<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
GRAPHIX ZONE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
GRAPHIX ZONE, INC.
2915 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
------------------------
You are invited to attend the Annual Meeting of Stockholders of Graphix
Zone, Inc. (the "Company") to be held at 10:00 A.M., California time, on
Tuesday, December 16, 1997 at the Company's principal executive offices, located
at 2915 Daimler Street, Santa Ana, California 92705 for the following purposes
as more fully described in the accompanying Proxy Statement:
1. To elect two directors to the Board of Directors to hold office for
one year and until their respective successors are elected and qualified.
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors nominates David J. Hirschhorn and Kevin P. Genda as
the nominees for election to the Board of Directors.
The Board of Directors has fixed the close of business on October 22, 1997,
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the meeting.
EACH STOCKHOLDER IS CORDIALLY INVITED TO BE PRESENT AND TO VOTE AT THIS
ANNUAL MEETING IN PERSON. STOCKHOLDERS ARE REQUESTED TO SIGN, DATE AND RETURN
THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID AND ADDRESSED ENVELOPE, WHETHER
OR NOT THEY EXPECT TO ATTEND. IN THE EVENT A STOCKHOLDER WHO HAS RETURNED A
SIGNED PROXY ELECTS TO ATTEND THE ANNUAL MEETING AND VOTE IN PERSON, THE
STOCKHOLDER WILL BE ENTITLED TO VOTE.
By Order of the Board of Directors,
/s/ DAVID J. HIRSCHHORN
-----------------------
David J. Hirschhorn
Chairman of the Board
Santa Ana, California
October 28, 1997
<PAGE> 3
GRAPHIX ZONE, INC.
2915 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Graphix Zone, Inc. (the "Company") to be
voted at the Annual Meeting of Stockholders of the Company to be held on
Tuesday, December 16, 1997, at the Company's principal executive offices located
at 2915 Daimler Street, Santa Ana, California 92705 at 10:00 A.M., California
time, and at any adjournments thereof (the "Annual Meeting"), for the purposes
set forth in the accompanying Notice of Annual Meeting of Stockholders and
described herein. The approximate date on which this Proxy Statement and the
enclosed form of proxy are first being sent or given to stockholders is November
10, 1997.
VOTING RIGHTS AND SOLICITATION OF PROXIES
The Board of Directors of the Company (the "Board of Directors" or the
"Board") has fixed the close of business on October 22, 1997, as the record date
for the determination of stockholders entitled to receive notice of, and to vote
at, the Annual Meeting (the "Record Date"). The Company has two classes of
voting securities entitled to be voted at the Meeting, Common Stock, par value
$.01 per share (the "Common Stock"), and Series C Convertible Preferred Stock,
par value $.01 per share (the "Series C Preferred"). At the Record Date,
16,179,004 shares of Common Stock and 1,185,185 shares of Series C Preferred
were issued and outstanding. Each share of Common Stock entitles the record
holder on the Record Date to one vote on all matters to which this Proxy
Statement applies. Each share of Series C Preferred entitles the record holder
on the Record Date to the number of votes equal to the number of shares of
Common Stock into which such share of Series C Preferred could be converted
pursuant to the Certificate of Designations of Series C Convertible Preferred
Stock (voting together with the Common Stock as a single class) on all matters
to which this Proxy Statement applies. As of the Record Date, each share of
Series C Preferred entitles the record holder to 1.018 votes per share. If
shares of Series C Preferred are convertible into a non-integral number of
shares of Common Stock, the aggregate number of votes to which such stockholder
is entitled shall be rounded to the nearest whole vote. With respect to the
election of directors only (Proposal 1), stockholders may vote in favor of all
of the nominees or withhold their votes as to all of the nominees or withhold
their vote as to specific nominees.
Any stockholder giving a proxy has the power to revoke the proxy prior to
its exercise. A proxy may be revoked (a) by delivering to the Secretary of the
Company, Carrie Style, at or prior to the Annual Meeting, an instrument of
revocation or a duly executed proxy bearing a date or time later than the date
or time of the proxy being revoked or (b) at the Annual Meeting, if the
stockholder is present and elects to vote in person. Mere attendance at the
Annual Meeting will not serve to revoke a proxy.
All proxies received and not revoked will be voted as directed. If no
directions are specified, such proxies will be voted "FOR" election of the
Board's two nominees for directors of the Company. As to any other business
which may properly come before the Annual Meeting, the persons named in such
proxies will vote in accordance with their best judgment, although the Company
does not presently know of any other such business.
A majority of the outstanding shares of Common Stock and Series C Preferred
(on an as converted basis) entitled to vote must be represented in person or by
proxy at the Annual Meeting in order to constitute a quorum for the transaction
of business. Abstentions and non-votes will be counted for purposes of
determining the existence of a quorum at the Annual Meeting. The candidates for
election as directors will be
<PAGE> 4
elected by the affirmative vote of a plurality of the shares of Common Stock and
Series C Preferred (on an as converted basis) present in person or by proxy,
entitled to vote and actually voting at the Annual Meeting. Abstentions will be
counted as votes against any of the proposals as to which a stockholder
abstains, but non-votes will have no effect on the voting with respect to any
proposal as to which there is a non-vote. A non-vote may occur when a nominee
holding shares of Common Stock for a beneficial owner does not vote on a
proposal because such nominee does not have discretionary voting power and has
not received instructions from the beneficial owner.
The expenses of soliciting proxies for the Annual Meeting are to be paid by
the Company. Solicitation of proxies may be made by means of personal calls
upon, or telephonic or telegraphic communications with, stockholders or their
personal representatives by directors, officers, employees and consultants of
the Company who will not be specially compensated for such services. Although
there is no formal agreement to do so, the Company may reimburse banks,
brokerage houses and other custodians, nominees and fiduciaries for their
reasonable expenses in forwarding this Proxy Statement to stockholders whose
Common Stock is held of record by such entities.
The Company was formed in January 1996 for the purpose of acquiring GZ
Multimedia, Inc. (formerly, Graphix Zone, Inc.), a California corporation
("GZ-CA"), and StarPress, Inc., a Colorado corporation ("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.
2
<PAGE> 5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table contains certain information as of the Record Date
regarding all persons who, to the knowledge of the Company, were the beneficial
owners of more than 5% of the outstanding voting securities of the Company
(namely, shares of Common Stock or Series C Preferred). The table also contains
information as of the Record Date relating to each class of equity securities of
the Company (namely, the Common Stock, Series C Preferred and Series B
Convertible Preferred Stock ("Series B Preferred")) beneficially owned by each
of the directors of the Company, each nominee for director, each of the
executive officers named in the Summary Compensation Table set forth herein
under the caption "Compensation of Executive Officers" (such officers are
collectively referred to herein as the "Named Executive Officers") and all
directors and executive officers as a group. The persons named hold sole voting
and investment power with respect to the shares shown opposite their respective
names, unless otherwise indicated. The information with respect to each person
specified is as supplied or confirmed by such person or based upon statements
filed with the U.S. Securities and Exchange Commission (the "SEC").
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)(2)
---------------------------------------------------------
PERCENT PERCENT
NAME COMMON STOCK OF CLASS SERIES C PREFERRED OF CLASS
- ----------------------------------------------- ------------ -------- ------------------ --------
<S> <C> <C> <C> <C>
NEA Enterprise Associates V, Limited
Partnership(3)................................. 900,114 5.56% -- --
1119 St. Paul Street
Baltimore, Maryland 21202
Charles R. Cortright, Jr. and Angela Aber
Cortright(4)................................... 846,400 5.22% -- --
23 San Mateo Way
Corona Del Mar, California 92625
The Gifford Fund(5)............................ 901,217 5.41% -- --
230 Park Avenue
New York, New York 10169
Pangaea Fund Limited(6)........................ 1,986,137 10.93% -- --
250 Kitchawan Road
South Salem, New York 10590
Madeleine L.L.C.(7)............................ 11,180,931 40.86% -- --
450 Park Avenue
28th Floor
New York, New York 10022
Inscape(8)..................................... 965,215 5.63% 948,148 80%
c/o Warner Music Group, Inc.
4000 Warner Blvd.
Burbank, California 91522
Trimark Interactive, Inc.(9)................... 241,304 1.47% 237,037 20%
2644 30th Street
Santa Monica, California 90405
DIRECTORS/NOMINEES
David J. Hirschhorn(10)........................ 1,009,167 5.87% -- --
2915 Daimler Street
Santa Ana, California 92705
Kevin P. Genda(11)............................. -- -- -- --
</TABLE>
(Table continued on the following page)
3
<PAGE> 6
(Table continued from the preceding page)
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)(2)
---------------------------------------------------------
PERCENT PERCENT
NAME COMMON STOCK OF CLASS SERIES C PREFERRED OF CLASS
- ----------------------------------------------- ------------ -------- ------------------ --------
<S> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS WHO ARE NOT
DIRECTORS/NOMINEES
Ronald S. Posner(12)........................... 375,698 2.32% -- --
Charles R. Cortright, Jr.(4)(13)............... 846,400 5.22% -- --
23 San Mateo Way
Corona Del Mar, California 92625
Norman H. Block(14)............................ -- -- -- --
Melissa Orr(15)................................ -- -- -- --
All directors and executive officers as a
group(3 persons)(16)......................... 1,384,865 8.06% -- --
</TABLE>
- ---------------
(1) Subject to applicable community property and similar statutes.
(2) Includes (a) shares beneficially owned, whether directly or indirectly,
individually or together with associates, (b) shares of which beneficial
ownership may be acquired within 60 days of the Record Date by exercise of
stock options ("Stock Option Shares") and by exercise of stock warrants
("Stock Warrant Shares") and (c) shares of which beneficial ownership may
be acquired within 60 days of the Record Date by conversion of shares of
Series B Preferred and Series C Preferred.
(3) A Schedule 13G dated February 10, 1997 was filed with the SEC on February
14, 1997 (the "Schedule 13G") which reported that the following entities
and individuals shared voting power and dispositive power with respect to
900,114 shares of Common Stock: New Enterprise Associates V, Limited
Partnership, a Delaware limited partnership ("NEA V"), NEA Partners V,
Limited Partnership, a Delaware limited partnership ("NEA Partners V"),
which is the sole general partner of NEA V, and Frank A. Bonsal, Jr.
("Bonsal"), Nancy L. Dorman ("Dorman"), C. Richard Kramlich ("Kramlich"), a
former director of the Company, Arthur J. Marks ("Marks"), Thomas C.
McConnell ("McConnell") and Charles W. Newhall III ("Newhall")
(collectively, the "General Partners"). The General Partners are individual
general partners of NEA Partners V. The persons and entities named in this
footnote are referred to individually herein as a "Reporting Person" and
collectively as the "Reporting Persons." The Schedule 13G reported that NEA
was the record owner of 900,114 shares of Common Stock as of December 31,
1996 (the "Record Shares"). The Schedule 13G reported that as the sole
general partner of NEA V, NEA Partners V may be deemed to own beneficially
the Record Shares. The Schedule 13G reported that as general partners of
NEA Partners V, which is the sole general partner of NEA V, each of the
General Partners also may be deemed to own beneficially the Record Shares.
In the Schedule 13G, each Reporting Person disclaimed beneficial ownership
of such shares of Common Stock except, in the case of NEA V for the 900,114
shares it held of record. The Schedule 13G reported that the address of the
principal business office of NEA V, NEA Partners V, Bonsal, Dorman, Marks
and Newhall is New Enterprise Associates, 1119 St. Paul Street, Baltimore,
Maryland 21202. The Schedule 13G reported that the address of the principal
business office of McConnell and Kramlich is New Enterprise Associates,
2490 Sand Hill Road, Menlo Park, California 94025.
(4) A Schedule 13D dated July 15, 1996 was filed with the SEC on July 25, 1996
(the "Schedule 13D") which reported that Charles R. Cortright, Jr. and
Angela Aber Cortright had sole voting power and dispositive power with
respect to 846,400 shares of Common Stock which amount included 30,000
Stock Option Shares.
(5) Includes 29,412 Stock Warrant Shares and 440,771 shares of Common Stock of
which beneficial ownership may be acquired within 60 days of the Record
Date by conversion of shares of Series B Preferred. The terms of the
Certificate of Designations of Series B Convertible Preferred Stock of the
Company (the "Series B Certificate") provide that shares of the Series B
Preferred are convertible into shares of Common Stock at a conversion price
per share equal to the lower of (i) $3.375 or (ii) 80% of the average
closing bid price of the Common Stock for the five days immediately prior
to the conversion
(Footnotes continued on the following page)
4
<PAGE> 7
(Footnotes continued from the preceding page)
date. Notwithstanding the foregoing provisions of the Series B
Certificate, as part of its restructuring plan, the Company currently is
negotiating with the holders of shares of Series B Preferred to exchange
such shares into shares of Common Stock at an exchange price of
approximately $.75 per share. Accordingly, the aggregate number of 440,771
shares of Common Stock referred to in this footnote that may be acquired
by conversion of shares of Series B Preferred has been calculated using an
exchange price of approximately $.75 per share.
(6) Represents 121,530 Stock Warrant Shares and 1,864,607 shares of Common
Stock of which beneficial ownership may be acquired within 60 days of the
Record Day by conversion of shares of Series B Preferred. See footnote 5
above for a description of the terms of conversion of the Series B
Preferred and the contemplated exchange of such shares currently being
negotiated by the Company. The aggregate number of 1,864,607 shares of
Common Stock referred to in this footnote that may be acquired by
conversion of shares of Series B Preferred has been calculated using an
exchange price of approximately $.75 per share.
(7) Represents 11,180,931 Stock Warrant Shares.
(8) Represents shares of Common Stock of which beneficial ownership may be
acquired within 60 days of the Record Date by conversion of shares of
Series C Preferred.
(9) Represents shares of Common Stock of which beneficial ownership may be
acquired within 60 days of the Record Date by conversion of shares of
Series C Preferred.
(10) Includes 1,000,000 Stock Option Shares.
(11) Mr. Genda is a Managing Director of Cerberus Partners, L.P., the managing
member of Madeleine L.L.C. Mr. Genda disclaims beneficial ownership of the
11,180,931 Stock Warrant Shares beneficially owned by Madeleine L.L.C.
(12) Mr. Posner ceased to be an executive officer and employee of the Company on
May 12, 1997.
(13) Mr. Cortright ceased to be an executive officer of the Company on October
28, 1996. Mr. Cortright ceased to be an employee of the Company on March
17, 1997.
(14) Mr. Block ceased to be an executive officer and employee of the Company on
April 18, 1997.
(15) Ms. Orr ceased to be an executive officer and employee of the Company on
June 9, 1997.
(16) Includes 1,000,000 Stock Option Shares.
ELECTION OF DIRECTORS
(PROPOSAL 1)
Under the Company's Certificate of Incorporation (the "Certificate") and
Bylaws (the "Bylaws"), David J. Hirschhorn and Kevin P. Genda each have been
nominated by the Board of Directors for election at the Annual Meeting to serve
one year terms expiring at the Company's Annual Meeting in 1998 and until his
successor is elected and qualified. A plurality of the votes cast at the Annual
Meeting is required for election of each nominee.
The Bylaws provide for two directors. Currently, there are two directors
whose terms expire at the Annual Meeting. Each of the nominees presently serves
as a director and has served continuously as a director of the Company since the
date indicated in his biography below. In the event the nominee is unable to or
declines to serve as a director at the time of the Annual Meeting (which is not
anticipated), the persons named in the proxy will vote for the election of such
person or persons as may be designated by the Board of Directors. UNLESS
OTHERWISE DIRECTED IN THE ACCOMPANYING PROXY, THE PERSONS NAMED THEREIN WILL
VOTE FOR THE ELECTION OF THE DIRECTOR NOMINEES LISTED BELOW.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF
DAVID J. HIRSCHHORN AND KEVIN P. GENDA AS DIRECTORS OF THE COMPANY.
5
<PAGE> 8
INFORMATION WITH RESPECT TO THE DIRECTOR NOMINEES
The following table sets forth information regarding the nominees,
including age on the date of the Annual Meeting, present position with the
Company, period served as a director (as applicable) and other business
experience during the past five years.
<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL OCCUPATION AND OTHER
NAME AGE SINCE INFORMATION CONCERNING NOMINEE
- ---------------------- ---- ----------- -------------------------------------------------
<S> <C> <C> <C>
David J. Hirschhorn 35 Feb. 1997 Mr. Hirschhorn has served as Co-Chairman of the
Board, Chief Executive Officer and a director of
the Company since March 1997. In April 1997, Mr.
Hirschhorn was appointed President of the
Company. In June 1997, Mr. Hirschhorn also became
Chairman of the Board, Chief Financial Officer
and Treasurer of the Company. From May 1994 to
March 1997, Mr. Hirschhorn held the position of
Managing Director/Corporate Finance at Cruttenden
Roth Incorporated, an investment banking firm.
From April 1990 to May 1994, Mr. Hirschhorn
served as Vice President/Capital Markets of The
Nikko Securities Company International, Inc., an
investment banking firm.
Kevin P. Genda 33 June 1997 Mr. Genda has served as a director of the Company
since June 1997 when he came onto the Board as a
condition to the Amended Loan and Security
Agreement dated June 5, 1997 by and between the
Company and Madeleine L.L.C. ("Madeleine"), the
Company's secured creditor. For a discussion of
the terms of the Amended Loan and Security
Agreement see "Transactions with Management and
Others," herein. Since August 1995, Mr. Genda has
served as a Managing Director of Cerberus
Partners, L.P., the managing member of Madeleine.
From August 1993 to August 1995, Mr. Genda held
the position of Vice President of Foothill
Capital Corporation, an asset based lender. Mr.
Genda serves as (a) Chairman of the Board of
Winterland Production, Inc., an apparel
manufacturer, since April 1997, (b) a director of
Zorro Holdings, an apparel manufacturer and
retailer, since December 1996, and (c) a director
of Tims Amusements, a gaming company, since April
1997.
</TABLE>
6
<PAGE> 9
INFORMATION WITH RESPECT TO EXECUTIVE OFFICERS WHO ARE NOT DIRECTOR NOMINEES
Currently, David J. Hirschhorn is the only executive officer and employee
of the Company. The following table sets forth similar information as that
provided for the director nominees with respect to those persons who served as
executive officers of the Company at times during the Fiscal Year ended June 30,
1997 ("Fiscal 1997") and who are not director nominees.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND OTHER
NAME AGE INFORMATION CONCERNING FORMER EXECUTIVE OFFICER
- ----------------------- ---- -----------------------------------------------------------
<S> <C> <C>
Norman H. Block 56 Mr. Block was a director of the Company from October 1996
to April 1997. From January 1996 to April 1997, Mr. Block
held the position of Chief Operating Officer of the
Company. Mr. Block also held the positions of Chief
Financial Officer from January 1996 to August 1996 and from
October 1996 to March 1997 and President from October 1996
to April 1997. Prior to joining the Company, Mr. Block was
Managing Director of PLATINUM Technology, Inc.'s Locus
Laboratory, the leading supplier of software products
integrating UNIX systems with desktop operating systems.
Prior to joining Locus Laboratory, from 1993 to 1995 Mr.
Block was Chief Executive Officer of Qual/Soft, a provider
of advanced technology for quality information management.
Prior to joining Qual/Soft, from 1987 to 1992 Mr. Block was
founder and President of Evernet Systems, Inc. which was
the nation's largest independent network systems
integration firm. From 1983 to 1987, Mr. Block was
Executive Vice President of Ashton-Tate, a leading software
development company.
Charles R. Cortright 48 Mr. Cortright served as the Company's President, Chief
Executive Officer and a director from January 1996 until
October 1996. Prior thereto, Mr. Cortright was Chairman,
President and Chief Executive Officer of GZ-CA since August
1989 and interim Chief Financial Office of GZ-CA since May
1995.
Melissa Orr 31 Ms. Orr held the position of Vice President, Sales from
April 1996 to June 1997. Prior thereto, Ms. Orr served as
the Director of National Retail Accounts for Symantac
Corporation, a PC software company, from June 1994 to March
1996. Ms. Orr also held various sales and marketing
positions at Central Point Software, a PC software company,
from November 1993 to May 1994, SoftNet, Inc., a facsimile
software company from July 1992 to November 1993 and Calera
Recognition Systems, an OCR company, from September 1990 to
July 1992.
Ronald S. Posner 55 Mr. Posner served as a director of the Company from January
1996 to October 1997, the Company's Chairman of the Board
from January 1996 to March 1997, the Company's Co-Chairman
of the Board from March 1997 to May 1997, and the Company's
Chief Executive Officer from October 1996 to March 1997.
Prior thereto, Mr. Posner served as Chairman of StarPress
from June 1995 until the closing of the Reorganization.
Prior to June 1995 and since it was incorporated in 1993,
Mr. Posner was the President and Chief Executive Officer of
StarPress Multimedia, which became a wholly-owned
subsidiary of StarPress as of June 1995. Prior to joining
StarPress Multimedia, Mr. Posner was the Chief Executive
Officer of WordStar inc., a software company from 1990 to
1995. Prior to joining WordStar, from 1989 to 1990, Mr.
Posner served as President and Chief Executive Officer of
Peter Norton Computing, Inc., a PC software company.
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND OTHER
NAME AGE INFORMATION CONCERNING FORMER EXECUTIVE OFFICER
- ----------------------- ---- -----------------------------------------------------------
<S> <C> <C>
Robert D. Shishino 42 Mr. Shishino held the positions of Vice President, Finance
and Chief Financial Officer from March 1997 to June 1997.
Prior thereto, Mr. Shishino held the position of Director,
Business Administrations for Nextel Communications, Inc., a
telecommunications company, from July 1994 to November 1996
and Director, Finance for Control Data Systems, Inc., a
systems integration company, from July 1989 to June 1994.
Angela C. Cortright 42 Ms. Cortright served as the Executive Vice President and
Secretary and as a director of the Company from January
1996 to October 1996. Prior thereto, Ms. Cortright was
Executive Vice President -- Marketing and Secretary of
GZ-CA since August 1989.
</TABLE>
In addition to the executive officers listed above, the following persons
also served as executive officers of the Company during Fiscal 1997; however,
the Company does not have information regarding the age and business experience
during the past five years for each of these persons.
<TABLE>
<CAPTION>
NAME FORMER EXECUTIVE OFFICER POSITION
- ------------------------- ----------------------------------------------------------------
<S> <C>
David Boss Mr. Boss held the position of Managing Director of the Company
from February 1997 to June 1997.
Kip Konwiser Mr. Konwiser held the position of Vice President, Interactive
Entertainment of the Company from January 1996 to June 1997.
Derrick Morton Mr. Morton held the position of Vice President, Production of
the Company from September 1996 to June 1997.
Frank Murnane Mr. Murnane held the position of Chief Financial Officer of the
Company from August 1996 to October 1996.
Robert Sebastian Mr. Sebastian held the position of Vice President, Marketing of
the Company from February 1997 to June 1997.
Joanna Skrdlant Ms. Skrdlant held the position of Vice President, Marketing of
the Company from August 1996 to February 1997.
</TABLE>
INFORMATION ABOUT THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD
MEETINGS OF THE BOARD AND ITS COMMITTEES
The Board of Directors manages the business of the Company. It establishes
overall policies and standards for the Company and reviews the performance of
management. The directors are kept informed of the Company's operations at
meetings of the Board through reports and analyses and discussions with
management and with the Company's independent public auditors. Since June 1997,
the Board has operated without any standing committees, including an audit,
compensation and nominating committee. During Fiscal 1997, the Board had
established a Compensation Committee and a Stock Option Committee.
During the Fiscal Year, the Board of Directors met on four occasions and
took action by Unanimous Written Consent on six occasions.
Each incumbent director attended 100% of the aggregate of (i) the total
number of meetings of the Board of Directors held during the Fiscal Year (held
during the period for which he has been a director) and (ii) the total number of
meetings held by all committees of the Board on which he served during the
Fiscal Year (held during the period that he served).
COMPENSATION OF DIRECTORS
All directors of the Company are reimbursed for out-of-pocket expenses in
connection with attendance of Board of Directors' Meetings or Committee
Meetings.
8
<PAGE> 11
Directors who are also employees of the Company are not paid any fees or
remuneration, as such, for service on the Board or on any Board Committee. In
Fiscal 1997, each non-employee director earned $1,000 for each Board meeting in
which he participated.
With the exception of directors serving on the Stock Option Committee, all
directors are eligible to receive discretionary stock options under the
Company's 1996 Stock Option Plan (the "1996 Plan"). In addition, on July 1st of
each year, each director who is a member of the Stock Option Committee under the
1996 Plan received a nonqualified stock option to purchase 25,000 shares of
Common Stock under the 1996 Plan. The exercise price for such options will be
the fair market value of the Common Stock on the date of grant. These options
become exercisable in two equal six month installments beginning on the date of
grant.
COMPENSATION OF EXECUTIVE OFFICERS
Except as noted below, the following table discloses compensation paid by
the Company during Fiscal 1997, the fiscal year ended June 30, 1996 ("Fiscal
1996"), and the fiscal year ended June 30, 1995 ("Fiscal 1995") to (i) three
individuals who served as the Company's Chief Executive Officer during Fiscal
1997 and (ii) two individuals who would have been among the four most
highly-paid executive officers, other than the Chief Executive Officer, but for
the fact that they were not serving as executive officers at the end of Fiscal
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
-------------------- OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) (#) COMPENSATION
- ------------------------------ ----- -------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
David J. Hirschhorn........... 1997 $ 52,500 $ -- 2,500,000 $ --
Chairman of the Board, 1996 -- -- -- --
President, Chief Executive 1995 -- -- -- --
Officer, Chief Financial
Officer and Treasurer
Ronald S. Posner(1)........... 1997 100,769 70,000(2) 660,015(3) 89,574(4)
Co-Chairman of the Board 1996 120,000 20,000 109,995 --
and Chief Executive Officer 1995 -- -- -- --
Charles R. Cortright, 1997 75,177 -- 60,000(6) --
Jr.(5)......................
President and Chief 1996 131,044 -- 10,000 --
Executive Officer 1995 98,150 -- -- --
Norman H. Block(7)............ 1997 152,933 35,000 300,000(8) 135,000(9)
President, Chief Operating 1996 58,854 5,000 225,000 --
Officer and Chief Financial 1995 -- -- -- --
Officer
Melissa Orr(10)............... 1997 120,573 -- 125,000(11) 65,000(12)
Vice President, Sales 1996 23,269 -- -- --
1995 -- -- -- --
</TABLE>
- ---------------
(1) Mr. Posner ceased to be Chief Executive Officer of the Company on March 17,
1997 and Co-Chairman of the Board and an employee of the Company on May 12,
1997.
(2) Represents 24,348 shares of Common Stock, with a fair market value of
$70,000 on the date of issuance, issued by the Company to Mr. Posner as
payment for accrued compensation.
(3) Includes options to purchase 384,995 shares of Common Stock with respect to
which the exercise price was repriced to $2.88 per share effective October
23, 1996 pursuant to a resolution adopted by the Stock Option Committee of
the Board of Directors of the Company which repriced an aggregate of
894,950 options on such date (the "Repriced Options").
(Footnotes continued on the following page)
9
<PAGE> 12
(Footnotes continued from the preceding page)
(4) Represents accrued severance payments in the amount of $45,800 to be paid
to Mr. Posner and the cancellation by the Company of a promissory note by
Mr. Posner in favor of the Company, with an outstanding principal and
accrued and unpaid interest balance of $43,774 on the date of cancellation,
in connection with the termination of Mr. Posner's employment with the
Company.
(5) Mr. Cortright ceased to be President and Chief Executive Officer of the
Company on October 28, 1996. Mr. Cortright ceased to be an employee of the
Company on March 17, 1997.
(6) Includes Repriced Options to purchase 35,000 shares of Common Stock.
(7) Mr. Block ceased to be Chief Financial Officer of the Company on March 10,
1997 and President, Chief Operating Officer and an employee of the Company
on April 18, 1997.
(8) Includes Repriced Options to purchase 225,000 shares of Common Stock.
(9) Represents severance payments in the amount of $45,000 paid and accrued
severance payments in the amount of $90,000 to be paid to Mr. Block in
connection with the termination of Mr. Block's employment with the Company.
(10) Ms. Orr ceased to be Vice President, Sales and an employee of the Company
on June 9, 1997.
(11) Includes Repriced Options to purchase 25,000 shares of Common Stock.
(12) Represents severance payments in the amount of $65,000 paid to Ms. Orr in
connection with the termination of her employment with the Company.
STOCK OPTIONS
Stock Option Grants. During Fiscal 1997, stock options were awarded to
certain of the Named Executive Officers in the amounts and with the terms
indicated in the following table:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
- --------------------------------------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/SARS EXERCISE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ----------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
- --------------------- ------------- ------------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David J. Hirschhorn 2,500,000(3) 66.3% $2.00 3/17/06 $1,381,408 $3,052,550
Ronald S. Posner 25,000(4) 0.7% 6.88 7/1/06 108,170 274,124
250,000(4) 6.6% 4.63 8/16/06 727,946 1,844,757
25,000(4)(5) 0.7% 2.88 7/1/06 45,280 114,749
250,000(4)(5) 6.6% 2.88 8/16/06 452,804 1,147,495
24,932(4)(5) 0.7% 2.88 7/24/05 45,157 114,437
85,083(4)(5) 2.3% 2.88 7/24/05 154,104 390,529
Charles R. Cortright,
Jr. 25,000(6) 0.7% 6.88 7/1/06 108,170 274,124
25,000(5)(6) 0.7% 2.88 7/1/06 45,280 114,749
10,000(5)(6) 0.3% 2.88 10/13/05 18,112 45,900
Norman H. Block 75,000(7) 2.0% 2.88 10/23/06 135,841 344,248
225,000(5)(7) 6.0% 2.88 1/15/06 407,524 1,032,745
Melissa Orr 25,000(8) 0.7% 6.00 4/9/06 94,334 239,061
75,000(5)(8) 2.0% 2.88 10/23/06 135,841 344,248
25,000(5)(8) 0.7% 2.88 4/9/06 45,280 114,749
</TABLE>
- ---------------
(1) In accordance with the rules of the U.S. Securities and Exchange Commission,
shown are the hypothetical gains or "option spreads" that would exist for
the respective options.
(2) All options were granted at the market price on the date of grant.
(Footnotes continued on the following page)
10
<PAGE> 13
(Footnotes continued from the preceding page)
(3) Mr. Hirschhorn's nonqualified stock option vests as follows: 1,000,000
shares on March 17, 1997, 200,000 shares on March 17, 1998, 300,000 shares
on March 17, 1999, 450,000 shares on March 17, 2000, and 550,000 shares on
March 17, 2001. The stock option may be exercised as to the vested portions
at any time after the date of vesting until five years from the individual
vesting dates. In the event that an entity which is not an affiliate of an
existing stockholder of the Company acquires more than 50% of the voting
stock of the Company or acquires control of the Board of Directors of the
Company, all options immediately shall vest.
(4) Mr. Posner's nonqualified stock option to purchase 25,000 shares of Common
Stock was granted on July 1, 1996 and vested in two equal installments on
December 31, 1996 and July 1, 1997, respectively. Mr. Posner's nonqualified
stock option to purchase 250,000 shares of Common Stock vested immediately
on August 16, 1996, the date of grant. Mr. Posner's nonqualified stock
options to purchase 24,932 and 85,083 shares of Common Stock were granted on
July 24, 1995 and vested at the rate of one sixteenth per quarter over a
four year period commencing on the date of grant with the first installment
vesting on November 1, 1995.
(5) Represents options with respect to which the exercise price was amended
pursuant to the repricing action taken by the Stock Option Committee
effective as of October 23, 1996 to equal $2.88, the last sale price on The
Nasdaq SmallCap Market on October 22, 1996.
(6) Mr. Cortright's nonqualified stock option to purchase 25,000 shares of
Common Stock was granted on July 1, 1996 and vested in two equal
installments on December 31, 1996 and July 1, 1997, respectively. Mr.
Cortright's nonqualified stock option to purchase 10,000 shares of Common
Stock was granted on October 13, 1995 and vested immediately on the date of
grant.
(7) Mr. Block's nonqualified stock option to purchase 75,000 shares of Common
Stock was granted on October 23, 1996 and vested in multiple installments
over four years, with 18,750 options vesting on the date of grant and the
balance vesting at the rate of one sixteenth per quarter over a four year
period commencing on the date of grant. Mr. Block's nonqualified stock
option to purchase 225,000 shares of Common Stock was granted on January 16,
1996 and vested in twenty-four equal monthly installments with the first
installment vesting on the date of grant and the remaining installments
vesting over the twenty-four month period following the date of grant. In
the event of a change in control of the Company following the
Reorganization, Mr. Block's nonqualified stock option to purchase 225,000
shares of Common Stock immediately shall vest.
(8) Ms. Orr's nonqualified stock option to purchase 25,000 shares of Common
Stock was granted on August 1, 1996 and vested in five equal installments on
each of April 9, 1997, 1998, 1999, 2000 and 2001. Ms. Orr's nonqualified
stock option to purchase 75,000 shares of Common Stock was granted on
October 23, 1996 and vested 25% on the date of grant, with the balance of
the options vesting at the rate of one sixteenth per quarter over a four
year period commencing on the date of grant.
11
<PAGE> 14
Option Exercises/Fiscal Year End Value. During Fiscal 1997, none of the
Named Executive Officers, including any one of the three persons who held the
office of Chief Executive Officer in Fiscal 1997, exercised any stock options or
SARs. None of the Named Executive Officers, including any one of the three
persons who held the office of Chief Executive Officer in Fiscal 1997, held
SARs. The following table includes the number of shares of Common Stock covered
by both exercisable and unexercisable stock options as of June 30, 1997, for the
Named Executive Officers who hold options:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTION/SARS
FY-END(#) AT FY-END($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David J. Hirschhorn........................ 1,000,000 1,500,000 $-- $--
Ronald S. Posner........................... 310,618 74,397 -- --
Charles R. Cortright, Jr................... -- -- -- --
Norman H. Block............................ 172,266 127,734 -- --
Melissa Orr................................ 22,266 77,734 -- --
</TABLE>
- ---------------
(1) Excludes the value of all unexercised options which have an exercise price
greater than or equal to $2.75, the closing price of the Common Stock on
June 30, 1997 (the last stock trading day of Fiscal 1997).
12
<PAGE> 15
Report on Repricing of Options. The following table includes for all Named
Executive Officers certain information relating to options which were repriced
for all Named Executive Officers during Fiscal 1997 and for all other executive
officers who held office during Fiscal 1997, for the past 10 completed fiscal
years. All Named Executive Officers and other executive officers were treated in
the same manner. Officers of the Company during the Fiscal Year who first became
officers after the repricing transaction are not included in the following
table. On October 23, 1996, the Company's Stock Option Committee made the
decision to reprice "underwater" stock options held by officers and directors of
the Company (the "Repricing Transaction"). An aggregate of 894,950 stock options
were repriced in the Repricing Transaction to an exercise price of $2.88 per
share, the fair market value of the Common Stock on October 22, 1996. The Stock
Option Committee's rationale for repricing options appeared to be that the
officers and directors whose options were "underwater" would not realize the
benefit originally conferred; accordingly, such benefit should be restored. In
addition, the Stock Option Committee believed it to be appropriate to continue
to incentivize its directors, officers and key employees. Other than the
Repricing Transaction, no other stock options of the Company were repriced
during the last ten completed fiscal years.
TEN-YEAR OPTION/SAR REPRICING
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES LENGTH OF
UNDERLYING MARKET PRICE EXERCISE ORIGINAL
OPTIONS/ OF STOCK AT PRICE AT OPTION TERM
SARS TIME OF TIME OF NEW REMAINING AT
REPRICED OR REPRICING OR REPRICING OR EXERCISE DATE OF
AMENDED AMENDMENT AMENDMENT PRICE REPRICING OR
NAME DATE (#) ($) ($) ($) AMENDMENT
- -------------------------------------- -------- ----------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald S. Posner...................... 10/23/96 25,000 $ 2.88 $ 6.88 $ 2.88 116 mo.
Co-Chairman of the Board and 10/23/96 250,000 2.88 4.63 2.88 188 mo.
Chief Executive Officer 10/23/96 24,932 2.88 4.91 2.88 105 mo.
10/23/96 85,083 2.88 6.61 2.88 105 mo.
Charles R. Cortright, Jr.............. 10/23/96 25,000 2.88 6.88 2.88 116 mo.
President and Chief Executive
Officer 10/23/96 10,000 2.88 5.88 2.88 108 mo.
Norman H. Block....................... 10/23/96 225,000 2.88 5.25 2.88 111 mo.
President, Chief Operating Officer
and Chief Financial Officer
Melissa Orr........................... 10/23/96 25,000 2.88 6.00 2.88 114 mo.
Vice President, Sales
Angela C. Cortright................... 10/23/96 10,000 2.88 5.88 2.88 108 mo.
Executive Vice President and
Secretary
Kip Konwiser.......................... 10/23/96 8,000 2.88 5.75 2.88 108 mo.
Vice President, Interactive 10/23/96 20,000 2.88 3.25 2.88 118 mo.
Entertainment
Derrick Morton........................ 10/23/96 7,000 2.88 4.00 2.88 100 mo.
Vice President, Production 10/23/96 4,000 2.88 4.25 2.88 118 mo.
Joanna Skrdlant....................... 10/23/96 5,000 2.88 4.00 2.88 100 mo.
Vice President, Marketing
</TABLE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Prior to his resignation on April 18, 1997, pursuant to an employment
agreement dated January 15, 1996, Norman H. Block, the Company's former
President, Chief Operating Officer and Chief Financial Officer, was entitled to
a base salary of $148,200 per year, a bonus of $10,000 payable within 30 days
after each quarter in which the Company achieves profits in excess of $300,000,
and an additional $20,000 bonus payable after the Company achieves four
consecutive quarters of profits exceeding $1,200,000 or for achieving the
Company's annual profit goals. All such profit goals contained a 10% plus or
minus variance. Mr. Block's employment agreement also provided for a grant of
225,000 shares of restricted Common Stock which vested pro rata on a monthly
basis over 24 months from January 15, 1996 and 9 months severance pay if
terminated by the Company except that the severance amount would not apply if
Mr. Block voluntarily resigned or if the Company terminated him for cause.
13
<PAGE> 16
In addition to his employment agreement, upon his resignation as an officer
and a director from the Company and the Company's subsidiaries, Mr. Block
entered into a Separation and Settlement Agreement as of April 18, 1997 pursuant
to which the Company agreed to pay to Mr. Block an aggregate of $102,850 less
applicable withholding and which included $12,850 of accrued vacation pay. This
aggregate amount is payable in installments from April 1997 through October
1997. In addition, the parties exchanged mutual releases.
Charles R. Cortright, Jr. served as President and Chief Executive Officer
of the Company from June 28, 1996 to October 28, 1996 but continued to serve as
an employee until his resignation on March 17, 1997. Prior to his resignation as
the President and Chief Executive Officer of the Company on October 28, 1996,
pursuant to an employment agreement dated April 18, 1996, Charles R. Cortright,
Jr. was entitled to a base salary of $120,000 per year over the three year term
of the agreement, was eligible to participate in a bonus plan to be adopted by
the Company and was eligible for 12 months severance pay if terminated by the
Company other than for cause. In connection with his change in employment
status, Mr. Cortright entered into an Amended and Restated Employment Agreement
as of October 28, 1996 (the "Amended Cortright Agreement") whereby he agreed to
devote approximately one-half of normal working hours to the Company and be
compensated at a base salary rate of $30,000 per six-month period, payable in
semi-monthly installments. By its terms, the Amended Cortright Agreement
terminated upon the earlier to occur of April 30, 1997, death of the employee,
termination for cause or by mutual agreement; provided, however unless either
party gives notice that it desires to terminate, the Amended Cortright Agreement
automatically was extended for successive 6 month periods. The Amended Cortright
Agreement also provided a severance benefit should the Company terminate Mr.
Cortright for any reason other than for cause. Such severance benefit provided
that the Company would continue to pay Mr. Cortright his base salary until the
end of the term (or extended term). The Amended Cortright Agreement also
provided that Mr. Cortright be entitled to participate in the Company's health
insurance program to the same extent as a full-time employee for the remainder
of his life, and the Company was to pay all related premiums. On October 13,
1997, the Company and Mr. Cortright entered into a Settlement Agreement and
Mutual Release, effective as of May 30, 1997 in which, among other things, the
Amended Cortright Agreement was terminated, except for certain confidentiality
provisions. For a further discussion of the Settlement Agreement and Mutual
Release see "Transactions with Management and Others," herein.
Prior to being laid off by the Company on June 9, 1997, pursuant to a
letter agreement dated March 25, 1996, Melissa Orr, Vice President, Sales, was
entitled to a base salary of $110,000 with a non-refundable draw on commission
of $10,000 to be earned ratably during the 1996 calendar year. Commissions
earned by Ms. Orr would be paid at the rate of 1% of all sales that exceed
$8,000,000, commencing April 1, 1996 through December 31, 1996. In addition, Ms.
Orr was entitled to a severance benefit of six months base salary if she was
terminated by the Company for any reason other than cause.
Prior to his resignation as an officer of the Company, Ronald S. Posner and
the Company were parties to an oral compensation agreement based on Mr. Posner's
former written employment agreement with StarPress which entitled Mr. Posner to
a base salary of $120,000 per year. In addition, pursuant to such agreement, Mr.
Posner was entitled to participate in a bonus plan to be adopted by the Company
and 12 months severance pay if terminated by the Company other than for cause.
Upon his resignation as an officer of the Company and its subsidiaries, Mr.
Posner, Co-Chairman of the Board and Chief Executive Officer and a director of
the Company, entered into a Separation and Settlement Agreement as of May 21,
1997 pursuant to which the Company agreed to pay to Mr. Posner $45,800, less
applicable withholding, payable in three installments commencing June 1, 1997
through November 1, 1997. In connection with such Agreement, the parties also
exchanged mutual releases.
Since March 17, 1997, the Company and David J. Hirschhorn have been
operating pursuant to a written employment memorandum dated February 28, 1997
(the "Hirschhorn Employment Agreement"). Pursuant to the terms of the Hirschhorn
Employment Agreement, the Company will pay to Mr. Hirschhorn an annual salary of
$180,000 during the first year of the agreement, $250,000 during the second year
of the agreement and $300,000 during the third year of the agreement. Mr.
Hirschhorn's annual salary during the second or third year of such Agreement
however, will be reduced to $180,000 if the Company has a net loss during the
third and/or fourth quarter of the first or the second year, respectively, of
the Hirschhorn Employment
14
<PAGE> 17
Agreement. Pursuant to the terms of the Hirschhorn Employment Agreement, the
Company agreed to pay to Mr. Hirschhorn his salary under such Agreement for a
period of 18 months if Mr. Hirschhorn's employment with the Company is
terminated for any reason at any time during the three-year term of such
Agreement. Pursuant to the terms of the Hirschhorn Employment Agreement, the
Company agreed to grant to Mr. Hirschhorn a stock option to purchase 2,500,000
shares of Common Stock at an exercise price of $2.00 per share. The stock option
vests in five installments as follows: 1,000,000 shares on March 17, 1997,
200,000 shares on March 17, 1998, 300,000 shares on March 17, 1999, 450,000
shares on March 17, 2000, and 550,000 shares on March 17, 2001. Upon a change of
control of the Company, all of the options vest immediately. The stock options
may be exercised as to the vested portions at any time after the date of vesting
until the date that is five years from the individual vesting dates.
In addition to the above-referenced agreements, certain of the Company's
stock option agreements contain termination or change of control provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the Fiscal Year (until June 1997), the Compensation Committee of the
Company's Board of Directors consisted of Mr. Kramlich and Mr. Yuen, neither of
whom was at any time during the Fiscal Year, an officer or employee of the
Company or its subsidiaries. As noted above, Messrs. Kramlich and Yuen resigned
prior to the end of Fiscal 1997. As discussed under the caption "Transactions
with Management and Others," herein, the Company entered into a lease agreement
with a party which is an affiliate of Mr. Yuen; however, the term of such
leasehold interest commenced after Mr. Yuen resigned as a director. There were
no other Compensation Committee interlocks between the Company and other
entities involving the Company's executive officers and Board members who serve
as executive officers or Board members of such other entities.
During the Fiscal Year (until June 1997), the Stock Option Committee of the
Company's Board of Directors consisted of Mr. Posner and Mr. Block. Prior to
resigning, Messrs. Posner and Block served as directors and executive officers
of the Company during the Fiscal Year. There are no Stock Option Committee
interlocks between the Company and other entities involving the Company's
executive officers and Board members who served as executive officers or Board
members of such other entities.
Since June 3, 1997, the Company's Board of Directors has functioned without
committees.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This Report of the Board on executive compensation shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filings under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
During Fiscal 1997, the Compensation Committee and the Stock Option
Committee did not meet to discuss a compensation philosophy for the Company,
rather the Company and the members of the Compensation and Stock Option
Committees relied on the prior guidelines which are set forth below, tempered by
the realization that as the Fiscal Year progressed and a new executive team was
engaged to reorganize and/or reposition the Company, the Board, the Compensation
Committee and the Stock Option Committee recognized the need to design
compensation packages competitive with opportunities in other
work-out/reorganization situations.
All of the members of the Compensation Committee and the Stock Option
Committee have resigned. The remaining members of the Board are Messrs.
Hirschhorn and Genda. Mr. Genda has no knowledge of any compensation decisions
since becoming a director. Mr. Hirschhorn, who became a director and executive
officer on March 17, 1997 has focused on restructuring the Company. As a result
of the restructuring, the Company laid-off a number of employees, resulting in
Mr. Hirschhorn being the only employee. Accordingly, this Report is prepared
over the name of Mr. Hirschhorn in his capacity as a reporter of past policies
and practices. All such remarks are to the best of his knowledge.
Compensation Policies and Philosophy. The Company's executive compensation
policies were designed to attract, retain and reward executive officers and
other key employees who contributed to the Company's
15
<PAGE> 18
success, to provide economic incentives to achieve the Company's business
objectives by linking compensation to the performance of the Company, to align
executive officer and key employee compensation with stockholder interests to
create stockholder value and to reward individual performance. The Company will
use a combination of base salary, cash bonuses and stock option awards to
achieve the aforementioned objectives.
In carrying out these objectives, the Compensation and Stock Option
Committees or in the absence of those Committees, the Board of Directors, will
consider a number of factors which include the level and types of compensation
paid to executive officers and key employees in similar positions by comparable
companies. In addition, the Compensation Committee, or the Board in the absence
of such Committee, would review the individual performance of each executive
officer, including a review of the ability of a given executive officer to meet
individual performance objectives, demonstration of job knowledge and skills,
and the ability to work with others towards the achievement of the Company's
success.
Components of Compensation. Executive officers' and other key employees'
salaries were to be established in relation to a range of salaries for
comparable positions among similar high technology and computer software
companies of comparable size and complexity. In making salary recommendations,
the Compensation Committee would look at the Company's financial position and
performance, the contribution of individual executive officers and key employees
during the prior fiscal year in helping meet the Company's financial and
business objectives as well as overall performance of their individual
responsibilities.
Executive officers and key employees may be paid cash bonuses at the
discretion of the Board of Directors. Cash bonuses may be used to reward prior
individual performance in helping the Company achieve its financial and business
objectives.
The Stock Option Committee believed that equity ownership by executive
officers and key employees provided incentive to build stockholder value and
align the interests of executive officers and key employees with the
stockholders. The size of stock option awards should usually be based upon
factors such as comparable equity compensation offered by other high technology
and computer software companies, the seniority of the executive officer or key
employee and the contribution that the executive officer or key employee is
expected to make to the Company. In determining the size of periodic grants the
Stock Option Committee should consider prior grants to the executive officer or
key employee, the executive officer's or key employee's performance during the
current fiscal year and his or her expected contributions during the succeeding
fiscal year.
Compensation of the Chief Executive Officer. The Compensation Committee and
Stock Option Committees respective policies were to review the performance of
the Chief Executive Officer of the Company annually. During Fiscal 1997, the
position of Chief Executive Officer was held at different times by three
individuals, Charles R. Cortright, Jr., Ronald S. Posner and David J.
Hirschhorn. Mr. Cortright's and Mr. Posner's compensation each was based upon a
combination of a competitive base salary, a discretionary bonus and
discretionary stock option grants, the latter two components most directly
linking compensation with the Company's performance. Mr. Hirschhorn's employment
agreement is comprised of cash compensation and stock options. The base salary
escalates over a three year period; provided, however, to the extent that the
Company suffers a loss during the third and/or fourth quarter of the first or
second year, Mr. Hirschhorn's salary for the second or third year, respectively,
will be reduced to the initial $180,000 base amount. This feature of Mr.
Hirschhorn's compensation is specifically linked to corporate performance. Mr.
Hirschhorn's options to purchase 2,500,000 shares of Common Stock vest through
March 2001 providing Mr. Hirschhorn with the incentive to maximize shareholder
value over an extended period of time. For a further discussion of the
employment agreements of Messrs. Cortright, Posner and Hirschhorn, see the
discussion under the caption "Compensation of Executive Officers -- Employment
Contracts and Termination of Employment and Change of Control Arrangements."
Respectfully submitted,
David J. Hirschhorn
Chairman of the Board
16
<PAGE> 19
STOCK PERFORMANCE GRAPH
The information under this caption, including, but not limited to, the
Stock Performance Graph, shall not be deemed incorporated by reference by any
general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933 or under the Securities Exchange Act of
1934, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
The following graph compares the cumulative total stockholder return on the
Common Stock with the cumulative total return on the Hambrecht and Quist
Technology Index and the Nasdaq Stock Market -- U.S. Index for the period
beginning June 28, 1996, the effective date of the Reorganization, and ended
June 30, 1997.
The comparisons in this table are required by the SEC and, therefore, are
not intended to forecast or be indicative of possible future performance of the
Common Stock.
GRAPHIX ZONE
H&Q TECHNOLOGY INDEX
NASDAQ STOCK MARKET-U.S. INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NASDAQ STOCK
(FISCAL YEAR COVERED) GRAPHIX ZONE H&Q TECHNOLOGY MARKET-U.S.
<S> <C> <C> <C>
7/1/96 100.00 100.00 100.00
74.07 88.06 90.13
61.11 93.39 95.18
SEP-96 57.41 104.19 102.47
59.26 102.70 101.33
53.70 114.81 107.60
DEC-96 37.04 111.72 107.50
38.89 123.69 115.14
32.41 113.59 108.78
MAR-97 25.93 106.49 101.68
5.09 110.43 104.86
3.70 127.05 116.74
JUN-97 0.67 122.60 120.31
</TABLE>
TRANSACTIONS WITH MANAGEMENT AND OTHERS
On December 24, 1996, the Company issued 9,167 shares of Common Stock to
David J. Hirschhorn in his capacity as Managing Director/Corporate Finance at
Cruttenden Roth Incorporated, the Company's investment banker at that time, in
exchange for investment banking services rendered to the Company, having a value
of $27,500 as determined by the Company. At the time of the transaction, Mr.
Hirschhorn was not an employee, officer or director of the Company.
On January 31, 1997, the Company entered into a loan agreement with
Madeleine L.L.C., a New York limited liability company ("Madeleine"), in the
original principal amount of $3,740,000 with an initial interest rate equal to
the prime rate, as announced by Citibank, N.A., plus 4.25% and, commencing on
July 31, 1997,
17
<PAGE> 20
increasing to a rate equal to such prime rate plus 6.25% (the "Madeleine Loan
Agreement"). The Madeleine Loan Agreement is secured by all of the Company's
assets and matures on January 30, 1998. The loan proceeds, net of $280,000 of
fees paid to Madeleine, were $3,460,000. The Madeleine Loan Agreement has
numerous negative covenants which restrict the ability of the Company to effect
certain transactions without Madeleine's written consent. Among these negative
covenants is a prohibition on declaring or paying any cash dividends. In
connection with the Madeleine Loan Agreement, the Company issued to Madeleine a
warrant (the "Madeleine Warrant") to purchase 300,000 shares of Common Stock at
an exercise price equal to the lower of $2.68 per share or the fair market value
of the Common Stock which shall be determined based on the average of the last
sales prices for Common Stock over the 7 trading days immediately preceding the
date of exercise (the "Fair Market Value Calculation"). The Madeleine Warrant
expires on January 31, 2000. The Company recorded an original issue discount
with respect to the Madeleine loan of $93,709 which represents the fair value of
the Madeleine Warrant at the time of issuance. The fair value of the Madeleine
Warrant is reflected as a reduction to the principal amount of the Madeleine
Loan Agreement and is being amortized over the life of the loan. Kevin J. Genda
is a Managing Director of Cerebus Partners, L.P., the managing member of
Madeleine.
On June 5, 1997, the Company and Madeleine entered into an amendment (the
"Amendment") to the Madeleine Loan Agreement which provided for an additional
loan in the principal amount of $1,300,000 under the terms of the Madeleine Loan
Agreement. The loan proceeds from the Amendment, net of $50,000 of fees paid to
Madeleine, were $1,250,000. Pursuant to the terms of the Amendment, Madeleine
waived certain events of default under the Madeleine Loan Agreement and certain
exceptions to the representations and warranties contained in the Madeleine Loan
Agreement, which events of default and exceptions were outstanding on June 5,
1997. The Madeleine Loan Agreement and the Amendment are hereafter collectively
referred to as the "Amended Loan Agreement." In connection with the Amendment,
the company issued to Madeleine a warrant (the "Second Madeleine Warrant") to
purchase 25% of the Common Stock, determined on a fully diluted basis as of June
5, 1997, at an exercise price equal to the lowest of (a) $0.2366 per share, (b)
the lower of $1.00 per share or the fair market value (determined based on the
Fair Market Value Calculation) of the Common Stock as of the effective date that
the Company files a registration statement on Form S-4, or such other form, with
the U.S. Securities and Exchange Commission, in connection with a merger or
consolidation involving the Company, or (c) the fair market value (determined
based on the Fair Market Value Calculation) of the Common Stock as of the date
the Second Madeleine Warrant is exercised. The Second Madeleine Warrant expires
on June 5, 2000. The Company recorded an original issue discount with respect to
the Amendment of $489,870 which represents the fair value of the Second
Madeleine Warrant at the time of issuance. The fair value of the Second
Madeleine Warrant is reflected as a reduction to the principal amount of the
Madeleine Loan Agreement and is being amortized over the life of the loan.
As a condition subsequent to the Amendment, the Company entered into a loan
transaction with Mr. David J. Hirschhorn, Chairman of the Board, President,
Chief Executive Officer, Chief Financial Officer, Treasurer and a director of
the Company, pursuant to which in October 1997 Mr. Hirschhorn loaned $250,000 to
the Company on similar terms as set forth in the Amendment. In connection with
such loan, the Company agreed to issue to Mr. Hirschhorn a warrant to purchase
shares of Common Stock on terms and conditions to be agreed to between the
Company and Mr. Hirschhorn. The Company and Mr. Hirschhorn have not reached an
agreement regarding the terms of the warrant.
On July 14, 1997, the Company received a Notice of Default and Demand for
Payment from Madeleine with respect to the Amended Loan Agreement based upon the
Company's failure to make certain interest payments when due. The notice stated
that the Company was in default under the terms of the Amended Loan Agreement
and demanded that all past due amounts be paid to Madeleine by July 18, 1997.
The Company did not pay to Madeleine the past due amounts by the July 18, 1997
deadline. On August 29, 1997, the Company received a second Notice of Default
and Demand for Payment (the "August Notice") from Madeleine. The August Notice
stated that in the event that the Company did not pay the past due amounts by
September 5, 1997, Madeleine would exercise its rights to declare all
obligations under the Amended Loan Agreement immediately due and payable. The
Company did not pay the past due amounts by September 5, 1997. As of October 27,
1997, Madeleine has not declared all obligations under the Amended Loan
18
<PAGE> 21
Agreement immediately due and payable. The Company currently is negotiating with
Madeleine to obtain a waiver of defaults under the Amended Loan Agreement and to
amend the terms of the Amended Loan Agreement to extend its term, reduce the
interest rate thereof and provide for later payments of amounts thereunder.
In June 1997, the Company entered into a lease (the "Lease") with Daimler
Commerce Partners, L.P. (the "Partnership") with respect to the Company's
headquarters facility. The general partner of the Partnership is Conifer
Investments, Inc. ( "Conifer" ), the sole stockholders of Conifer are Thomas
C.K. Yuen and Misako Yuen, as co-trustees of The Thomas Yuen Family Trust (the
"Trust"), and the executive officers of Conifer include Mr. and Mrs. Yuen. Mr.
and Mrs. Yuen, as co-trustees of the Trust beneficially own as of the Record
Date 2% of the Common Stock. Until June 18, 1997, Mr. Yuen was a director of the
Company. The headquarters facility consists of 3,000 square feet of office and
warehouse space. The Lease term commenced on June 23, 1997, after Mr. Yuen
resigned as a director, and may be terminated by the Partnership at any time
upon 30 days notice. The monthly lease payment is $2,550, approximately $.85 per
square foot, which management believes is below the per square foot market rate
for comparable space.
On October 13, 1997, Charles Cortright and Angela Cortright, former
directors and executive officers of the Company, entered into a Settlement
Agreement and Mutual General Release with the Company, effective as of May 30,
1997 (the "Settlement Agreement"). Pursuant to the terms of the Settlement
Agreement, (a) Charles Cortright agreed to pay to the Company $10,000 regarding
various expenses he charged to the Company; (b) the Company and Angela Cortright
agreed that the amount that the Company owed to her under a certain provision of
her Amended and Restated Employment Agreement was $5,000; and (c) Charles and
Angela Cortright each waived their rights (including, but not limited to, health
benefits) under their respective employment agreements with the Company and such
agreements were terminated (except with respect to certain confidentiality
provisions); and (d) the parties executed mutual general releases.
In the opinion of management, the terms of the above-described agreements
are fair and reasonable and as favorable to the Company as those which could
have been obtained from unrelated third parties at the time of their execution.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than 10%
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during Fiscal 1997, its officers, directors and greater
than 10% beneficial owners complied with all Section 16(a) filing requirements.
RELATIONSHIP OF THE COMPANY WITH INDEPENDENT
PUBLIC ACCOUNTANTS
KMPG Peat Marwick LLP ("KMPG") was previously the principal accountants for
the Company. On October 15, 1997, KMPG's appointment as principal accountants
was terminated. The decisions to change accountants was made by the Company's
Chief Executive Officer and ratified by the Board of Directors of the Company.
In connection with the audits of the two fiscal years ended June 30, 1997,
there were no disagreements with KPMG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.
19
<PAGE> 22
The audit reports of KPMG on the consolidated financial statements of
Graphix Zone, Inc. and subsidiaries as of and for the years ended June 30, 1997
and 1996 did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles, except as stated in the following paragraph.
KPMG's auditors' report on the consolidated financial statements of Graphix
Zone, Inc. and subsidiaries as of and for the years ended June 30, 1997 and
1996, contained a separate paragraph stating that the "accompanying consolidated
financial statements and financial statement schedule have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
17 to the consolidated financial statements, the Company has suffered recurring
losses from operations, has a net capital deficiency and does not have the
necessary funds to pay its secured and unsecured debt obligations. In addition,
the Company has received two Notices of Default from its senior secured lender
and has taken steps to cease its principal business operations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 17. The consolidated financial statements and financial statement schedule
do not include any adjustments that might result from the outcome of this
uncertainty."
KPMG has furnished a letter indicating agreement with the foregoing, except
that KPMG stated therein that they were not in a position to agree or disagree
with the Company's statement that the decision to change accountants was made by
the Company's Chief Executive Officer and ratified by the Board of Directors of
the Company.
The Company does not expect that representatives of KPMG will be present at
the Annual Meeting; however, if representatives of KPMG are present, they will
have an opportunity to make a statement if they desire to do so and would be
expected to be available to respond to appropriate questions.
The Company has not yet selected a firm of independent certified public
accountants for the current fiscal year but is in the process of interviewing
firms. If the Company selects a new principal accountant prior to the Annual
Meeting, representatives of such firm will be expected to be present at the
Annual Meeting and will have an opportunity to make a statement if they desire
to do so and will be expected to be available to respond to appropriate
questions.
STOCKHOLDER PROPOSALS
Stockholders of the Company who intend to submit proposals to the Company's
stockholders at the annual meeting of stockholders to be held in 1998 must
submit such proposals to the Company no later than June 30, 1998 in order for
them to be included in the Company's proxy materials for such meeting.
Stockholder proposals should be directed to the attention of the Secretary of
the Company at the address of the Company set forth on the first page of this
Proxy Statement.
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<PAGE> 23
ANNUAL REPORT
A COPY OF THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR (THE "FORM
10-K"), INCLUDING THE FINANCIAL STATEMENTS AND THE FINANCIAL STATEMENT SCHEDULES
REQUIRED TO BE FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION PURSUANT
TO RULE 13A-1 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, MAY BE
OBTAINED BY EACH STOCKHOLDER OF RECORD (AND EACH BENEFICIAL HOLDER) ON THE
RECORD DATE, WITHOUT CHARGE. COPIES OF EXHIBITS TO THE FORM 10-K ARE AVAILABLE,
BUT A REASONABLE FEE WILL BE CHARGED TO A STOCKHOLDER REQUESTING EXHIBITS. ALL
SUCH REQUESTS SHOULD BE MADE IN WRITING TO THE COMPANY AT THE ADDRESS OF THE
COMPANY SET FORTH ON THE FIRST PAGE OF THIS PROXY STATEMENT, ATTENTION: MS.
CARRIE STYLE, SECRETARY.
By Order of the Board of Directors,
/s/ DAVID J. HIRSCHHORN
David J. Hirschhorn
Chairman of the Board
Santa Ana, California
October 28, 1997
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<PAGE> 24
PROXY
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS OF
GRAPHIX ZONE, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS AND MAY BE REVOKED PRIOR TO ITS EXERCISE
(the "Company"), hereby appoints David J. Hirschhorn, Douglas McCrary, or either
of them, proxies, each with full power of substitution, for and in the name of
the undersigned at the Annual Meeting of Stockholders of the Company to be held
on December 16, 1997, and at any and all adjournments, to vote all shares of the
capital stock of said Company (including shares of Common Stock and Series C
Convertible Preferred Stock) held of record by the undersigned on October 22,
1997, as if the undersigned were present and voting the shares.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED. IN
THE ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED FOR THE NOMINEES NAMED IN
PROPOSAL 1 ON THE REVERSE SIDE AND IN ACCORDANCE WITH THEIR DISCRETION ON SUCH
OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING.
(CONTINUED AND TO BE VOTED, SIGNED AND DATED ON THE REVERSE SIDE)
<PAGE> 25
GRAPHIX ZONE, INC.
PLEASE MARK YOUR VOTE IN THE BOX IN THE FOLLOWING MANNER USING DARK INK ONLY. M
THE LISTED NOMINEES HAVE BEEN PROPOSED BY THE COMPANY. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED.
<TABLE>
<S> <C>
1. ELECTION OF DIRECTORS FOR
Nominees for election to the Board of Directors: all the nominees listed (except as indicated to the
David J. Hirschhorn and Kevin P. Genda contrary)
[ ]
<CAPTION>
1. ELECTION OF DIRECTORS WITHHOLD AUTHORITY
David J. Hirschhorn and Kevin P. Genda [ ]
<CAPTION>
Nominees for election to the Board of Directors: to vote for all the nominees listed
</TABLE>
(INSTRUCTIONS: To withhold authority to vote for any nominee, write the
nominee's(s') name(s) on the space provided below.)
- --------------------------------------------------------------------------------
2. The proxies are authorized to vote in their discretion upon such other
business as may properly come before the meeting
I PLAN TO ATTEND THE
MEETING. [ ]
Dated: , 1997
-------------------------
-------------------------
(Signature)
-------------------------
(Signature)
Please date this Proxy
and sign exactly as your
name appears hereon. When
signing as attorney,
executor, administrator,
trustee or guardian,
please give your full
title. If there is more
than one trustee, all
should sign. All joint
owners should sign.
