Bank or Borrower
in entering into this Agreement, and Creditor has kept and will continue to keep
itself fully apprised of the financial and other condition of Borrower. This
Agreement may be amended only by written instrument signed by Creditor and Bank.
13. In the event of any legal action to enforce the rights of a party
under this Agreement, the party prevailing in such action shall be entitled, in
addition to such other relief as may be granted, all reasonable costs and
expenses, including reasonable attorneys' fees, incurred in such action.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
"Creditor" "Bank"
GRAPHIX ZONE, INC. SILICON VALLEY BANK
By: By:
--------------------------------- ----------------------------
Title: Title:
------------------------------ -------------------------
The undersigned approves of the terms of this Agreement.
"Borrower"
STARPRESS, INC.
By:
-----------------------------
Title:
--------------------------
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THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Graphix Zone, Inc., a California corporation
Number of Shares: 20,000
Class of Stock: Common
Initial Exercise Price: $5.625
Issue Date: June 26, 1996
Expiration Date: June 26, 2001
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, SILICON VALLEY BANK ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE.
1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by
delivering a duly executed Notice of Exercise in substantially the form attached
as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as
specified in Section 1.1, Holder may from time to time convert this Warrant, in
whole or in part, into a number of Shares determined by dividing (a) the
aggregate fair market value of the Shares or other securities otherwise issuable
upon exercise of this Warrant minus the aggregate Warrant Price of such Shares
by (b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant Section 1.4.
1.3 [Intentionally Omitted].
1.4 FAIR MARKET VALUE. If the Shares are traded in a public market,
the fair market value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Shares are not traded in a public market, the
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgment. The foregoing notwithstanding, if Holder
advises the Board of Directors in writing that Holder disagrees
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with such determination, then the Company and Holder shall promptly agree
upon a reputable investment banking firm to undertake such valuation. If the
valuation of such investment banking firm is greater than that determined by
the Board of Directors, then all fees and expenses of such investment banking
firm shall be paid by the Company. In all other circumstances, such fees and
expenses shall be paid by Holder.
1.5 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE COMPANY.
1.7.1. "ACQUISITION". For the purpose of this Warrant,
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2. ASSUMPTION OF WARRANT. Upon the closing of any
Acquisition the successor entity shall assume the obligations of this Warrant,
and this Warrant shall be exercisable for the same securities, cash, and
property as would be payable for the Shares issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were outstanding on the
record date for the Acquisition and subsequent closing. The Warrant Price shall
be adjusted accordingly.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of
2
<PAGE>
securities and property that Holder would have received for the Shares if
this Warrant had been exercised immediately before such reclassification,
exchange, substitution, or other event. Such an event shall include any
automatic conversion of the outstanding or issuable securities of the Company
of the same class or series as the Shares to common stock pursuant to the
terms of the Company's Articles of Incorporation upon the closing of a
registered public offering of the Company's common stock. The Company or its
successor shall promptly issue to Holder a new Warrant for such new
securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to
the Warrant Price and to the number of securities or property issuable upon
exercise of the new Warrant. The provisions of this Section 2.2 shall
similarly apply to successive reclassifications, exchanges, substitutions, or
other events.
2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 [Intentionally Omitted].
2.5 NO IMPAIRMENT. The Company shall not, by amendment of its
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Article 2 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Article against impairment. If the
Company takes any action affecting the Shares or its common stock other than as
described above that adversely affects Holder's rights under this Warrant, the
Warrant Price shall be adjusted downward and the number of Shares issuable upon
exercise of this Warrant shall be adjusted upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.6 FRACTIONAL SHARES. No fractional Shares shall be issuable upon
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share
interest arises upon any exercise or conversion of the Warrant, the Company
shall eliminate such fractional share interest by paying Holder amount computed
by multiplying the fractional interest by the fair market value of a full Share.
2.7 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the
Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial Officer
setting forth such adjustment and the facts upon which such adjustment is based.
The Company shall, upon written request, furnish Holder a certificate setting
forth the Warrant Price in effect upon the date thereof and the series of
adjustments leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3
<PAGE>
3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents
and warrants to the Holder as follows:
(a) [Intentionally omitted.]
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time
(a) to declare any dividend or distribution upon its common stock, whether in
cash, property, stock, or other securities and whether or not a regular cash
dividend; (b) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights; (c) to effect any reclassification or recapitalization of common
stock; (d) to merge or consolidate with or into any other corporation, or sell,
lease, license, or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; or (e) offer holders of registration rights the
opportunity to participate in an underwritten public offering of the company's
securities for cash, then, in connection with each such event, the Company shall
give Holder (1) at least 20 days prior written notice of the date on which a
record will be taken for such dividend, distribution, or subscription rights
(and specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant
and/or any of the Shares, the Company shall deliver to the Holder (a) promptly
after mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) within forty-five (45) days after the end of each of the first three
quarters of each fiscal year, the Company's quarterly, unaudited financial
statements.
3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The
Company agrees that the Shares or, if the Shares are convertible into common
stock of the Company, such common stock, shall be subject to the registration
rights set forth on Exhibit B, if attached.
ARTICLE 4. MISCELLANEOUS.
4.1 TERM; NOTICE OF EXPIRATION. This Warrant is exercisable, in
whole or in part, at any time and from time to time on or before the Expiration
Date set forth above. The Company shall give Holder written notice of Holder's
right to exercise this Warrant in
4
<PAGE>
the form attached as Appendix 2 not more than 90 days and not less than 30
days before the Expiration Date. If the notice is not so given, the
Expiration Date shall automatically be extended until 30 days after the date
the Company delivers the notice to Holder.
4.2 LEGENDS. This Warrant and the Shares (and the securities
issuable, directly or indirectly, upon conversion of the Shares, if any) shall
be imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION
IS NOT REQUIRED.
4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and
the Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has complied with
Rule 144(f), and the Company is provided with a copy of Holder's notice of
proposed sale.
4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.2,
Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant (or the securities issuable, directly or indirectly,
upon conversion of the Shares, if any) by giving the Company notice of the
portion of the Warrant being transferred setting forth the name, address and
taxpayer identification number of the transferee and surrendering this Warrant
to the Company for reissuance to the transferee(s) (and Holder if applicable).
Unless the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 NOTICES. All notices and other communications from the Company
to the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such holder from time
to time.
4.6 WAIVER. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
5
<PAGE>
4.7 ATTORNEYS FEES. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 GOVERNING LAW. This Warrant shall be governed by and construed
in accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
"COMPANY"
GRAPHIX ZONE, INC.
By
---------------------------
Name
-------------------------
(Print)
Title: Chairman of the Board, President,
or Vice President
By
---------------------------
Name
-------------------------
(Print)
Title: Chief Financial Officer, Secretary
Assistant Treasurer, or Assistant
Secretary
6
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase _____________ shares of the
Common Stock of __________________________________________________________
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _____________________ of the Shares
covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
------------------------
(Name)
------------------------
------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
------------------------------------
(Signature)
- -------------------
(Date)
7
<PAGE>
APPENDIX 2
Notice that Warrant Is About to Expire
_______________, ____
(Name of Holder)
(Address of Holder)
Attn: Chief Financial Officer
Dear _______________:
This is to advise you that the Warrant issued to you described below will
expire on _________________________, 19__.
Issuer: Graphix Zone, Inc.
Issue Date: June 26, 1996
Class of Security Issuable: Common stock
Exercise Price per Share: $5.625
Number of Shares Issuable: 20,000
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.
---------------------------
(Name of Issuer)
By
---------------------------
Its
--------------------------
8
<PAGE>
EXHIBIT A
[Intentionally omitted.]
9
<PAGE>
EXHIBIT B
Registration Rights
(Agreement attached hereto)
10
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
A. Graphix Zone Inc., a California corporation (GZ-CA).
B. StarPress Inc., a Colorado corporation (StarPress).
C. StarPress Subsidiaries are:
1. Great Bear Technology, Inc., a California corporation
2. Healthsoft, Inc., a California corporation
3. Great Bear - Arizona, Inc., an Arizona corporation
4. StarPress Multimedia, Inc., a Delaware corporation
5. iTravel International Ltd., a Washington corporation
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference herein of our report dated August
18, 1995 with respect to the consolidated financial statements of StarPress,
Inc. (formerly known as Great Bear Technology Incorporated) as of June 30, 1995
and for each of the two years in the period then ended included in the Annual
Report of Graphix Zone, Inc. (Form 10-K) for 1996 filed with the Securities and
Exchange Commission.
Ernst & Young
Walnut Creek, California
October 14, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,288,196
<SECURITIES> 0
<RECEIVABLES> 3,867,268
<ALLOWANCES> 0
<INVENTORY> 833,700
<CURRENT-ASSETS> 6,271,047
<PP&E> 653,833
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,528,685
<CURRENT-LIABILITIES> 6,290,678
<BONDS> 0
0
0
<COMMON> 40,189,771
<OTHER-SE> (38,141,042)
<TOTAL-LIABILITY-AND-EQUITY> 2,048,729
<SALES> 7,182,046
<TOTAL-REVENUES> 7,182,046
<CGS> 3,195,934
<TOTAL-COSTS> 27,423,716
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,056
<INCOME-PRETAX> (23,518,660)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,518,660)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,518,660)
<EPS-PRIMARY> (5.05)
<EPS-DILUTED> 0
</TABLE>
