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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER 0-28676
GRAPHIX ZONE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0697932
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2915 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 833-3838
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes [X] No [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein,
and will not 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]
Based on the last sale price, the aggregate market value of the voting
stock held by non-affiliates of the Registrant on September 29, 1997 was
$1,911,480.
As of September 29, 1997, 15,929,004 shares of the Registrant's only class
of Common Stock, $.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement prepared in connection with
the Annual Meeting of Stockholders to be held in 1997 are incorporated by
reference into Part III in this Report on Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1. Business............................................................. 1
Item 2. Properties........................................................... 7
Item 3. Legal Proceedings.................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders.................. 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 8
Matters..............................................................
Item 6. Selected Consolidated Financial Data................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........... 17
Item 8. Financial Statements and Supplementary Data.......................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting and 46
Financial Disclosure.................................................
PART III
Item 10. Directors and Executive Officers of the Registrant................... 46
Item 11. Executive Compensation............................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 46
Item 13. Certain Relationships and Related Transactions....................... 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 46
SIGNATURES......................................................................... 51
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PART I
ITEM 1. BUSINESS
OVERVIEW
Background
Graphix Zone, Inc., a Delaware corporation (the "Company"), was
incorporated on January 17, 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"). Both GZ-CA and StarPress
were publishers of entertainment-oriented interactive multimedia software. On
June 28, 1996, the Company acquired GZ-CA and StarPress in reverse triangular
mergers and the companies became wholly-owned subsidiaries of the Company (the
"Reorganization"). Upon the consummation of the Reorganization, the stockholder
interests in the Company of the former StarPress shareholders were larger than
those of the former GZ-CA shareholders, and therefore, StarPress was deemed to
be 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. The historical
shares of StarPress presented therein have been adjusted to reflect a .14666 for
1 stock exchange in connection with the Reorganization. All references to the
"Company" prior to June 28, 1996 relate to StarPress.
Following the consummation of the Reorganization, the Company's principal
business was developing, producing and marketing CD-ROM and on-line interactive
entertainment products for the personal computer industry. In addition,
following the Reorganization, the Company operated certain other businesses,
including developing and operating WILMA, an Internet site for live music venues
and developing and marketing certain Internet access and exploration products.
Current Status of Company/Restructuring Plan
In March 1997, the Company hired a new executive management team for the
purpose of evaluating the business and financial condition of the Company and,
if necessary, restructuring the Company. The management team reviewed the
Company's history of operating losses, current financial condition, current
strategic position within the entertainment software industry, competitors in
such industry and capital requirements for new product development. Based upon
its review, the management team reached the following conclusions with respect
to the Company's primary businesses and its financial condition:
- Entertainment Software Products. During the fiscal year ended June 30,
1997 ("Fiscal 1997"), the Company earned approximately 61% of its net
revenues from the sale of two entertainment software products which were
licensed to the Company under a license agreement with Sony Interactive
Entertainment, Inc. ("Sony"). The Company's license agreement with Sony
expired on September 1, 1997, and after such date, the Company no longer
had the right to sell products under such license other than liquidating
its inventory of Sony products during the 6 month period following
September 1, 1997. In addition, the Company does not have the resources
necessary to develop new entertainment software products which would
produce sufficient revenues to allow the Company to profitably operate in
the entertainment software industry.
- Interactive Music. The Company has not been able to obtain the interest
of music or computer retailers and consumers for its interactive music
products, and therefore, the Company has not been able to develop a
market which can support this business.
- Internet Access and Accessories. The Company has not been able to
maintain the profitability of its Internet access products due to the
large number of competitive products which are available, including free
promotional programs provided by large Internet access providers to their
customers.
- World Wide Web Content. The Company does not have the resources necessary
to develop World Wide Web content which would produce sufficient revenues
to support this business.
- General Financial Condition. The Company is insolvent and does not have
the funds necessary to continue its current operations.
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Based upon their conclusions, the management team decided that it was in
the best interests of the Company and its stockholders and creditors to attempt
to restructure the Company, and in June 1997, proposed to the Board of Directors
of the Company a restructuring plan (as described below, the "Restructuring
Plan"), which included terminating the Company's existing business operations.
On June 3, 1997, the Board of Directors adopted the Restructuring Plan. By June
24, 1997, the Company had taken steps to cease its principal business operations
and had terminated all employees other than Mr. David Hirschhorn, the Chairman
of the Board, President, Chief Executive Officer and Chief Financial Officer of
the Company.
As approved by the Board of Directors, the Restructuring Plan contained the
following elements:
- Business -- Divest or dispose of the Company's existing businesses
related to the personal computer industry and explore opportunities to
enter into new businesses and industries.
- Senior Secured Debt -- Renegotiate the terms of the Company's senior
secured loan and the related collateral agreements to extend the term of
the loan, reduce the interest rate thereof and provide for later payments
of amounts due thereunder and to reduce the senior lender's warrant
position in the Company.
- Outstanding Unsecured Debt -- Pay to unsecured creditors of the Company
$0.30 for each $1.00 of debt outstanding.
- Outstanding Convertible Preferred Stock -- Exchange outstanding shares of
the Company's Series B and Series C Convertible Preferred Stock, each $.01
par value per share (collectively, "Preferred Stock"), for shares of the
Company's common stock, $.01 par value per share ("Common Stock"), at an
exchange price of approximately $0.75 per share.
- Additional Capital -- Evaluate alternative methods for raising additional
funds for the Company.
Since July 1997, the Company's business activities have consisted of
licensing and attempting to enter into licenses for certain of the entertainment
software products held in its library, divesting or disposing of its businesses
and products related to the personal computer industry, and attempting to
restructure its debt obligations, equity structure and business operations. The
Common Stock was delisted from The Nasdaq Stock Market, Inc. ("Nasdaq") SmallCap
Market on June 19, 1997 because the Company no longer complied with the criteria
established by Nasdaq for continuation of listing.
On July 14, 1997, the Company received a Notice of Default and Demand for
Payment from its senior secured lender, Madeleine L.L.C. ("Madeleine"), based
upon the Company's failure to make certain interest payments when due under the
terms of the loan agreement, as amended (the "Amended Loan Agreement"), between
the Company and Madeleine. The notice stated that the Company was in default
under the terms of the Amended Loan Agreement and demanded that all pastdue
amounts be paid by July 18, 1997. The Company did not pay 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 failed to pay all
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 the September 5, 1997
deadline. As of October 13, 1997, Madeleine has not declared all obligations
under the Amended Loan Agreement immediately due and payable. The Company has
had preliminary oral discussions with Madeleine concerning obtaining a waiver of
existing defaults of the Company under the terms of the Amended Loan Agreement
and renegotiating the terms of the Amended Loan Agreement and the related
collateral agreements. Madeleine has indicated to the Company that if the
Company is able to reach agreements with its unsecured creditors regarding the
repayment of their debt at a reduced basis and with its preferred stockholders
regarding the conversion of their shares of Preferred Stock into shares of
Common Stock, the senior lender may be willing to waive the existing defaults
under the Amended Loan Agreement, extend the term of its loan, reduce the
interest rate charged to the Company thereunder and reduce its current warrant
position of approximately 25% of the restructured Company, determined on a
fully-diluted basis. The amount of the reductions relating to interest rate and
warrant position are still subject to negotiation. To the extent that the
Restructuring Plan is unsuccessful, Madeleine has indicated that it will
foreclose upon its interest and liquidate all of the assets of the Company.
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The Company is negotiating with its unsecured creditors to pay $.30 for
each $1.00 of debt outstanding. In order for the Restructuring Plan to proceed,
the unsecured creditors (a) holding approximately 90% of the aggregate dollar
amount of the Company's unsecured debt and (b) comprising over 65% of the number
of the unsecured creditors must agree to the repayment plan. The Company does
not intend to negotiate different payment terms with any of its current
unsecured creditors. If all of the Company's unsecured creditors agree to the
repayment plan, the Company estimates that its total payments to creditors would
be approximately $1,800,000.
The Company also is negotiating exchange agreements with its holders of
Series B Convertible Preferred Stock, $.01 par value per share ("Series B
Stock"), and Series C Convertible Preferred Stock, $.01 par value per share
("Series C Stock"), pursuant to which all outstanding shares of Preferred Stock
would be converted into shares of Common Stock at an exchange price of
approximately $0.75 per share. The Company has entered into exchange agreements
with several, but not all, of the holders of Series B Stock and has not entered
into exchange agreements with the holders of Series C Stock. As of September 29,
1997, the outstanding shares of Preferred Stock of the Company consisted of the
following: 1,806 shares of Series B Stock and 1,185,185 shares of Series C
Stock. The Company estimates that under the terms of the Restructuring Plan,
such outstanding shares of Preferred Stock will be converted into approximately
8 million shares of Common Stock. As of September 29, 1997, the Company has
approximately 15,929,000 shares of Common Stock outstanding, and after effecting
the exchange of shares of Preferred Stock described above, the Company will have
approximately 23,929,000 shares of Common Stock outstanding.
In order to facilitate the Restructuring Plan, management must raise a
minimum of $3,000,000 in new capital. There is no assurance that management will
be successful in attracting new capital given the Company's financial history
and current financial position.
Forward-Looking Statements
This Annual Report on Form 10-K includes a number of forward-looking
statements that are subject to certain risks and uncertainties that could cause
the Company's actual results and financial position to be affected negatively as
events unfold. These events include, but are not limited to, the risk that the
Restructuring Plan is not successful and, even if successful, the risks inherent
in starting a new business venture. The Company will not update or revise any
such forward-looking statements to reflect events or circumstances that may
arise after this Report is filed and that may have an effect on the Company's
overall performance. A more thorough discussion of these factors is presented in
this Item 1 under the caption "Risk Factors," below, and elsewhere in this
Annual Report on Form 10-K.
RISK FACTORS
Success of Restructuring/Going Concern
The Company is in default under the terms of its loan agreements with its
senior secured lender and is in default under other agreements with numerous
other creditors. From a financial viewpoint, the Company is insolvent. The
Company's future will depend significantly on its ability to successfully
complete the Restructuring Plan. If the Company fails to complete any step in
its Restructuring Plan, it is likely that the Company's senior secured lender
will foreclose on all of the assets of the Company and pursue the dissolution of
the Company. Based upon the current assets of the Company, there would be
insufficient assets to satisfy the secured lender's claims and, accordingly,
there would be no assets remaining to satisfy the unsecured creditors' claims.
There can be no assurance that the Company will successfully complete its
restructuring or that the senior secured lender will not foreclose on the assets
of the Company at any time or that the Company will continue as a going concern.
No Current Operations; No Current Business Arrangements
Since July 1997, the Company's business activities have consisted of
licensing and attempting to enter into licenses for certain of the entertainment
software products held in its library, divesting or disposing of its businesses
and products related to the personal computer industry, and attempting to
restructure its debt
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obligations, equity structure and business operations. After October 31, 1997,
the Company intends to cease its efforts to enter into new licenses for
entertainment software products in its library. The Company is considering
several strategic business alternatives in industries which the Company has not
operated in the past, including but not limited to, the financial service
industry. The Company has no understandings, commitments, agreements or
arrangements (collectively, "arrangements") with respect to the business
alternatives being considered. Accordingly, the Company has no operating history
or current business arrangements upon which an evaluation of the Company and its
prospects can be based. There can be no assurance that the Company will be able
to begin operating a new business or that the Company will attain profitability.
Employees; Financial and Management Controls
Since June 24, 1997, the Company has had only one employee, Mr. David
Hirschhorn, Chairman of the Board, President, Chief Executive Officer, Chief
Financial Officer and Treasurer, and several non-employee consultants. As the
Company begins operations in new businesses, the Company's success will depend
significantly upon its ability to attract and retain skilled employees and to
develop financial and management controls, reporting systems and procedures.
There can be no assurance that the Company will be able to attract and retain
skilled employees or develop such controls, systems or procedures effectively or
on a timely basis.
Dilution to Stockholders
If the Company successfully completes the proposed exchange of outstanding
shares of Preferred Stock of the Company for shares of Common Stock, the number
of outstanding shares of Common Stock will increase by approximately 50%. As a
result, the holders of Common Stock will incur substantial dilution. In
addition, the Company is evaluating alternatives for raising additional funds
for the Company and certain of these alternatives may result in additional
dilution of the holders of Common Stock.
PRIOR BUSINESS
Prior to June 1997, the principal business operations of the Company
consisted of developing, producing and marketing interactive entertainment and
multimedia products for the personal computer industry. The Company developed,
produced and marketed (collectively, "developed") products in four primary
categories: (a) entertainment software (b) interactive music, (c) Internet
access and accessories and (d) World Wide Web content.
Entertainment Software
During Fiscal 1997, sales of two personal computer entertainment software
products made up approximately 61% of the Company's net revenues. The rights to
sell these two products, Wheel of Fortune and Jeopardy!, were licensed to the
Company under the terms of a license agreement with Sony (the "Sony License").
During Fiscal 1997, the Company attempted to negotiate a new license with Sony,
but Sony would not enter into a new license agreement. The Sony License expired
on September 1, 1997 (the "Expiration Date"). Under the terms of the Sony
License, following the Expiration Date, the Company is not allowed to sell Wheel
of Fortune and Jeopardy! other than in connection with liquidating its existing
inventory of such products during the 6 month period following the Expiration
Date.
During Fiscal 1997, the Company sold a variety of other personal computer
entertainment software products including: The Guided Tour of Multimedia,
Lights! Camera! Interaction! and Travis Jett's Real Extreme CD-Room, both based
on the America's Funniest Home Videos Television show; Nixon, based upon the
Oliver Stone film; and The Crow, based upon the film The Crow. The Company also
published and distributed titles featuring household names such as MTV's Beavis
and Butthead, CNN, Highlights, the Improv and Playboy.
On February 24, 1997, the Company entered into an agreement with Inscape, a
Delaware general partnership among Home Box Office and corporations owned by
Warner Music Group, Inc. ("WMG") and
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Nash New Media, Inc., and WMG (collectively, "Inscape"), to purchase certain
assets from and assume certain liabilities of Inscape. The purchased assets
consisted of all rights, title and interest in twelve existing personal computer
game products and seven personal computer game products in development; all
rights, title and interest in the Inscape name; certain furniture and equipment;
and certain leases and other agreements. The liabilities assumed consisted of
accrued compensation costs associated with those Inscape employees offered
employment with the Company. In exchange for the Inscape assets, the Company
issued to Inscape 948,148 shares of the Company's Series C Stock, which had a
stated liquidation value of $3,200,000 but which the Company valued at
$2,193,066 due to the restricted nature of the securities.
On February 26, 1997, the Company entered into an agreement with Trimark
Holdings, Inc. and its subsidiary, Trimark Interactive, Inc. ("Trimark"), to
purchase certain assets from and assume certain liabilities of Trimark. The
purchased assets consisted of all rights, title and interest in seven existing
personal computer game products and three personal computer game products in
development, related inventories and certain other agreements. The liabilities
assumed consisted primarily of liabilities related to the products in
development. In exchange for the Trimark assets, the Company issued to Trimark
237,037 shares of the Company's Series C Stock, which had a stated liquidation
value of $800,000 but which the Company valued at $548,267 due to the restricted
nature of the securities.
Interactive Music
The Company was one of the first companies to develop interactive music
products. In June 1994, the Company released its initial interactive music
product, Prince Interactive, featuring the artist formerly known as Prince.
During the fiscal year ended June 30, 1995 ("Fiscal 1995"), the Company released
its second interactive music product, Highway 61 Interactive, featuring Bob
Dylan. During the fiscal year ended June 30, 1996 ("Fiscal 1996"), the Company
did not release any new interactive music products. During Fiscal 1997, the
Company released three interactive music products: Willie, based on the work of
country western star Willie Nelson; Living Jazz, the first of a proposed series
of interactive jazz products to be developed jointly with Herbie Hancock; and
Under the Covers, a historical music product which explored the rock scene of
the 1960's through the lens of photographer Henry Diltz. The three titles
released in Fiscal 1997 had limited financial success due to a lack of retailer
and consumer interest.
Internet Access and Accessories
During Fiscal 1996, the Company developed an Internet access product named
ExpressNet Suite which was a collection of internet software that included
Netscape Navigator 2.0, Internet Phone and other third party modules and which
linked with Earthlink, Inc. as the Internet service provider. The ExpressNet
Suite had limited financial success. During Fiscal 1997, the Company developed a
second edition of ExpressNet Suite. In addition, during Fiscal 1997, the Company
developed a similar line of Internet access and exploration products under the
name SmartNet which linked with Concentric as the Internet service provider. The
Internet products released in Fiscal 1997 had little financial success due to
the large number of competitive products available, including free promotional
programs provided by large Internet access providers to their customers.
World Wide Web Content
In April 1996, StarPress acquired WILMA, an Internet site for live music
venues, in exchange for an aggregate purchase price of $220,876, consisting of
shares of Common Stock of StarPress and a promissory note. StarPress intended to
develop WILMA into a "virtual world" where artists, music bands, music fans and
other music oriented people could interact and exchange information about music
clubs and other secondary concert venues. Additionally, StarPress intended to
sell tickets and other products through WILMA. During the second quarter of
Fiscal 1997, the Company decided that the large amount of capital projected to
be needed by WILMA for its operations made the project unfeasible. During the
fourth quarter of Fiscal 1997, the Company entered into an agreement with the
founders of WILMA to sell WILMA to such founders in exchange for $5,000.
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Distribution
The Company used independent distributors to distribute its products to
computer and software outlets, music stores, large merchandisers and other
retail stores.
Competition
The Company's competition in its primary business industry, entertainment
software development, can be grouped into four categories: (a) large software
developers such as Davidson, Broderbund, Electronic Arts, The Learning Company
and GT Interactive Software; (b) small software publisher/developers such as 7th
Level and Interplay Productions; (c) large entertainment companies, such as The
Walt Disney Company and Sony; and (d) small to medium sized independent
publisher developers who specialize in particular niches (the "Niche Category").
The Company is considered to fall in the Niche Category. Companies in the Niche
Category typically do not have the capital required to compete with the larger
software companies and have less market acceptance because they compete in niche
markets and, as a result, are not as well known. In addition, as compared to
prior years, market conditions are requiring software developers to produce
higher-quality products at a lower cost, and therefore, companies in the Niche
Category, which sell a smaller number of products, are making less money on an
overall basis. During the calendar year ended December 31, 1996, on an
industry-wide basis, more software titles were published than in the previous
year and the average revenue per software title decreased. Accordingly, the
software market is becoming more competitive for consumer dollars spent on
software and less profitable on a per software product basis.
Research and Development
During Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company spent
$3,703,775, $2,008,614 and $2,032,059, respectively, on expenditures for
research and development. The Company's research and development activities
primarily are directed towards developing new entertainment software products.
The Company believes that success in the entertainment software industry is
directly dependent upon the ability to finance research and development costs in
an effort to develop new entertainment software products. The Company does not
have the financial resources necessary to finance research and development
activities in the future.
Intellectual Property
The Company relied on copyright and trademark protection and non-disclosure
agreements to protect its intellectual property. The Company holds no patents or
patent applications in connection with its products. The Company's logo and the
name "Graphix Zone" 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. From time to time, the Company licensed
from third parties video, audio and related content which it used in the
production of software products.
Significant Customers
During Fiscal 1997, the Company's sales to Tech Data Corporation and
Navarre Corporation represented approximately 26% and 15% of the Company's total
net revenues. Since July 1997, the Company's primary software sales related
activity has consisted of licensing two interactive pc-games to a game
distributor. Because the Company is terminating its software business
operations, software sales will terminate in the year ending June 30, 1998
("Fiscal 1998"), and during Fiscal 1998 the Company does not expect to obtain
any new software customers.
EMPLOYEES
As of September 29, 1997, the Company had one full-time employee.
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ITEM 2. PROPERTIES
In June 1997, the Company entered into a lease for a 3,000 square foot
facility in Santa Ana, California consisting of office and warehouse space. The
Company leases the facility from Daimler Commerce Partners, L.P. (the
"Partnership"), an affiliated partnership. The general partner of the
Partnership is Conifer Investments, Inc. ("Conifer"). The sole shareholders 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, also beneficially
own as of September 29, 1997, 1.4% of the Company's outstanding Common Stock.
Until June 1997, Mr. Yuen was a director of the Company. The lease term
commenced on June 23, 1997 and can be terminated by the lessor at any time upon
30 days notice. The monthly lease payment under the lease is $2,550,
approximately $.85 per square foot, which management believes is below the per
square foot market rate for comparable space.
During Fiscal 1997, the Company leased approximately 17,000 square feet of
office, multimedia production, showroom and theater space in two separate
buildings in Irvine, California. Both leases expired on June 30, 1997 and were
not renewed.
The Company subleases approximately 12,100 square feet of office space in
San Francisco, California, which location formerly was used as the principal
executive offices of StarPress. The Company has assigned its sublease to a third
party, but remains liable as a guarantor of the sublease, in the event of
default by the assignee, until December 1997.
In management's opinion, the Company's current facilities are adequate for
its current level of operations as well as the Company's anticipated level of
operations. However, the monthly lease rate for the Company's facility in Santa
Ana, California is below market and the lessor has the right to terminate the
lease at any time upon 30 days notice. No assurances can be made that the lease
for the Santa Ana, California facility will not be terminated or that the lease
payment will not be increased. In addition, no assurances can be made that
should either of such events occur, the Company will be able to locate a
comparable facility at a comparable lease rate.
ITEM 3. LEGAL PROCEEDINGS
The Company may from time to time be involved in routine legal matters
incidental to its business. In the opinion of management, the resolution of such
matters will not have a material adverse effect on its consolidated financial
condition or results of operations. Set forth below is a summary of certain
material legal proceedings to which the Company and/or any of its subsidiaries
is a party.
The Company and Tunes Network, Inc. (formerly Surf Communications, Inc.)
("Tunes") currently are involved in an arbitration pending in the San Francisco,
California office of the American Arbitration Association. The arbitration was
instituted in April 1997. The arbitration relates to claims made by Tunes
against the Company in the amount of $322,000, plus unspecified additional
royalties, interest and attorneys' fees, allegedly owed under an agreement
entered into between the Company and Tunes as of November 5, 1996 (the "November
5th Agreement"). The November 5th Agreement relates to services to be performed
by Tunes in connection with creating and maintaining an Internet website for the
Company. Although the Company cannot predict the likely outcome of this
arbitration at this time, management intends to vigorously defend this
arbitration and believes that the final outcome will not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In April 1997, the Company solicited the votes of the six holders of its
Series B Convertible Preferred Stock (the "Series B Preferred") to amend the
Certificate of Designations of the Series B Preferred to establish a $1.00
conversion price floor. For the proposed amendment to become effective, a vote
of the holders of (a) the Series B Preferred, voting as a class, and (b) the
Common Stock and Series C Preferred Stock, voting together as one class, must be
obtained. In light of the Restructuring, the Company has not pursued obtaining
this vote. See "Item 1. Business -- Current Status of the Company/Restructuring
Plan."
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
During Fiscal 1996, the Common Stock of GZ-CA was listed on the Nasdaq
("Nasdaq") SmallCap Market under the symbol "GZON" and the Common Stock of
StarPress was quoted on the OTC Electronic Bulletin Board under the symbol
"GTBR." During the period beginning July 1, 1996 and continuing through June 19,
1997, the Common Stock was listed on the Nasdaq SmallCap Market under the symbol
"GZON." On June 19, 1997, the Common Stock was delisted from the Nasdaq SmallCap
Market because the Company no longer complied with the criteria established by
Nasdaq for continuation of listing. Following its delisting from the Nasdaq
SmallCap Market and continuing through the end of Fiscal 1997, the Common Stock
has been quoted on the OTC Electronic Bulletin Board under the symbol "GZON."
The table below sets forth the range of high and low bid information for
the periods indicated as reported by (a) the Nasdaq SmallCap Market with respect
to the Company for the first three quarters of Fiscal 1997 and GZ-CA for all
four quarters of Fiscal 1996, (b) the OTC Electronic Bulletin Board and the
Nasdaq SmallCap Market with respect to the Company for the fourth quarter of
Fiscal 1997 and (c) the OTC Electronic Bulletin Board with respect to StarPress
for all four quarters of Fiscal 1996. These quotations reflect interdealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
COMPANY -- FISCAL 1997
First quarter.......................................... $ 6.875 $3.000
Second quarter......................................... 4.000 1.875
Third quarter.......................................... 3.500 1.500
Fourth quarter......................................... 1.500 0.031
GZ-CA FISCAL 1996
First quarter.......................................... $ 11.750 $4.875
Second quarter......................................... 8.625 4.375
Third quarter.......................................... 6.750 4.750
Fourth quarter......................................... 8.000 4.750
STARPRESS FISCAL 1996
First quarter.......................................... $ 9.375 $3.409
Second quarter......................................... 7.671 3.146
Third quarter.......................................... 6.392 3.835
Fourth quarter......................................... 5.966 4.262
</TABLE>
HOLDERS
As of September 29, 1997, there were 166 holders of record of the Company's
Common Stock.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock following a
philosophy of retaining earnings in order to finance the expansion and
development of its business. Currently, the Company is prohibited from making
cash dividend payments under the terms of the Amended Loan Agreement, the
Company's senior credit facility. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," herein and "Item 8. Financial Statements and Supplementary
Data -- Notes to Consolidated Financial Statements -- Note 6."
8
<PAGE> 11
SALES OF UNREGISTERED SECURITIES
During Fiscal 1997, the Company sold the following unregistered securities,
which previously have not been reported in a Quarterly Report on Form 10-Q for
the Company, pursuant to exemptions under the Securities Act of 1933, as amended
(the "Act"):
1. On December 12, 1996, the Company issued a warrant to purchase 100,000
shares of Common Stock to Silicon Valley Bank, which the Company believed to be
an "accredited investor" as defined in the Act, in exchange for the agreement by
Silicon Valley Bank to forbear until December 31, 1997 from taking any legal
actions to foreclose on the assets of the Company in connection with the
Company's defaults under a loan agreement with Silicon Valley Bank. The warrant
may be exercised at a price per share equal to the lowest price at which the
Company sells securities in the two equity placements immediately prior to the
time of exercise of the warrant. No underwriter was involved in the transaction.
The above-referenced securities were issued in reliance on the private offering
exemption set forth in Section 4(2) of the Act on the basis that they were
issued under circumstances not involving a public offering.
2. On December 24, 1996, the Company issued 43,542 shares of Common Stock
to Cruttenden Roth Incorporated ("Cruttenden") and David J. Hirschhorn (who was
not an officer or director of the Company at the time of such issuance), both of
which the Company believed to be accredited investors, in exchange for
investment banking services, having a value of $130,625 as determined by the
Company, performed for the Company. Other than Cruttenden and Mr. Hirschhorn in
their capacities as the recipients of the shares of stock, no underwriter was
involved in the transaction. The above-referenced securities were issued in
reliance on the private offering exemption set forth in Section 4(2) of the Act
on the basis that they were issued under circumstances not involving a public
offering.
3. On December 24, 1996, the Company issued 24,348 shares of Common Stock
with a fair market value of $70,000 on the date of issuance to Ronald S. Posner,
the Company's Chairman of the Board and Chief Executive Officer at the time of
issuance, as payment for accrued compensation in the amount of $70,000. No
underwriter was involved in the transaction. The above-referenced securities
were issued in reliance on the private offering exemption set forth in Section
4(2) of the Act on the basis that they were issued under circumstances not
involving a public offering.
4. On January 31, 1997, the Company entered into a loan agreement in the
original principal amount of $3,740,000 (the "Madeleine Loan Agreement") with,
and issued a warrant to purchase 300,000 shares of Common Stock to, Madeleine
L.L.C. ("Madeleine"), which the Company believed to be an accredited investor.
The warrant may be exercised at a price per share 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 the Common Stock over the 7
trading days immediately preceding the date of exercise (the "Fair Market Value
Calculation"). No underwriter was involved in the transaction. The
above-referenced securities were issued in reliance on the private offering
exemption set forth in Section 4(2) of the Act on the basis that they were
issued under circumstances not involving a public offering.
5. On February 3, 1997, the Company issued a convertible promissory note in
the original principal amount of $200,000 (the "Note") to Middlefield Ventures,
Inc. ("Middlefield"), which the Company believed to be an accredited investor.
In connection with the issuance of the Note, the Company issued to Intel
Corporation ("Intel"), an affiliate of Middlefield, which the Company believed
to be an accredited investor, a warrant (the "Warrant") to purchase 613,718
shares of Common Stock at an exercise price of $3.46 per share. At the option of
Middlefield, the Note may be converted into shares of Common Stock under the
terms of the Warrant. Pursuant to the terms of the Warrant, shares vest as
Middlefield converts amounts under the Note or as Intel provides certain
marketing funds to the Company. No underwriter was involved in the transaction.
The above-referenced securities were issued in reliance on the private offering
exemption set forth in Section 4(2) of the Act on the basis that they were
issued under circumstances not involving a public offering.
6. On March 17, 1997, the Company issued to David J. Hirschhorn, the
Chairman of the Board, President, Chief Executive Officer, Chief Financial
Officer, Treasurer and a director of the Company, an
9
<PAGE> 12
option to purchase 2,500,000 shares of Common Stock at an exercise price of
$2.00 per share. The option was issued to Mr. Hirschhorn in connection with his
employment with the Company. The option vests over a period of four years. The
option 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. No
underwriter was involved in the transaction. The above-referenced securities
were issued in reliance on the private offering exemption set forth in Section
4(2) of the Act on the basis that they were issued under circumstances not
involving a public offering.
7. On June 5, 1997, the Company issued to Madeleine a warrant to purchase
25% of the Common Stock of the Company, determined on a fully diluted basis, in
connection with amending the Madeleine Loan Agreement to provide for an
additional loan in the principal amount of $1,300,000 under the terms of the
Madeleine Loan. The warrant may be exercised at a price per share equal to the
lowest of (i) $0.2366 per share, (ii) 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 (iii) the fair market value (determined based on the Fair Market Value
Calculation) of the Common Stock as of the date that the warrant is exercised.
No underwriter was involved in the transaction. The above-referenced securities
were issued in reliance on the private offering exemption set forth in Section
4(2) of the Act on the basis that they were issued under circumstances not
involving a public offering.
8. During the period from August 1996 to December 1996, in order to attract
and retain certain consultants, the Company granted options to purchase 30,000
shares of Common Stock to 6 persons. The options may be exercised at prices
ranging from $3.00 to $4.13 share. No underwriter was involved in the
transactions. The above-referenced securities were issued in reliance on the
private offering exemption set forth in Section 4(2) of the Act on the basis
that they were issued under circumstances not involving a public offering.
9. During the period from August to October 1996, the Company issued 9,134
shares of Common Stock to 3 individuals/entities which the Company believed to
be accredited investors in connection with the exercise of options. The
aggregate proceeds paid to the Company in connection with the exercise of the
options were $9,243. No underwriter was involved in the transactions. The
above-referenced securities were issued in reliance on the private offering
exemption set forth in Section 4(2) of the Act on the basis that they were
issued under circumstances not involving a public offering.
10
<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data for the Company and
should be read in connection with the Consolidated Financial Statements, related
notes and other financial information appearing elsewhere in this report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------ -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)(1)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues............................. $ 7,709 $ 7,182 $ 2,171 $ 244 $ --
Gross margin............................. 1,713 3,986 333 77 --
Net loss................................. $ 16,831 $23,519 $10,916 $2,773 $ 839
-------- ------- ------- ------ -----
Per Share Data:
Net loss................................. $ 1.61 $ 5.05 $ 7.76 $ 3.15 $3.04
Weighted average shares outstanding...... 11,044 4,661 1,407 881 276
-------- ------- ------- ------ -----
Balance Sheet Data:
Long-term obligations.................... $ 51 $ 189 $ -- $ -- $ --
Mandatory Redeemable Series C Preferred
Stock................................. $ 2,881 $ -- $ -- $ -- $ --
Working capital (deficit)................ $ (9,133) $ (20) $ (277) $ 296 $(696)
Total Assets............................. 1,752 8,529 3,771 3,852 126
Shareholders' equity (deficit)........... $(11,789) $ 2,049 $ 939 $3,039 $(591)
</TABLE>
- ---------------
(1) The Company was formed for the purpose of acquiring GZ-CA and StarPress. On
June 28, 1996 (the "Effective Date"), the Company acquired GZ-CA and
StarPress in reverse triangular mergers and the companies became
wholly-owned subsidiaries of the Company (the "Reorganization"). Upon the
consummation of the Reorganization, the stockholder interests in the Company
of the former StarPress shareholders were larger than those of the former
GZ-CA shareholders, and therefore, StarPress was deemed to be the acquiring
entity for financial accounting purposes. Accordingly, the historical
financial information presented herein, prior to the Effective Date, is the
financial information of StarPress. The historical shares of StarPress
presented herein have been adjusted to reflect a .14666 for 1 stock exchange
in connection with the Reorganization.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CURRENT STATUS OF COMPANY
Until June 1997, the principal business operations of the Company consisted
of developing, producing and marketing interactive entertainment and multimedia
products for the personal computer industry. During the third quarter of Fiscal
1997, the Company hired a new executive management team to evaluate the current
business and operations and financial condition of the Company and, if
necessary, restructure the Company (the "Restructuring"). On June 3, 1997, the
Board of Directors of the Company adopted the restructuring plan proposed by the
management team, which included terminating the Company's existing business
operations. By June 24, 1997, the Company had taken steps to cease its principal
business operations and had terminated all employees other than Mr. David
Hirschhorn, the Chairman of the Board, President, Chief Executive Officer, Chief
Financial Officer and Treasurer of the Company. On each of July 14, 1997 and
August 29, 1997, the Company received a Notice of Default and Demand for Payment
from its senior secured lender based on the Company's failure to make certain
interest payments when due. As of October 13, 1997, the Company has not paid the
past-due amounts and the senior secured lender has not foreclosed on the senior
secured loan. Since July 1997, the Company's business activities have consisted
of licensing and attempting to enter into licenses for certain of the
entertainment software products held in its library, divesting or disposing of
its businesses and products related to the personal computer industry, and
attempting to restructure its debt
11
<PAGE> 14
obligations, equity structure and business operations. After October 31, 1997,
the Company intends to cease its efforts to enter into new licenses for
entertainment software products in its library.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations expressed in percentage relationship to, and as
compared with, prior periods.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net revenues..................................... 100.0% 100.0% 100.0%
Cost of revenues................................. 77.8 44.5 84.7
------ ------ ------
Gross margin..................................... 22.2 55.5 15.3
Research and development expense................. 48.0 28.0 93.6
Sales and marketing expense...................... 52.5 41.4 115.0
General and administrative expense............... 87.6 36.3 144.6
Restructuring charge............................. 23.3 26.4 --
Acquired in-process technology................... 21.1 249.7 129.4
------ ------ ------
Operating loss................................... (210.3) (326.3) (467.3)
Interest expense, net............................ 7.7 1.1 35.4
------ ------ ------
Net loss......................................... (218.3)% (327.4)% (502.7)%
====== ====== ======
</TABLE>
Net revenues
Net revenues for Fiscal 1997 increased by $526,854 to $7,708,900 from
$7,182,046 in Fiscal 1996. The increase in net revenues of 7.3% from Fiscal 1996
to Fiscal 1997 is primarily due to the Company releasing ten new titles during
Fiscal 1997, offset by significantly lower revenues in the fourth quarter of
Fiscal 1997 as a result of the Company implementing the Restructuring. Net
revenues for Fiscal 1996 increased $5,010,742 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.
Approximately 41% of the Company's net revenues for Fiscal 1997 were
derived from two customers. During Fiscal 1997, Tech Data Corporation and
Navarre Corporation individually accounted for 26% and 15% of net revenues,
respectively. Approximately 66% of the Company's net revenues for Fiscal 1996
were derived from three customers. During Fiscal 1996, 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. During Fiscal 1995, Tech Data
Corporation, Ingram Micro and Kenyon Capital Ltd. individually accounted for
36%, 12% and 10% of net revenues, respectively.
Gross Margin
Gross margin as a percentage of net revenues decreased to 22.2% in Fiscal
1997 from 55.5% in Fiscal 1996. The decrease in gross margin percentage is
primarily a result of the Company recording several charges to cost of revenues
in the third and fourth quarters of Fiscal 1997 related to the decrease in the
net realizable value of certain assets of the Company. These charges include
write-downs of approximately $1,516,000 for excess and obsolete inventory as
well as approximately $771,000 related to prepaid and guaranteed royalties and
acquired capitalized software development costs. Gross margin as a percentage of
net revenues increased to 55.5% in Fiscal 1996 from 15.3% in Fiscal 1995. The
increase in gross margin percentage from Fiscal 1995 to Fiscal 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.
12
<PAGE> 15
Additionally, during Fiscal 1996 the Company was able to decrease per unit
product costs as it gained experience in the procurement of product components.
Research and Development Expenses
Research and development expenses increased by $1,695,161 to $3,703,775 in
Fiscal 1997 from $2,008,614 in Fiscal 1996 and represented 48.0% and 28.0% of
net revenues in Fiscal 1997 and Fiscal 1996, respectively. The increase in
research and development expenses from Fiscal 1996 to Fiscal 1997 is primarily a
result of the Company developing ten new titles during Fiscal 1997 as well as
assuming on-going development activities in connection with its purchase of
assets from Inscape and Trimark. Research and development expenses decreased 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 in Fiscal 1996 and 1995,
respectively. The decrease in research and development expenses as a percentage
of net revenues from Fiscal 1995 to Fiscal 1996 is 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 and
fourth quarters of Fiscal 1996 in anticipation of the Reorganization. As
previously discussed, for financial statement reporting purposes, the expenses
incurred by GZ-CA are not reflected in the Company's results of operations for
Fiscal 1996.
Sales and Marketing Expenses
Selling and marketing expenses during Fiscal 1997 increased to $4,049,633
from $2,973,569 in Fiscal 1996 and $2,498,488 in Fiscal 1995, representing
52.5%, 41.4% and 115.0% of net revenues during such years. The increase in sales
and marketing expenses was 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 increase in sales and marketing expenses, as a percentage of net revenues,
from Fiscal 1996 to Fiscal 1997 is primarily a result of significantly lower
sales in the fourth quarter of Fiscal 1997 as a result of the Company
implementing the Restructuring. The decrease in sales and marketing expenses, as
a percentage of net revenues, from Fiscal 1995 to Fiscal 1996 was primarily due
to significant increases in revenues and only moderate increases in selling and
marketing expenses.
General and Administrative Expenses
General and administrative expenses increased by $4,142,326 to $6,748,996
in Fiscal 1997 from $2,606,670 in Fiscal 1996. The increase in general and
administrative expenses from Fiscal 1996 to Fiscal 1997 is due in part to the
Company recording a charge in the third quarter of Fiscal 1997 of approximately
$1,253,000 related to impairment of property and equipment, intangible assets
and other long term assets and recording in the third and fourth quarters of
Fiscal 1997 approximately $1,147,000 of additional bad debt reserves. In
addition, the comparative increase is due in part to the curtailment of certain
administrative functions and personnel in the third quarter of Fiscal 1996 in
anticipation of the Reorganization. General and administrative expenses during
Fiscal 1996 decreased to $2,606,670 from $3,139,507 during Fiscal 1995. The
decrease is primarily a 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 vacated facilities for the second half of Fiscal 1996 were reserved for and
included in the restructuring charge discussed below rather than being included
in general and administrative expenses.
General and administrative expenses increased as a percentage of net
revenues to 87.6% in Fiscal 1997 from 36.3% in Fiscal 1996 but decreased from
144.6% of net revenues in Fiscal 1995. The increase as a percentage of net
revenues in Fiscal 1997 as compared to Fiscal 1996 is primarily a result of the
aforementioned charges recorded in the third and fourth quarters of Fiscal 1997
and significantly lower sales in the fourth quarter of Fiscal 1997 as a result
of the Company implementing the Restructuring. The decrease as a percentage of
net revenues in Fiscal 1996 compared to Fiscal 1995 is primarily a result of a
significant increase in revenues and a moderate decrease in general and
administrative expenses resulting from the curtailment of certain administrative
functions and personnel in the third quarter of Fiscal 1996 in anticipation of
the Reorganization.
13
<PAGE> 16
Restructuring Charges
In June 1997, the Company began implementing the Restructuring. In
connection with the Restructuring, the Company recorded a charge of
approximately $2,063,000, primarily related to the write-down of property and
equipment, goodwill and intangibles related to the Inscape and Trimark asset
purchases and severance costs related to terminating all but one of the
employees of the Company.
During the second quarter of Fiscal 1996, in anticipation of the
Reorganization, the Company implemented a restructuring plan to enhance overall
competitiveness, productivity and efficiency through the reduction of overhead
costs. The total estimated cost of the charge to operations during Fiscal 1996
related to such plan was $1,900,000. The charge principally reflects severance
costs resulting from a reduction of a significant portion of the Company's work
force, write-down of excess furniture and equipment and office facilities and
write-offs of assembled work force and goodwill arising from the Company's
acquisition of StarPress Multimedia, Inc. in June 1995. During Fiscal 1997, the
Company reversed approximately $267,000 of the accrued restructuring charge
recorded in Fiscal 1996, primarily related to facility and equipment leases for
its San Francisco, California facility, which leases were subsequently
sub-leased.
Acquired in-process technology
As a result of the Company's acquisition of certain assets from Inscape and
Trimark in February 1997, and the acquisitions of GZ-CA in June 1996 and
StarPress Multimedia, Inc. in June 1995, the Company wrote-off $1,628,000,
$17,935,000 and $2,810,000 of acquired research and development costs in Fiscal
1997, 1996 and 1995, respectively. These costs are considered non-recurring
expenses.
Interest expense
Interest expense increased $511,910 to $592,966 in Fiscal 1997 from $81,056
in Fiscal 1996. The increase in interest expense is primarily related to the
Company's borrowings under the Madeleine Loan Agreement (hereinafter defined).
Interest expense decreased $702,451 to $81,056 in Fiscal 1996 from $783,507 in
Fiscal 1995. The decrease in interest expense was primarily related to the
Company's payment of certain notes payable and conversion of certain debentures
and notes payable to Common Stock in the latter part of Fiscal 1995 and first
quarter of Fiscal 1996.
NEW ACCOUNTING STANDARDS
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This statement is effective for both interim and annual periods ending
after December 15, 1997, and replaces the presentation of "primary" earnings per
share with "basic" earnings per share and the presentation of "fully diluted"
earnings per share with "diluted" earnings per share. Earlier application is not
permitted. When adopted, all previously reported earnings per share amounts must
be restated based on the provisions of the new standard. Application of SFAS No.
128 is not expected to have a material impact on the Company's loss per share.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for reporting of comprehensive
income and its components in annual financial statements. Reclassification or
restatement of comparative financial statements of financial information for
earlier periods is required upon adoption of SFAS No. 130. Application of SFAS
No. 130 is not expected to have a material impact on the Company's consolidated
results of operations or loss per share data as currently reported.
14
<PAGE> 17
Disclosure about Segments of an Enterprise
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement is effective for fiscal
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
reporting financial and descriptive information about an enterprise's operating
segments in its annual financial statements and selected segment information in
interim financial reports. Reclassification or restatement of comparative
financial statements or financial information for earlier periods is required
upon adoption of SFAS No. 131. Application of SFAS No. 131 is not expected to
have a material impact on the Company's consolidated results of operations or
earnings per share data as currently reported.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash on-hand. At June 30,
1997, the balance of cash and cash equivalents was $726,443, the net working
capital deficiency was ($9,133,497) and net stockholders' deficiency was
($11,789,259). At June 30, 1996, the balance of cash and cash equivalents was
$1,288,196, the net working capital deficiency was ($19,631) and net
shareholders' equity was $2,048,729. The decrease in the balance of cash and
cash equivalents from Fiscal 1996 to Fiscal 1997 was primarily due to the use in
Fiscal 1997 of cash and cash equivalents to fund operations and make debt
payments, as partially offset by net proceeds of $2,355,948 raised by the
Company in private placements (described below) and net proceeds of $4,710,000
received from the Amended Loan Agreement (hereinafter defined). Cash used in
operating activities during Fiscal 1997, Fiscal 1996 and Fiscal 1995 were
$6,331,949, $7,082,940 and $4,979,232, respectively.
During the period from September 25, 1996 to February 7, 1997, the Company
issued 3,025 shares of Series A Convertible Preferred Stock, $.01 par value per
share and a stated liquidation value of $1,000 per share (the "Series A
Preferred"), at a price of $1,000 per share to a number of accredited investors
in a series of private placements. The cash proceeds to the Company from such
issuances, net of offering expenses, were $2,355,948. The proceeds from the
Company's private placements were used as working capital to fund the
development of products and the operations of the Company.
On January 31, 1997, the Company entered into a loan agreement with
Madeleine L.L.C. ("Madeleine") in the 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, 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 initial loan proceeds, net of $280,000 of fees to Madeleine, were
$3,460,000 and were used to satisfy existing trade debt and royalties and to
provide working capital to the Company. 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 those negative
covenants is a prohibition on declaring or paying any cash dividends.
On February 3, 1997, in connection with a production and development
agreement entered into with Intel Corporation ("Intel"), the Company entered
into a Convertible Promissory Note with Middlefield Ventures, Inc.
("Middlefield"), an affiliate of Intel, in the principal amount of $200,000,
bearing interest at the rate of 8% per annum. The Promissory Note matures on
February 3, 2000. Commencing on January 1, 1998 and on the first day of each
calendar quarter thereafter, the Company must pay one-eighth of the principal
amount and all accrued and unpaid interest. The Company expects to repay the
Promissory Note in the fiscal year ending June 30, 1998 and, therefore, the
Promissory Note is classified as a current liability on the Company's balance
sheet as of June 30, 1997. In connection with the Promissory Note, the Company
issued to Intel a warrant (the "Intel Warrant") to purchase 613,718 shares of
Common Stock at an exercise price of $3.46 per share. Pursuant to the terms of
the Intel Warrant, shares subject to the Intel Warrant vest as Middlefield
cancels amounts under the Promissory Note or as Intel provides certain marketing
funds to the Company.
On June 5, 1997, the Company entered into an amendment to the Madeleine
Loan Agreement which provided for an additional loan in the principal amount of
$1,300,000 with the same interest rate and maturity date as the Madeleine Loan
Agreement (the "Amendment"). The loan proceeds from the Amendment, net of
15
<PAGE> 18
$50,000 of fees to Madeleine, were $1,250,000 and are being used to sustain
administrative operations as the Company continues to implement the
Restructuring. 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." As a condition subsequent to the Amendment,
the Company entered into a loan transaction with Mr. David Hirschhorn pursuant
to which 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.
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 July 18, 1997. 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 failed to pay all 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 the September 5, 1997. As of September 29, 1997, Madeleine
has not declared the obligations under the Amended Loan 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.
The Company does not have the necessary funds to pay its secured and
unsecured debt obligations and, as noted above, is in default under the Amended
Loan Agreement as well as in default under various other credit agreements.
As part of the Restructuring, the Company is in the process of negotiating
settlements with all trade creditors and debtors related to its prior business
activities pursuant to which the Company would pay to such creditors and debtors
$.30 for each $1.00 of debt. The Company is in default under agreements with
many of these creditors and debtors. The Company's obligations to such trade
creditors and debtors were approximately $6,000,000 as of June 30, 1997. In
concert with settlement negotiations, the Company is investigating various
sources of capital in an effort to raise funds for the Company to be used to
satisfy its existing obligations. In addition, the Company is exploring
opportunities to enter different businesses and industries.
The Company's short-term liquidity is principally contingent on its ability
to (a) raise funds through private and/or public debt and equity placements, (b)
reach settlements with its trade creditors and debtors, and (c) obtain from
Madeleine a waiver of defaults under the Amended Loan Agreement. The Company's
immediate liquidity needs include paying existing trade debt and amounts past
due under the Amended Loan Agreement and obtaining sufficient working capital to
sustain its Restructuring efforts and service the debt payments under the
Amended Loan Agreement. Long-term liquidity needs include repayment of
borrowings under the Amended Loan Agreement which matures on January 30, 1998,
and working capital needs for continuing operations. There can be no assurances
that the Company will be able obtain the necessary capital to satisfy its
existing debt obligations and continue as a going concern. To the extent that
the Company is unable to complete any step of its Restructuring Plan, it is
likely that the Company's senior secured lender will foreclose on all of the
assets of the Company and pursue the dissolution of the Company.
FORWARD-LOOKING STATEMENTS
Included in "Item 1. Business," herein, this "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this Report are certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends that
such forward-looking statements
16
<PAGE> 19
shall be protected by the safe harbors provided for in such sections. Such
statements are subject to risks and uncertainties that could cause actual
results to vary materially from those projected in the forward-looking
statements. It is uncertain whether the Company will be able to effect the
Restructuring. If the Company does effect the Restructuring and pursues other
business interests, the Company may experience significant fluctuations in
future operating results due to a number of economic, competitive and other
factors. These factors and others could cause operating results to vary
significantly from those in prior periods. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of the factors set forth in "Item 1. Business -- Risk
Factors."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports......................................................... 18
Consolidated Balance Sheets as of June 30, 1997 and 1996.............................. 20
Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and
1995................................................................................ 21
Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended June
30, 1997, 1996 and 1995............................................................. 22
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and
1995................................................................................ 23
Notes to Consolidated Financial Statements............................................ 25
Schedule II -- Valuation and Qualifying Accounts...................................... S-1
</TABLE>
17
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Graphix Zone, Inc.:
We have audited the accompanying consolidated balance sheets of Graphix
Zone, Inc. and subsidiaries as of June 30, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for the years then ended. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule for the years ended June 30, 1997 and 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 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 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, 1997 and 1996, and the 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 for the years ended June 30, 1997 and 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.
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.
/s/ KPMG Peat Marwick LLP
Orange County, California
October 8, 1997
18
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
StarPress, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of StarPress, Inc. (formerly known as Great
Bear Technology Incorporated) for the year ended June 30, 1995. Our audit also
included the financial statement schedule for the year ended June 30, 1995
listed in the Index at Item 14. 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 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 consolidated results of
operations, stockholders' equity and cash flows of StarPress, Inc. for the year
ended June 30, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule for
the year ended June 30, 1995, 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 that StarPress Inc. will continue as a going concern. The Company has
incurred operating losses since its 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.
/s/ Ernst and Young LLP
Walnut Creek, California
August 18, 1995
19
<PAGE> 22
GRAPHIX ZONE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash and cash equivalents....................................... $ 726,443 $ 1,288,196
Accounts receivable, net of allowance for doubtful accounts of
$1,397,270 in 1997 and $640,194 in 1996....................... 387,707 3,867,268
Inventories..................................................... 34,001 833,700
Deferred loan fees.............................................. 238,333 --
Prepaid expenses and other current assets....................... 88,630 281,883
------------ ------------
Total current assets.................................. 1,475,114 6,271,047
Property and equipment, net..................................... 250,000 653,833
Intangible assets, net.......................................... -- 850,186
Other assets, net............................................... 26,570 753,619
------------ ------------
$ 1,751,684 $ 8,528,685
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Notes payable................................................... $ 4,561,895 $ 750,000
Accounts payable................................................ 2,852,819 2,542,806
Accrued royalties............................................... 1,609,730 977,764
Accrued liabilities............................................. 1,509,167 1,159,946
Accrued restructuring charge.................................... 75,000 573,461
Deferred revenue................................................ -- 286,701
------------ ------------
Total current liabilities............................. 10,608,611 6,290,678
Other liabilities............................................... 51,147 189,278
------------ ------------
Total liabilities..................................... 10,659,758 6,479,956
Mandatory Redeemable Series C Convertible Preferred Stock,
1,300,000 shares authorized, 1,185,185 issued and outstanding
at June 30, 1997 (Liquidation preference $4,000,000).......... 2,881,185 --
Stockholders' equity (deficiency)
Preferred stock, $.01 par value, 25,000,000 shares
authorized -- all classes:
Series B Convertible Preferred Stock, $.01 par value, 3,500
shares authorized, 2,255 issued and outstanding at June
30, 1997................................................. 1,585,948 --
Common stock, $.01 par value, 100,000,000 shares authorized,
12,745,503 and 10,608,748 issued and outstanding at June
30, 1997 and 1996, respectively............................ 127,455 106,087
Additional paid-in capital.................................... 41,469,405 40,083,684
Accumulated deficit........................................... (54,972,067) (38,141,042)
------------ ------------
Net stockholders' equity (deficiency)................. (11,789,259) 2,048,729
------------ ------------
Commitments and contingencies...................................
Going concern...................................................
Subsequent events...............................................
$ 1,751,684 $ 8,528,685
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
20
<PAGE> 23
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues..................................... $ 7,708,900 $ 7,182,046 $ 2,171,334
Cost of revenues................................. 5,995,565 3,195,934 1,838,699
------------ ------------ ------------
Gross margin..................................... 1,713,335 3,986,112 332,635
------------ ------------ ------------
Operating expenses:
Research and development....................... 3,703,775 2,008,614 2,032,059
Sales and marketing............................ 4,049,633 2,973,569 2,498,488
General and administrative..................... 6,748,996 2,606,670 3,139,507
Restructuring charge........................... 1,795,638 1,900,000 --
Acquired in-process technology................. 1,628,000 17,934,863 2,810,000
------------ ------------ ------------
Total operating expenses............... 17,926,042 27,423,716 10,480,054
------------ ------------ ------------
Operating loss................................... (16,212,707) (23,437,604) (10,147,419)
Interest expense, net............................ (592,966) (81,056) (783,507)
Other income (expense), net...................... (25,352) -- 14,529
------------ ------------ ------------
Net loss......................................... $(16,831,025) $(23,518,660) $(10,916,397)
============ ============ ============
Loss per share of common stock................... $ (1.61) $ (5.05) $ (7.76)
============ ============ ============
Weighted average common shares................... 11,043,679 4,661,401 1,406,688
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
21
<PAGE> 24
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------
SERIES
COMMON STOCK SERIES A B
------------------------ ------------------- -----
SHARES AMOUNT SHARES AMOUNT SHARES
---------- ----------- ------ ---------- -----
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994............................................. 1,340,942 $ 6,744,939 -- $ -- --
Common Stock issued for acquisition of StarPress Multimedia,
Inc.............................................................. 1,935,539 1,649,682 -- -- --
Common Stock issued in private placement, net...................... 381,316 3,081,451 -- -- --
Detachable warrants issued in connection with convertible
debentures and notes payable..................................... -- 1,059,796 -- -- --
Common Stock issued upon conversion of debentures.................. 319,132 2,200,278 -- -- --
Common stock issued upon exercise of warrants...................... 301,753 20,575 -- -- --
Common Stock issued for services................................... 43,118 158,500 -- -- --
Stock option compensation.......................................... -- 720,351 -- -- --
Notes receivable for purchase of common stock...................... -- (73,782) -- -- --
Net loss........................................................... -- -- -- -- --
---------- ---------- ------ --------- -----
Balance, June 30, 1995............................................. 4,321,800 15,561,790 -- -- --
Common stock issued upon conversion of debentures.................. 24,932 195,180 -- -- --
Common stock issued upon exercise of warrants...................... 52,995 3,613 -- -- --
Common stock issued upon exercise of options....................... 300,260 134,879 -- -- --
Common stock issued for acquisition of assets...................... 172,059 292,852 -- -- --
Stock option compensation.......................................... -- 195,682 -- -- --
Common stock issued in satisfaction of obligations................. 85,159 80,000 -- -- --
Common stock issued for services................................... 125,000 618,750 -- -- --
Common stock issued for acquisition of GZ-CA....................... 5,526,543 23,107,025 -- -- --
Issuance of GZ-DE Common Stock -- (40,083,684) -- -- --
Net loss........................................................... -- -- -- -- --
---------- ---------- ------ --------- -----
Balance, June 30, 1996............................................. 10,608,748 106,087 -- -- --
Common stock issued upon exercise of options....................... 52,850 529 -- -- --
Common stock issued for services................................... 67,890 679 -- -- --
Issuance of Series A convertible preferred stock................... -- -- 3,025 2,355,948 --
Exchange of Series A for Series B convertible preferred stock...... -- -- (3,025) (2,355,948) 3,025
Conversion of Series B preferred stock to common stock............. 2,023,515 20,235 -- -- (770)
Accretion of discount on Series C Convertible Preferred Stock...... -- -- -- -- --
Redemption of common stock from merger dissenters.................. (7,500) (75) -- -- --
Common stock warrants issued in connection with notes payable...... -- -- -- -- --
Convertible preferred stock dividends.............................. -- -- -- -- --
Discount on issuance of Series A preferred stock................... -- -- -- (603,792) --
Amortization of discount on Series A Convertible Preferred Stock... -- -- -- 603,792 --
Net loss........................................................... -- -- -- -- --
---------- ---------- ------ --------- -----
Balance, June 30, 1997............................................. 12,745,503 $ 127,455 -- $ -- 2,255
========== ========== ====== ========= =====
<CAPTION>
NET
ADDITIONAL STOCKHOLDERS'
PAID IN ACCUMULATED EQUITY
AMOUNT CAPITAL DEFICIT (DEFICIENCY)
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance, June 30, 1994............................................. $ -- $ -- $(3,705,985) $ 3,038,954
Common Stock issued for acquisition of StarPress Multimedia,
Inc.............................................................. -- -- -- 1,649,682
Common Stock issued in private placement, net...................... -- -- -- 3,081,451
Detachable warrants issued in connection with convertible
debentures and notes payable..................................... -- -- -- 1,059,796
Common Stock issued upon conversion of debentures.................. -- -- -- 2,200,278
Common stock issued upon exercise of warrants...................... -- -- -- 20,575
Common Stock issued for services................................... -- -- -- 158,500
Stock option compensation.......................................... -- -- -- 720,351
Notes receivable for purchase of common stock...................... -- -- -- (73,782)
Net loss........................................................... -- -- (10,916,397) (10,916,397)
--------- ----------- ----------- -----------
Balance, June 30, 1995............................................. -- -- (14,622,382) 939,408
Common stock issued upon conversion of debentures.................. -- -- -- 195,180
Common stock issued upon exercise of warrants...................... -- -- -- 3,613
Common stock issued upon exercise of options....................... -- -- -- 134,879
Common stock issued for acquisition of assets...................... -- -- -- 292,852
Stock option compensation.......................................... -- -- -- 195,682
Common stock issued in satisfaction of obligations................. -- -- -- 80,000
Common stock issued for services................................... -- -- -- 618,750
Common stock issued for acquisition of GZ-CA....................... -- -- -- 23,107,025
Issuance of GZ-DE Common Stock -- 40,083,684 -- --
Net loss........................................................... -- -- (23,518,660) (23,518,660)
--------- ----------- ----------- -----------
Balance, June 30, 1996............................................. -- 40,083,684 (38,141,042) 2,048,729
Common stock issued upon exercise of options....................... -- 13,403 -- 13,932
Common stock issued for services................................... -- 199,946 -- 200,625
Issuance of Series A convertible preferred stock................... -- -- -- 2,355,948
Exchange of Series A for Series B convertible preferred stock...... 2,355,948 -- -- --
Conversion of Series B preferred stock to common stock............. (770,000) 749,765 -- --
Accretion of discount on Series C Convertible Preferred Stock...... -- (139,852) -- (139,852)
Redemption of common stock from merger dissenters.................. -- (74,987) -- (75,062)
Common stock warrants issued in connection with notes payable...... -- 809,805 -- 809,805
Convertible preferred stock dividends.............................. -- (172,359) -- (172,359)
Discount on issuance of Series A preferred stock................... -- 603,792 -- --
Amortization of discount on Series A Convertible Preferred Stock... -- (603,792) -- --
Net loss........................................................... -- -- (16,831,025) (16,831,025)
--------- ----------- ----------- -----------
Balance, June 30, 1997............................................. $1,585,948 $ 41,469,405 (54,972,067) $(11,789,259)
========= =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
22
<PAGE> 25
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(16,831,025) $(23,518,660) $(10,916,397)
Net Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,064,342 349,769 95,067
Impairment of intangibles and other long-term assets... 1,101,000 -- 1,680,046
Acquired in-process technology......................... 1,628,000 17,934,863 2,810,000
Provision for sales returns and doubtful accounts...... 1,727,000 221,000 398,000
Provision for inventory reserve........................ 1,537,603 90,000 --
Write-down of excess furniture and equipment........... 252,000 -- --
Amortization of discount on convertible debentures..... -- -- 579,122
Stock option and warrant compensation expense.......... -- 195,682 853,851
Restructuring charge................................... 1,795,638 1,900,000 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........... 1,752,561 (3,926,851) (619,476)
Decrease (increase) in inventories................... (737,904) 251,246 (4,447)
Decrease in prepaid expenses and other current
assets............................................ 208,747 424,507 71,981
Decrease (increase) in other assets.................. 143,149 (59,679) 54,691
Increase (decrease) in accounts payable.............. 310,013 (162,490) (593,782)
Increase in accrued royalties........................ 631,966 360,857 --
Increase (decrease) in accrued liabilities........... 199,633 (612,483) 594,842
Decrease in accrued restructuring.................... (827,961) (484,031) --
Increase (decrease) in deferred revenue.............. (286,701) (46,670) 17,270
------------ ------------ ------------
Net cash used in operating activities............. (6,331,949) (7,082,940) (4,979,232)
Cash flows from investing activities:
Purchase of property and equipment....................... (684,622) (42,000) (226,727)
Proceeds from sale of property and equipment............. -- 97,360 --
Acquisition of StarPress Multimedia, Inc................. -- -- (337,000)
Acquisition of DMT assets................................ -- (20,890) --
Net cash acquired from purchase of GZ-CA................. -- 6,854,357 --
------------ ------------ ------------
Net cash provided by (used in) investing
activities...................................... (684,622) 6,888,827 (563,727)
Cash flows from financing activities:
Release of restricted cash from escrow................... -- -- 592,700
Proceeds from convertible notes payable.................. -- -- 2,766,537
Proceeds from notes payable to related parties........... -- -- 300,000
Payments for redemption of common stock.................. (75,062) -- --
Payments on notes payable to related parties............. -- -- (222,000)
Proceeds from notes payable.............................. 4,910,000 -- 265,000
Payments on notes payable................................ (750,000) (575,285) (243,000)
Proceeds from exercise of stock options.................. 13,932 134,879 --
Proceeds from exercise of warrants....................... -- 3,613 20,575
Proceeds from convertible preferred stock issuances,
net.................................................... 2,355,948 -- --
Proceeds from common stock issuances, net................ -- -- 3,081,451
------------ ------------ ------------
Net cash provided by (used in) financing
activities...................................... 6,454,818 (436,793) 6,561,263
Net increase (decrease) in cash and cash equivalents....... (561,753) (630,906) 1,018,304
Cash and cash equivalents at the beginning of year......... 1,288,196 1,919,102 900,798
------------ ------------ ------------
Cash and cash equivalents at end of year................... $ 726,443 $ 1,288,196 $ 1,919,102
============ ============ ============
</TABLE>
(continued)
23
<PAGE> 26
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest..................... $ 257,664 $ 86,635 $ 140,251
============ ============ ============
Supplemental disclosure of noncash investing and financing
activities:
Mandatory redeemable Series C convertible preferred stock
issued in connection with acquisitions................. $ 2,741,333 -- --
============ ============ ============
Common stock issued in connection with acquisitions and
services............................................... $ 200,625 $ 24,018,627 $ 1,674,682
============ ============ ============
Conversion of convertible debentures and notes payable to
common stock........................................... $ -- $ 195,180 $ 2,200,278
============ ============ ============
Common stock issued in satisfaction of obligations....... $ -- $ 80,000 $ --
============ ============ ============
Preferred stock dividends accrued and not paid........... $ 172,359 $ -- $ --
============ ============ ============
Discount on issuance of preferred stock.................. $ 603,792 $ -- $ --
============ ============ ============
Loan fees added to notes payable......................... $ 330,000 $ -- $ --
============ ============ ============
Common stock warrants issued in connection with notes
payable................................................ $ 809,805 $ -- $ --
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
24
<PAGE> 27
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Graphix Zone, Inc., a Delaware corporation (the "Company" or "GZ-DE"), was
incorporated on January 17, 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"). Both GZ-CA and StarPress
were publishers of entertainment-oriented interactive multimedia software. On
June 28, 1996, the Company acquired GZ-CA and StarPress in reverse triangular
mergers and the companies became wholly-owned subsidiaries of the Company (the
"Reorganization"). Following the consummation of the Reorganization, the
Company's principal business was developing, producing and marketing CD-ROM and
on-line products for the personal computer industry. In addition, the Company
operated certain other businesses, including developing and operating WILMA, an
Internet site for live music venues and developing and marketing certain
Internet access and exploration products.
HISTORICAL FINANCIAL STATEMENTS
Upon the consummation of the Reorganization, the stockholder interests in
the Company of the former StarPress shareholders were larger than those of the
former GZ-CA shareholders, and therefore, StarPress was deemed to be 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. The historical shares
of StarPress presented therein have been adjusted to reflect a .14666 for 1
stock exchange in connection with the Reorganization. All references to the
"Company" prior to June 28, 1996 relate to StarPress.
CURRENT STATUS OF COMPANY
In March 1997, the Company hired a new executive management team for the
purpose of evaluating the current business and operations and financial
condition of the Company and, if necessary, restructuring the Company (the
"Restructuring"). The management team performed an in-depth review of the
Company's past history of operating losses, current financial condition, current
strategic position within the entertainment software industry, competitors in
such industry and capital requirements for new product development. In June
1997, based on the results of its review, the management team proposed to the
Board of Directors of the Company a restructuring plan (as described below, the
"Restructuring Plan") for the Company, which included terminating the Company's
existing business operations. On June 3, 1997, the Board of Directors of the
Company adopted the Restructuring Plan proposed by the management team.
The Restructuring Plan adopted by the Board of Directors of the Company
consists of the following elements: Business -- Divest or dispose of the
Company's existing businesses related to the personal computer industry and
explore opportunities to enter into new businesses and industries; Senior
Secured Debt -- Renegotiate the terms of the Company's senior secured loan and
the related collateral agreements to extend the term of the loan, reduce the
interest rate thereof and provide for later payments of amounts due thereunder
and to reduce the senior lender's warrant position in the Company; Outstanding
Unsecured Debt -- Pay to unsecured creditors $0.30 for each $1.00 of debt
outstanding; Outstanding Convertible Preferred Stock -- Exchange outstanding
shares of the Company's Series B and Series C Convertible Preferred Stock, each
$.01 par value per share (collectively, the "Preferred Stock"), for shares of
the Company's common stock, $.01 par value per share ("Common Stock"), at an
exchange price of approximately $0.75 per share; and Additional
Capital -- Evaluate alternatives for raising additional funds for the Company.
25
<PAGE> 28
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
By June 24, 1997, the Company had taken steps to cease its principal
business operations and had terminated all employees other than Mr. David
Hirschhorn, the Chairman of the Board, President, Chief Executive Officer, Chief
Financial Officer and Treasurer of the Company.
Since July 1997, the Company's business activities have consisted of
licensing and attempting to enter into licenses for certain of the entertainment
software products held in its library, divesting or disposing of its businesses
and products related to the personal computer industry, and attempting to
restructure its debt obligations, equity structure and business operations.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries GZ-CA and StarPress. All material
inter-company balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue was recognized from CD-ROM sales upon shipment. The Company granted
certain distributors limited rights to exchange merchandise and price protection
on unsold merchandise. The Company established a reserve for price adjustments
and estimated returns at the time the related revenue was 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). See Note 8 for a discussion regarding the write-down of
inventory.
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
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful life of the related asset. See Note 8 for
discussions regarding write-downs of property and equipment.
SOFTWARE DEVELOPMENT COSTS
The Company capitalized costs related to the development of certain
software products. In accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software,"
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 included amounts
capitalized pursuant to the acquisitions described in Note 7.
Amortization was computed on an individual product basis and was recognized
over the greater of the remaining economic lives of each product or the ratio
that current gross revenues for a product bore to the total of current and
anticipated revenues for that product, commencing when the products became
available
26
<PAGE> 29
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
for general release to customers. Software development costs generally were
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
$85,720, $214,731 and $720,340 in Fiscal 1997, 1996 and 1995, respectively. The
Company wrote-down software development costs of approximately $21,000 in Fiscal
1997 in connection with the Restructuring. See Note 8 for discussions regarding
write-downs of software development costs.
INTANGIBLE ASSETS
The Company accounted for goodwill and other intangible assets at the lower
of amortized cost or fair value. Goodwill represented 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 could be recovered through projected non-
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. See Note 8 for discussions of write-downs of
goodwill and intangible assets.
ROYALTY EXPENSE
Royalty expense was recognized based upon actual net product sales in
accordance with the terms of the related royalty agreement. Royalty advances
were capitalized and expensed when earned. The Company periodically reviewed the
realizability of capitalized royalty advances and wrote-off those advances which
it determined might not be realized from future sales. Royalty expenses are
included in cost of revenues in the accompanying consolidated statements of
operations. See Note 8 for a discussion of write-downs of royalty advances.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure about
Fair Value of Financial Instruments." SFAS No. 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 No. 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 of June 30, 1997 and 1996, the carrying value of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities and
accrued royalties approximates fair value due to the short term nature of such
instruments. The carrying value of all debt approximates fair value as the
related interest rates approximates rates currently available to the Company.
LONG-LIVED ASSETS
During Fiscal 1996, the Company adopted SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
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. See Note 8 for a discussion of charges
recorded by the Company during Fiscal 1997 in accordance with SFAS No. 121.
27
<PAGE> 30
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
USE OF ESTIMATES
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 SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 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.
STOCK-BASED COMPENSATION
Effective June 30, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes the financial accounting and
reporting standards for stock-based compensation plans. The Company elected to
continue accounting for stock-based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations ("APB Opinion No. 25"), as SFAS No. 123
permits, and to follow the pro forma net income, pro forma earnings per share,
and stock-based compensation plan disclosure requirements set forth in SFAS No.
123 (See Note 9).
NET LOSS PER SHARE OF COMMON STOCK
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement is effective for both interim and annual periods ending after December
15, 1997, and replaces the presentation of "primary" earnings per share with
"basic" earnings per share and the presentation of "fully diluted" earnings per
share with "diluted" earnings per share. Earlier application is not permitted.
When adopted, all previously reported earnings per share amounts must be
restated based on the provisions of the new standard. Application of SFAS No.
128 is not expected to have a material impact on the Company's loss per share.
Net loss per share of Common Stock is computed using the weighted average
number of shares of Common Stock outstanding for the year. Dividends declared
and discounts on issuances of Preferred Stock increase the net loss for
determining net loss per share of Common Stock.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for reporting comprehensive income
and its components in annual financial statements. Reclassification or
restatement of comparative financial statements of financial information for
earlier periods is required upon adoption of SFAS No. 130. Application of the
SFAS No. 130 is not expected to have a material impact on the Company's
consolidated results of operations or loss per share data as currently reported.
28
<PAGE> 31
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
DISCLOSURES ABOUT SEGMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement is effective for fiscal
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
reporting financial and descriptive information about an enterprise's operating
segments in its annual financial statements and selected segment information in
interim financial reports. Reclassification or restatement of comparative
financial statements or financial information for earlier periods is required
upon adoption of SFAS No. 131. Application of SFAS No. 131 is not expected to
have a material impact on the Company's consolidated results of operations or
earnings per share data as currently reported.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the
presentation for Fiscal 1997.
(2) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997 1996
--------- ----------
<S> <C> <C>
Finished goods.................................... $ 34,001 $ 479,747
Components........................................ -- 353,953
------- --------
$ 34,001 $ 833,700
======= ========
</TABLE>
See Note 8 for discussions regarding write-downs of inventory.
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997 1996
--------- ----------
<S> <C> <C>
Computer and office equipment..................... $ 333,000 $ 824,474
Furniture and fixtures............................ 15,000 174,760
Computer software................................. 27,000 101,287
Equipment held under capital lease obligations.... -- 100,575
--------- ---------
375,000 1,201,096
Accumulated depreciation and amortization......... (125,000) (547,263)
--------- ---------
$ 250,000 $ 653,833
========= =========
</TABLE>
See Note 8 for discussions regarding write-downs of property and equipment.
29
<PAGE> 32
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
(4) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
------- --------
<S> <C> <C>
Assembled work force.................................. $ -- $185,000
Goodwill.............................................. -- 560,186
Other................................................. -- 105,000
----- --------
-- 850,186
Accumulated amortization.............................. -- --
----- --------
$ -- $850,186
===== ========
</TABLE>
See Note 8 for discussions regarding write-downs of goodwill and intangible
assets.
(5) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
------- --------
<S> <C> <C>
Capitalized software development costs................ $ -- $238,342
Capitalized warrant valuation (see Note 12)........... -- 312,000
Other................................................. 26,570 221,477
------- --------
26,570 771,819
Accumulated amortization.............................. -- (18,200)
------- --------
$26,570 $753,619
======= ========
</TABLE>
See Note 8 for discussions regarding write-downs of other assets.
(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
1.5%, was secured by all of the Company's assets, excluding the assets purchased
from Sony Interactive Entertainment (see Note 7), and had a maturity date of
February 24, 1996. In connection with the loan agreement, the Company issued to
Silicon Valley Bank a warrant to purchase 6,160 shares of Common Stock at an
exercise price of $8.52 per share. The warrant expires on October 27, 2000. On
June 28, 1996, the Company repaid the outstanding principal balance of, and all
accrued and unpaid interest under, its 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 3%. In
connection with the new loan agreement, the Company issued to Silicon Valley
Bank a warrant to purchase 20,000 shares of Common Stock at an exercise price of
$5.625 per share. The warrant expires on June 26, 2001. In December 1996, in
connection with a Forbearance Agreement pursuant to which Silicon Valley Bank
agreed to forbear until December 31, 1996 from taking any legal actions to
foreclose on the assets of the Company in connection with the Company's defaults
under the loan agreement with Silicon Valley Bank, the Company issued to Silicon
Valley Bank a warrant to purchase 100,000 shares of Common Stock at an exercise
price equal to the lowest price at which the Company sells securities in the two
equity placements immediately prior to the time of exercise of the warrant. The
warrant expires on December 12, 2001. The fair value of the warrant was deemed
immaterial as of the date of issuance. In February 1997, the
30
<PAGE> 33
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
Company repaid the outstanding principal balance of, and all accrued and unpaid
interest under, such loan using proceeds from the private equity placements
described in Note 9 below.
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, 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 and is being amortized over the life
of the loan.
On February 3, 1997, in connection with a production and development
agreement entered into with Intel Corporation ("Intel"), the Company entered
into a Convertible Promissory Note with Middlefield Ventures, Inc.
("Middlefield"), an affiliate of Intel in the principal amount of $200,000,
bearing interest at the rate of 8% per annum. The Promissory Note matures on
February 3, 2000. Commencing on January 1, 1998 and on the first day of each
calendar quarter thereafter, the Company must pay one-eighth of the principal
amount and all accrued and unpaid interest. The Company expects to repay the
Promissory Note in the fiscal year ending June 30, 1998 and, therefore, the
Promissory Note is classified as a current liability on the Company's balance
sheet as of June 30, 1997. In connection with the Promissory Note, the Company
issued to Intel a warrant (the "Intel Warrant") to purchase 613,718 shares of
Common Stock of the Company at an exercise price of $3.46 per share. Pursuant to
the terms of the Intel Warrant, shares subject to the Intel Warrant vest as
Middlefield cancels amounts under the Promissory Note or as Intel provides
certain marketing funds to the Company. The Company recorded an original issue
discount with respect to the Intel Promissory Note of $226,226 which represents
the fair value of the Intel Warrant at the time of issuance. The fair value of
the Intel Warrant is reflected as a reduction to the principal amount of the
Intel Promissory Note and is being amortized over the life of the loan.
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 representatives 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 of the Company, 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 of
the Company 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
31
<PAGE> 34
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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 of the Company 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 loan
made in connection with 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 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 at 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 Madeleine 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 Madeleine 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 failed to pay all 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 the September 5, 1997. As of October
8, 1997, Madeleine has not declared all obligations under the Amended Loan
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 Madeleine Loan Agreement to extend its term, reduce the
interest rate thereof and provide for later payments of amounts thereunder.
(7) ACQUISITIONS AND TRANSACTIONS
STARPRESS MULTIMEDIA, INC.
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.
32
<PAGE> 35
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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:
<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 work force.............................. 240,000 3 years
Goodwill.......................................... 31,686 3 years
Net liabilities assumed........................... (1,180,004)
-----------
Purchase price.................................. $ 2,011,682
===========
</TABLE>
SONY INTERACTIVE ENTERTAINMENT, INC.
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 Common Stock valued at $115,965 (which were valued by independent appraisal)
and a promissory note with a principal amount of $561,781 which bore interest at
the prime rate as quoted by Chemical Bank and which 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 allocation of the purchase price for the Sony assets is 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>
DIGITAL MEDIA THEORY, INC.
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 certain 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 $23,099. Acquisition
costs were $20,890. The acquisition was accounted for by the purchase method of
accounting.
33
<PAGE> 36
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The allocation of the purchase price for the assets of DMT is 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>
GZ-CA
On June 28, 1996, the Company acquired all of the outstanding shares of
capital stock of GZ-CA in exchange for the issuance of 5,526,543 shares of
Common Stock to the shareholders of GZ-CA. In connection with the acquisition,
the Company also issued 125,000 shares of Common Stock to its investment banker
in exchange for services rendered in connection with the acquisition. In
addition, the Company assumed all outstanding options and warrants of GZ-CA and
such options and warrants became exercisable to purchase shares of Common Stock.
The acquisition was accounted for by the purchase method of accounting.
The total purchase price for the shares of the capital stock of GZ-CA was
$23,930,957 (which was determined based upon the fair market value of GZ-CA
common stock), including acquisition costs of $823,932. The allocation of the
purchase price for the shares of the capital stock of GZ-CA 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 work force.............................. 185,000 3 years
Goodwill.......................................... 459,310 3 years
Net assets assumed................................ 5,262,394 N/A
-----------
Purchase price.................................. $ 23,930,957
===========
</TABLE>
INSCAPE
On February 24, 1997, the Company entered into an agreement with Inscape, a
Delaware general partnership among Home Box Office and corporations owned by
Warner Music Group, Inc. ("WMG") and Nash New Media, Inc., and WMG
(collectively, "Inscape"), to purchase certain assets from and assume certain
liabilities of Inscape. The purchased assets consisted of all rights, title and
interest in twelve existing pc-game products and seven pc-game products under
development, all rights, title and interest in the Inscape name, furniture and
equipment and certain leases and other agreements. The liabilities assumed
consisted of accrued compensation costs associated with those Inscape employees
offered employment with the Company.
The purchase price for the Inscape assets consisted of 948,148 shares of
the Company's Series C Convertible Preferred Stock, $.01 par value per share,
and a stated liquidation value of $3.375 per share (the "Series C Preferred").
The Series C Preferred is convertible into Common Stock, at the option of the
holder, at a conversion price of $3.375 per share and must be redeemed by the
Company on February 28, 2000 at $3.375 per share. The holder of the Series C
Preferred is entitled to receive dividends of $0.10125 per share per annum which
are fully cumulative from date of issuance. Although the stated liquidation
value of the shares of the Series C Preferred issued is $3,200,000, the Company
determined the fair market value of such
34
<PAGE> 37
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
shares of Series C Preferred to be $2,193,066 based upon the fair market value
of the Common Stock on the date of the transaction, discounted to take into
account the restricted nature of the securities.
The allocation of the purchase price for the Inscape assets is as follows:
<TABLE>
<CAPTION>
ALLOCATION OF AMORTIZATION
DESCRIPTION PURCHASE PRICE (USEFUL LIFE)
------------------------------------------------ -------------- -------------
<S> <C> <C>
In-process technology charged to operations..... $1,153,000 N/A
Assembled work force............................ 476,000 5 years
Goodwill........................................ 129,723 5 years
Furniture and equipment......................... 474,066 2 - 5 years
Assumed liabilities............................. (39,723) N/A
----------
Purchase price........................ $2,193,066
==========
</TABLE>
Certain assets acquired from Inscape were written-off in the fourth quarter
of Fiscal 1997 in connection with the Restructuring (See Note 8).
TRIMARK
On February 26, 1997, the Company entered into an agreement with Trimark
Holdings, Inc. and its subsidiary, Trimark Interactive, Inc. ("Trimark"), to
purchase certain assets from and assume certain liabilities of Trimark. The
purchased assets consisted of all rights, title and interest in seven existing
pc-game products and three pc-game products under development, inventories and
certain other agreements. The liabilities assumed consisted primarily of
liabilities related to pc-game products under development.
The purchase price for the Trimark assets consisted of 237,037 shares of
the Series C Preferred. The Series C Preferred is convertible into Common Stock,
at the option of the holder, at a conversion price of $3.375 per share and must
be redeemed by the Company on February 28, 2000 at $3.375 per share. The holder
of the Series C Preferred is entitled to receive dividends of $0.10125 per share
per annum which are fully cumulative from date of issuance. Although the stated
liquidation value of the shares of Series C Preferred issued is $800,000, the
Company determined the fair market value of the shares of Series C Preferred to
be $548,267 based upon the fair market value of the Common Stock on the date of
the transaction, discounted to take into account the restricted nature of the
securities.
The allocation of the purchase price for the Trimark assets is as follows:
<TABLE>
<CAPTION>
ALLOCATION OF AMORTIZATION
DESCRIPTION PURCHASE PRICE (USEFUL LIFE)
-------------------------------------------------- -------------- -------------
<S> <C> <C>
In-process technology charged to operations....... $475,000 N/A
Assembled work force.............................. 36,000 5 years
Goodwill.......................................... 37,267 5 years
----------
Purchase price.......................... $548,267 5 years
==========
</TABLE>
Certain assets acquired from Trimark were written off in the fourth quarter
of Fiscal 1997 in connection with the Restructuring (See Note 8).
(8) RESTRUCTURING CHARGES
During the second quarter of Fiscal 1996, the Company adopted a
restructuring plan to enhance overall competitiveness, productivity and
efficiency through the reduction of overhead costs (the "1996 Restructuring
Plan"). The 1996 Restructuring Plan included the elimination of the Company's
in-house software research and development activities. In connection with the
1996 Restructuring Plan, the Company recorded
35
<PAGE> 38
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
restructuring charges of $1,950,000, $50,000 of which were reversed in the
fourth quarter of Fiscal 1996 due to changes in the underlying estimates. The
charges principally reflected severance costs of $777,492 resulting from a
reduction of a significant portion of the Company's work force, write-down and
disposal of excess furniture and equipment and office facilities of $946,103,
and write-offs of assembled work force and goodwill of $226,405 arising from the
Company's acquisition of StarPress Multimedia, Inc. in June 1995. At June 30,
1997, none of the accrued restructuring costs related to the 1996 Restructuring
Plan remained outstanding. During the first quarter of Fiscal 1997, the Company
reversed approximately $267,000 of the accrued restructuring charge recorded in
Fiscal 1996, primarily related to facility and equipment leased for its San
Francisco, California facility, which leases were subsequently sub-leased.
In March 1997, the Company hired a new executive management team for the
purpose of evaluating the current business and operations and financial
condition of the Company and, if necessary, restructuring the Company (the
"Restructuring"). The management team performed an in-depth review of the
Company's past history of operating losses, current financial condition, current
strategic position within the entertainment software industry, competitors in
such industry and capital requirements for new product development. In
connection with the Company's evaluation of its business and operations and
financial condition and in accordance with SFAS 121, in March 1997 the Company
evaluated all assets and liabilities to determine impairment, if any. As a
result, the Company recorded a charge of approximately $1,221,000 to general and
administrative expenses related to property and equipment, intangible assets and
other long term assets being impaired during the third quarter of Fiscal 1997.
In addition, the Company recorded charges to cost of revenues of approximately
$1,000,000 related to the net realizable value of inventory, approximately
$321,000 related to the net realizable value of prepaid royalties and acquired
capitalized software development costs being impaired and approximately $203,000
of bad debt reserves during the third quarter of Fiscal 1997.
In June 1997, based on the results of its review, the management team
proposed to the Board of Directors of the Company a Restructuring plan for the
Company, which included terminating the Company's existing business operations.
On June 3, 1997, the Board of Directors adopted the Restructuring plan. By June
24, 1997, the Company had taken steps to cease its principal business operations
and had terminated all employees other than Mr. David Hirschhorn, the Chairman
of the Board, President, Chief Executive Officer, Chief Financial Officer and
Treasurer of the Company.
In June 1997, in connection with the Restructuring, the Company recorded a
charge of approximately $2,063,000 primarily related to the write-down of
property and equipment, goodwill and intangibles related to the Inscape and
Trimark asset purchases and severance costs related to terminating all but one
of the employees of the Company. As of June 30, 1997, the remaining balance in
the restructuring accrual is $75,000 and is expected to be paid by December 31,
1997.
Additionally, as part of the Company's continuing evaluation of its
business and operations and financial condition the Company recorded charges to
cost of revenues and general and administrative expenses of approximately
$966,000 and $976,000, respectively, in the fourth quarter of Fiscal 1997.
Charges to cost of revenues primarily relates to the net realizable value of
inventory and to the accrual for certain future guaranteed royalties. Charges to
general and administrative expenses primarily relate to reserves established for
uncollectable accounts receivable.
(9) STOCKHOLDERS' EQUITY
PREFERRED STOCK
During the period from September 25, 1996 to February 7, 1997, the Company
issued 3,025 shares of Series A Convertible Preferred Stock, $.01 par value per
share and a stated liquidation value of $1,000 per share (the "Series A
Preferred"), at a price of $1,000 per share to a number of accredited investors
in a series
36
<PAGE> 39
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
of private placements. The cash proceeds to the Company from such issuances, net
of offering expenses, was $2,355,948. The Series A Preferred was convertible, at
the option of the holders, into shares of Common Stock at a conversion price per
share equal to the lower of (a) $3.375 or (b) 80% of the average closing bid
price of the Common Stock for the five days immediately prior to the applicable
conversion date. In connection with the issuance of the Series A Preferred, the
Company recorded a discount of $603,792 to reflect the initial conversion
discount feature. The discount was amortized over the 60-day holding period and
is reflected in the accompanying Consolidated Statement of Stockholders' equity
(deficiency) in Fiscal 1997. The holders of the Series A Preferred were entitled
to receive dividends of $80 per share per annum which were fully cumulative from
the date of issuance. In addition, the Company issued to such investors warrants
to purchase 221,204 shares of Common Stock at an exercise prices of between
$4.69 and $5.00 per share (the "Series A Warrants"). The Company determined the
value of the Series A Warrants to be immaterial.
On February 24, 1997, the Company issued 3,025 shares of Series B
Convertible Preferred Stock, $.01 par value per share and with a stated
liquidation value of $1,000 per share (the "Series B Preferred"), and warrants
to purchase 221,204 shares of Common Stock at an exercise price of $5.00 per
share (the "Series B Warrants") in exchange for all of the outstanding shares of
Series A Preferred and Series A Warrants. The Series B Preferred is convertible,
at the option of the holders, into shares of Common Stock at conversion price
per share equal to the lower of (a) $3.375 or (b) 80% of the average closing bid
price of the Common Stock for the five days immediately prior to the conversion
date. The holders of the Series B Preferred are entitled to receive dividends of
$80 per share per annum which are fully cumulative from the date of issuance.
The Series B Warrants expire on January 31, 2000. During the fourth quarter of
Fiscal 1997, certain holders of 770 shares of Series B Preferred converted such
shares into 2,023,515 shares of Common Stock. During the period from July 1,
1997 to October 8, 1997, 579 shares of Series B Preferred were converted into
3,433,501 shares of Common Stock.
In April 1997, the Company solicited the votes of the six holders of its
Series B Preferred to amend the Certificate of Designations of the Series B
Preferred to establish a $1.00 conversion price floor. For the proposed
amendment to become effective, a vote of the holders of the Series B Preferred,
voting as a class, and (b) the Common Stock and Series C Preferred Stock, voting
together as one class, must be obtained. In light of the Restructuring, the
Company has not pursued obtaining this vote.
On March 5, 1997, the Company issued 1,185,185 shares of Series C Preferred
to two accredited investors in connection with two separate acquisitions of
certain assets from such investors (see Note 7). The total stated liquidation
value of such shares of Series C Preferred was $4,000,000, however, the Company
determined that the fair market value of such shares at the time of issuance was
$2,741,333 based upon the fair market value of the Common Stock at the time of
such issuance of Preferred Stock, discounted to take into account the restricted
nature of the Series C Preferred. The shares of Series C Preferred are
convertible into shares of Common Stock at the option of the holders, at a
conversion price of $3.375 per share and are subject to mandatory redemption by
the Company on February 28, 2000 at $3.375 per share. The holders of the Series
C Preferred are entitled to receive dividends of $0.10125 per share per annum
which are fully cumulative from the date of issuance. In connection with the
issuance of the Series C Preferred, the Company recorded a discount of
$1,258,667 which is being amortized on a straight line basis through February
28, 2000.
The Company is negotiating exchange agreements with the holders of shares
of Series B Preferred and Series C Preferred pursuant to which all outstanding
shares would be converted into shares of Common Stock of the Company at an
exchange price of approximately $0.75 per share. The Company has entered into
exchange agreements with several, but not all, of the holders of Series B
Preferred and has not entered into exchange agreements with the holders of
Series C Preferred.
37
<PAGE> 40
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
COMMON STOCK
In December 1996, the Company issued (i) 34,375 shares of Common Stock,
with a fair market value of $103,125 on the date of issuance, to Cruttenden Roth
Incorporated ("Cruttenden"), the Company's investment banker, and (ii) 9,167
shares of Common Stock, with a fair market value of $27,500 on the date of
issuance, to David J. Hirschhorn, a managing director of Cruttenden at the time
of such issuance and the current Chairman of the Board, President, Chief
Executive Officer, Chief Financial Officer, Treasurer and a director of the
Company, in connection with investment banking services performed by such
parties for the Company related to the Reorganization. In December 1996, the
Company issued 24,348 shares of Common Stock with a fair market value of $70,000
on the date of issuance to Ronald S. Posner, the Company's Chairman of the Board
and Chief Executive Officer at the time of issuance, as payment for accrued
compensation.
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 (the "Debentures") with detachable common stock warrants. 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 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 Debentures offering. All
of the above-described loans were repaid with proceeds from the Debentures
offering.
STOCK WARRANTS
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 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 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 and
the Lender's Warrant may be exercised at any time prior to October 27, 2000.
38
<PAGE> 41
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
In connection with the Reorganization, the Company assumed all outstanding
warrants of GZ-CA. The following table summarizes the number of shares of Common
Stock issuable upon exercise of such warrants, the exercise price per share of
Common Stock and the applicable expiration date:
<TABLE>
<CAPTION>
SHARES OF PER SHARE WARRANT
COMMON STOCK EXERCISE PRICE EXPIRATION DATE
------------ -------------- ---------------
<S> <C> <C> <C>
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
---------
Total: 1,474,802
=========
</TABLE>
STOCK OPTIONS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "Plan") is administered by a
committee of the Board of Directors of the Company (the "Committee") which
determines the recipients and terms of options granted under the Plan. All stock
option plans of the Company's wholly-owned subsidiaries, GZ-CA and StarPress,
have been assumed under 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. The 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 Common Stock on the date of grant and must be exercised within ten
years of the date of grant. The terms of the Plan require that NQOs granted
under the Plan must have an exercise price of not less than 85% of the fair
market value of the Common Stock on the date of grant and must be exercised
within five years of the date of grant. The Plan also provides for automatic
annual grants of NQOs to each member of the Committee for the purchase of 25,000
shares of Common Stock at an exercise price equal to 100% of the fair market
value on the date of grant. NQOs granted to members of the Committee vest as
follows: 50% of the shares subject to the NQO vest six months after the date of
grant and the remaining 50% of the shares vest twelve months after the date of
grant. At June 30, 1997, 934,446 options granted under the Plan were exercisable
with a weighted average exercise price of $3.09. At June 30, 1997, there were
394,818 additional shares available for grant under the Plan.
39
<PAGE> 42
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following is a summary of stock option activity under the Plan:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at June 30, 1994...................... 66,437 7.37
Options granted................................... 46,613 2.40
Options exercised................................. (1,467) 1.70
Options canceled.................................. (16,238) 7.24
Assumed from StarPress Multimedia, Inc. .......... 279,414 0.56
---------
Outstanding at June 30, 1995...................... 374,759 1.75
Options granted................................... 517,710 6.38
Options exercised................................. (300,260) 1.37
Options canceled.................................. (396,647) 4.94
Assumed from GZ-CA................................ 314,050 4.33
---------
Outstanding as of June 30, 1996................... 509,612 5.12
Options granted................................... 1,270,450 2.88
Options exercised................................. (43,716) 0.11
Options canceled.................................. (262,855) 3.27
--------- ----
Outstanding at June 30, 1997...................... 1,473,491 3.01
========= ====
</TABLE>
Subsequent to June 30, 1997, as a result of the termination of all but one
employee (see Note 8), all options under the Plan have been cancelled.
During Fiscal 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 was recorded for the difference between the option
exercise price and fair market value on the date of acceleration.
NON-PLAN STOCK OPTIONS
On March 17, 1997, the Company granted David J. Hirschhorn, the Chairman of
the Board, President, Chief Executive Officer, Chief Financial Officer,
Treasurer and a director of the Company, a non-Plan NQO to purchase 2,500,000
shares of Common Stock at an exercise price of $2.00 per share (the fair market
value of the Common Stock on the date of grant). The option vests over a period
of four years. The option 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.
During Fiscal 1997, the Company granted various non-Plan NQOs to purchase
an aggregate of 30,000 shares of Common Stock at exercise prices ranging from
$3.00 to $4.13 per share (the fair market value of the Common Stock on the
respective date of grant). The options were granted to several consultants and
individuals providing assistance to the Company. The options vest at various
times and upon certain triggering events, and expire in five years from the date
of grant. The Company determined the fair value of the options granted to be
immaterial.
During Fiscal 1995, the Company granted various non-Plan NQOs to purchase
an aggregate of 106,679 shares of Common Stock at exercise prices ranging from
$3.43 to $4.25 per share (the fair market value of the
40
<PAGE> 43
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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 until their expiration ten years from the date of grant, subject
to acceleration upon the occurrence of certain events.
Certain directors, officers and consultants of the Company were granted
non-Plan NQOs to purchase 121,581 shares of Common Stock during Fiscal 1995.
These options vested immediately upon grant at exercise prices ranging form
$.007 to $8.52 per share. Compensation expense of $720,351 related to the
issuance of these stock options was recorded for the year ended June 30, 1995.
A summary of the stock option activity for all non-Plan NQOs is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at June 30, 1994..................... 182,988 5.57
Options granted.................................. 121,581 3.25
--------- ----
Outstanding at June 30, 1995..................... 304,569 4.66
Assumed from GZ-CA............................... 119,179 3.43
--------- ----
Outstanding at June 30, 1996..................... 423,748 4.34
Options granted.................................. 2,530,000 2.02
Options exercised................................ (9,134) 0.88
Options canceled................................. (4,441) 5.06
--------- ----
Outstanding at June 30, 1997..................... 2,940,173 2.34
========= ====
</TABLE>
As of June 30, 1997, there were approximately 1,269,490 non-Plan NQOs
exercisable with a weighted average exercise price of $2.95.
The per share weighted-average fair value of options granted during Fiscal
1997 and 1996 was $2.88 and $6.38, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: Fiscal 1997 -- risk-free interest rate of 6.50%, volatility of 25%
and an expected life of 4 years; Fiscal 1996 -- risk-free interest rate of
6.50%, volatility of 25% and an expected life of 4 years.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its Plan and, accordingly, no compensation cost
has been recognized for its stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss and net loss
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net loss:
As reported................................. $(16,831,025) $(23,518,660)
Pro forma................................... $(17,569,606) $(23,591,052)
Net loss per share:
As reported................................. $ (1.61) $ (5.05)
Pro forma................................... $ (1.68) $ (5.06)
</TABLE>
41
<PAGE> 44
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
Pro forma net loss and pro forma net loss per share reflect only options
granted in Fiscal 1997 and 1996. The full impact of calculating compensation
cost for stock options under SFAS 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the options'
vesting period of four years and compensation cost for options granted prior to
July 1, 1995 is not considered.
(10) INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities, are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 13,418,000 $ 6,867,000
Reserves not currently deductible............ 3,117,000 698,000
Less valuation allowance..................... (16,535,000) (7,565,000)
------------ ------------
Total deferred tax assets................. -- --
============ ============
Deferred tax liability:
Identified intangible assets................. -- --
============ ============
</TABLE>
The valuation allowance for deferred tax assets as of June 30, 1997 was
$16,535,000. The net change in the total valuation allowance for the year ended
June 30, 1997 was an increase of $8,970,000.
Reconciliation of the Federal statutory rate to the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Federal statutory rate..................................... (34.0)% (34.0)%
State income taxes, net.................................... (3.7) (6.1)
Write-off of acquired in-process technology for which no
tax benefit is recognized................................ 9.7 30.6
Net operating loss carryforward with no tax benefit
recognized............................................... 28.0 9.5
---- ----
-- --
==== ====
</TABLE>
As of June 30, 1997, the Company had net operating loss carryforwards for
Federal and state income tax purposes of approximately $36,484,000 and
$16,664,000, respectively, which are available to offset future taxable income.
The net operating loss carryforwards, if not utilized, will expire over the
period from 2005 through 2012. Pursuant to the Reorganization and the conversion
of certain shares of Preferred Stock into shares of Common Stock and other
equity related transactions, the utilization of the net operating loss
carryforwards may be limited due to restrictions imposed under applicable
Federal and state tax law due to a change in ownership.
42
<PAGE> 45
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
(11) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment under non-cancelable operating lease
agreements which provide for the following minimum annual lease payments:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
JUNE 30, LEASES
--------------------------------------------------------- -------
<S> <C>
1998................................................... $24,315
1999................................................... 11,133
2000................................................... 1,856
-------
Total minimum lease payments............................. $37,304
=======
</TABLE>
On June 27, 1997, the Company entered into a month-to-month lease for its
corporate office and warehouse space with an affiliated party. The monthly lease
payment under the lease is $2,550, which management believes is below the market
rate for comparable space.
The Company subleases approximately 12,100 square feet of office space in
San Francisco, California, which location formerly was used as the principal
executive offices of StarPress. The Company has assigned its sublease to a third
party, but remains liable as a guarantor of the sublease, in the event of
default by the assignee, until December 1997.
Total rental expense, including month-to-month rentals, approximated
$447,906, $248,000 and $230,000 in Fiscal 1997, 1996 and 1995, respectively.
ROYALTIES
The Company 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
based on certain guarantees. As of June 30, 1997, the Company has accrued all
earned royalties and future 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. Set forth below is a summary of certain material legal
proceedings to which the Company and/or any of its subsidiaries is a party.
The Company and Tunes Network, Inc. (formerly Surf Communications, Inc.)
("Tunes") currently are involved in an arbitration pending in the San Francisco,
California office of the American Arbitration Association. The arbitration was
instituted in April 1997. The arbitration relates to claims made by Tunes
against the Company in the amount of $322,000, plus unspecified additional
royalties, interest and attorneys' fees, allegedly owed under an agreement
entered into between the Company and Tunes as of November 5, 1996 (the "November
5th Agreement"). The November 5th Agreement relates to services to be performed
by Tunes in connection with creating and maintaining an Internet website for the
Company. The Company intends to vigorously contest liability for the amounts
claimed. Although the Company cannot predict the likely outcome of this
arbitration at this time, management intends to vigorously defend this
arbitration and believes that the final outcome will not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
43
<PAGE> 46
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
(12) DISTRIBUTION AGREEMENT
On March 13, 1996, the Company entered into a distribution agreement (the
"GT Agreement") with GT Interactive Software Corp. ("GT"). In connection with
the GT Agreement, the Company issued a warrant to GT to purchase up to 800,000
shares of Common Stock at a per share exercise price of $5.125. The Warrant
expires on February 28, 2001. As of June 30, 1996, GT had acquired 80,000 shares
through partial exercise of such warrant. The Company has agreed that upon
receiving a request from GT the Company will register the Common Stock
underlying the warrant. At the time of issuance, management estimated that the
fair market value of the warrant was $312,000. Such amount was being amortized
over the five year life of the GT Agreement. During the third quarter of Fiscal
1997, the Company determined that the GT Agreement would not yield any material
future economic benefit to the Company and recorded a charge of $247,000 for the
unamortized value of the warrant which amount is included in general and
administrative expenses in the accompanying consolidated statements of
operations. On July 2, 1997, the Company and GT amended and restated the GT
Agreement in connection with settling certain disputes related to payments under
the terms of the original agreement.
(13) SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company had sales to two major customers: Tech Data Corporation and
Navarre Corporation, which represented approximately 26% and 15%, respectively,
of Fiscal 1997 revenues. The Company had sales to three major customers: GT
Interactive, Tech Data Corporation and Navarre Corporation, which represented
approximately 27%, 24% and 15%, respectively, of Fiscal 1996 revenues and 36%,
12% and 10%, respectively, of Fiscal 1995 revenues. At June 30, 1997 and 1996,
accounts receivable included approximately $313,000 and $3,134,000,
respectively, due from these major customers.
(14) RELATED PARTY TRANSACTIONS
Certain former officers and major shareholders of the Company were
affiliated with companies which provided various shipping, warehousing,
consulting, legal and accounting services to the Company. The cost of these
services were $47,975 for the year ended June 30, 1995.
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 assist such
persons with the exercise of certain vested stock options under the Plan. These
advances were secured by promissory notes which bore interest at a rate of 6%
per annum and became due on or before termination of employment with the
Company. As of June 30, 1996, $94,062 remained outstanding under these
promissory notes. During Fiscal 1997, two of the promissory notes were paid off
in full. On May 21, 1997, the Company cancelled the third promissory note in
connection with a Separation and Settlement Agreement entered into with Ronald
S. Posner with respect to the termination of Mr. Posner's employment as the
Co-Chairman of the Board and Chief Executive Officer of the Company. At the time
that the Company cancelled Mr. Posner's promissory note, the balance of unpaid
principal and accrued and unpaid interest thereunder was approximately $44,000.
Pursuant to the 1996 Restructuring Plan, on April 2, 1996, the Company
entered into 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"), 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.
44
<PAGE> 47
GRAPHIX ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
(15) PROFIT SHARING PLAN
The Company and its wholly-owned subsidiaries maintain a pretax savings and
profit sharing plan under Section 401(k) of the Internal Revenue Code. Under the
plan, eligible employees are able to contribute from 1% to 15% of their
compensation. 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. During Fiscal 1997, the Company made matching contributions in the
aggregate amount of $13,137.
(16) JOINT VENTURE
Under a joint venture agreement with Olivetti Telemedia, the Company is
obligated to invest $450,000 in cash and contribute intellectual property valued
by the joint venture at $1,000,000. The cash is to be contributed based upon the
financial needs of the joint venture, as determined 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. During Fiscal 1996, the Company had accrued
and expensed $100,000 of the required contribution of $450,000. 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, 1997.
(17) GOING CONCERN
The Company incurred significant losses from operations during Fiscal 1997
and Fiscal 1996, and, as of June 30, 1997, the Company's net working capital
deficiency was ($9,133,497). By July 24, 1997, the Company had taken steps to
cease its principal business operations. The Company does not have the necessary
funds to pay its secured and unsecured debt obligations. The Company is in
default under the terms of its senior secured loan and agreements with other
creditors and has received two Notices of Default from its senior secured
lender. In connection with the Restructuring, the Company is attempting to
renegotiate the terms of its senior secured loan, negotiate the payment of $.30
for each $1.00 of unsecured debt, convert outstanding shares of Preferred Stock
into shares of Common Stock, and raise operating funds for the Company. However,
there can be no assurances that the Company will be able to successfully
complete the Restructuring and continue as a going concern. If the Company is
unsuccessful in completing the Restructuring, it is likely that Madeleine will
foreclose upon all of the assets of the Company and pursue the dissolution of
the Company.
45
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "ELECTION OF DIRECTORS" and
"TRANSACTIONS WITH MANAGEMENT AND OTHERS -- Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement (the "Proxy
Statement") for the Annual Meeting of Stockholders scheduled to be held on
December 16, 1997, is incorporated herein by reference. The Proxy Statement will
be filed with the U.S. Securities and Exchange Commission not later than 120
days after the close of Fiscal 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "COMPENSATION OF EXECUTIVE
OFFICERS" and "INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE
BOARD -- Compensation of Directors" in the Proxy Statement is incorporated
herein by reference, provided however, that the Report of the Compensation
Committee on Executive Compensation and the Performance Graph set forth under
the caption "COMPENSATION OF EXECUTIVE OFFICERS" shall not be deemed
incorporated by reference in this Report and shall not otherwise be deemed
"filed" as part of this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "TRANSACTIONS WITH MANAGEMENT
AND OTHERS" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(A)(1) FINANCIAL STATEMENTS
Index to Financial Statements and Financial Statements................... 17
(A)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts......................... S-1
</TABLE>
All other schedules are omitted because they are not required, are not
applicable or the information required to be set forth therein is included in
the financial statements or in the notes thereto.
46
<PAGE> 49
(A)(3) EXHIBITS. The Exhibits listed below are filed with this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated January 3, 1996 between GZ
Multimedia, Inc. (formerly Graphix Zone, Inc.), a California corporation
("GZ-CA"), and StarPress, Inc., a Colorado corporation ("StarPress"), previously
filed with the U.S. Securities and Exchange Commission (the "Commission") as
Exhibit 2.1 to the Company's Registration Statement on Form S-4 dated March 25,
1996 (Registration No. 333-2642) (the "Registration Statement"), which is
incorporated herein by reference.
2.2 Restructuring Plan adopted by the Board of Directors of the Company on June 3,
1997.
3.1 Certificate of Incorporation of the Company, previously filed with the
Commission as Exhibit 3.1 to the Registration Statement, which is incorporated
herein by reference.
3.2 Amended and Restated Certificate of Designations of Series A Convertible
Preferred Stock of the Company, previously filed with the Commission as Exhibit
3.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 (File No. 0-28676) (the "September 1996 Quarterly
Report"), which is incorporated herein by reference.
3.3 Certificate of Amendment of Amended and Restated Certificate of Designations of
Series A Convertible Preferred Stock of the Company, previously filed with the
Commission as Exhibit 3.4 to the Company's September 1996 Quarterly Report,
which is incorporated herein by reference.
3.4 Certificate of Amendment of Certificate of Designations of Series A Convertible
Preferred Stock of the Company.
3.5 Certificate of Designations of Series B Convertible Preferred Stock of the
Company, previously filed with the Commission as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated February 18, 1997, and filed with the
Commission on March 5, 1997 (File No. 0-28676) (the "March 5th Current Report"),
which is incorporated herein by reference.
3.6 Certificate of Designations of Series C Convertible Preferred Stock of the
Company, previously filed as Exhibit 10.34 to the Company's Current Report on
Form 8-K dated March 5, 1997, and filed with the Commission on March 20, 1997
(File No. 0-28676) (the "March 20th Current Report"), which is incorporated
herein by reference.
3.7 Bylaws of the Company, previously filed with the Commission as Exhibit 3.2 to
the Registration Statement, which is incorporated herein by reference.
4.1 Registration Rights Agreements dated January 31, 1994 and February 28, 1994
among GZ-CA, Frank Cutler, James Cutler, Jr. and Gregory A. Brown, previously
filed with the Commission as an exhibit to GZ-CA's Registration Statement on
Form SB-2 dated March 15, 1994 or amendment thereto dated May 15, 1994
(Registration No. 33-76552-LA) (the "1994 Registration Statement"), which is
incorporated herein by reference.
4.2 Form of Registration Rights Agreement dated February 2, 1996 among GZ-CA and
each of the investors in the GZ-CA 1996 private placement offering (the "1996
Private Placement"), previously filed with the Commission as Exhibit 10.16 to
the Registration Statement, which is incorporated herein by reference.
4.3 Registration Rights Agreement dated March 13, 1996 between GZ-CA and GT
Interactive Software Corp., a Delaware corporation ("GTIS"), previously filed
with the Commission as Exhibit 10.7 to the Registration Statement, which is
incorporated herein by reference.
Management Contracts and Compensatory Plans or Arrangements
10.1 Warrant Agreements dated January 31, 1994 and February 28, 1994 between GZ-CA
and Frank Cutler, previously filed with the Commission as an exhibit to the 1994
Registration Statement, which is incorporated herein by reference.
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
10.2 Non-Qualified Stock Option Agreement dated July 1, 1994 between GZ-CA and Frank
Cutler, previously filed with the Commission as Exhibit 10.4 to GZ-CA's
Registration Statement on Form S-8 dated December 6, 1994, and filed with the
Commission on December 9, 1994, which is incorporated herein by reference.
10.3 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and
John and Anne Aber, previously filed with the Commission as Exhibit 10.20 to
GZ-CA's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995,
and filed with the Commission on October 5, 1995 (File No. 0-24166) (the "GZ-CA
1995 Annual Report"), which is incorporated herein by reference.
10.4 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and
John Aber, previously filed with the Commission as Exhibit 10.21 to the GZ-CA
1995 Annual Report, which is incorporated herein by reference.
10.5 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and
Anne Aber, previously filed with the Commission as Exhibit 10.22 to the GZ-CA
1995 Annual Report, which is incorporated herein by reference.
10.6 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and
Thomas and Honor Vandeveer, previously filed with the Commission as Exhibit
10.23 to the GZ-CA 1995 Annual Report, which is incorporated herein by
reference.
10.7 1996 Stock Option Plan of the Company (the "1996 Plan"), previously filed with
the Commission as Exhibit 10.1 to the Registration Statement, which is
incorporated herein by reference.
10.8 Form of Non-Qualified Stock Option Agreement pertaining to the 1996 Plan,
previously filed with the Commission as Exhibit 10.2 to the Registration
Statement, which is incorporated herein by reference.
10.9 Form of Incentive Stock Option Agreement pertaining to the 1996 Plan, previously
filed with the Commission as Exhibit 10.3 to the Registration Statement, which
is incorporated herein by reference.
10.10 Employment letter dated January 15, 1996 between GZ-CA and Norman H. Block.
10.11 Separation and Settlement Agreement dated April 18, 1997 between the Company and
Norman H. Block.
10.12 Employment Agreement dated June 23, 1995 between StarPress and Ronald S. Posner,
previously filed with the Commission as an exhibit to StarPress' Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1995, and filed with the
Commission on September 27, 1995 (the "StarPress 1995 Annual Report"), which is
incorporated herein by reference.
10.13 Promissory Note dated March 21, 1996 in the original principal amount of $41,250
by Ronald S. Posner in favor of the Company.
10.14 Separation and Settlement Agreement dated May 21, 1997 among the Company, GZ-CA,
StarPress and Ronald S. Posner.
10.15 Employment letter dated March 25, 1996 between the Company and Melissa Orr.
10.16 Amended and Restated Employment Agreement dated October 28, 1996 between the
Company and Charles R. Cortright, Jr.
10.17 Employment letter dated February 26, 1997 between the Company and Robert D.
Shishino, previously filed with the Commission as Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and
filed with the Commission on May 20, 1997 (File No. 0-28676) (the "March 1997
Quarterly Report"), which is incorporated herein by reference.
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
10.18 Terms of Employment Agreement between the Company and David J. Hirschhorn.
10.19 Terms of Stock Option granted by the Company to David J. Hirschhorn.
10.20 Confidential Settlement Agreement and Mutual General Release dated October 13,
1997 and effective as of May 30, 1997 among the Company, Charles Cortright and
Angela Cortright.
Other Material Contracts
10.21 Office Building Lease dated October 10, 1990 between GZ-CA and Masaaki & Fumiko
Nakaoka, as amended, previously filed with the Commission as an exhibit to the
1994 Registration Statement, which is incorporated herein by reference.
10.22 Office Building Lease dated September 13, 1994 between GZ-CA and Pan Pacific
Investments, as amended by First, Second and Third Amendments, previously filed
with the Commission as an exhibit to the GZ-CA 1995 Annual Report, which is
incorporated herein by reference.
10.23 Joint Venture Agreement dated March 31, 1995 among StarPress Multimedia, Inc., a
Delaware corporation ("StarPress Multimedia"), Olivetti Systems and Network
Holdings N.V., previously filed with the Commission as an exhibit to the
StarPress 1995 Annual Report, which is incorporated herein by reference.
10.24 Sublease Agreement dated August 13, 1995 between StarPress and International
Business Machines Corporation, previously filed with the Commission as an
exhibit to the StarPress 1995 Annual Report, which is incorporated herein by
reference.
10.25 Business Loan Agreement dated October 27, 1995 between Silicon Valley Bank and
StarPress, previously filed with the Commission as an exhibit to StarPress'
Quarterly Report on Form 10-QSB for the quarterly period ended September 30,
1995 (the "StarPress September 1995 Quarterly Report"), which is incorporated
herein by reference.
10.26 Business Loan Agreement dated June 26, 1996 between GZ-CA and Silicon Valley
Bank, previously filed with the Commission as Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (File No.
0-28676), which is incorporated herein by reference.
10.27 Warrant to Purchase Stock dated December 12, 1996 between the Company and
Silicon Valley Bank.
10.28 Asset Purchase Agreement dated November 1, 1995 between StarPress and Sony
Interactive Entertainment, Inc., previously filed with the Commission as an
exhibit to the StarPress September 1995 Quarterly Report, which is incorporated
herein by reference.
10.29 Form of Warrant Agreement entered into between GZ-CA and each of the investors
in the 1996 Private Placement, previously filed with the Commission as Exhibit
10.17 to the Registration Statement, which is incorporated herein by reference.
10.30 Distribution Agreement dated March 13, 1996 among GZ-CA, StarPress and GTIS,
previously filed with the Commission as Exhibit 10.4 to the Registration
Statement, which is incorporated herein by reference.
10.31 Keep-Well Agreement dated March 13, 1996 among the Company, GZ-CA and GTIS,
previously filed with the Commission as Exhibit 10.5 to the Registration
Statement, which is incorporated herein by reference.
10.32 Common Stock Purchase Warrant dated March 13, 1996 between GZ-CA and GTIS,
previously filed with the Commission as Exhibit 10.6 to the Registration
Statement, which is incorporated herein by reference.
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
10.33 Loan and Security Agreement dated January 31, 1997 between the Company and
Madeleine L.L.C., a New York limited liability company ("Madeleine"), previously
filed with the Commission as Exhibit 10.1 to the March 1997 Quarterly Report,
which is incorporated herein by reference.
10.34 Amendment No. 1 to Loan and Security Agreement dated March 5, 1997 between the
Company and Madeleine, previously filed with the Commission as Exhibit 10.3 to
the March 1997 Quarterly Report, which is incorporated herein by reference.
10.35 Consent and Amendment Number Two to Loan and Security Agreement dated June 5,
1997 between the Company and Madeleine.
10.36 Warrant to Purchase 300,000 Shares of Common Stock dated January 31, 1997
between the Company and Madeleine, previously filed with the Commission as
Exhibit 10.2 to the March 1997 Quarterly Report, which is incorporated herein by
reference.
10.37 Warrant to Purchase Shares of Common Stock dated June 5, 1997 between the
Company and Madeleine.
10.38 Asset Purchase Agreement dated February 24, 1997 among the Company, Inscape and
Warner Music Group, Inc., previously filed with the Commission as Exhibit 10.32
to the March 20th Current Report, which is incorporated herein by reference.
10.39 Asset Purchase Agreement dated February 26, 1997 among the Company, Trimark
Holdings, Inc. and its subsidiary, Trimark Interactive, previously filed with
the Commission as Exhibit 10.33 to the March 20th Current Report, which is
incorporated herein by reference.
10.40 Form of StarPress 9% Convertible Subordinated Debentures with Warrant
Agreements, previously filed with the Commission as an exhibit to StarPress'
Current Report on Form 8-K dated March 31, 1995, which is incorporated herein by
reference.
10.41 Sub-Lease Agreement dated June 23, 1997 between the Company and Daimler Commerce
Partners, L.P.
10.42 Promissory Note dated February 3, 1997 in the original principal amount of
$200,000 by the Company in favor of Middlefield Ventures, Inc.
10.43 Warrant to Purchase 613,718 Shares of Common Stock of Graphix Zone, Inc. dated
February 3, 1997 between the Company and Intel Corporation.
11 Statement Regarding Computation of Per Share Earnings (Loss).
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of KPMG Peat Marwick LLP, independent auditors.
27 Financial Data Schedule.
</TABLE>
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of Fiscal 1997.
50
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRAPHIX ZONE, INC.
Date: October 13, 1997 By: /s/ DAVID J. HIRSCHHORN
------------------------------------
David J. Hirschhorn
Chairman of the Board,
President, Chief Executive Officer,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ----------------------------- -----------------
<C> <S> <C>
/s/ DAVID J. HIRSCHHORN Director, Chairman of the October 13, 1997
- --------------------------------------------- Board, President, Chief
David J. Hirschhorn Executive Officer, Chief
Financial Officer and
Treasurer (Principal
Executive Officer, Principal
Financial Officer and
Principal Accounting Officer)
/s/ KEVIN P. GENDA Director October 13, 1997
- ---------------------------------------------
Kevin P. Genda
Director
- ---------------------------------------------
Ronald S. Posner
</TABLE>
51
<PAGE> 54
SCHEDULE II
GRAPHIX ZONE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1997 1996 1995
------ ----- ----
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, beginning of year......................................... $ 640 $ 177 $ --
Additions charged to expense....................................... 1,524 384 154
Additions from acquisitions........................................ -- 79 23
Deductions, accounts written-off................................... (767) -- --
------ ----- ----
Balance, end of year............................................... $1,397 $ 640 $177
====== ===== ====
ALLOWANCE FOR SALES RETURNS AND DISCOUNTS
Balance, beginning of year......................................... $ 849 $ 501 $ --
Net additions (reductions) charged (credited) to sales............. 203 (163) 244
Additions from acquisitions........................................ -- 511 257
------ ----- ----
Balance, end of year............................................... $1,052 $ 849 $501
====== ===== ====
ALLOWANCE FOR COOPERATIVE ADVERTISING FUNDS
Balance, beginning of year......................................... $ 191 $ 165 $ --
Net additions (reductions) charged (credited) to sales and
marketing expense................................................ 114 26 165
------ ----- ----
Balance, end of year............................................... $ 305 $ 191 $165
====== ===== ====
</TABLE>
S-1
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated January 3, 1996 between GZ
Multimedia, Inc. (formerly Graphix Zone, Inc.), a California corporation
("GZ-CA"), and StarPress, Inc., a Colorado corporation ("StarPress"), previously
filed with the U.S. Securities and Exchange Commission (the "Commission") as
Exhibit 2.1 to the Company's Registration Statement on Form S-4 dated March 25,
1996 (Registration No. 333-2642) (the "Registration Statement"), which is
incorporated herein by reference.
2.2 Restructuring Plan adopted by the Board of Directors of the Company on June 3,
1997.
3.1 Certificate of Incorporation of the Company, previously filed with the
Commission as Exhibit 3.1 to the Registration Statement, which is incorporated
herein by reference.
3.2 Amended and Restated Certificate of Designations of Series A Convertible
Preferred Stock of the Company, previously filed with the Commission as Exhibit
3.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 (File No. 0-28676) (the "September 1996 Quarterly
Report"), which is incorporated herein by reference.
3.3 Certificate of Amendment of Amended and Restated Certificate of Designations of
Series A Convertible Preferred Stock of the Company, previously filed with the
Commission as Exhibit 3.4 to the Company's September 1996 Quarterly Report,
which is incorporated herein by reference.
3.4 Certificate of Amendment of Certificate of Designations of Series A Convertible
Preferred Stock of the Company.
3.5 Certificate of Designations of Series B Convertible Preferred Stock of the
Company, previously filed with the Commission as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated February 18, 1997, and filed with the
Commission on March 5, 1997 (File No. 0-28676) (the "March 5th Current Report"),
which is incorporated herein by reference.
3.6 Certificate of Designations of Series C Convertible Preferred Stock of the
Company, previously filed as Exhibit 10.34 to the Company's Current Report on
Form 8-K dated March 5, 1997, and filed with the Commission on March 20, 1997
(File No. 0-28676) (the "March 20th Current Report"), which is incorporated
herein by reference.
3.7 Bylaws of the Company, previously filed with the Commission as Exhibit 3.2 to
the Registration Statement, which is incorporated herein by reference.
4.1 Registration Rights Agreements dated January 31, 1994 and February 28, 1994
among GZ-CA, Frank Cutler, James Cutler, Jr. and Gregory A. Brown, previously
filed with the Commission as an exhibit to GZ-CA's Registration Statement on
Form SB-2 dated March 15, 1994 or amendment thereto dated May 15, 1994
(Registration No. 33-76552-LA) (the "1994 Registration Statement"), which is
incorporated herein by reference.
4.2 Form of Registration Rights Agreement dated February 2, 1996 among GZ-CA and
each of the investors in the GZ-CA 1996 private placement offering (the "1996
Private Placement"), previously filed with the Commission as Exhibit 10.16 to
the Registration Statement, which is incorporated herein by reference.
4.3 Registration Rights Agreement dated March 13, 1996 between GZ-CA and GT
Interactive Software Corp., a Delaware corporation ("GTIS"), previously filed
with the Commission as Exhibit 10.7 to the Registration Statement, which is
incorporated herein by reference.
Management Contracts and Compensatory Plans or Arrangements
10.1 Warrant Agreements dated January 31, 1994 and February 28, 1994 between GZ-CA
and Frank Cutler, previously filed with the Commission as an exhibit to the 1994
Registration Statement, which is incorporated herein by reference.
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
10.2 Non-Qualified Stock Option Agreement dated July 1, 1994 between GZ-CA and Frank
Cutler, previously filed with the Commission as Exhibit 10.4 to GZ-CA's
Registration Statement on Form S-8 dated December 6, 1994, and filed with the
Commission on December 9, 1994, which is incorporated herein by reference.
10.3 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and
John and Anne Aber, previously filed with the Commission as Exhibit 10.20 to
GZ-CA's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995,
and filed with the Commission on October 5, 1995 (File No. 0-24166) (the "GZ-CA
1995 Annual Report"), which is incorporated herein by reference.
10.4 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and
John Aber, previously filed with the Commission as Exhibit 10.21 to the GZ-CA
1995 Annual Report, which is incorporated herein by reference.
10.5 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and
Anne Aber, previously filed with the Commission as Exhibit 10.22 to the GZ-CA
1995 Annual Report, which is incorporated herein by reference.
10.6 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and
Thomas and Honor Vandeveer, previously filed with the Commission as Exhibit
10.23 to the GZ-CA 1995 Annual Report, which is incorporated herein by
reference.
10.7 1996 Stock Option Plan of the Company (the "1996 Plan"), previously filed with
the Commission as Exhibit 10.1 to the Registration Statement, which is
incorporated herein by reference.
10.8 Form of Non-Qualified Stock Option Agreement pertaining to the 1996 Plan,
previously filed with the Commission as Exhibit 10.2 to the Registration
Statement, which is incorporated herein by reference.
10.9 Form of Incentive Stock Option Agreement pertaining to the 1996 Plan, previously
filed with the Commission as Exhibit 10.3 to the Registration Statement, which
is incorporated herein by reference.
10.10 Employment letter dated January 15, 1996 between GZ-CA and Norman H. Block.
10.11 Separation and Settlement Agreement dated April 18, 1997 between the Company and
Norman H. Block.
10.12 Employment Agreement dated June 23, 1995 between StarPress and Ronald S. Posner,
previously filed with the Commission as an exhibit to StarPress' Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1995, and filed with the
Commission on September 27, 1995 (the "StarPress 1995 Annual Report"), which is
incorporated herein by reference.
10.13 Promissory Note dated March 21, 1996 in the original principal amount of $41,250
by Ronald S. Posner in favor of the Company.
10.14 Separation and Settlement Agreement dated May 21, 1997 among the Company, GZ-CA,
StarPress and Ronald S. Posner.
10.15 Employment letter dated March 25, 1996 between the Company and Melissa Orr.
10.16 Amended and Restated Employment Agreement dated October 28, 1996 between the
Company and Charles R. Cortright, Jr.
10.17 Employment letter dated February 26, 1997 between the Company and Robert D.
Shishino, previously filed with the Commission as Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and
filed with the Commission on May 20, 1997 (File No. 0-28676) (the "March 1997
Quarterly Report"), which is incorporated herein by reference.
10.18 Terms of Employment Agreement between the Company and David J. Hirschhorn.
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
10.19 Terms of Stock Option granted by the Company to David J. Hirschhorn
10.20 Confidential Settlement Agreement and Mutual General Release dated October 13,
1997 and effective as of May 30, 1997 among the Company, Charles Cortright and
Angela Cortright.
Other Material Contracts
10.21 Office Building Lease dated October 10, 1990 between GZ-CA and Masaaki & Fumiko
Nakaoka, as amended, previously filed with the Commission as an exhibit to the
1994 Registration Statement, which is incorporated herein by reference.
10.22 Office Building Lease dated September 13, 1994 between GZ-CA and Pan Pacific
Investments, as amended by First, Second and Third Amendments, previously filed
with the Commission as an exhibit to the GZ-CA 1995 Annual Report, which is
incorporated herein by reference.
10.23 Joint Venture Agreement dated March 31, 1995 among StarPress Multimedia, Inc., a
Delaware corporation ("StarPress Multimedia"), Olivetti Systems and Network
Holdings N.V., previously filed with the Commission as an exhibit to the
StarPress 1995 Annual Report, which is incorporated herein by reference.
10.24 Sublease Agreement dated August 13, 1995 between StarPress and International
Business Machines Corporation, previously filed with the Commission as an
exhibit to the StarPress 1995 Annual Report, which is incorporated herein by
reference.
10.25 Business Loan Agreement dated October 27, 1995 between Silicon Valley Bank and
StarPress, previously filed with the Commission as an exhibit to StarPress'
Quarterly Report on Form 10-QSB for the quarterly period ended September 30,
1995 (the "StarPress September 1995 Quarterly Report"), which is incorporated
herein by reference.
10.26 Business Loan Agreement dated June 26, 1996 between GZ-CA and Silicon Valley
Bank, previously filed with the Commission as Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (File No.
0-28676), which is incorporated herein by reference.
10.27 Warrant to Purchase Stock dated December 12, 1996 between the Company and
Silicon Valley Bank.
10.28 Asset Purchase Agreement dated November 1, 1995 between StarPress and Sony
Interactive Entertainment, Inc., previously filed with the Commission as an
exhibit to the StarPress September 1995 Quarterly Report, which is incorporated
herein by reference.
10.29 Form of Warrant Agreement entered into between GZ-CA and each of the investors
in the 1996 Private Placement, previously filed with the Commission as Exhibit
10.17 to the Registration Statement, which is incorporated herein by reference.
10.30 Distribution Agreement dated March 13, 1996 among GZ-CA, StarPress and GTIS,
previously filed with the Commission as Exhibit 10.4 to the Registration
Statement, which is incorporated herein by reference.
10.31 Keep-Well Agreement dated March 13, 1996 among the Company, GZ-CA and GTIS,
previously filed with the Commission as Exhibit 10.5 to the Registration
Statement, which is incorporated herein by reference.
10.32 Common Stock Purchase Warrant dated March 13, 1996 between GZ-CA and GTIS,
previously filed with the Commission as Exhibit 10.6 to the Registration
Statement, which is incorporated herein by reference.
10.33 Loan and Security Agreement dated January 31, 1997 between the Company and
Madeleine L.L.C., a New York limited liability company ("Madeleine"), previously
filed with the Commission as Exhibit 10.1 to the March 1997 Quarterly Report,
which is incorporated herein by reference.
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
10.34 Amendment No. 1 to Loan and Security Agreement dated March 5, 1997 between the
Company and Madeleine, previously filed with the Commission as Exhibit 10.3 to
the March 1997 Quarterly Report, which is incorporated herein by reference.
10.35 Consent and Amendment Number Two to Loan and Security Agreement dated June 5,
1997 between the Company and Madeleine.
10.36 Warrant to Purchase 300,000 Shares of Common Stock dated January 31, 1997
between the Company and Madeleine, previously filed with the Commission as
Exhibit 10.2 to the March 1997 Quarterly Report, which is incorporated herein by
reference.
10.37 Warrant to Purchase Shares of Common Stock dated June 5, 1997 between the
Company and Madeleine.
10.38 Asset Purchase Agreement dated February 24, 1997 among the Company, Inscape and
Warner Music Group, Inc., previously filed with the Commission as Exhibit 10.32
to the March 20th Current Report, which is incorporated herein by reference.
10.39 Asset Purchase Agreement dated February 26, 1997 among the Company, Trimark
Holdings, Inc. and its subsidiary, Trimark Interactive, previously filed with
the Commission as Exhibit 10.33 to the March 20th Current Report, which is
incorporated herein by reference.
10.40 Form of StarPress 9% Convertible Subordinated Debentures with Warrant
Agreements, previously filed with the Commission as an exhibit to StarPress'
Current Report on Form 8-K dated March 31, 1995, which is incorporated herein by
reference.
10.41 Sub-Lease Agreement dated June 23, 1997 between the Company and Daimler Commerce
Partners, L.P. .
10.42 Promissory Note dated February 3, 1997 in the original principal amount of
$200,000 by the Company in favor of Middlefield Ventures, Inc.
10.43 Warrant to Purchase 613,718 Shares of Common Stock of Graphix Zone, Inc. dated
February 3, 1997 between the Company and Intel Corporation.
11 Statement Regarding Computation of Per Share Earnings (Loss).
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of KPMG Peat Marwick LLP, independent auditors.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 2.2
RESTRUCTURING PLAN
On June 3, 1997, the Board of Directors of the Company adopted a
restructuring plan for the Company consisting of the following:
o Business--Divest or dispose of the Company's existing businesses
--------
related to the personal computer industry and explore
opportunities to enter into new businesses and industries.
o Senior Secured Debt--Renegotiate the terms of the Company's
-------------------
senior secured loan and the related collateral agreements to
extend the term of the loan, reduce the interest rate thereof
and provide for later payments of amounts due thereunder and to
reduce the senior lender's warrant position in the Company.
o Outstanding Unsecured Debt--Pay to unsecured creditors $0.30
--------------------------
for each $1.00 of debt.
o Outstanding Convertible Preferred Stock--Exchange outstanding
---------------------------------------
shares of the Company's Series B and Series C Preferred Stock,
each $.01 par value per share, for shares of the Company's
common stock, $.01 par value per share, at an exchange price of
approximately $0.75 per share.
o Additional Capital--Evaluate alternative methods for raising
------------------
additional funds for the Company.
<PAGE> 1
EXHIBIT 3.4
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATION
FILED 09:00 AM 01/31/1997
971034629 - 2583237
GRAPHIX ZONE, INC.
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 242 of the General Corporation Law
of the State of Delaware)
-------------
Graphix Zone, Inc., a Delaware corporation (the "Corporation"), in
accordance with the provisions of Section 103 of the General Corporation Law of
the State of Delaware (the "DGCL") DOES HEREBY CERTIFY:
That pursuant to authority vested in the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation, the Board
of Directors of the Corporation, by unanimous written consent, dated January
__, 1997, adopted a resolution providing for an amendment of the Certificate of
Designations of Series A Convertible Preferred Stock, $.01 par value, as
heretofore amended, which resolution is as follows:
RESOLVED, that pursuant to authority vested in the Board of Directors
of the Corporation by the Certificate of Incorporation, the Board of Directors
does hereby provide for the amendment of the Certificate of Designations, as
heretofore amended (the "Certificate of Designations"), of Series A Convertible
Preferred Stock, $.01 par value, as follows:
1. Section 1 of the Certificate of Designations is hereby amended by
deleting the existing Section 1 in its entirety and substituting in lieu
thereof the following:
SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Convertible Preferred Stock" (the "Series A
Convertible Preferred Stock"), and the number of shares constituting the
Series A Convertible Preferred Stock shall be 3,500, and shall not be
subject to increase.
<PAGE> 2
2. Section 9(a) of the Certificate of Designations is hereby
amended by deleting the existing Section 9(a) in its entirety and substituting
in lieu thereof the following:
(a) CONVERSION AT OPTION OF HOLDER. The holders of the Series
A Convertible Preferred Stock may, upon surrender of the certificates
therefor, convert any or all of their shares of Series A Convertible
Preferred Stock into fully paid and nonassessable shares of Common Stock
and such other securities and property as hereinafter provided. At any
time to and including the day prior to the Mandatory Conversion Date,
each share of Series A Convertible Preferred Stock may be converted at
the principal executive offices of the Corporation, the office of any
transfer agent for the Series A Convertible Preferred Stock, if any, the
office of any transfer agent for the Common Stock or at such other
office or offices, if any, as the Board of Directors may designate,
initially into such number of fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of
a share) determined by dividing (x) the sum of (i) the Conversion
Amount, (ii) accrued but unpaid dividends to the Conversion Date on the
share of Series A Convertible Preferred Stock being converted, and (iii)
accrued but unpaid interest on the dividends on the share of Series A
Convertible Preferred Stock being converted in arrears to the Conversion
Date by (y) the lower of (1) the product of the Conversion Percentage
times the arithmetic average of the Closing Price of the Common Stock on
the five consecutive trading days immediately preceding the Conversion
Date or (2) $3.375 (subject to equitable adjustments for stock splits,
stock dividends, combinations, recapitalizations, reclassifications and
similar events occurring on or after September 26, 1996), in each case
subject to adjustment as hereinafter provided (the "Conversion Rate");
provided, however, that in no event shall any holder be entitled to
convert any shares of Series A Convertible Preferred Stock in excess of
that number of shares of Series A Convertible Preferred Stock upon
conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by such holder and any person whose beneficial
ownership of shares of Common Stock would be aggregated with such
holder's beneficial ownership of shares of Common Stock for purposes of
Section 13(d) of the Securities Exchange Act of 1934, as
-2-
<PAGE> 3
amended (the "Exchange Act"), and Regulation 13D-G thereunder (each a
"Restricted Person" and collectively, the "Restricted Persons") (other
than shares of Common Stock deemed beneficially owned through the
ownership of unconverted shares of Series A Convertible Preferred Stock
and unexercised Warrants) and (2) the number of shares of Common Stock
issuable upon the conversion of the number of shares of Series A
Convertible Preferred Stock with respect to which the determination in
this proviso is being made, would result in beneficial ownership by any
Restricted Person of more than 4.9% of the outstanding shares of Common
Stock. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Exchange Act and Regulation 13D-G thereunder,
except as otherwise provided in clause (1) of the proviso to the
immediately preceding sentence. The "Conversion Price" shall be equal to
the Conversion Amount divided by the Conversion Rate.
3. The third paragraph of Section 9(c)(3) of the Certificate of
Designations is hereby amended by deleting the existing third paragraph of
Section 9(c)(3) in its entirety and substituting in lieu thereof the following:
The right of the holders of Series A Convertible Preferred Stock
to convert their shares shall be exercised by delivering (which may be
done by telephone line facsimile transmission) to the Corporation or its
agent, as provided above, a written notice, duly signed by or on behalf
of the holder, stating the number of shares of Series A Convertible
Preferred Stock to be converted. If a holder of Series A Convertible
Preferred Stock elects to convert any shares of Series A Convertible
Preferred Stock in accordance with section 8(a), such holder shall not
be required to physically surrender the certificate(s) representing such
shares of Series A Convertible Preferred Stock to the Corporation unless
all of the shares of Series A Convertible Preferred Stock represented
thereby are so converted. Each holder of shares of Series A Convertible
Preferred Stock and the Corporation shall maintain records showing the
number of shares so converted and the dates of such conversions or
shall use such other method, satisfactory to such holder and the
corporation, so as to not require physical surrender of such
certificates upon each such conversion. In the event of any dispute or
discrepancy, such records of the
-3-
<PAGE> 4
Corporation shall be controlling and determinative in the
absence of manifest error. Notwithstanding the foregoing, if
any shares of Series A Convertible Preferred Stock evidenced by
a particular certificate therefor are converted as aforesaid,
the holder of Series A Convertible Preferred Stock may not
transfer the certificate(s) representing such shares of Series A
Convertible Preferred Stock unless such holder first physically
surrenders such certificate(s) to the Corporation, whereupon the
Corporation will forthwith issue and deliver upon the order of
such holder of shares of Series A Convertible Preferred Stock
new certificate(s) of like tenor, registered as such holder of
shares of Series A Convertible Preferred Stock (upon payment by
such holder of shares of Series A Convertible Preferred Stock of
any applicable transfer taxes) may request, representing in the
aggregate the remaining number of shares of Series A Convertible
Preferred Stock represented by such certificate(s). Each holder
of shares of Series A Convertible Preferred Stock, by acceptance
of a certificate for such shares, acknowledges and agrees that
(1) by reason of the provisions of this paragraph and Section
8(d)(1), following conversion of any shares of Series A
Convertible Preferred Stock represented by such certificate, the
number of shares of Series A Convertible Preferred Stock
represented by such certificate may be less than the number of
shares stated on such certificate and the number of shares of
Common Stock from the Maximum Share Amount (as defined herein)
allocated to the shares of Series A Convertible Preferred Stock
represented by such certificate for purposes of conversion of
such shares may be less than the number thereof on such
certificate and (2) the Corporation may place a legend on the
certificates of shares of Series A Convertible Preferred Stock
which refers to or describes the provisions of this paragraph.
The Corporation shall pay any tax arising in connection with any
conversion of shares of Series A Convertible Preferred Stock
except that the Corporation shall not, however be required to
pay any tax which may be payable in respect of any transfer
involved in the issue and delivery upon conversion of shares of
Common Stock or other securities or property in a name other
than that of the holder of the shares of the Series A
Convertible Preferred Stock being converted, and the Corporation
shall not be required to issue or deliver any such shares or
other securities or property unless and until the person or
persons requesting the issuance thereof
-4-
<PAGE> 5
shall have paid to the Corporation the amount of any such tax or
shall have established to the satisfaction of the Corporation
that such tax has been paid.
-5-
<PAGE> 6
IN WITNESS WHEREOF, Graphix Zone, Inc. has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Norman H.
Block, its President, as of the 31 day of January, 1997.
By: /s/ N. H. BLOCK
-----------------------------
Norman H. Block
President
-6-
<PAGE> 1
[GRAPHIX ZONE LOGO] EXHIBIT 10.10
January 15, 1996
Mr. Norm Block
26672 Honey Creek
Palos Verdes, CA 90275
Dear Norm:
Angela, Ron, and I have enjoyed our recent discussions with you regarding the
possibility of you joining our company in a senior executive management role.
Please let this memo summarize those discussions and serve as an offer letter.
During your employment:
o Your title will be Executive Vice President and COO/CFO reporting to me.
o The following company departments will report to you:
- Finance
- Administration & Human Resources
- Sales (Worldwide)
o Your base salary will be $5,700 per pay period (every 2 weeks).
o A $10,000 bonus will be paid to you within 30 days after each quarter
achieving profits => $300,000. In addition, a $20,000 bonus will be paid
to you within 30 days after 4 consecutive quarters achieving profits =>
$1,200,000 or for meeting the company's annual profit goals. (All above
bonus goals are plus or minus 10%).
o A $30,000 non-recoverable draw against the above mentioned bonuses will
be paid to you at the rate of $7,500 per quarter.
o Your start date will be 1/6/96.
o 225,000 shares will be granted to you at fair market value of today's
stock close price of 5 3/8.
- The 225,000 shares shall vest monthly over the next 24 months
commencing on your start date.
<PAGE> 2
- After the Graphix Zone/StarPress merger is completed and approved by
the SEC and shareholders, all above granted shares shall vest if any
material change in ownership or control occurs. For example, but not
limited to, the sale, partial sale, or merger of the Company.
- Currently there is not enough stock in the Graphix Zone 1995 Stock
Option Plan to satisfy the above transaction. As a result, we envision
your becoming the EVP/CFO/COO of the new Delaware corporation that
would be the holding company of both Graphix Zone and StarPress after
the merger ("New GZ"). We expect New GZ to be formed and a New GZ
Stock Option Plan (which would ultimately subsume all of the Graphix
Zone and StarPress plans as well as provide options for New GZ
employees such as yourself) adopted within a week. The New GZ 1996
Stock Option Plan would be submitted to the vote of shareholders of
both companies at the time of the vote on the merger and would,
therefore, be a 16b-3 exempt plan. We expect to be able to form New GZ
and adopt New GZ 1996 Stock Option Plan within the two week time frame
before your start date.
- If, for legal, tax or accounting reasons, we conclude that this method
of dealing with the issues proves unworkable (this possible solution
was only recently considered and needs to be thought through by the
relevant professionals), the alternative solution will be to hire you
as EVP CFO/COO of Graphix Zone, grant you an options to purchase
approximately 150,000 shares of Graphix Zone now and 75,000 shares
after the merger is completed and new plans put in place, with Graphix
Zone's commitment to make up to you and loss incurred as a result of
increased in Graphix Zone's stock price between the date of grant of
the 150,000 shares and the date of grant of the 75,000 shares (by
additional options, stock appreciation rights, bonuses, or some
combination of the foregoing acceptable to all of us).
o You will be invited to attend and participate in each company board
meeting.
o The company currently does not have a severance package. However, we
are willing to provide you with at least 9 months severance pay should
you be terminated from the company, expect by your own voluntary
resignation or serious cause involving an illegal act.
o Medical, dental, and vision insurance are included in your compensation
package, subject to your acceptance by our insurance carrier. You may
also opt to purchase dependent coverage for your family. If necessary,
Jill Lewis, our VP of administration, will give you more information on
this.
<PAGE> 3
Norm, we are all impressed with your experience, style and track record. We are
confident that you can make a significant contribution to our company and its
future success and profitability. Please call me at your earliest convenience if
you have any questions or comments.
I look forward to your positive response.
Sincerely,
/s/ CHUCK CORTRIGHT
- --------------------
Chuck Cortright
President & CEO
cc: Angela Aber
Jill Lewis
Ron Posner
Accepted:
/s/ NORM BLOCK
- ------------------------------
Norm Block Date
<PAGE> 1
EXHIBIT 10.11
SEPARATION AND SETTLEMENT AGREEMENT
THIS SEPARATION AND SETTLEMENT AGREEMENT (the "Agreement") is made as of
April 18, 1997, by and among Graphix Zone, Inc., a Delaware corporation ("GZ"),
GZ Multimedia, Inc., a California corporation ("GZM"), StarPress, Inc., a
Colorado corporation ("SP") (GZ, GZM and SP are collectively referred to as the
"GZ Entities"), and Norman H. Block ("Block").
RECITALS
A. Block has been employed as a Director of each of the GZ
Entities, as President of GZ, and as President, Chief Financial Officer and
Secretary of each of GZM and SP. The parties to this Agreement mutually desire
to sever the relationship between the GZ Entities and Block.
B. The GZ Entities and Block have agreed to the terms and
conditions set forth in this Agreement and the amounts set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing promises and the
provisions hereinafter set forth, the parties agree as follows:
1. RESIGNATION AS DIRECTOR AND OFFICERS. Effective April 18, 1997,
Block will deliver his signed letter confirming his resignation from his
positions as a Director and officer of the various GZ Entities. Block will
vacate his office at GZ no later than April 18, 1997. Block hereby promises and
affirms that any information, computers (except as otherwise set forth in this
Agreement), laptops, files, records, documents, business equipment or
information of the GZ Entities, including but not limited to, handwritings,
typewritings, printing, photostating, photographing, computer files, hard disk
drive, tape, floppy disk, and every other means of recording upon any tangible
thing, for communication or representation, including letters, pictures, sounds
or symbols or any combination thereof, of the GZ Entities will not be retained,
utilized, disseminated, or in any other manner disclosed by Block and Block will
surrender possession of these items to whomsoever is designated by the GZ
Entities.
2. SEVERANCE PAYMENTS. Pursuant to the terms of this Agreement, GZ
agrees to make the following scheduled severance payments to Block:
a. On April 18, 1997, all accrued vacation pay through
April 18, 1997, which vacation pay totals $12,850.32 less applicable
withholdings.
b. On July 18, 1997, $45,000.00 less applicable
withholdings.
c. On August 18, 1997, $15,000.00 less applicable
withholdings.
<PAGE> 2
d. On September 18, 1997, $15,000.00 less applicable
withholdings.
e. On October 18, 1997, $15,000.00 less applicable
withholdings.
f. GZ agrees to pay for the continuation of Block's medical
and dental benefits for a period of six months from April 18, 1997.
3. BLOCK'S PURCHASE OF PERSONAL COMPUTER, MONITOR AND OPTICAL
DRIVE. Block agrees to purchase a personal computer, monitor and optical drive
agreed upon by GZ and Block for the purchase price of $1.00.
4. POST-EMPLOYMENT CONSULTING. Block will in good faith provide
reasonable cooperation and assistance to GZ Entities subsequent to the effective
date of this Agreement on an "as-needed" basis for a period of not less than six
months, but only as requested by the GZ Entities or their attorneys.
5. NON-DISCLOSURE AGREEMENT. Block by this Agreement promises,
assets, and affirms not to disclose any confidential information which he
learned while employed by or through the GZ Entities, including but not limited
to, the contents, terms, or other proprietary information contained in customer
lists, drawings, designs, plans, computer software and databases, financial
information, operational, marketing activities or employment practices of the GZ
Entities.
6. INDEMNITY. The GZ Entities will to the extent authorized in
their respective articles of incorporation and bylaws, defend, indemnify and
hold harmless Block from and against any and all third-party claims, demands,
causes of action, arbitration, litigation, administrative action, arising out of
or reasonably related to Block's employment with or service to the GZ Entities.
Block will not be indemnified for any claim that involves an allegation that all
or a portion of this Agreement has been breached.
7. RELEASE BY BLOCK. Except for the obligations and provisions set
forth in this Agreement, Block hereby releases and discharges the GZ Entities,
and their respective officers, directors, shareholders, parent corporations,
subsidiary corporations, brother/sister corporations, successors, assigns,
affiliates, employees, consultants and attorneys, from any and all agreements,
obligations, claims, demands and causes of action which arise out of or relate
to compensation or benefits relating to Block's employment by the GZ Entities.
Block will not initiate, cooperate with, or participate in any litigation,
claim, demand, arbitration or other proceeding of any kind in any form
pertaining to any of the released claims set forth in this Agreement.
- 2 -
<PAGE> 3
8. RELEASE BY GZ ENTITIES. Except for the obligations and
provisions set forth in this Agreement, each of the GZ Entities hereby releases
and discharges Block from any and all charges, complaints, claims, liabilities,
obligations, promises, agreements, controversies, damages, actions, causes of
action, suits, rights, demands, costs, losses, debts and expenses which arise
out of or relate to compensation or benefits relating to Block's employment by
the GZ Entities.
9. BINDING OBLIGATION. This Agreement is intended by the parties
to this Agreement to be a valid and legally binding obligation, enforceable
against such parties in accordance with its terms. Neither the execution or
delivery of this Agreement, nor the performance of any of their obligations
pursuant to this Agreement, constitutes or will constitute a breach or violation
of any contract, law, rule, order, decree, judgment, agreement, indenture,
bylaw, certificate of incorporation or other instrument which the parties to
this Agreement are legally bound.
10. CONFIDENTIALITY. This Agreement and the transactions described
herein are confidential. No party to this Agreement, or any party under the GZ
Entities' or Block's respective control, including without limitation,
employees, officers, directors, consultants, attorneys and agents, will
disclose publicly a copy of all or any portion of this Agreement, or make any
statement or disclosure pertaining to the financial transactions described in
this Agreement, except as required by law or if necessary for the enforcement
of this Agreement.
11. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one and the same instrument.
12. ENTIRE AGREEMENT/AMENDMENT/WAIVER. This Agreement contains the
entire and complete understanding between the parties concerning its subject
matter and all representations, agreements, arrangements and understandings
between or among the parties, whether oral or written, have been fully merged
herein and are superseded hereby. This Agreement may be amended, supplemented,
modified or rescinded only through an express written instrument signed by all
the parties or their respective successors and assigns. The parties may
specifically and expressly waive in writing any portion of this Agreement or
any breach hereof, but such waiver will not constitute a further or continuing
waiver of any proceeding or succeeding breach of the same or any other
provision. The consent by one party to any act for which such consent was
required will not be deemed to imply consent or waiver of the necessity of
obtaining such consent for the same or similar acts in the future.
13. SEVERABILITY. Each provision of this Agreement is intended to
be severable and if any term or provision herein is determined invalid or
unenforceable for any reason, such illegality or invalidity will not affect the
validity of the remainder of this Agreement and, wherever possible, intent
will be given to the invalid or unenforceable provision.
- 3 -
<PAGE> 4
14. FURTHER DOCUMENTS AND ACTS. Each of the parties will cooperate
in good faith with the others, and execute and deliver such further instruments
and perform such other acts as may be reasonably necessary or appropriate to
consummate and carry into effect the transactions contemplated by this
Agreement.
15. BENEFIT OF AGREEMENT. This Agreement is for the sole and
exclusive benefit of the signatories hereto and nothing in this Agreement will
be construed to give any person or entity other than the parties hereto any
legal or equitable right, claim or remedy. Subject to the foregoing sentence,
this Agreement will inure to the benefit of and will be binding upon the
specific successors, assigns, personal representatives, estates, heirs and
legatees of each of the parties.
16. SIGNATORIES' AUTHORITY. Each of the individuals signing this
Agreement represents and warrants to the others that he or she has the right,
capacity, power and authority to sign this Agreement on his or her behalf, or
on behalf of the corporation or other business entity for which he or she has
signed, as the case may be, and to sign all other documents and perform all
other acts as may be necessary in relation to this Agreement.
17. COSTS. Each of the parties to this Agreement will pay its own
costs and expenses relative to the negotiation and preparation of this
Agreement.
18. INTERPRETATION. This Agreement will be interpreted in
accordance with California law and any action or proceeding concerning this
Agreement will be brought and decided exclusively in Orange County,
California. The prevailing party in any action, litigation or other dispute
will be entitled to recover all of their costs, expenses, including without
limitation, costs, attorneys' fees, postjudgment attorneys' fees and experts'
fees.
19. INTERPRETATION. The language in all parts of this Agreement
will be in all cases construed simply according to its fair meaning and not
strictly for or against any party. Whenever the context requires, all words
used in the singular will be construed to have been used in the plural, and
vice versa, and each gender will include any other gender. The captions of the
sections of this Agreement are for the convenience only and will not affect the
construction or interpretation of any of the provisions herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-4-
<PAGE> 5
20. ARBITRATION. All disputes involving or arising out of any
alleged breach of this Agreement shall be resolved by final and binding
arbitration without resort to a trial by jury. Issues of procedure,
arbitrability, or confirmation of awards shall be governed by the Federal
Arbitration Act, 9 U.S.C. Sections 1-16, except that court review of the
arbitrator's award shall be that of an appellate court reviewing a decision of
a trial judge sitting without a jury.
IN WITNESS WHEREOF, this Agreement has been entered into as of the date
first set forth above.
GRAPHIX ZONE, INC., a Delaware corporation
By: /s/ DAVID J. HIRSCHHORN
--------------------------------------
David J. Hirschhorn
GZ MULTIMEDIA, INC., a California
corporation
By: /s/ DAVID J. HIRSCHHORN
--------------------------------------
David J. Hirschhorn
STARPRESS, INC., a Colorado corporation
By: /s/ DAVID J. HIRSCHHORN
--------------------------------------
David J. Hirschhorn
/s/ NORMAN H. BLOCK
------------------------------------------
NORMAN H. BLOCK, an individual
-5-
<PAGE> 1
EXHIBIT 10.13
SECURED PROMISSORY NOTE
$41,250.00 San Francisco, CA
March 21, 1996
FOR VALUE RECEIVED, the undersigned hereby promises to pay to the order
of Graphix Zone, Inc., 42 Corporate Park, Suite 200, Irvine, California 92174,
or at such other place as the holder of this Note ("Holder") may designate in
writing from time to time, the principal amount of Forty-One Thousand Two
Hundred Fifty Dollars ($41,250.00) together with interest thereon calculated
from the date set forth above until paid at the rate of six percent (6%) per
annum, computed and compounded annually. The entire unpaid principal balance
and accrued interest shall be due and payable on or before termination of
employment with StarPress, Inc. or any successor company (including, without
limitation, Holder or any successor to Holder). At the option of the Holder,
payments will be applied first to interest, next to any collection charge or
expense and last to reduction of principal.
The undersigned may prepay all or any portion of the amount due under
this Note without premium or penalty. Any prepayment shall be applied first to
full payment of accrued interest, next to any collection charge or expense and
last to reduction of principal.
The undersigned represents and warrants that funds advanced pursuant to
this Note will be used to acquire common stock of StarPress, Inc. Time is of
the essence of this Note and of the payments and performances hereunder and
under any of the other documents executed by the undersigned in connection
herewith.
The occurrence of one or more of the following events ("Events of
Default") shall constitute a default under this Note: (i) the failure to pay
principal and interest under this Note when the same shall become due and
payable or (ii) the undersigned's application for consent to or acquiescence in
the appointment of a trustee, receiver, liquidator, assignee, sequestrator or
other similar official for the undersigned or the undersigned's property (or if
involuntary the failure of the undersigned to have the same discharged with 60
days), or the making of a general assignment for the benefit of creditors, or
any bankruptcy, reorganization, debt arrangement or other proceeding under any
bankruptcy or other insolvency law of common law or in equity being instituted
by or against the undersigned (and, only if involuntary, the same is not
dismissed within 60 days).
Upon the occurrence of an Event of Default, and in addition to any
other right or remedy provided by applicable law, the Holder may without
further demand protest or notice of any kind to the undersigned, declare any
or all sums and obligations due under this Note to be immediately due and
payable, and upon such declaration the same shall become and be immediately due
and payable, the interest rate shall be increased to the lesser of ten percent
(10%) per annum or the maximum interest rate allowed under applicable law, and
interest shall thereafter be added to the principal balance to bear interest
itself. The undersigned agrees to pay all costs of collection and reasonable
attorney's fees in case of any Event of Default. The nonexercise by the Holder
of its
<PAGE> 2
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
The obligations of this Note shall be joint and several. The
undersigned, and all endorsers and all persons liable or to become liable on
this Note, severally waive diligence, presentment, demand, protest and notice
of demand, protest and nonpayment, and consent to any and all renewals and
extensions of the time of payment hereof.
This Note shall be governed by and construed in accordance with the
laws of the State of California.
/s/ RONALD S. POSNER
----------------------------
Ronald S. Posner
Social Security #: ###-##-####
-----------
<PAGE> 1
EXHIBIT 10.14
SEPARATION AND SETTLEMENT AGREEMENT
THIS SEPARATION AND SETTLEMENT AGREEMENT (the "Agreement") is made as of
May 21, 1997, by and among Graphix Zone, Inc., a Delaware corporation ("GZ"), GZ
Multimedia, Inc., a California corporation ("GZM"), StarPress, Inc., a Colorado
corporation ("SP") (GZ, GZM and SP are collectively referred to as the "GZ
Entities"), and Ronald S. Posner ("Posner").
RECITALS
A. Posner has been employed as Chairman and CEO of each of the GZ
Entities. The parties to this Agreement mutually desire to sever the
relationship between the GZ Entities and Posner, in those capacities, but Posner
shall remain a Director of the Entities.
B. The GZ Entities and Posner have agreed to the terms and
conditions set forth in this Agreement and the amounts set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing promises and the
provisions hereinafter set forth, the parties agree as follows:
1. RESIGNATION AS CHAIRMAN & CEO. Effective May 12, 1997, Posner
will deliver his signed letter confirming his resignation from his positions as
Chairman & CEO of the various GZ Entities. Posner hereby promises and affirms
that any information, computers (except as otherwise set forth in this
Agreement), laptops, files, records, documents, business equipment or
information of the GZ Entities, including but not limited to, handwritings,
typewritings, printing, photostating, photographing, computer files, hard disk
drive, tape, floppy disk, and every other means of recording upon any tangible
thing, for communication or representation, including letters, pictures, sounds
or symbols or any combination thereof, of the GZ Entities will not be retained,
utilized, disseminated, or in any other manner disclosed by Posner and Posner
will surrender possession of these items to whomsoever is designated by the GZ
Entities.
2. SEVERANCE PAYMENTS. Pursuant to the terms of this Agreement, GZ
agrees to make the following scheduled severance payments to Posner:
a. On June 1, 1997, a payment in the amount of $15,266.66
less applicable withholdings.
b. On September 1, 1997, $15,266.66 less applicable
withholdings.
c. On November 1, 1997, $15,266.66 less applicable
withholdings.
- 1 -
<PAGE> 2
3. POSNER'S PURCHASE OF PERSONAL COMPUTER AND MONITOR. Posner
agrees to purchase a personal computer and monitor agreed upon by GZ and Posner
for the purchase price of $1.00.
A. GZ Agrees to continue medical benefit payments through
November 1997, at which time Posner can elect to maintain benefits under
COBRA.
4. NON-DISCLOSURE AGREEMENT. Posner by this Agreement promises,
asserts, and affirms not to disclose any confidential information which he
learned while employed by or through the GZ Entities, including but not limited
to, the contents, terms, or other proprietary information contained in customer
lists, drawings, designs, plans, computer software and databases, financial
information, operational, marketing activities or employment practices of the GZ
Entities.
5. INDEMNITY. The GZ Entities will to the extent authorized in
their respective articles of incorporation and bylaws, defend, indemnify and
hold harmless Posner from and against any and all third-party claims, demands,
causes of action, arbitration, litigation, administrative action, arising out of
or reasonably related to Posner's employment with or service to the GZ Entities.
Posner will not be indemnified for any claim that involves an allegation that
all or a portion of this Agreement has been breached.
6. RELEASE BY POSNER. Except for the obligations and provisions set
forth in this Agreement, Posner hereby releases and discharges the GZ Entities,
and their respective officers, directors, shareholders, parent corporations,
subsidiary corporations, brother/sister corporations, successors, assigns,
affiliates, employees, consultants and attorneys, from any and all agreements,
obligations, claims, demands and causes of action which arise out of or relate
to compensation or benefits relating to Posner's employment by the GZ Entities.
Posner will not initiate, cooperate with, or participate in any litigation,
claim, demand, arbitration or other proceeding of any kind in any form
pertaining to any of the released claims set forth in this Agreement.
7. RELEASE BY GZ ENTITIES. Except for the obligations and
provisions set forth in this Agreement, each of the GZ Entities hereby releases
and discharges Posner from any and all charges, complaints, claims, liabilities,
obligations, promises, agreements, controversies, damages, actions, causes of
action, suits, rights, demands, costs, losses, debts and expenses which arise
out of or relate to compensation or benefits relating to Posner's employment by
the GZ Entities.
8. BINDING OBLIGATION. This Agreement is intended by the parties to
this Agreement to be a valid and legally binding obligation, enforceable against
such parties in accordance with its terms. Neither the execution or delivery of
this Agreement, nor the performance of any of their obligations pursuant to this
Agreement, constitutes or will constitute a breach or violation of any contract,
law, rule, order, decree, judgment, agreement, indenture, bylaw, certificate of
incorporation or other instrument which the parties to this Agreement are
legally bound.
- 2 -
<PAGE> 3
9. CONFIDENTIALITY. This Agreement and the transactions described
herein are confidential. No party to this Agreement, or any party under the GZ
Entities' or Posner's respective control, including without limitation,
employees, officers, directors, consultants, attorneys and agents, will
disclose publicly a copy of all or any portion of this Agreement, or make any
statement or disclosure pertaining to the financial transactions described in
this Agreement, except as required by law or if necessary for the enforcement
of this Agreement.
10. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one and the same instrument.
11. ENTIRE AGREEMENT/AMENDMENT/WAIVER. This Agreement contains the
entire and complete understanding between the parties concerning its subject
matter and all representations, agreements, arrangements and understandings
between or among the parties, whether oral or written, have been fully merged
herein and are superseded hereby. This Agreement may be amended, supplemented,
modified or rescinded only through an express written instrument signed by all
the parties or their respective successors and assigns. The parties may
specifically and expressly waive in writing any portion of this Agreement or
any breach hereof, but such waiver will not constitute a further or continuing
waiver of any proceeding or succeeding breach of the same or any other
provision. The consent by one party to any act for which such consent was
required will not be deemed to imply consent or waiver of the necessity of
obtaining such consent for the same or similar acts in the future.
12. SEVERABILITY. Each provision of this Agreement is intended to
be severable and if any term or provision herein is determined invalid or
unenforceable for any reason, such illegality or invalidity will not affect the
validity of the remainder of this Agreement and, wherever possible, intent will
be given to the invalid or unenforceable provision.
13. FURTHER DOCUMENTS AND ACTS. Each of the parties will
cooperate in good faith with the others, and execute and deliver such further
instruments and perform such other acts as may be reasonably necessary or
appropriate to consummate and carry into effect the transactions contemplated
by this Agreement.
14. BENEFIT OF AGREEMENT. This Agreement is for the sole and
exclusive benefit of the signatories hereto and nothing in this Agreement will
be construed to give any person or entity other than the parties hereto any
legal or equitable right, claim or remedy. Subject to the foregoing sentence,
this Agreement will inure to the benefit of and will be binding upon the
specific successors, assigns, personal representatives, estates, heirs and
legatees of each of the parties.
-3-
<PAGE> 4
15. SIGNATORIES' AUTHORITY. Each of the individuals signing this Agreement
represents and warrants to the others that he or she has the right, capacity,
power and authority to sign this Agreement on his or her behalf, or on behalf
of the corporation or other business entity for which he or she has signed, as
the case may be, and to sign all other documents and perform all other acts as
may be necessary in relation to this Agreement.
16. COSTS. Each of the parties to this Agreement will pay its own
costs and expenses relative to the negotiation and preparation of this
Agreement.
17. INTERPRETATION. This Agreement will be interpreted in accordance
with California law and any action or proceeding concerning this Agreement will
be brought and decided exclusively in Orange County, California. The
prevailing party in any action, litigation or other dispute will be entitled to
recover all of their costs, expenses, including without limitation, costs,
attorneys' fees, post judgment attorneys' fees and experts' fees.
18. INTERPRETATION. The language in all parts of this Agreement will
be in all cases construed simply according to its fair meaning and not strictly
for or against any party. Whenever the context requires, all word used in the
singular will be construed to have been used in the plural, and vice versa, and
each gender will include any other gender. The captions of the sections of this
Agreement are for the convenience only and will not affect the construction or
interpretation of any of the provisions herein.
19. ARBITRATION. All disputes involving or arising out of any alleged
breach of this Agreement shall be resolved by final and binding arbitration
without resort to a trial by jury. Issues of procedure, arbitrability, or
confirmation of awards shall be governed by the Federal Arbitration Act, 9
U.S.C. Sections 1-16, except that court review of the arbitrator's award shall
be that of an appellate court reviewing a decision of a trial judge sitting
without a jury.
-4-
<PAGE> 5
IN WITNESS WHEREOF, this Agreement has been entered into as of the date first
set forth above.
GRAPHIX ZONE, INC., a Delaware corporation
By: /s/ DAVID J. HIRSCHHORN
----------------------------------------
David J. Hirschhorn
GZ MULTIMEDIA, INC., a California
corporation
By: /s/ DAVID J. HIRSCHHORN
----------------------------------------
David J. Hirschhorn
STARPRESS, INC., a Colorado corporation
By: /s/ DAVID J. HIRSCHHORN
----------------------------------------
David J. Hirschhorn
/S/ RONALD S. POSNER
-------------------------------------------
Ronald S. Posner, an individual
-5-
<PAGE> 1
EXHIBIT 10.15
[Graphix Zone Letterhead]
March 25, 1996
Melissa Orr
12 Padua Court
Newport Beach, California 92657
Dear Melissa,
This letter will confirm our offer to have you join Graphix Zone as Vice
President - World Wide Sales. In this position you will report directly to me
and be responsible for all sales activity of the combined Graphix Zone and Star
Press companies.
We will offer you a base salary of $4,230.77 per pay period (26 pay periods),
with a non-refundable draw on commission of $10,000.00 to be earned ratably
during calendar year 1996. We anticipate that you will earn a total of
$40,000.00 in commission during the next 9 months as your target commission
earned. Commission will be paid to you at the rate of 1% of all sales,
commencing April 1, 1996 through 12/31/96 that exceed $8,000,000.00.
Additionally, we will offer you 6 months severance should you be terminated by
the company for any reason other than just cause. Furthermore, we will
recommend to our Board of Directors that you be granted stock options on 25,000
shares of common stock under our existing Stock Option Plan.
Medical, dental and visual benefits are provided for full time employees on the
first of the month after thirty days of employment.
Melissa, I look forward to having you join us no later than April 15, 1996.
Sincerely,
/s/ NORM BLOCK
Norm Block
Chief Operating Officer
Accepted: /s/ MELISSA ORR 3/25/96
-------------------------
Melissa Orr
cc: Jill Lewis
<PAGE> 1
EXHIBIT 10.16
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is
entered into as of October 28, 1996, between Graphix Zone, Inc., a Delaware
corporation (the "Company"), and Charles R. Cortright, Jr. ("Employee").
RECITALS
WHEREAS, Employee and the Company had previously entered in an
Employment Agreement dated April 18, 1996 (the "Old Agreement"), whereby
Employee was employed as President of the Company; and
WHEREAS, Employee, with the consent of the Board of Directors of the
Company, has resigned as President of the Company; and
WHEREAS, the parties desire that Employee remain with the Company to
assist management in various ways.
NOW, THEREFORE, in consideration of the foregoing premises, the
following mutual covenants and agreements contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by each of the parties hereto, the parties hereto agree, intending
to be legally bound, that this Amended and Restated Employment Agreement shall
supersede and replace the Old Agreement in its entirety, and shall henceforth
read as follows:
AGREEMENT
1. SERVICES.
(a) The Company hereby employs Employee as an assistant to
management of the Company and Employee hereby accepts such employment on the
terms and conditions set forth herein. In this regard, Employee shall perform
and discharge well and faithfully the duties and responsibilities that shall be
assigned to him from time to time by the Company in connection with the conduct
of its business, including special projects which may be mutually agreed upon
from time-to-time, consistent with the duties customarily performed by an
employee of similar stature, and shall devote approximately one-half (1/2) of
normal working hours to such duties and responsibilities.
(b) Employee is not and shall not be engaged directly or
indirectly in any other business activity, or previously have contracted to
perform such activity at a future date which would prevent the performance of
the obligations hereunder or involve activities which would result in a breach
of any provision of this Agreement.
<PAGE> 2
2. TERM.
(a) The term of this Agreement shall begin on the date
hereof and shall cease and terminate upon the earliest of (i) the close of
business on April 30, 1997; (ii) the death of Employee; (iii) termination by the
Company for "cause" (as defined in Section 2(b)) or otherwise; or (iv)
termination by mutual agreement between the parties.
(b) As used in this Section 2, "cause" shall mean and be
limited to one or more of the following occurrences with respect to Employee:
(i) the willful and continued failure by Employee to
substantially perform his duties with the Company (other than
any such failure resulting from his incapacity due to physical
or mental illness) after a written demand for a substantial
performance is delivered to Employee by the Board of Directors
of the Company which specifically identifies the manner in which
the Board of Directors believes that Employee has not
substantially performed his duties; or
(ii) gross negligence or willful misconduct of Employee
in the performance of his duties.
(c) The term of this Agreement shall automatically be
extended for successive six (6) month terms unless either party gives written
notice to the other at least thirty (30) days prior to the end of the term (or
any extended term) that such party desires to terminate this Agreement at the
end of the term (or any extended term).
3. COMPENSATION.
(a) The Company shall pay to Employee a base salary of
Thirty Thousand Dollars ($30,000) per 6 month period, payable in semi-monthly
installments.
(b) Employee shall receive additional compensation from
time-to-time at the discretion of the Company's Board of Directors.
(c) If Employee's employment pursuant to this Agreement is
terminated by the Company other than for "cause" (as defined in Section 2
hereof), the Company shall continue to pay Employee his base salary until the
end of the term (or any extended term), plus any amounts accrued through the end
of the term (or any extended term) as additional compensation referred to in
clause (b) above.
(d) During the term of his employment, Employee shall be
entitled to participate in employee benefit plans or programs of the Company, if
any, to the extent his position, tenure, salary, age, health and other
qualifications makes him eligible to
<PAGE> 3
participate, subject to the rules and regulations applicable thereto; provided,
however, that Employee shall 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 shall pay all premiums with respect thereto.
(e) Employee shall not be entitled to paid vacation, per
se; however, because Employee will essentially be a "half-time" employee, he
shall not be required to follow any particular schedule and work a particular
number of hours, other than that, during the term of this Agreement, he shall
devote a number of hours to the Company's business which shall be approximately
equal to one-half (1/2) of the hours a regular, full-time employee would devote
during a time period equal to the term.
4. EXPENSES. The Company will reimburse Employee for direct
out-or-pocket expenses properly incurred by him in his performance of this
Agreement and provided that a written accounting is made to the Company by
Employee, and as approved in advance by the Company's President.
5. CONFIDENTIALITY.
(a) Employee acknowledges that as a consequence of his
relationship with the Company, he has been and will continue to be given access
to confidential information which may include the following types of
information: financial statements and related financial information with
respect to the Company, trade secrets, computer programs, certain methods of
operation, procedures, improvements, systems, customer lists, supplier lists
and specifications and other private and confidential materials concerning the
Company's business (collectively, "Confidential Information"). Employee agrees
that he shall maintain any Confidential Information in strictest confidence and
shall not disclose any Confidential Information to third parties during the
term of this Agreement and after the termination hereof, however such
termination shall occur, unless previously approved by the Board of Directors
of the Company in writing.
(b) Notwithstanding the foregoing, nothing herein shall be
construed as prohibiting Employee from disclosing any Confidential Information
(i) which, at the time of disclosure, Employee can demonstrate either was in
the public domain and generally available to the public by publication or
otherwise through no act of Employee; (ii) which Employee can show was received
by him after the termination of this Agreement from a third party who did not
acquire it directly or indirectly from the Company under an obligation of
confidence; (iii) to the extent that Employee can reasonably demonstrate such
disclosure is required by law or in any legal proceeding, governmental
investigation, or other similar proceeding.
6. PREVIOUS EMPLOYMENT. Employee hereby represents that
Employee's execution of this Agreement, employment with the Company and
performance of Employee's proposed duties to the Company in the development of
its business will not violate any obligations Employee may have to any former
employer, including, but not
<PAGE> 4
limited to, any obligations to keep confidential any proprietary or
confidential information of any such employer. Employee has not entered into,
and Employee will not enter into, any agreement which conflicts with or would,
if performed by Employee, cause Employee to breach this Agreement. Employee
hereby represents, warrants and covenants to the Company, that in the course of
performing Employee's duties to the Company, Employee will not utilize any
proprietary or confidential information of any former employer.
7. NO WAIVER; AMENDMENTS, ETC. The failure of any party to insist
upon the strict performance of any of the terms, conditions or provisions of
this Agreement shall not be construed as a waiver or relinquishment of future
compliance therewith, and said terms, conditions and provisions shall remain in
full force and effect. No interpretation, amendment, changes, or other
modifications or waivers of any of the provisions of this Agreement shall be
binding upon the Company or Employee unless in writing and signed by the person
to be bound.
8. RIGHTS, OBLIGATIONS AND ASSIGNMENT. the rights and obligations
of the Company under this Agreement shall inure to the benefit of, and shall be
binding upon, its successors and assigns. The duties of Employee to any such
successor entity shall not be greater than the duties performed for the Company
prior to such succession. Employee is prohibited from making any assignment of
this Agreement.
9. ENTIRE AGREEMENT. This Agreement embodies the entire
understanding between the parties hereto pertaining to the subject matter
hereof and supersedes all prior agreements and understandings of the parties in
connection therewith.
10. SEVERABILITY. If any of the provisions of this Agreement shall
for any reason be adjudged by any court of competent jurisdiction to be invalid
or unenforceable, such judgment shall not affect, impair or invalidate the
remainder of this Agreement, but shall be confined in its operations to the
provision of this Agreement directly involved in the controversy in which such
judgment shall have been rendered.
11. NOTICES. Notices, other communications or deliveries required
or permitted under this Agreement shall be in writing directed as follows:
If to the Company, at: Graphix Zone, Inc.
42 Corporate Park, Suite 200
Irvine, California 92606
Attn: Chairman of the Board
If to Employee, at: Mr. Charles R. Cortright, Jr.
23 San Mateo Way
Corona del Mar, California 92625
<PAGE> 5
The parties may designate by notice to each other any new
address for the purpose of this Agreement. Unless otherwise specified in this
Agreement, all notices shall be effective when mailed postage prepaid by
registered or certified mail, return receipt requested.
12. APPLICABLE LAW. This Agreement shall be interpreted, enforced
and construed in accordance with the laws of the State of California.
13. HEADINGS. The captions and headings contained in this
Agreement are for reference purposes only and shall not affect the
interpretation or meaning of this Agreement.
<PAGE> 6
14. ATTORNEYS' FEES. In any dispute related to this Agreement, the
prevailing party shall, in addition to all damages, be entitled to recover
reasonable attorneys' fees and costs.
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Employment Agreement as of the date and year first above written.
COMPANY:
GRAPHIX ZONE, INC.
By: /s/ R. S. POSNER
-------------------------------
Ronald S. Posner,
Chairman of the Board
COMPANY:
By: /s/ CHARLES R. CORTRIGHT, JR.
-------------------------------
Charles R. Cortright, Jr.
<PAGE> 1
EXHIBIT 10.18
----------------------------------------------------------------------------
MEMORANDUM
TO: Ron Posner CC:
FROM: David Hirschhorn
DATE: February 28, 1997
RE: Employee Agreement
----------------------------------------------------------------------------
As per our conversation and your e-mail, I understand our agreement as follows:
o Compensation
= Option to purchase 1.0 million shares upon execution of formal
employee contract with an exercise price of $2.00 (as determined by a
$0.125 premium over the closing bid price of $1.875 on February 21,
1997)
= Additional option to purchase 1.5 million shares with exercise prices
of $2.00 (as determined by a $0.125 premium over the closing bid price
of $1.875 on February 21, 1997). Vesting as follows:
a) 200,000 1 year from date of employee contract
b) 300,000 2 years from date of employee contract
c) 450,000 3 years from date of employee contract
d) 550,000 4 years from date of employee contract
= Annual salary as follows:
a) Year 1: $180,000
b) Year 2: $250,000*
c) Year 3: $300,000*
* assumes Company operates profitably for 2 trailing quarters,
if Company is not profitable then annual salary will be
$180,000
o Severance Provisions
= 18 months of current salary
o Change of control
= in the event of change of control at the Company (i.e. 50.1% of the
voting stock or control of the Board of Directors goes to an
unaffiliated entity) all options shall vest immediately
o Other issues
= shall receive all customary benefits (i.e. medical coverage, expense
allowance, etc.)
= title shall be Co-Chairman* and Chief Executive Officer
* pending necessary shareholder approval at first available voting
opportunity
= Art Schneiderman at Wilson Sonsini Goodrich & Rosati will prepare the
formal employee contract.
<PAGE> 1
EXHIBIT 10.19
TERMS OF DAVID J. HIRSCHHORN STOCK OPTION
On March 17, 1997, the Company granted to David J. Hirschhorn a stock
option to purchase 2,500,000 shares of Common Stock of the Company at an
exercise price $2.00 per share. The stock option vests as follows: 1,000,000
shares vest on March 17, 1997; 200,000 shares vest on March 17, 1998; 300,000
shares vest on March 17, 1999; 450,000 shares vest on March 17, 2000; and
550,000 vest on March 17, 2001. The stock option 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.
<PAGE> 1
EXHIBIT 10.20
CONFIDENTIAL SETTLEMENT AGREEMENT
AND MUTUAL GENERAL RELEASE
This Confidential Settlement Agreement and Mutual General Release is
entered into by Graphix Zone, Inc. (hereinafter the "Company") and Charles
Cortright, for himself and his heirs, successors, and assigns (hereinafter
collectively "Charles Cortright"), and Angela Cortright, for herself and her
heirs, successors, and assigns (hereinafter collectively "Angela Cortright")
effective as of May 30, 1997.
WHEREAS, various differences and issues have arisen between the Company
on the one hand, and Charles and Angela Cortright on the other hand, and
WHEREAS, all three parties desire to resolve all differences by the
terms of this agreement and with no admission of any wrongdoing of any kind by
any party.
NOW, THEREFORE, the parties agree as follows:
CHARLES CORTRIGHT
1. Charles Cortright agrees to pay the Company $10,000 regarding
various expenses he charged to the Company (the "Expense Amount"). Charles and
Angela Cortright agree that they will pay the Expense Amount; provided,
however, that the Expense Amount will be reduced by the $5,000 owed to Angela
Cortright by the Company which is referenced under
Initialed: /s/DH
--------
/s/CC/AC
--------
<PAGE> 2
paragraph 6 of this Agreement, and Angela Cortright hereby authorizes the
Company to use said $5,000 owed to her as partial payment of the Expense
Amount. As a condition to the Company signing this Agreement, Charles Cortright
will pay the $5,000 balance owed to the Company on the date on which the
parties execute and deliver this Agreement.
2. The Company agrees to waive any claim that Charles Cortright owes
the Company any additional amount regarding such charges or otherwise.
3. Charles Cortright agrees that he is not owed any money by the
Company based on his Amended and Restated Employment Agreement entered into as
of October 28, 1996 or on any other basis.
4. Charles Cortright agrees to waive any and all rights which he had or
may have under said Amended and Restated Employment Agreement, including but
not limited to specifically waiving any and all rights to any health benefits
under Section 3(d) of said Agreement.
5. Except as specifically stated in paragraph 1, Charles Cortright and
the Company hereby agree to waive any and all claims which either had or may
have against the other for any reason (contract, covenant, tort, statute,
public policy, or otherwise, without exception) on or before the effective date
of this agreement. It is further understood and agreed that as a condition of
this agreement,
Initialed: /s/DH
--------
/s/CC/AC
--------
-2-
<PAGE> 3
all rights under Section 1542 of the Civil Code of the State of California are
expressly waived by Charles Cortright and the Company. Such section reads as
follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially affected his
settlement with the debtor."
ANGELA CORTRIGHT
6. With the exception of $5,000 which the Company and Angela Cortright
agree that the Company owes to her under Section 3(b) of the Amended and
Restated Employment Agreement entered into as of October 28, 1996 between the
Company and Angela Cortright (the "AC Employment Agreement"), Angela Cortright
agrees that she is not owed any money by the Company based on the AC Employment
Agreement or on any other basis. Angela Cortright hereby acknowledges and
consents to the use of the $5,000 to be paid to her under the AC Employment
Agreement as an offset to the Expense Amount that Charles Cortright owes to the
Company pursuant to paragraph 1 of this Agreement.
Initialed: /s/DH
--------
/s/CC/AC
--------
-3-
<PAGE> 4
7. Angela Cortright agrees to waive any and all other rights
which she had or may have under the AC Employment Agreement including, but not
limited to specifically waiving any and all rights to any health benefits under
Section 3(d) of the AC Employment Agreement.
8. Except as specifically stated in paragraph 6, Angela Cortright
and the Company hereby agree to waive any and all claims which either had or
may have against the other for any reason (contract, covenant, tort, statute,
public policy, or otherwise, without exception) on or before the effective date
of this agreement. It is further understood and agreed that as a condition of
this agreement, all rights under Section 1542 of the Civil Code of the State of
California are expressly waived by Angela Cortright and the Company. Such
section reads as follows:
"A general release does not extend to claims
which the creditor does not know or suspect to
exist in his favor at the time of executing the
release, which if known by him must have
materially affected his settlement with the debtor."
Initialed: /s/DH
--------
/s/CC/AC
--------
-4-
<PAGE> 5
GENERAL PROVISIONS
9. The employment agreements referred to herein are deemed
terminated and of no force and effect, except that paragraph 5 of both
agreements remains in effect in accordance with its terms. Otherwise, this
document represents the sole and entire agreement between the Company on the
one hand and Charles and Angela Cortright on the other, and supersedes any
other prior agreements or understandings, express or implied.
10. Charles Cortright and Angela Cortright agree that their releases
of the Company above include the Company and all of its related and subsidiary
entities, predecessors, successors, assigns, directors, officers, employees,
agents, attorneys and representatives of the Company.
11. The parties agree that nothing contained in this Agreement,
including but not limited to the Releases set forth herein, shall or does
affect or diminish any of the Cortrights' rights relating to stock in the
Company.
12. All parties hereto agree to keep this agreement in confidence
and not to disclose the contents thereof to any other person, including but not
limited to any current, former, or future employee, customer, or vendor of the
Company. The only exceptions are required disclosures by the Company under
applicable securities laws,
Initialed: /s/DH
--------
/s/CC/AC
--------
-5-
<PAGE> 6
tax and legal advisors, and governmental taxing authorities to the extent
disclosure is required by law.
13. Any dispute hereafter arising between the Company and either or
both of the Cortrights, including but not limited to any dispute pertaining to
the formation, validity, interpretation, effect or alleged breach of this
Agreement, or any act which allegedly has or would violate any provision of
this Agreement, will be submitted to arbitration in Orange County, California.
The arbitrator will be selected and such arbitration shall be conducted in
accordance with the Employment Arbitration Rules of the American Arbitration
Association and shall be the exclusive remedy for any such claim or dispute,
in lieu of any court action, which is hereby waived. Should either Charles or
Angela Cortright or the Company hereafter institute any legal action or
administrative proceeding against the other or the released parties with
respect to any claim waived by this Agreement or pursue any dispute or matter
covered by this paragraph by any method other than said arbitration, the
responding party shall be entitled to recover from him all damages, costs,
expenses, and attorneys' fees incurred as a result of such action.
14. In the event any provision of this Agreement shall be invalid,
illegal or unenforceable in any respect by
-6-
Initialed: /s/ DH
---------
/s/ CC/AC
---------
<PAGE> 7
a Court of competent jurisdiction, the remaining provisions shall remain in
full force and effect, and shall be interpreted in such manner as to best
fulfill the purpose and intent of this Agreement.
Dated: October 13, 1997 Dated: October 13, 1997
GRAPHIX ZONE, INC. CHARLES CORTRIGHT
By: /s/ CHARLES CORTRIGHT
By: /s/ DAVID J. HIRSCHHORN ----------------------
------------------------ Charles Cortright
David J. Hirschhorn
President and Chief
Executive Officer ANGELA CORTRIGHT
By: /s/ ANGELA CORTRIGHT
---------------------
Angela Cortright
APPROVED:
/s/ JOHN COCHRANE
----------------------
John Cochrane, Esq.
Attorney for Charles and
Angela Cortright
<PAGE> 1
EXHIBIT 10.27
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: 100,000
Class of Stock: Common
Initial Exercise Price: The price per share of the Company's common stock
equal to the lowest price posted in the two equity
rounds immediately prior to the initial exercise date.
Issue Date: December 12, 1996
Expiration Date: December 12, 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 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 Alternate Stock Appreciation Right. At Holder's option, the
Company shall pay Holder the fair market value of the Shares issuable upon
conversion of this Warrant pursuant to Section 1.2 in cash in lieu of such
Shares.
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 with such
determination, then the Company and Holder shall promptly agree upon a
reputable investment
1
<PAGE> 2
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.
1.7.3 Purchase Right. Notwithstanding the foregoing, at the
election of Holder, the Company shall purchase the unexercised portion of this
Warrant for cash upon the closing of any Acquisition for an amount equal to (a)
the fair market value of any consideration that would have been received by
Holder in consideration of the Shares had Holder exercised the unexercised
portion of this Warrant immediately before the record date for determining the
shareholders entitled to participate in the proceeds of the Acquisition, less
(b) the aggregate Warrant Price of the Shares, but in no event less than zero.
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 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
<PAGE> 3
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 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 Adjustments for Diluting Issuances. The Warrant Price and the
number of Shares issuable upon exercise of this Warrant or, if the Shares are
Preferred Stock, the number of shares of common stock issuable upon conversion
of the Shares, shall be subject to adjustment, from time to time in the manner
set forth on Exhibit A in the event of Diluting Issuances (as defined on
Exhibit A).
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> 4
3.1 Representations and Warranties. The Company hereby represents
and warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than (i) the price per share at which the Shares
were last issued in an arms-length transaction in which at least $500,000 of
the Shares were sold and (ii) the fair market value of the Shares as of the
date of this Warrant.
(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 unaudited 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 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,
4
<PAGE> 5
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 tranferor 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, as 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.
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.
5
<PAGE> 6
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.
GRAPHIX ZONE, INC.,
a California corporation
By: /s/ NORMAN BLOCK
-----------------------------------------
Norman Block
Its President and Chief Operating Officer
6
<PAGE> 7
APPENDIX I
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase 100,000 shares of the
Common Stock of Graphix Zone, Inc., a California corporation, pursuant to the
terms of the attached Warrant, and tenders herewith payment of the purchase
price of such shares in full.
2. The undersigned hereby elects to convert the attached Warrant
into Shares 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.]
3. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name as is specified
below:
Silicon Valley Bank
-------------------
(Name)
3003 Tasman Drive
-------------------
Santa Clara, CA 95054
---------------------
(Address)
4. 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.
------------------------------------
Douglas Turley
- --------------------
(Date)
7
<PAGE> 8
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:
Issue Date:
Class of Security Issuable:
Exercise Price per Share:
Number of Shares Issuable:
Procedure for Exercise:
Please contact [name of contract 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> 9
EXHIBIT A
Anti-Dilution Provisions
(For Common Stock Warrants Where Exercise Price Equals
Price of Preferred Stock Which Has Anti-Dilution Protection)
------------------------------------------------------------
In the event of the issuance (a "Diluting Issuance") by the Company,
after the Issue Date of the Warrant, of securities at a price per share less
than the then conversion price of the Company's Series __ Preferred Stock, then
the number of Shares issuable upon exercise of the Warrant shall be adjusted as
a result of Diluting Issuances in the same proportion as the number of shares
of common stock issuable upon conversion of the Company's Series __ Preferred
Stock (the "Preferred Stock") are adjusted pursuant to those provisions (the
"Provisions") of the Company's Articles (Certificate) of Incorporation which
adjust the conversion price of the Preferred Stock in the event of Diluting
Issuances.
The Company agrees that the Provisions, as in effect on the Issue Date,
shall be deemed to remain in full force and effect during the term of the
Warrant notwithstanding (a) any subsequent amendment, waiver or termination
thereof by the Company's shareholders or (b) the conversion of the Preferred
Stock.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
9
<PAGE> 10
EXHIBIT A
---------
Anti-Dilution Provisions
(For Preferred Stock Warrants With Existing Anti-Dilution Protection)
---------------------------------------------------------------------
In the event of the issuance (a "Diluting Issuance") by the Company,
after the Issue Date of the Warrant, of securities at a price per share less
than the Warrant Price, then the number of shares of common stock issuable upon
conversion of the Shares shall be adjusted in accordance with those provisions
(the "Provisions") of the Company's Articles (Certificate) of Incorporation
which apply to Diluting Issuances.
The Company agrees that the Provisions, as in effect on the Issue Date,
shall be deemed to remain in full force and effect during the term of the
Warrant notwithstanding any subsequent amendment, waiver or termination thereof
by the Company's shareholders.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
9
<PAGE> 11
EXHIBIT A
Anti-Dilution Provisions
(For Preferred Stock or Common Stock Warrants Where
Anti-Dilution Protection is Inadequate or Non-existent)
In the event of the issuance (a "Diluting Issuance") by the Company,
after the Issue Date of the Warrant, of securities at a price per share less
than the Warrant Price, or, if the Shares are common stock, less than the then
conversion price of the Company's Series __ Preferred Stock, then the number of
shares of common stock issuable upon conversion of the Shares, or if the Shares
are common stock, the number of Shares issuable upon exercise of the Warrant,
shall be adjusted as a result of Diluting Issuances in accordance with the
Holder's standard form of Anti-Dilution Agreement in effect on the Issue Date.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
9
<PAGE> 12
EXHIBIT B
REGISTRATION RIGHTS
The Shares (if common stock), or the common stock issuable upon
conversion of the Shares, shall be deemed "registrable securities" or otherwise
entitled to "piggy back" registration rights in accordance with the terms of
the following agreement (the "Agreement") between the Company and its
investor(s):
---------------------------------------------------------------
[Identify Agreement by Date, title and parties. If no Agreement
exists, indicate by "none".]
The Company agrees that no amendments will be made to the Agreement
which would have an adverse impact on Holder's registration rights thereunder
without the consent of Holder. By acceptance of the Warrant to which this
Exhibit B is attached, Holder shall be deemed to be a party to the Agreement.
If no Agreement exists, then the Company and the Holder shall enter
into Holder's standard form of Registration Rights Agreement as in effect on
the Issue Date of the Warrant.
10
<PAGE> 1
EXHIBIT 10.35
CONSENT AND AMENDMENT NUMBER TWO TO
LOAN AND SECURITY AGREEMENT
---------------------------
THIS CONSENT AND AMENDMENT NUMBER TWO TO LOAN AND SECURITY
AGREEMENT (this "Amendment") is entered into as of June 5, 1997 (but effective
only in accordance with the terms and conditions of Section 4 of this
Amendment), by and between MADELEINE L.L.C., a New York limited liability
company ("Lender"), and GRAPHIX ZONE, INC., a Delaware corporation ("Borrower"),
with reference to the following facts:
A. Lender and Borrower heretofore have entered into that certain
Loan and Security Agreement, dated as of January 31, 1997, as
amended by that certain Consent to Inscape and Trimark
Acquisitions and Amendment Number One to Loan and Security
Agreement, dated as of March 5, 1997 (as amended, the "Loan
Agreement");
B. Borrower has requested that Lender (i) amend the Loan
Agreement to provide for an additional term loan facility in
the amount of $1,250,000, (ii) waive those certain Events of
Default (the "Existing Events of Default") identified on (y)
that certain letter, dated May 14, 1997, from Borrower to
Lender, and (z) that certain update to such letter (both the
letter and the update are attached hereto as Exhibit A and
collectively shall be referred to as the "Notification
Letter"); and (iii) waive those certain exceptions to the
representations and warranties contained in the Loan Documents
as more particularly set forth in Schedule A attached hereto
the "Exceptions").
C. Borrower also has requested that Lender consent to the
following transactions being contemplated by Borrower: (i) the
proposed merger (such merger currently the subject of
preliminary discussions and not currently being subject to a
letter of intent or any other oral or written agreement to
which Borrower is a party) of a privately held company, which
confidentially has been identified to Lender and whose
identity is the subject of a letter previously delivered by
Borrower to Lender, with and into Borrower in exchange for the
issuance of securities of Borrower entitling the shareholders
of the acquired company to acquire approximately 30% of the
outstanding equity of Borrower on a fully-diluted basis, after
giving effect to the transactions contemplated in the Loan
Agreement, this Amendment, Warrant #1, Warrant #2, and Warrant
#3 (the "Proposed Merger"); (ii) the exchange of all of the
issued and outstanding shares of Series B Convertible
Preferred Stock of Borrower (the "Series B Stock") for shares
of Series D Convertible Preferred Stock of Borrower (the
"Series D Stock") which shall possess substantially the same
rights and be subject to substantially the same obligations of
the Series B Stock, except that the Series D Stock may not be
<PAGE> 2
converted at a conversion price below $1.00 per share during
the initial 3 year period that such shares are outstanding, or
$0.75 per share after such initial 3 year period if the
conversion price of the Series B Stock does not exceed $1.00
per share during such initial 3 year period (the "Series B
Stock Exchange Transaction"); (iii) the amendment of certain
rights and obligations of the Series C Convertible Preferred
Stock of Borrower (the "Series C Stock") to reduce the
conversion rate of the Series C Stock from $3.375 to $1.00 per
share and to delete the mandatory redemption provisions
applicable to the Series C Stock, which amendment may be
accomplished in the sole discretion of Borrower by either (x)
amending the Certificate of Designations of Series C
Convertible Preferred Stock of Borrower or (y) exchanging all
of the issued and outstanding shares of Series C Stock for
shares of a new series of preferred stock of Borrower which
shall possess substantially the same rights and be subject to
substantially the same obligations of the Series C Stock,
except as otherwise set forth in this subparagraph (iii) (the
"Series C Stock Exchange Transaction"); (iv) in connection
with the Series C Stock Exchange Transaction, the amendment of
that certain Asset Purchase Agreement, dated as of February
24, 1997, by and among Borrower, Inscape, and Warner Music
Group, Inc. to delete from the definition of "Acquired Assets"
contained therein all right, title, and interest in and to the
product "The KGB Files" and all agreements and intellectual
property related thereto (the "Inscape Amendment"); and (v)
the cancellation of the outstanding Indebtedness of Borrower
(other than Indebtedness related to the Executive Loan
Agreement and the Loan Agreement as amended by this Amendment)
identified on Schedule B attached hereto, in exchange for the
payment to each of the holders of such Indebtedness of cash in
an amount less than the aggregate amount of each such holder's
Indebtedness and shares of common Stock of Borrower to be
issued at a price equal to the fair market value of such
shares at the time of issuance for any remaining portion of
each such holder's Indebtedness (the "Creditor Exchange
Transaction").
D. Lender is willing to so amend the Loan Agreement and to
provide such waivers and consents in accordance with the terms
and conditions hereof; and
E. All capitalized terms used but not defined herein shall have
the meanings ascribed to them in the Loan Agreement, as
amended hereby.
NOW, THEREFORE, in consideration of the above recitals and the
mutual premises contained herein, Lender and Borrower hereby agree as follows:
-2-
<PAGE> 3
1. Amendments to the Loan Agreement.
---------------------------------
a. Section 1.1 of the Loan Agreement hereby is
amended by adding the following defined terms in alphabetical order:
"Creditor Exchange Transaction" has the meaning set forth in
the recitals to the Second Amendment.
"Executive" means David Hirschhorn, an individual.
"Executive Intercreditor Agreement" means an intercreditor
agreement executed and delivered by Executive and Lender in form and substance
satisfactory to Lender in its sole discretion.
"Executive Loan Agreement" means that certain Loan and
Security Agreement executed and delivered by Executive and Borrower, in respect
of a loan by Executive to Borrower in the principal amount of $250,000, which
loan shall be pari-passu with Term Loan #2 on a pro rata basis.
"Executive Loan Documents" means the Executive Loan Agreement,
Warrant #3, and any and all other agreements, instruments, and documents
executed and delivered by Executive and/or Borrower in respect of the
transactions contemplated by the Executive Loan Agreement, each of which
documents shall be in form and substance satisfactory to Lender in its sole
discretion.
"Exceptions" has the meaning set forth in the recitals to the
Second Amendment.
"Liquidity" means unrestricted cash and cash equivalents.
"Notification Letter" has the meaning set forth in the
recitals to the Second Amendment.
"Proposed Merger" has the meaning set forth in the recitals to
the Second Amendment.
"Second Amendment" means that certain Consent and Amendment
Number Two to Loan and Security Agreement, dated as of June 5, 1997,
between Lender and Borrower.
"Second Amendment Closing Date" means the date of the funding
of Term Loan #2.
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"Second Amendment Closing Fee" has the meaning set forth in
Section 2.8(d).
"Series B Stock" has the meaning set forth in the recitals to
the Second Amendment.
"Series C Stock" has the meaning set forth in the recitals to
the Second Amendment.
"Series D Stock" has the meaning set forth in the recitals to
the Second Amendment.
"Series B Stock Exchange Transaction" has the meaning set
forth in the recitals to the Second Amendment.
"Series C Stock Exchange Transaction" has the meaning set
forth in the recitals to the Second Amendment.
"Servicing Fee" has the meaning set forth in Section 2.8(c).
"Term Loan #1" has the meaning set forth in Section 2.1(a).
"Term Loan #2" has the meaning set forth in Section 2.1(b).
"Warrant #1" means those certain common Stock purchase
warrants issued and delivered to Lender by Borrower on the Closing Date
for the purchase of 300,000 shares of Borrower's common Stock, $0.01
par value, having the powers, preferences, and rights, and the
qualifications, limitations, or restrictions set forth in Borrower's
Governing Documents.
"Warrant #2" means those certain common Stock purchase
warrants issued and delivered to Lender by Borrower, in form and
substance satisfactory to Lender, on the Second Amendment Closing Date
for the purchase of shares of Borrower's common Stock, $0.01 par value,
having the powers, preferences, and rights, and the qualifications,
limitations, or restrictions set forth in Borrower's Governing
Documents, as amended, modified, or supplemented to the Second
Amendment Closing Date.
"Warrant #3" means those certain common Stock purchase
warrants issued and delivered to Executive by Borrower in connection
with the Executive Loan Agreement, in form and substance satisfactory
to Executive and Lender, on the date of the Executive Loan Agreement
for the purchase of shares of Borrower's common Stock, $0.01 par value,
having the powers, preferences, and rights, and the
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<PAGE> 5
qualifications, limitations, or restrictions set forth in Borrower's
Governing Documents, as amended, modified, or supplemented to the date
thereof.
b. The definition of "Loan Documents" contained in Section 1.1
of the Loan Agreement hereby is amended by adding the defined term "Second
Amendment."
c. The definition of "Permitted Liens" contained in Section
1.1 of the Loan Agreement hereby is amended by adding the following text at the
end of such definition:
(k) Liens granted to Executive so long as the Executive
Intercreditor Agreement is in full force and effect.
d. The definition of "Term Loan" contained in Section 1.1 of
the Loan Agreement hereby is deleted in its entirety and the following is
substituted in alphabetical order in lieu thereof:
"Term Loan" means Term Loan #1 and Term Loan #2, individually
and collectively.
e. The defined term "Term Loan" used in the definition of
"Closing Date," and Sections 2.8(a) (Closing Fee) and 3.1 (Conditions Precedent)
of the Loan Agreement shall be deleted and the defined term "Term Loan #1" shall
be substituted in lieu thereof.
f. The defined term "Warrants" shall be deleted in its
entirety and the following is substituted in alphabetical order in lieu thereof:
"Warrants" means Warrant #1 and Warrant #2, individually and
collectively.
g. The defined term "Warrants" used in subsections 3.1(c) and
(r) (Conditions Precedent) of the Loan Agreement hereby is deleted and the
defined term "Warrant #1" is substituted in lieu thereof.
h. Section 2.1 of the Loan Agreement hereby is deleted in its
entirety and the following is substituted in lieu thereof:
2.1 TERM LOAN.
(a) Lender has agreed to make a term loan ("Term Loan #1")
to Borrower on the Closing Date in the original principal amount of (i)
$3,500,000, plus (ii) the amount of the Closing Fee.
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(b) Lender has agreed to make a term loan ("Term Loan #2")
to Borrower on the Second Amendment Closing Date in the original
principal amount of (i) $1,250,000, plus (ii) the amount of the Second
Amendment Closing Fee.
(c) The outstanding principal balance of the Term Loan and all
accrued and unpaid interest under the Term Loan shall be due and payable
upon the termination of this Agreement, whether by its terms, by
prepayment, by acceleration, or otherwise. The unpaid principal balance
of the Term Loan may be prepaid in whole or in part without penalty or
premium at any time during the term of this Agreement upon 30 days prior
written notice by Borrower to Lender. All amounts outstanding under the
Term Loan shall constitute Obligations.
i. Section 2.2(e) of the Loan Agreement hereby is deleted in its
entirety and the following is substituted in lieu thereof:
(e) Application of Proceeds. With respect to mandatory
prepayments described in subsection (a) through (d) above, such
prepayments shall be applied (i) first, in payment of the outstanding
balance of the Term Loan on a pro rata basis until the Term Loan is paid
in full, and (ii) then, in payment of any other Obligations owing by
Borrower to Lender, such payments to be applied to such Obligations by
Lender in its sole discretion.
j. Section 2.8(c) of the Loan Agreement hereby is deleted in its
entirety and the following is substituted in lieu thereof:
(c) Servicing Fee. On the first day of each of April, July,
October, and January during the term of this Agreement, and thereafter
so long as the Obligations are outstanding, a servicing fee (the
"Servicing Fee") in an amount equal to $35,000.
k. Section 2.8 of the Loan Agreement hereby is amended by adding the
following subsection (d) thereto:
(d) Second Amendment Closing Fee. On the Second Amendment
Closing Date, a closing fee (the "Second Amendment Closing Fee") of
$50,000, which fee is in addition to any fees previously paid by
Borrower to Lender and shall be paid by adding the amount thereof to the
balance of Term Loan #2.
l. Section 7.17 of the Loan Agreement hereby is deleted in its
entirety and the following is substituted in lieu thereof:
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7.17 USE OF PROCEEDS. (a) Use the proceeds of Term Loan #1 made
hereunder for any purpose other than (i) on the Closing Date, (y) to repay
(1) in full the outstanding principal, accrued interest, and accrued fees
and expenses owing to Existing Lender and (2) trade payables; provided,
however, that not more than $3,000,000 of the proceeds of Term Loan #1 may
be used to complete the payments under this clause (y), and (z) to pay
transactional costs and expenses incurred in connection with this
Agreement, and (ii) thereafter, consistent with the terms and conditions
hereof, for its lawful and permitted corporate purposes.
(b) Use the proceeds of Term Loan #2 for any purpose other than
(i) on the Second Amendment Closing Date, to pay transactional costs and
expenses incurred in connection with the Second Amendment, and (ii)
thereafter, consistent with the terms and conditions hereof, for its lawful
and permitted corporate purposes.
m. Section 7.20 of the Loan Agreement hereby is amended by adding
following thereto:
(d) Liquidity. Liquidity, at all times, of at least $250,000
after giving effect to the repayment of Indebtedness made by Borrower in
connection with the Creditor Exchange Transaction.
2. Waivers and Consents.
---------------------
a. Lender hereby (i) waives the Existing Events of Default and the
Exceptions, and (ii) agrees to forbear until the earlier of (y) such time as
Borrower shall have completed its restructuring, and (z) 90 days from the Second
Amendment Closing Date from exercising any of its rights, powers, or remedies
under the Loan Agreement in respect of any Event of Default caused by (1)
Borrower's failure to maintain the covenants set forth in Section 7.20 of the
Loan Agreement (other than the covenant contained in subsection 7.20(d)
thereof), and (2) Borrower's insolvency, unless and until an Insolvency
Proceeding as described in Sections 8.5 or 8.6 of the Loan Agreement is
commenced by any Person other than Lender.
b. Lender hereby consents to the Proposed Merger, the Series B
Stock Exchange Transaction, the Series C Stock Exchange Transaction, the
Creditor Exchange Transaction, the Inscape Amendment, and the Executive Loan
Agreement (collectively, the "Transactions") and agrees that the consummation of
the Transactions shall be deemed not to cause any Default or Event of Default or
accelerate any rights or remedies under, or otherwise violate the Loan
Agreement, including, but not limited to, with respect to the provisions of
Sections 7.1, 7.3, 7.4, or 7.9 of the Loan Agreement, or any other applicable
provision of the Loan Agreement as amended by this Agreement, and any other Loan
Document; provided, however, that the foregoing consent and agreement
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<PAGE> 8
with respect to the Creditor Exchange Transaction shall be subject to the
satisfaction of the covenant contained in subsection 7.20(d) of the Loan
Agreement.
c. Lender hereby (i) consents to Borrower doing business under
the name "Ignite" and "Ignite Media" and any variations thereof and (ii)
acknowledges that the use of such names by Borrower shall not constitute a
breach of the provisions of Section 7.5 of the Loan Agreement.
3. Representations and Warranties. Borrower hereby represents and
warrants to Lender that (a) the execution, delivery, and performance of
this Amendment and of the Loan Agreement, as amended by this Amendment, are
within its corporate powers, have been duly authorized by all necessary
corporate action, and are not in contravention of any law, rule, or
regulation, or any order, judgment, decree, writ, injunction, or award of
any arbitrator, court, or governmental authority, or of the terms of its
charter or bylaws, or of any contract or undertaking to which it is a party
or by which any of its properties may be bound or affected, and (b) this
Amendment and the Loan Agreement, as amended by this Amendment, constitute
Borrower's legal, valid, and binding obligation, enforceable against
Borrower in accordance with its terms.
4. Conditions Precedent to the Effectiveness of this Amendment. The
effectiveness of this Amendment is subject to the fulfillment, to the
satisfaction of Lender and its counsel, of each of the following
conditions:
a. Lender shall have received Warrant #2 duly executed and in full
force and effect;
b. Lender shall have received a certificate from the Secretary of
Borrower attesting to (i) the resolutions of Borrower's Board of Directors
authorizing its execution, delivery, and performance of this Amendment and
Warrant #2 and authorizing specific officers to execute the same, and (ii)
Borrower's Governing Documents, as amended, modified, or supplemented to
the Second Amendment Closing Date;
c. Mr. Kevin Genda shall have been nominated for the position of
director of Borrower;
d. Except as set forth in the Exceptions, the representations and
warranties in this Amendment, the Loan Agreement as amended by this
Amendment, and the other Loan Documents shall be true and correct in all
respects on and as of the date hereof, as though made on such date (except
to the extent that such representations and warranties relate solely to an
earlier date);
e. Except as set forth in the Exceptions and the Notification
Letter, no Event of Default or event which with the giving of notice or
passage of time would
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<PAGE> 9
constitute an Event of Default shall have occurred and be continuing on the
date hereof, nor shall result from the consummation of the transactions
contemplated herein;
f. No injunction, writ, restraining order, or other order of any
nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated herein shall have been issued and remain in force
by any governmental authority against Borrower, Lender, or any of their
Affiliates; and
g. Except as set forth in the Exceptions and the Notification
Letter, no material adverse change in the financial condition of Borrower
or in the value of the Collateral shall have occurred since March 31, 1997.
5. Conditions Subsequent. As conditions subsequent to the making of
Term Loan #2 on the Second Amendment Closing Date, Borrower shall perform
or cause to be performed the following (the failure by Borrower to so
perform or cause to be performed constituting an Event of Default under the
Loan Agreement):
a. Within 10 days of the Second Amendment Closing Date, Lender
shall have received Collateral Access Agreements in respect of any new
facilities occupied by Borrower subsequent to and in connection with the
consummation of the acquisition of certain assets of Inscape and Trimark
Interactive, Inc. by Borrower;
b. Within 15 days of the Second Amendment Closing Date, Lender
shall have received (i) fully executed copies of the Executive Loan
Documents, each certified by the Secretary of Borrower as being true,
correct, and complete, and (ii) a fully executed original of the Executive
Intercreditor Agreement; and
c. Within 5 days of the Second Amendment Closing Date, Lender
shall have received UCC-1 Financing Statements in regard to the additional
locations of Inventory listed on Schedule A attached hereto.
6. Effect on Loan Agreement. The Loan Agreement, as amended hereby,
shall be and remain in full force and effect in accordance with its
respective terms and hereby is ratified and confirmed in all respects. The
execution, delivery, and performance of this Amendment shall not operate as
a waiver of or, except as expressly set forth herein, as an amendment, of
any right, power, or remedy of Lender under the Loan Agreement, as in
effect prior to the date hereof.
7. Further Assurances. Borrower shall execute and deliver all
agreements, documents, and instruments, in form and substance satisfactory
to Lender, and take all actions as Lender may reasonably request from time
to time, to perfect and maintain the perfection and priority of Lender's
security interests in the Collateral and to
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<PAGE> 10
fully consummate the transactions contemplated under this Amendment and the
Loan Agreement, as amended by this Amendment.
8. Miscellaneous.
--------------
a. Upon the effectiveness of this Amendment, each reference in
the Loan Agreement to "this Agreement", "hereunder", "herein", "hereof", or
words of like import referring to the Loan Agreement shall mean and refer
to the Loan Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in
the Loan Documents to the "Loan Agreement", "thereunder", "therein",
"thereof" or words of like import referring to the Loan Agreement shall
mean and refer to the Loan Agreement as amended by this Amendment.
c. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York.
d. This Amendment may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument
and any of the parties hereto may execute this Amendment by signing any
such counterpart.
[Remainder of page intentionally left blank]
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first written above.
MADELEINE L.L.C.,
a New York limited liability company
By: /s/ KEVIN P. GENDA
--------------------------------------
Title: Kevin P. Genda, Attorney-in-Fact
GRAPHIX ZONE, INC.,
a Delaware corporation
By: /s/ DAVID J. HIRSCHHORN
--------------------------------------
Title: President and Chief Executive Officer
--------------------------------------
S-1
<PAGE> 1
EXHIBIT 10.37
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED,
(iii) RECEIPT OF A NO-ACTION LETTER(S) FROM THE APPROPRIATE
GOVERNMENTAL AUTHORITY(IES), OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
GRAPHIX ZONE, INC.
------------------
WARRANT TO PURCHASE SHARES
OF COMMON STOCK (this "Warrant")
GRAPHIX ZONE, INC., a Delaware corporation (the "Company"), hereby
certifies that, for value received, Madeleine L.L.C., a New York limited
liability company ("Madeleine"), or registered assigns, is the registered holder
of warrants (the "Warrants") to subscribe for and purchase the Initial Amount
(as defined below) of shares of the fully paid and nonassessable Common Stock
(as adjusted pursuant to the second paragraph hereof and Section 4 hereof, the
"Shares") of the Company, at the price equal to the lowest of (i) $0.2366 per
share, (ii) the lower of (a) the fair market value of the Common Stock as
determined pursuant to Section 4 hereof or (b) $1.00 per share, as of the
effective date (the "S-4 Date") of the Company's filing of a registration
statement on Form S-4, or such other form, if in connection with a merger or
consolidation involving the Company, with the Securities and Exchange Commission
(the "Filing Event"), or (iii) the fair market value of the Common Stock as
determined pursuant to Section 4 hereof as of the date the Warrants are
exercised (or converted pursuant to Section 10.3(b) hereof) (such price and such
other price as shall result, from time to time, from the adjustments specified
in Section 4 hereof is herein referred to as the "Warrant Price"), subject to
the provisions and upon the terms and conditions hereinafter set forth. As used
herein, (a) the term "Common Stock" shall mean the Company's presently
authorized Common Stock, $0.01 par value per share, and any stock into or for
which such Common Stock may hereafter be converted or exchanged, (b) the term
"Date of Grant" shall mean June 5, 1997, (c) the term "Warrant Percentage" shall
mean the quotient of 1,250,000 divided by 1,500,000, (d) the term "Other
Warrants" shall mean any warrant issued upon transfer or partial exercise of
this Warrant, and (e) the term "Warrant #3" shall have the meaning of such term
as set forth in the Amendment (defined below) and shall be deemed to include any
warrant issued upon transfer or partial exercise of Warrant #3. The terms
"Warrant" and "this Warrant" as used herein shall be deemed to include Other
Warrants, and the term "Shares" shall be deemed to include shares of the Common
Stock of the Company to be issued upon exercise of Other Warrants, unless the
context hereof or thereof clearly requires otherwise. Solely for the purposes of
Section 9 hereof, the terms "Warrant" and "this Warrant" shall also be deemed to
<PAGE> 2
include Warrant #3 and the term "Shares" shall also be deemed to include shares
of the Common Stock of the Company to be issued upon exercise of Warrant #3,
unless the context hereof or thereof clearly requires otherwise.
As of the Date of Grant, the "Initial Amount" shall be an amount equal
to such number of shares of Common Stock as would, if issued on the Date of
Grant, equal the Warrant Percentage multiplied by product of (i) the quotient of
thirty percent (30%) divided by seventy percent (70%) and (ii) the outstanding
Common Stock of the Company immediately prior to such issuance (calculated on a
fully diluted basis as described below). If the Company, during the ninety (90)
day period beginning on the Date of Grant (the "Restructuring Period"), effects
the Series B Stock Exchange Transaction or Series C Stock Exchange Transaction,
as such terms are defined in that certain Consent and Amendment Number Two to
Loan and Security Agreement (the "Amendment") entered into as of June 5, 1997 by
and between Madeleine and the Company, or the stock option and warrant reduction
plan of the Company (by which certain stock options and warrants of the Company
set forth on Exhibit B hereto will be exchanged for other securities of the
Company), (each, a "Transaction"), whereby the outstanding Common Stock of the
Company (calculated on a fully diluted basis) decreases in connection with such
a Transaction (net of any increases pursuant to such Transaction), then the
number of Shares to be issued upon exercise or conversion of this Warrant shall
be decreased by an amount equal to such number of shares of Common Stock (the
"Decreased Amount") as would equal the Warrant Percentage multiplied by the
product of (i) the amount by which the number of shares of outstanding Common
Stock of the Company (calculated on a fully diluted basis) are reduced as a
result of the Transaction (net of any increases pursuant to such Transaction and
without regard to the corresponding reduction in the number of (A) Shares for
which the Warrant is exercisable and (B) shares of Common Stock for which
Warrant #3 is exercisable) and (ii) the quotient of thirty percent (30%) divided
by seventy percent (70%). For all purposes of this paragraph, when determining
the number of outstanding shares of Common Stock calculated on a fully diluted
basis, the maximum number of shares of Common Stock which a holder of any
rights, options, warrants or convertible or exchangeable securities shall be
entitled to subscribe for or purchase shall be deemed to be issued and
outstanding excluding the number of Shares for which the Warrant is exercisable.
Adjustments described in this paragraph shall be made successively. Section 1 of
this Warrant notwithstanding, this Warrant may not be exercised, in whole or
part, during the Restructuring Period. Any adjustment, pursuant to the terms of
this paragraph, to the number of Shares to be issued upon exercise or conversion
of the Warrant are to be made in addition to any adjustments to such number of
Shares as are required pursuant to, and in the order described in, Section 4
hereof.
1. Term. The purchase right represented by this Warrant is exercisable,
in whole or in part, at any time and from time to time from the Date of Grant
through and including the third anniversary thereof.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, by
the surrender of this Warrant (with the notice of exercise form attached hereto
as Exhibit A duly executed) at the principal office of the Company and by the
payment to the Company of an amount equal to the then applicable Warrant
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<PAGE> 3
Price multiplied by the number of Shares then being purchased. The person or
persons in whose name(s) any certificate(s) representing shares of Common Stock
shall be issuable upon exercise of this Warrant shall be deemed to have become
the holder(s) of record of, and shall be treated for all purposes as the record
holder(s) of, the shares represented thereby (and such shares shall be deemed to
have been issued) immediately prior to the close of business on the date or
dates upon which this Warrant is exercised. In the event of any exercise of the
rights represented by this Warrant, certificates for the shares of stock so
purchased shall be delivered to the holder hereof as soon as possible and in any
event within thirty (30) days after such exercise and, unless this Warrant has
been fully exercised or expired, a new Warrant representing the portion of the
Shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be issued to the holder hereof as soon as possible and in
any event within such thirty-day period.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from all taxes, liens, charges, and pre-emptive rights
with respect to the issue thereof. The Company shall pay all transfer taxes, if
any, attributable to the issuance of Shares upon the exercise of the Warrants.
During the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of the issue upon exercise of the purchase rights evidenced by this
Warrant, a sufficient number of shares of its Common Stock to provide for the
exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and
kind of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
a. Reclassification or Merger. In case of any
reclassification, change or conversion of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any merger of the Company with or into another
corporation (other than a merger with another corporation in which the Company
is the acquiring and the surviving corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant), or in case of any sale of all or substantially all of the assets
of the Company, the Company, or such successor or purchasing corporation, as the
case may be, shall duly execute and deliver to the holder of this Warrant a new
Warrant (in form and substance satisfactory to the holder of this Warrant), so
that the holder of this Warrant shall have the right to receive, at a total
purchase price not to exceed that payable or to be payable upon the exercise of
the unexercised portion of this Warrant, and in lieu of the shares of Common
Stock theretofore issuable upon exercise of the unexercised portion of this
Warrant, the kind and amount of shares of stock, other securities, money and
property receivable upon such reclassification, change or merger by a holder of
the number of shares of Common Stock then purchasable under this Warrant. Such
new Warrant shall provide for adjustments that shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 4. The
provisions of this subparagraph (a) shall similarly apply to successive
reclassifications, changes, mergers and transfers.
3
<PAGE> 4
b. Subdivision or Combination of Shares. If the Company at any
time while this Warrant remains outstanding and unexpired shall subdivide or
combine its outstanding shares of Common Stock, the Warrant Price shall be
proportionately decreased in the case of a subdivision or increased in the case
of a combination, effective at the close of business on the date the subdivision
or combination becomes effective.
c. Stock Dividends and Other Distributions. If the Company at
any time while this Warrant is outstanding and unexpired shall (i) pay a
dividend with respect to Common Stock payable in Common Stock, or (ii) make any
other distribution with respect to Common Stock (except any distribution
specifically provided for in the foregoing sub-paragraphs (a) and (b)) of Common
Stock, then the Warrant Price shall be adjusted, from and after the date of
determination of shareholders entitled to receive such dividend or distribution,
to that price determined by multiplying the Warrant Price in effect immediately
prior to such date of determination by a fraction (i) the numerator of which
shall be the total number of shares of Common Stock outstanding immediately
prior to such dividend or distribution, and (ii) the denominator of which shall
be the total number of shares of Common Stock outstanding immediately after such
dividend or distribution.
d. Rights Offerings. In case the Company shall issue rights,
options or warrants to any person or persons who are at the time of such
issuance the holders of equity securities of the Company, entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible or
exchangeable into Common Stock) at a price per share of Common Stock (or having
a conversion or exchange price per share of Common Stock if a security
convertible or exchangeable into Common Stock) less than the fair market value
per share of Common Stock on the record date for such issuance (or the date of
issuance, if there is no record date), the Warrant Price to be in effect on and
after such record date (or issuance date, as the case may be) shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date (or issuance date, as the case may be) by a fraction (i) the
numerator of which shall be the number of shares of Common Stock outstanding on
such record date (or issuance date, as the case may be) plus the number of
shares of Common Stock which the aggregate offering price of the total number of
shares of such Common Stock so to be offered (or the aggregate initial exchange
or conversion price of the exchangeable or convertible securities so to be
offered) would purchase at such fair market value on such record date (or
issuance date, as the case may be) and (ii) the denominator of which shall be
the number of shares of Common Stock outstanding on such record date (or
issuance date, as the case may be) plus the number of additional shares of
Common Stock to be offered for subscription or purchase (or into which the
convertible securities to be offered are initially exchangeable or convertible).
In case such subscription price may be paid in part or in whole in a form other
than cash, the fair value of such consideration shall be determined by the Board
of Directors of the Company in good faith as set forth in a duly adopted board
resolution certified by the Company's Secretary or Assistant Secretary. Such
adjustment shall be made successively whenever such an issuance occurs; and in
the event that such rights, options, warrants, or convertible or exchangeable
securities are not so issued or expire or cease to be convertible or
exchangeable before they are exercised, converted, or exchanged (as the case may
be), then the Warrant Price shall again be adjusted to be the Warrant Price that
would then be in effect if such issuance had
4
<PAGE> 5
not occurred, but such subsequent adjustment shall not affect the number of
Shares issued upon any exercise of Warrants prior to the date such subsequent
adjustment is made.
e. Special Distributions. In case the Company shall fix a
record date for the making of a distribution to all holders of shares of Common
Stock (including any such distribution made in connection with a consolidation
or merger in which the Company is the surviving corporation) of evidences of
indebtedness or assets (other than dividends and distributions referred to in
subparagraphs (b) and (c) above and other than cash dividends) or of
subscription rights, options, warrants, or exchangeable or convertible
securities containing the right to subscribe for or purchase shares of any class
of equity securities of the Company (excluding those referred to in subparagraph
(d) above), the Warrant Price to be in effect on and after such record date
shall be adjusted by multiplying the Warrant Price in effect immediately prior
to such record date by a fraction (i) the numerator of which shall be the fair
market value per share of Common Stock on such record date, less the fair value
(as determined by the Board of Directors of the Company in good faith as set
forth in a duly adopted board resolution certified by the Company's Secretary or
Assistant Secretary) of the portion of the assets or evidences of indebtedness
so to be distributed or of such subscription rights, options, warrants, or
exchangeable or convertible securities applicable to one (1) share of the Common
Stock outstanding as of such record date, and (ii) the denominator of which
shall be such fair market value per share of Common Stock. Such adjustment shall
be made successively whenever such a record date is fixed; and in the event that
such distribution is not so made, the Warrant Price shall again be adjusted to
be the Warrant Price which would then be in effect if such record date had not
been fixed, but such subsequent adjustment shall not affect the number of Shares
issued upon any exercise of Warrants prior to the date such subsequent
adjustment was made.
f. Other Issuances of Securities. In case the Company or any
subsidiary shall issue shares of Common Stock, or rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock (excluding (i) shares, rights, options,
warrants, or convertible or exchangeable securities described in subparagraphs
(f) or (g) of Section 11 hereof or issued in any of the transactions described
in subparagraphs (b), (c), (d) or (e) above, (ii) shares issued upon the
exercise of such rights, options or warrants or upon conversion or exchange of
such convertible or exchangeable securities, and (iii) the Warrants, Warrant #3
and any shares issued upon exercise thereof), at a price per share of Common
Stock (determined in the case of such rights, options, warrants, or convertible
or exchangeable securities by dividing (x) the total amount receivable by the
Company in consideration of the sale and issuance of such rights, options,
warrants, or convertible or exchangeable securities, plus the total minimum
consideration payable to the Company upon exercise, conversion, or exchange
thereof by (y) the total maximum number of shares of Common Stock covered by
such rights, options, warrants, or convertible or exchangeable securities) lower
than the fair market value per share of Common Stock on the date the Company
fixes the offering price of such shares, rights, options, warrants, or
convertible or exchangeable securities, then the Warrant Price shall be adjusted
so that it shall equal the price determined by multiplying the Warrant Price in
effect immediately prior thereto by a fraction (i) the numerator of which shall
be the sum of (A) the number of shares of Common Stock outstanding immediately
prior to such sale and issuance plus (B) the number of shares of Common Stock
which the aggregate consideration received (determined as provided below) for
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<PAGE> 6
such sale or issuance would purchase at such fair market value per share, and
(ii) the denominator of which shall be the total number of shares of Common
Stock outstanding immediately after such sale and issuance. Such adjustment
shall be made successively whenever such an issuance is made. For the purposes
of such adjustment, the maximum number of shares of Common Stock which the
holder of any such rights, options, warrants or convertible or exchangeable
securities shall be entitled to subscribe for or purchase shall be deemed to be
issued and outstanding as of the date of such sale and issuance and the
consideration received by the Company therefor shall be deemed to be the
consideration received by the Company for such rights, options, warrants, or
convertible or exchangeable securities, plus the minimum consideration or
premium stated in such rights, options, warrants, or convertible or exchangeable
securities to be paid for the shares of Common Stock covered thereby. In case
the Company shall sell and issue shares of Common Stock, or rights, options,
warrants, or convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock for a consideration consisting,
in whole or in part, of property other than cash or its equivalent, then in
determining the price per share of Common Stock and the consideration received
by the Company for purposes of the first sentence of this subparagraph (f), the
Board of Directors of the Company shall determine, in good faith, the fair value
of said property, and such determination shall be described in a duly adopted
board resolution certified by the Company's Secretary or Assistant Secretary. In
case the Company shall sell and issue rights, options, warrants, or convertible
or exchangeable securities containing the right to subscribe for or purchase
shares of Common Stock together with one or more other securities as a part of a
unit at a price per unit, then in determining the price per share of Common
Stock and the consideration received by the Company for purposes of the first
sentence of this subparagraph (f), the Board of Directors of the Company shall
determine, in good faith, which determination shall be described in a duly
adopted board resolution certified by the Company's Secretary or Assistant
Secretary, the fair value of the rights, options, warrants, or convertible or
exchangeable securities then being sold as part of such unit. Such adjustment
shall be made successively whenever such an issuance occurs, and in the event
that such rights, options, warrants, or convertible or exchangeable securities
expire or cease to be convertible or exchangeable before they are exercised,
converted, or exchanged (as the case may be), then the Warrant Price shall again
be adjusted to the Warrant Price that would then be in effect if such sale and
issuance had not occurred, but such subsequent adjustment shall not affect the
number of Shares issued upon any exercise of Warrants prior to the date such
subsequent adjustment is made.
g. Adjustment of Number of Shares; Exception to Warrant Price
Adjustment; Calculations for Complex Transactions. Upon each adjustment pursuant
to this Section 4 (but other than pursuant to Section 4(a) hereof) that would
represent an adjustment in the Basis (i) Warrant Price (defined below), the
number of Shares of Common Stock purchasable upon exercise of the Warrant shall
be adjusted, to the nearest whole share, to the product obtained by multiplying
the number of Shares purchasable immediately prior to such adjustment in the
Basis (i) Warrant Price by a fraction, the numerator of which shall be the Basis
(i) Warrant Price immediately prior to such adjustment and the denominator of
which shall be the Basis (i) Warrant Price immediately thereafter. The "Basis
(i) Warrant Price" shall mean the Warrant Price calculated by using the basis
for determining same set forth in clause (i) of the first paragraph of this
Warrant (as adjusted pursuant to this Section 4), as if such basis were the
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<PAGE> 7
only basis for determining the Warrant Price. For the purposes of this Section
4, the adjustments to the Warrant Price set forth herein shall not apply to or
be made with respect to (i) the second alternative basis for determining the
Warrant Price as set forth in the first paragraph of this Warrant (the lower of
$1.00 per share or the fair market value of the Common Stock as of the S-4 Date)
with respect to the period prior to the Filing Event, or (ii) the third
alternative basis for determining the Warrant Price as set forth in such
paragraph (the fair market value of the Common Stock as of the date the Warrants
are exercised or converted) with respect to the period prior to the date of such
exercise or conversion. In the event an adjustment or adjustments to the number
of Shares for which this Warrant is exercisable and/or the Warrant Price
(including the Basis (i) Warrant Price) pursuant to this Section 4 would occur
simultaneously with an adjustment or adjustments to the number of Shares for
which this Warrant is exercisable pursuant to the second paragraph of this
Warrant, calculations (including without limitation pursuant to the following
sentence) and adjustments pursuant to this Section 4 shall be made first and
without taking into account adjustments to be made pursuant to such second
paragraph, which second paragraph adjustments shall then subsequently be made.
In determining whether an adjustment to the Warrant Price (including the Basis
(i) Warrant Price) will be made, or in calculating the amount of same, in the
event an increase in the outstanding Common Stock of the Company (calculated on
a fully diluted basis if so described herein) occurs simultaneously with a
decrease in same, such decrease shall be taken into account when determining,
and reflected in, the number of shares of Common Stock outstanding immediately
prior to the increasing issuance, dividend or distribution, notwithstanding the
actual time of such decrease.
h. Determination of Fair Market Value. For purposes of this
Section 4 and for determining the Warrant Price of this Warrant, "fair market
value" of a share of Common Stock as of a particular date (the "Determination
Date") shall mean (i) if shares of Common Stock are traded as a national
securities exchange (an "Exchange"), the average of the closing prices of a
share of the Common Stock of the Company on the last seven (7) trading days
prior to the Determination Date reported on such Exchange as reported in The
Wall Street Journal, or (ii) if shares of Common Stock are not traded on an
Exchange but trade in the over-the-counter market and such shares are quoted on
the National Association of Securities Dealers Automated Quotations System
("NASDAQ"), (A) the average of the last sale prices reported on NASDAQ or (B) if
such shares are an issue for which last sale prices are not reported on NASDAQ,
the average of the closing bid and ask prices, in each case on the last seven
(7) trading days (or if the relevant price or quotation did not exist on any of
such days, the relevant price or quotation on the next preceding business day on
which there was such a price or quotation) prior to the Determination Date as
reported in The Wall Street Journal.
5. Notice of Adjustments. Whenever the Warrant Price (including a basis
for determining same) or the number of Shares purchasable hereunder shall be
adjusted pursuant to Section 4 hereof, the Company shall make a certificate
signed by its chief financial officer setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated, and the Warrant Price and the number of
Shares purchasable hereunder after giving effect to such adjustment, which shall
be mailed (without regard to Section 13 hereof, by first class mail, postage
prepaid) to the holder of this Warrant.
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<PAGE> 8
6. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor based on the fair market
value (as determined in accordance with Section 4(h) above) of a share of Common
Stock on the date of exercise.
7. Compliance with Securities Act; Disposition of Warrant or Shares of
Common Stock.
a. Compliance with Securities Act. The holder of this Warrant,
by acceptance hereof, agrees that this Warrant, the shares of Common Stock to be
issued upon exercise hereof are being acquired for investment and that such
holder will not offer, sell or otherwise dispose of this Warrant, or any shares
of Common Stock to be issued upon exercise hereof except under circumstances
which will not result in a violation of the Securities Act of 1933, as amended
(the "Act"). Upon exercise of this Warrant, the holder hereof shall confirm in
writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that
the shares of Common Stock so purchased are being acquired for investment and
not with a view toward distribution or resale. This Warrant and all shares of
Common Stock issued upon exercise of this Warrant (unless registered under the
Act) shall be stamped or imprinted with a legend in substantially the following
form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR
THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S)
FROM THE APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (iv) OTHERWISE
COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH
THESE SECURITIES WERE ISSUED DIRECTLY OR INDIRECTLY."
In addition, in connection with the issuance of this Warrant,
the holder specifically represents to the Company by acceptance of this Warrant
as follows:
(1) The holder is aware of the Company's business
affairs and financial condition, and has acquired information about the Company
sufficient to reach an informed and knowledgeable decision to acquire this
Warrant. The holder is acquiring this Warrant for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Act.
(2) The holder understands that this Warrant and the
Shares have not been registered under the Act in reliance upon a specific
exemption therefrom, which exemption depends upon, among other things, the bona
fide nature of the holder's investment intent as expressed herein. In this
connection, the holder understands that, in the view of the Securities and
Exchange Commission (the "SEC"), the statutory basis for such exemption may be
unavailable if the holder's representation was predicated solely upon a present
intention to
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<PAGE> 9
hold the Warrant and the Shares for the minimum capital gains period specified
under applicable tax laws, for a deferred sale, for or until an increase or
decrease in the market price of the Warrant and the Shares, or for a period of
one (1) year or any other fixed period in the future.
(3) The holder further understands that this Warrant
and the Shares must be held indefinitely unless subsequently registered under
the Act and any applicable state securities laws, or unless exemptions from
registration are otherwise available.
(4) The holder is aware of the provisions of Rule 144
and 144A, promulgated under the Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions, if applicable, including,
among other things: the availability of certain public information about the
Company, the resale occurring not less than one (1) year after the party has
purchased and paid for the securities to be sold; the sale being made through a
broker in an unsolicited "broker's transaction" or in transactions directly with
a market maker (as said term is defined under the Securities Exchange Act of
1934, as amended) and the amount of securities being sold during any three-month
period not exceeding the specified limitations stated therein.
(5) The holder further understands that at the time
it wishes to sell this Warrant and the Shares there may be no public market upon
which to make such a sale, and that, even if such a public market then exists,
the Company may not be satisfying the current public information requirements of
Rule 144 and 144A, and that, in such event, the holder may be precluded from
selling this Warrant and the Shares under Rule 144 and 144A even if the one-year
minimum holding period had been satisfied.
(6) The holder further understands that in the event
all of the requirements of Rule 144 and 144A are not satisfied, registration
under the Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 and
144A is not exclusive, the Staff of the SEC has expressed its opinion that
persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 and 144A will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.
b. Disposition of Warrant or Shares. With respect to any
offer, sale or other disposition of this Warrant, or any Shares acquired
pursuant to the exercise of this Warrant prior to registration of such Warrant
or Shares, the holder hereof and each subsequent holder of this Warrant agrees
to give written notice to the Company prior thereto, describing briefly the
manner thereof, together with a written opinion of such holder's counsel, if
reasonably requested by the Company, to the effect that such offer, sale or
other disposition may be effected without registration or qualification (under
the Act as then in effect or any federal or state law then in effect) of this
Warrant or such Shares and indicating whether or not under the Act certificates
for this Warrant or such Shares to be sold or otherwise disposed of require any
restrictive legend as to applicable restrictions on transferability in order to
ensure
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<PAGE> 10
compliance with applicable law. Promptly upon receiving such written notice and
reasonably satisfactory opinion, if so requested, the Company, as promptly as
practicable, shall notify such holder that such holder may sell or otherwise
dispose of this Warrant or such Shares, all in accordance with the terms of the
notice delivered to the Company. If a determination has been made pursuant to
this subsection (b) that the opinion of counsel for the holder is not reasonably
satisfactory to the Company, the Company shall so notify the holder promptly
after such determination has been made. The foregoing notwithstanding, this
Warrant or such Shares may, as to such federal laws, be offered, sold or
otherwise disposed of in accordance with Rule 144 and 144A under the Act,
provided that the Company shall have been furnished with such information as the
Company may reasonably request to provide a reasonable assurance that the
provisions of Rule 144 and 144A have been satisfied. Each certificate
representing this Warrant or the Shares thus transferred (except a transfer
pursuant to Rule 144) shall bear a legend as to the applicable restrictions on
transferability in order to ensure compliance with such laws, unless in the
aforesaid opinion of counsel for the holder, such legend is not required in
order to ensure compliance with such laws. The Company may issue stop transfer
instructions to its transfer agent or, if acting as its own transfer agent, the
Company may stop transfer on its corporate books, in connection with such
restrictions.
8. Rights as Shareholders; Information. No holder of this Warrant, as
such, shall be entitled to vote or receive dividends or be deemed the holder of
Common Stock or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything contained
herein be construed to confer upon the holder of this Warrant, as such, any of
the rights of a shareholder of the Company or any right to vote for the election
of the directors or upon any matter submitted to shareholders at any meeting
thereof, or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been exercised
and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein. The foregoing notwithstanding, the Company will
transmit to the holder of this Warrant such information, documents and reports
as are generally distributed to the holders of any class or series of the
securities of the Company concurrently with the distribution thereof to the
shareholders.
9. Registration Rights.
--------------------
9.1. Demand Registration.
--------------------
a. The Company covenants and agrees that at any time
after receipt of a written request (a "Demand Registration Request") from the
holders of this Warrant and the Other Warrants and/or holders of Shares (this
Warrant, the Other Warrants, and the Shares are referred to herein,
collectively, as the "Securities") (hereinafter, the "Securityholders")
constituting in the first instance, at least fifty percent (50%), and in the
second instance, one hundred percent (100%), of the Securities outstanding on
such date (determined on an as-converted basis) and then eligible for inclusion
in a registration pursuant to this Section 9.1, stating that the Initiating
Securityholders (as defined below) desire and intend to transfer all or a
portion of the Securities held by them under such circumstances (constituting in
the first instance, at least fifty percent (50%), and in the second instance,
one hundred percent (100%) of the aggregate of all such outstanding and eligible
Securities), the Company shall give
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notice (the "Registration Notice") to all of the Securityholders within fifteen
(15) days of the Company's receipt of such registration request, and the Company
shall cause to be included in such requested registration all Securities
requested to be included therein by any such Securityholder within fifteen (15)
days after such Registration Notice is effective (subject to the provisions of
the final sentence of this Section 9.1(a)). After such 15-day period, the
Company shall file as promptly as practicable a registration statement and use
its reasonable best efforts to cause such registration statement to become
effective under the Act and remain effective for one hundred and twenty (120)
days or such shorter period as may be required if all such Securities covered by
such registration statement are sold prior to the expiration of such 120-day
period; provided that the Company shall not be obligated to effect any such
registration pursuant to this Section 9.1 after the Company has effected two (2)
such registrations pursuant to this Section 9.1. The Company shall have the
right to select the form used to effect the registration hereunder (subject to
the approval of a majority in interest of the Securityholders requesting
registration, which will not be unreasonably withheld). Each Securityholder
making a demand for registration under this Section 9.1 is referred to herein as
an "Initiating Securityholder." For purposes of this Section 9, a registration
shall not be deemed to have been effected unless a registration statement with
regard thereto has been declared effective and remained effective for a period
of one hundred and twenty (120) days (or such shorter period as is permitted in
the second sentence of this Section 9.1). The foregoing notwithstanding, in the
event of an underwritten offering pursuant to this Section 9.1, if the managing
underwriter of such offering shall advise the Securityholders in writing that,
in its opinion, the distribution of a specified portion of the securities
requested to be included in the registration would materially adversely affect
the distribution of such securities by increasing the aggregate amount of the
offering in excess of the maximum amount of securities which such managing
underwriter believes can reasonably be sold in the contemplated distribution,
then the securities to be included in the registration shall be included in the
following order: (i) first, all of the Securities requested to be included
therein by the Initiating Securityholders, (ii) second, the Securities requested
to be included therein by the other Securityholders, pro rata among such
Securityholders according to the number of Securities requested to be included
by each such Securityholder requesting inclusion therein, and (iii) third, the
securities the Company proposes to include therein and (iv) fourth, such other
securities requested to be included therein, pro rata among the holders of such
other securities according to the number of securities requested to be included
by each such holder requesting inclusion therein.
b. For purposes of this Section 9.1, the
Securityholders who have requested registration of Shares to be acquired upon
the exercise of Warrants not theretofore exercised shall furnish the Company
with an undertaking that they or the underwriters or other persons to whom such
Warrants will be transferred have undertaken to exercise such Warrants and to
sell, transfer or otherwise dispose of the Shares received upon exercise of such
Warrants in such registration.
c. In the event of an underwritten offering pursuant
to this Section 9.1, the Initiating Securityholders requesting registration of
the Securities being registered shall be entitled to select the underwriter;
provided, that the underwriter so selected shall be subject to approval by the
Company, which approval shall not be withheld unreasonably.
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<PAGE> 12
d. Notwithstanding the terms of Section 9.1(a), the
Company shall not be required to register the Securities of Securityholders
pursuant to Section 9.1, if the Company elects, at its sole option and to the
extent that it may legally do so, to purchase such Securities and completes such
purchase pursuant to the provisions of this Section 9.1(d). Within fifteen (15)
days after receipt of a Demand Registration Request, the Company may elect to
purchase all and not less than all of the Securities that would otherwise be
subject to registration pursuant to Section 9.1(a) by providing written notice
(the "Purchase Notice") to all of the Securityholders setting forth (i) its
election to purchase such Securities, (ii) the purchase price of the Securities,
and (iii) the closing date for such purchase. The Company shall thereafter
purchase all of the Securities requested to be included in such purchase by the
Securityholders within fifteen (15) days after the Purchase Notice becomes
effective. The purchase price for each Share shall be the fair market value (as
defined in Section 4) of a share of Common Stock on the date of the Demand
Registration Request; the purchase price for each Warrant shall be (x) the fair
market value (as defined in Section 4) of a share of Common Stock on the date of
the Demand Registration Request less (y) the Warrant Price as of such date. The
closing of the purchase of the Securities shall take place on the date set forth
in the Purchase Notice, which date shall be not less than fifteen (15) not more
than forty-five (45) days after the date of the Purchase Notice. At the closing,
the Company shall deliver to each Securityholder, in cash, the purchase price
for the Securities surrendered by such Securityholder.
9.2. Piggy-Back Registration Rights.
-------------------------------
a. The Company covenants and agrees with the
Securityholders that in the event that the Company proposes to file a
registration statement under the Act with respect to any of its equity
securities (other than pursuant to registration statements on Form S-4 or Form
S-8 or any successor or similar forms), whether or not for its own account, then
the Company shall give written notice of such proposed filing to all
Securityholders promptly (and in any event at least twenty (20) days before the
anticipated filing date). Such notice shall offer to such Securityholders,
together with others who have similar rights, the opportunity to include in such
registration statement such number of Securities as they may request. The
Company shall cause the managing underwriter of a proposed underwritten offering
(unless the offering is an underwritten offering of a class of the Company's
equity securities other than Common Stock and the managing underwriter has
advised the Company in writing that, in its opinion, the inclusion in such
offering of Common Stock would materially adversely affect the distribution of
such offering) to permit the holders of Securities requested to be included in
the registration to include such Securities in the proposed offering and the
Company shall use its reasonable best efforts to include such Securities in such
proposed offering on the same terms and conditions as any similar securities of
the Company included therein. If the offering of which the Company gives notice
is a public offering involving an underwriter, the right of a Securityholder to
registration pursuant to this Section 9.2 shall be conditioned upon such
Securityholder's participation in such underwriting and the inclusion of the
Securities to be sold by such Securityholder in the underwriting. All
Securityholders proposing to distribute Securities through such underwriting
shall enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters. The foregoing
notwithstanding, in the case of a firm commitment offering on underwriting terms
appropriate for such a transaction, other than a registration requested by
Securityholders pursuant to Section 9.1, if any such managing
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<PAGE> 13
underwriter of recognized standing shall advise the Company and the
Securityholders in writing that, in its opinion, the distribution of all or a
specified portion of the Securities requested to be included in the registration
concurrently with the securities being registered by the Company would
materially adversely affect the distribution of such securities by increasing
the aggregate amount of the offering in excess of the maximum amount of
securities which such managing underwriter believes can reasonably be sold in
the contemplated distribution, then the securities to be included in a
registration which is a primary underwritten offering on behalf of the Company
shall be included in the following order: (i) first, the securities the Company
proposes to include therein and (ii) second, such other securities (including
the Securities) requested to be included, pro rata among the holders (including
the Securityholders) of such other securities according to the number of
securities requested to be included by each such holder requesting inclusion
therein.
b. In the event that a holder or holders of the
Company's securities (other than a Securityholder or Securityholders) requests,
pursuant to rights granted to such holder or holders, that the Company file a
registration statement for the public offering of securities and the Company and
the other holders of the Company's securities (including the Securityholders)
who have rights to be included in such registration, request to be included in
such registration and the managing underwriter of such offering shall advise the
Company and the holders requesting inclusion in the offering that, in its
opinion, the distribution of a specified portion of the securities requested to
be included in the registration would materially adversely affect the
distribution of such securities by increasing the aggregate amount of the
offering in excess of the maximum amount of securities which such managing
underwriter believes can reasonably be sold in the contemplated distribution
then, the securities to be included in the registration shall be included in the
following order: (i) first, all of the securities requested to be included
therein by the holder or holders making the initial request for the
registration, and (ii) second, such other securities requested to be included
therein by the Company and the holders of such other securities, pro rata among
the Company and the holders of such other securities according to the number of
securities requested to be included by the Company and each such holder
requesting inclusion therein. For purposes of this Section 9.2(b), the Company
agrees to request for inclusion in the registration only that number of
securities that the Company intends, in good faith, to sell, if all such
securities so requested by the Company were permitted to be included by the
managing underwriter in such registration and sold pursuant thereto.
9.3. Company Covenants; Registration Right Provisions.
------------------------------------------------
a. In connection with the registration of Securities
on behalf of the holders thereof (such Securityholders being referred to herein
as "Sellers") in accordance with Section 9.1 or Section 9.2 above, the Company
agrees to:
(i) enter into a cross-indemnity agreement,
in customary form, with each underwriter, if any, and each Seller;
(ii) subject to the provisions of Section
9.1(a), Section 9.2(a) and Section 9.2(b) regarding reductions by the managing
underwriter, include in
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<PAGE> 14
the registration statement filed with the SEC, the Securities for which requests
for registration have been made; provided, however, that promptly after filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company shall furnish to each Seller copies of all such documents proposed
to be filed including documents incorporated by reference in the registration
statement; and notify each Seller of any stop order issued or threatened by the
SEC and use its best efforts to prevent the entry of such stop order or to
remove it if entered;
(iii) prepare and file with the SEC such
amendments of and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective (A) in the case of a registration pursuant to Section 9.1,
for a period of one hundred and twenty (120) days, or, in the case of a
registration pursuant to Section 9.2, for a period of ninety (90) days or (B)
such shorter period as may be required if all such Securities covered by such
registration statement are sold prior to the expiration of such periods, and
comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the Sellers set forth in
such registration statement;
(iv) furnish to each Seller and each
underwriter, if any, without charge, such number of copies of the registration
statement, each amendment and supplement thereto (in each case including all
exhibits thereto), the prospectus included in such registration statement
(including each preliminary prospectus) and such other documents as such Seller
may reasonably request in order to facilitate the disposition of the Securities
proposed to be sold by such Seller;
(v) use its reasonable best efforts to
register or qualify such Securities under such other securities or Blue Sky laws
of such jurisdictions as any Seller or any such underwriter reasonably requests
and keep such registrations or qualifications in effect for so long as such
registration statement remains in effect and do any and all acts and things
which may be reasonably necessary or advisable to enable such Seller to
consummate the disposition in such jurisdictions of the Securities owned by such
Seller; provided, however, that the Company shall not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this subsection (v), (ii) subject itself to taxation
in any such jurisdiction, or (iii) consent to general service of process in any
jurisdiction;
(vi) notify each Seller, at any time when a
prospectus relating to such Seller's Securities is required to be delivered
under the Act, of the occurrence of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits to state any material fact necessary to make the
statements therein not misleading, and as soon as practicable prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading;
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<PAGE> 15
(vii) cause all such Securities to be listed
on any Exchange on which similar securities issued by the Company are then
listed;
(viii) provide a transfer agent, registrar
and CUSIP number for all such Securities not later than the effective date of
such registration statement;
(ix) enter into such customary agreements
(including an underwriting agreement in customary form) and take all such other
actions that the Sellers or the underwriters, if any, reasonably request in
order to expedite or facilitate the disposition of such Securities;
(x) make available for inspection by the
Sellers and their counsel, any underwriter participating in any disposition
pursuant to such registration statement, and any counsel retained by any such
underwriter, all pertinent financial and other information and corporate
documents of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such Seller,
underwriter or counsel in connection with such registration statement;
(xi) use its reasonable best efforts to
obtain a "cold comfort" letter from the Company's independent public accountants
in customary form and covering such matters of the type customarily covered by
"cold comfort" letters as the Sellers or any underwriter may reasonably request;
(xii) obtain an opinion of counsel to the
Company, addressed to the Sellers and any underwriter, in customary form and
including such matters as are customarily covered by such opinions in
underwritten registered offerings of equity securities as the Sellers or any
underwriter may reasonably request, such opinion to be reasonably satisfactory
in form and substance to each Seller; and
(xiii) otherwise use its best efforts to
comply with all applicable rules and regulations of the SEC, and make available
to its securityholders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve (12) months subsequent to the effective
date of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
b. Any other provisions of this Section 9
notwithstanding, upon receipt by the Securityholders of a written notice signed
by the chief executive officer, chief operating officer or chief financial
officer of the Company to the effect set forth below, the Company shall not be
obligated during a reasonable period of time thereafter to effect any
registrations pursuant to this Section 9, and the Securityholders agree that
they will immediately suspend sales of shares under any effective registration
statement for a reasonable period of time, in either case not to exceed ninety
(90) days, at any time at which, in the Company's reasonable judgment, (i) there
is a development involving the Company or any of its affiliates which is
material but which has not yet been publicly disclosed or (ii) sales pursuant to
the registration statement would materially and adversely affect an underwritten
public offering for the account of the Company or any other material financing
project or a proposed or pending material
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<PAGE> 16
merger or other material acquisition or material business combination or
material disposition of the Company's assets, to which the Company or any of its
affiliates is, or is expected to be, a party. In the event a registration is
postponed or sales by the Securityholders pursuant to an effective registration
statement are suspended in accordance with this Section 9.3(b), there shall be
added to the period during which the Company is obligated to keep a registration
effective the number of days for which the registration was postponed or sales
were suspended pursuant to this Section 9.3(b).
c. The Company may require each Seller to furnish to
the Company such information regarding the distribution of the Securities
proposed to be sold by such Seller as the Company may from time to time
reasonably request in writing.
d. Each Seller agrees that, upon receipt of any
notice from the Company of the occurrence of any event of the kind described in
subsection (vi) of Section 9.3(a) above, such Seller shall forthwith discontinue
disposition of Securities pursuant to the registration statement covering such
Securities until such Seller's receipt of copies of the supplemented or amended
prospectus contemplated by Section 9.3(a)(vi) above and, if so directed by the
Company, such Seller will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies in such Seller's possession, of the
prospectus covering such Securities current at the time of receipt of such
notice. In the event the Company shall give any such notice, the period
mentioned in Section 9.3(a)(iii) above shall be extended by the number of days
during the period from and including the date of giving of such notice to and
including the date when each Seller shall have received the copies of the
supplemented or amended prospectus contemplated by Section 9.3(a)(vi) above.
e. The Company shall not file or permit the filing of
any registration or comparable statement which refers to any Seller by name or
otherwise as the Seller of any securities of the Company unless such reference
to such Seller is specifically required by the Act or any similar federal
statute then in force.
9.4 Expenses. All expenses incident to the Company's
performance of or compliance with this Warrant, including without limitation all
registration and filing fees, fees and expenses relating to filings with any
Exchange, fees and expenses of compliance with securities or Blue Sky laws in
jurisdictions reasonably requested by any Seller or underwriter pursuant to
Section 9.3(a)(v) (including reasonable fees and disbursements of counsel in
connection with Blue Sky qualifications of the Securities), all word processing,
duplicating and printing expenses, messenger and delivery expenses, fees and
disbursements of counsel for the Company and one (1) counsel for the Sellers,
independent public accountants (including the expenses of any special audit or
"cold comfort" letters required by or incident to such performance) and
underwriters (excluding discounts, commissions or fees of underwriters, selling
brokers, dealer managers or similar securities industry professionals
attributable to the securities being registered, or legal expenses of any person
other than the Company and the Sellers, but including liability insurance if the
Company so desires), all the Company's internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the expense of any annual audit, the expense of any
liability insurance (if the Company determines to obtain such insurance) and the
fees and
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<PAGE> 17
expenses incurred in connection with the listing of the securities to be
registered on each Exchange on which such securities issued by the Company are
then listed, the reasonable fees and expenses of any special experts (including
attorneys) retained by the Company (if it so desires) in connection with such
registration and fees and expenses of other persons retained by the Company (all
such expenses being herein called "Registration Expenses"), shall be borne by
the Company.
9.5 Registration Statement Preparation; Investigation. In
connection with the preparation and filing of each registration statement under
the Act pursuant to this Section 9, the Company shall give the Sellers under
such registration statement, their underwriters, if any, and their respective
counsel and accountants, the opportunity to participate in the preparation of
such registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give each
of them such access to its books and records and such opportunities to discuss
the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of such Sellers' and such underwriters' respective counsel, to
conduct a reasonable investigation within the meaning of the Act.
9.6. Indemnification.
----------------
a. In the event of any registration of any securities
of the Company under the Act, the Company shall, and hereby does, indemnify and
hold harmless in the case of any registration statement filed pursuant to
Section 9.1 or Section 9.2, the Seller of any Securities covered by such
registration statement, its directors, officers and employees, each other person
who participates as an underwriter in the offering or sale of such Securities
and each other person, if any, who controls such Seller or any such underwriter
within the meaning of the Act against any losses, claims, damages, or
liabilities (or actions or proceedings whether commenced or threatened in
respect thereof), joint or several, to which such Seller or any such director or
officer or underwriter or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages, or liabilities (or actions
or proceedings, whether commenced or threatened, in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
Securities were registered under the Act, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company shall reimburse such Seller and each
such director, officer, employee, underwriter and controlling person for any
legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, liability, action, or
proceeding; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding, whether commenced or threatened in respect thereof), or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment, or
supplement in reliance upon
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<PAGE> 18
and in conformity with written information furnished to the Company through an
instrument duly executed by such Seller specifically stating it is for use in
the preparation thereof and, provided, further, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability (or action or proceeding, whether commenced or threatened, in respect
thereof), or expense arises out of such person's failure to send or give a copy
of the final prospectus, as the same may be then supplemented or amended, within
the time required by the Act to the person asserting an untrue statement or
alleged untrue statement or omission or alleged omission if such statement or
omission was corrected in such final prospectus. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
such Seller or any such director, officer, underwriter or controlling person and
shall survive the transfer of such Securities by such Seller.
b. The Company may require, as a condition to
including any Securities in any registration statement filed pursuant to Section
9.3, that the Company shall have received an undertaking satisfactory to it from
the prospective Seller, to indemnify and hold harmless (in the same manner and
to the same extent as set forth in Section 9.6(a)) the Company, each director,
officer and employee of the Company, and each other person, if any, who controls
the Company within the meaning of the Act, with respect to any statement or
alleged statement in or omission or alleged omission from such registration
statement, any preliminary prospectus, final prospectus, or summary prospectus
contained therein, or any amendment or supplement thereto, if such statement or
alleged statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company through an
instrument duly executed by such Seller specifically stating that it is for use
in the preparation of such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment, or supplement. Such indemnity shall
remain in full force and effect, regardless of any investigation made by or on
behalf of the Company or any such director, officer, or controlling person and
shall survive the transfer of such Securities by such Seller. In no event shall
the liability of any selling Seller hereunder (including without limitation
indemnification liability in connection with Section 9.6(d) hereof) be in the
aggregate greater in amount than the dollar amount, if any, by which (1) the
proceeds received by such Seller upon the sale of the Securities giving rise to
such indemnification obligation exceed (2) the purchase or exercise price paid
by such Seller for such Securities. The Company shall be entitled to receive
indemnities from underwriters, selling brokers, dealer managers, and similar
securities industry professionals participating in the distribution to the same
extent as provided above with respect to information so furnished in writing by
such persons specifically for inclusion in any prospectus or registration
statement.
c. Promptly after receipt by an indemnified party of
notice of the commencement of any action or proceeding involving a claim
referred to in this Section 9.6, such indemnified party shall, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to the latter of the commencement of such action; provided, however, that the
failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 9.6, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any such
action is brought against an indemnified party, unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying
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<PAGE> 19
parties may exist in respect of such claim, the indemnifying party shall be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified, to the extent that the indemnifying
party may wish, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof other than
reasonable costs of investigation. If, in the indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist in respect of such claim, the indemnified party may assume the
defense of such claim, jointly with any other indemnified party that reasonably
determines such conflict of interest to exist, and the indemnifying party shall
be liable to such indemnified parties for the reasonable legal fees and expenses
of one counsel for all such indemnified parties and for other expenses
reasonably incurred in connection with the defense thereof incurred by the
indemnified party. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
of any such action which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from
all liability, or a covenant not to sue, in respect of such claim or litigation.
No indemnified party shall consent to entry of any judgment or enter into any
settlement of any such action the defense of which has been assumed by an
indemnifying party without the consent of such indemnifying party.
d. Indemnification and contribution similar to that
specified in this Section 9.6 (with appropriate modifications) shall be given by
the Company and may be required of each Seller with respect to any required
registration or other qualification of Securities under any Federal or state law
or regulation of any governmental authority, other than the Act.
e. The indemnification required by this Section 9.6
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
f. If the indemnification provided for in this
Section 9.6 from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities, or expenses
referred to herein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of losses, claims, damages, liabilities, or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified party in connection with the actions
which resulted in such losses, claims, damages, liabilities, or expenses, as
well as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities, and expenses referred to above shall be deemed to include
any legal or other fees or
19
<PAGE> 20
expenses reasonably incurred by such party in connection with any investigation
or proceeding. In no event shall the liability of any Seller hereunder
(including without limitation contribution liability in connection with Section
9.6(d) hereof) be in the aggregate greater in amount than the dollar amount, if
any, by which (1) the proceeds received by such Seller upon the sale of the
Securities giving rise to such contribution obligation exceed (2) the purchase
or exercise price paid by such Seller for such Securities. The parties hereto
agree that it would not be just and equitable if contribution pursuant to this
Section 9.6(f) were determined by pro rata allocation or by any other method of
allocation which does not take into account the equitable considerations
referred to in this Section 9.6(f). No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
9.7 Conflicting Rights. The Company hereby represents and
covenants that, prior to and as of the Date of Grant the Company has not
granted, and after the Date of Grant the Company shall not grant, any
registration rights which conflict with the rights under this Section 9.
9.8 Lock-up Period. If requested by the managing underwriter
of an offering for which Shares of such Securityholder have been registered, a
Securityholder shall not sell or otherwise transfer or dispose of any Securities
held by such Securityholder (other than those included in the registration)
during such period following the effective date of such registration as is usual
and customary at such time in similar public offerings of similar securities;
provided, however, that the Company shall use its reasonable best efforts to
cause each holder of a material number of shares of Common Stock to enter into
similar "lock-up" agreements in respect of such offering. The obligations
described in this Section 9.8 shall not apply to offerings pursuant to a
registration statement on Form S-4 or Form S-8 or any successor or similar form.
10. Additional Rights.
-----------------
10.1 Secondary Sales. The Company agrees that, to the extent
reasonable, it will cooperate with the holder of this Warrant in obtaining
liquidity if opportunities to make secondary sales of the Company's securities
become available. To this end, the Company will promptly provide the holder of
this Warrant with notice of any offer to acquire from the Company's security
holders more than five percent (5%) of the total voting power of the Company and
will cooperate with the holder, if requested, in consummating the sale of this
Warrant to the person or persons making such offer. The foregoing paragraph
notwithstanding, the provisions of this Section 10.1 shall not require the
Company to take any action which would constitute a violation of Federal
securities laws.
10.2 Mergers. In the event that the Company undertakes to (i)
sell, lease, exchange, convey or otherwise dispose of all or substantially all
of its property or business, or (ii) merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary of the Company), or effect any
transaction (including a merger or other reorganization) or series of related
transactions, in which more than 50% of the voting power of the Company is
disposed of, the Company will use its reasonable best efforts to provide at
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<PAGE> 21
least thirty (30) days notice of the terms and conditions of the proposed
transaction. The Company will cooperate with the holder in consummating the sale
of this Warrant in connection with any such transaction. The foregoing paragraph
notwithstanding, the provisions of this Section 10.2 shall not require the
Company to take any action which would constitute a violation of, or create a
material liability for the Company under, Federal securities laws.
10.3 Right to Convert Warrant into Common Stock; Net Issuance.
--------------------------------------------------------
a. Right to Convert. In addition to and without limiting the
rights of the holder under the terms of this Warrant, the holder shall have the
right to convert this Warrant or any portion thereof (the "Conversion Right")
into shares of Common Stock as provided in this Section 10.3 at any time or from
time to time during the term of this Warrant. Upon exercise of the Conversion
Right with respect to a particular number of shares subject to this Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the holder (without
payment by the holder of any exercise price or any cash or other consideration)
that number of shares of fully paid and nonassessable Common Stock equal to the
quotient obtained by dividing (i) the value of this Warrant (or the specified
portion hereof) on the Conversion Date (as defined in subsection (b) hereof),
which value shall be equal to (A) the aggregate fair market value of the
Converted Warrant Shares issuable upon exercise of this Warrant (or the
specified portion hereof) on the Conversion Date less (B) the aggregate Warrant
Price of the Converted Warrant Shares immediately prior to the exercise of the
Conversion Right by (ii) the fair market value of one share of Common Stock on
the Conversion Date.
Expressed as a formula, such conversion shall be computed as
follows:
X= A - B
-----
Y
Where: X = the number of shares of Common Stock that may be
issued to holder
Y = the fair market value (FMV) of one share of
Common Stock
A = the aggregate FMV (i.e., FMV x Converted
Warrant Shares)
B = the aggregate Warrant Price (i.e., Converted
Warrant Shares x Warrant Price)
No fractional shares shall be issuable upon exercise of the
Conversion Right, and, if the number of shares to be issued determined in
accordance with the foregoing formula is other than a whole number, the Company
shall pay to the holder an amount in cash equal to the fair market value of the
resulting fractional share on the Conversion Date. For purposes of Section 9 of
this Warrant, shares issued pursuant to the Conversion Right shall be treated as
if they were issued upon the exercise of this Warrant.
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<PAGE> 22
b. Method of Exercise. The Conversion Right may be exercised
by the holder by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to this Warrant which are being surrendered (referred to in subsection
(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"). Certificates for the shares issuable
upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder within
thirty (30) days following the Conversion Date.
c. Determination of Fair Market Value. For purposes of this
Section 10.3, "fair market value" of a share of Common Stock shall have the
meaning set forth in Section 4(h) above.
11. Representations and Warranties. The Company represents and warrants
to the holder of this Warrant as follows:
a. This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and the rules of law or
principles at equity governing specific performance, injunctive relief and other
equitable remedies;
b. The Shares have been duly authorized and reserved for
issuance by the Company and, when issued in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable;
c. The rights, preferences, privileges and restrictions
granted to or imposed upon the Common Stock and the holders thereof are as set
forth in the articles or certificate of incorporation of the Company, as amended
to the Date of Grant (as so amended, the "Charter"), a true and complete copy of
which has been delivered to the original holder of this Warrant;
d. The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Charter or by-laws of the
Company, do not and will not contravene, in any material respect, any
governmental rule or regulation, judgment or order applicable to the Company,
and do not and will not conflict with or contravene, in any material respect,
any provision of, or constitute a material default under, any indenture,
mortgage, contract or other instrument of which the Company is a party or by
which it is bound or require the consent or approval of, the giving of notice
to, the registration or filing with or the taking of any action in respect of or
by, any Federal, state or local government authority or agency or other person,
except for the filing of notices pursuant to federal and state securities laws,
which filings will be effected by the time required thereby;
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<PAGE> 23
e. Except for the pending judicial settlements with Time, Inc.
and CNN, there are no actions, suits, audits, investigations or proceedings
pending or, to the knowledge of the Company, threatened against the Company in
any court or before any governmental commission, board or authority which, if
adversely determined, will have a material adverse effect on the ability of the
Company to perform its obligations under this Warrant;
f. The authorized capital stock of the Company consists of One
Hundred Million (100,000,000) shares of Common Stock, $0.01 par value per share,
of which approximately Twelve Million Two Hundred Sixty-Eight Thousand
Sixty-Nine (12,268,069) shares were issued and outstanding as of the close of
business on May 20, 1997, and Twenty-Five Million (25,000,000) shares of
Preferred Stock, $0.01 par value per share, of which Three Thousand Five Hundred
(3,500) shares are authorized as Series A Convertible Preferred Stock, of which
no shares are issued and outstanding as of the Date of Grant, Three Thousand
Five Hundred (3,500) shares are authorized as Series B Convertible Preferred
Stock, of which Two Thousand Two Hundred Four (2,204) shares are issued and
outstanding as of the Date of Grant and One Million Three Hundred Thousand
(1,300,000) shares are authorized as Series C Convertible Preferred Stock, of
which One Million One Hundred Eighty-Five Thousand One Hundred Eighty Five
(1,185,185) shares are issued and outstanding as of the Date of Grant. All such
outstanding shares have been validly issued and are fully paid, nonassessable
shares free of preemptive rights, except that the Company makes no
representations or warranties as to the valid issuance of shares of Common Stock
issued upon conversion of Series B Convertible Preferred Stock at a conversion
price not in accordance with the provisions of the Certificate of Designations
of Series B Convertible Preferred Stock of the Company.
g. Other than the Warrants, Warrant #3 and as provided in the
Company's Certificate of Designations of Series A Convertible Preferred Stock,
as amended, Certificate of Designations of Series B Convertible Preferred Stock,
and Certificate of Designations of Series C Convertible Preferred Stock, and
except as disclosed in the Schedule of Outstanding Rights attached hereto as
Exhibit B, there are no subscriptions, rights, options, warrants, or calls
relating to any shares of the Company's capital stock, including any right of
conversion or exchange under any outstanding security or other instrument; and
h. Except as disclosed in the Company's most recent Proxy
Statement and Form 10-K, and except as provided in the Company's Certificate of
Designations of Series A Convertible Preferred Stock, as amended, Certificate of
Designations of Series B Convertible Preferred Stock, and Certificate of
Designations of Series C Convertible Preferred Stock, (each of which the Company
represents and warrants have been delivered to Madeleine or its counsel and in
the form of same most recently filed with the Secretary of State of the State of
Delaware), the Company is not subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any security convertible into or exchangeable for any of its
capital stock.
12. Modification and Waiver. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
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<PAGE> 24
13. Notices. Any notice, request, communication or other document
required or permitted to be given or delivered to the holder hereof or the
Company shall be delivered, or shall be sent by private courier or certified or
registered mail, postage prepaid, to each such holder at its address as shown on
the books of the Company or to the Company at the address indicated therefor on
the signature page of this Warrant.
14. Binding Effect on Successors. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets, and all of the obligations
of the Company relating to the Common Stock issuable upon the exercise or
conversion of this Warrant shall survive the exercise, conversion and
termination of this Warrant and all of the covenants and agreements of the
Company shall inure to the benefit of the successors and assigns of the holder
hereof. The Company will, at the time of the exercise or conversion of this
Warrant, in whole or in part, upon request of the holder hereof but at the
Company's expense, acknowledge in writing its continuing obligation to the
holder hereof in respect of any rights to which the holder hereof shall continue
to be entitled after such exercise or conversion in accordance with this
Warrant; provided, that the failure of the holder hereof to make any such
request shall not affect the continuing obligation of the Company to the holder
hereof in respect of such rights.
15. Lost Warrants or Stock Certificates. The Company covenants to the
holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any loss, theft or destruction, upon
receipt of an executed lost securities bond or indemnity reasonably satisfactory
to the Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant or stock certificate, the Company will make and
deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
16. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
17. Governing Law. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Delaware.
18. Survival of Representations, Warranties and Agreements. All
representations and warranties of the Company and the holder hereof contained
herein shall survive the Date of Grant, the exercise or conversion of this
Warrant (or any part hereof) or the termination or expiration of rights
hereunder. All agreements of the Company and the holder hereof contained herein
shall survive indefinitely until, by their respective terms, they are no longer
operative.
19. Remedies. In case any one or more of the covenants and agreements
contained in this Warrant shall have been breached, the holders hereof (in the
case of a breach by the Company), or the Company (in the case of a breach by a
holder), may proceed to protect and enforce their or its rights either by suit
in equity and/or by action at law, including, but not
24
<PAGE> 25
limited to, an action for damages as a result of any such breach and/or an
action for specific performance of any such covenant or agreement contained in
this Warrant.
20. Acceptance. Receipt of this Warrant by the holder hereof
shall constitute acceptance of and agreement to the foregoing terms and
conditions.
21. No Impairment of Rights. The Company will not, by
amendment of its Charter or through any other means, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of this Warrant against impairment.
[SIGNATURE PAGE FOLLOWS]
25
<PAGE> 26
IN WITNESS WHEREOF, Graphix Zone, Inc. has caused this Warrant
to be executed on its behalf by one of its officers thereunto duly authorized.
GRAPHIX ZONE, INC.
By: /s/ DAVID J. HIRSCHHORN
--------------------------------------
Name: David J. Hirschhorn
Title: President and Chief Executive
Officer
Address: 42 Corporate Park, Suite 200
Irvine, California 92606
Date: June 5, 1997
S-1
<PAGE> 27
EXHIBIT A
NOTICE OF EXERCISE
To: GRAPHIX ZONE, INC.
1. The undersigned hereby elects to purchase _________ shares
of Common Stock of GRAPHIX ZONE, INC. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
2. Please issue a certificate or certificates representing
said shares in the name of the undersigned or in such other name or names as are
specified below:
--------------------------------------
(Name)
--------------------------------------
--------------------------------------
(Address)
3. The undersigned represents that the aforesaid shares are
being acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undesigned has executed an Investment Representation
Statement attached hereto as Schedule 1.
--------------------------------------
(Signature)
- ------------------
(Date)
<PAGE> 28
Schedule 1
----------
INVESTMENT REPRESENTATION STATEMENT
Purchaser:
Company: GRAPHIX ZONE, INC.
Security: Common Stock
Amount:
Date:
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to the Company as
follows:
(a) The Purchaser is aware of the Company's business affairs and
financial condition, and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Securities. The
Purchaser is purchasing the Securities for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
(the "Act").
(b) The Purchaser understands that the Securities have not been
registered under the Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of the
Purchaser's investment intent as expressed herein. In this connection, the
Purchaser understands that, in the view of the Securities and Exchange
Commission ("SEC"), the statutory basis for such exemption may be unavailable if
the Purchaser's representation was predicated solely upon a present intention to
hold these Securities for the minimum capital gains period specified under
applicable tax laws, for a deferred sale, for or until an increase or decrease
in the market price of the Securities, or for a period of one year or any other
fixed period in the future.
(c) The Purchaser further understands that the Securities must be held
indefinitely unless subsequently registered under the Act or unless an exemption
from registration is otherwise available. In addition, the Purchaser understands
that the certificate evidencing the Securities will be imprinted with the legend
referred to in the Warrant under which the Securities are being purchased.
<PAGE> 29
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: The availability of certain public information about the Company, the
resale occurring not less than one (1) year after the party has purchased and
paid for the securities to be sold; the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934, as
amended) and the amount of securities being sold during any three-month period
not exceeding the specified limitations stated therein.
(e) The Purchaser further understands that at the time it wishes to
sell the Securities there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144 and 144A, and
that, in such event, the Purchaser may be precluded from selling the Securities
under Rule 144 and 144A even if the one-year minimum holding period had been
satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the Act,
compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden or proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Purchaser:
---------------------
Date: ---------------
<PAGE> 1
EXHIBIT 10.41
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (this "Sublease") is made this twenty-third day
of June 1997, by and between ACG (U.S.) Inc., having an office at 2915 S.
Daimler Street, Santa Ana, California 92705-5810 ("Sublessor"), and Graphix
Zone, a California corporation, dba Ignite incorporated, having an office at 42
Corporate Park, Suite 200, Irvine, CA 92714 ("Sublessee)".
RECITALS
--------
A. Whereas, Sublessor, as lessee, entered into a lease with DAIMLER
COMMERCE PARTNERS, L.P., a California limited partnership, as lessor (the
"Prime Lessor"), dated August 1, 1996, leasing certain space at 2915 S. Daimler
Street, Santa Ana, California 92705-5810 (the "Prime Premises"), which lease is
hereinafter referred to as the "Prime Lease."
B. Whereas, Sublessor and Sublessee have agreed that Sublessor shall
sublet approximately 2,100 square feet of the Prime Premises to Sublessee (the
"Subleased Premises") as depicted on Exhibits "A" and "B" attached hereto and
incorporated herein.
COVENANTS
---------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Premises. Sublessor, hereby subleases to Sublessee the Subleased
Premises subject to the terms and conditions contained herein.
2. Term. The term of this Sublease (the "Term") shall commence on June
23, 1997 (the "Commencement Date"), and continue on a month to month basis
until (unless sooner terminated by Sublessor and Sublessee pursuant to the
terms hereof) the termination of the Prime Lease as provided in Section 1.05 of
the Prime Lease (the "Termination Date"). Notwithstanding the foregoing,
Sublessor and Sublessee may each terminate this Sublease upon thirty (30) days'
written notice to the other party.
3. Rent.
(a) During the term hereof, Sublessee shall pay Sublessor as rent
for the Sublease of the Subleased Premises $1,785.00 per month. The sublessee
shall pay for its own utilities, liability and property insurance, janitorial
service, security alarm service and all other normal facility expenses; except
(i) real property tax, (ii) premiums, costs, expenses and deductibles of
insurance maintained by Prime Lessor or Sublessor pursuant to the Prime Lease,
and (iii) common area maintenance costs.
(b) Upon execution of this Sublease, Sublessee shall pay to
Sublessor the Rent due for the first month of the Term. All Rent payable
hereunder shall be paid in advance on the first day of each succeeding calendar
month during the Term, with Rent due hereunder apportioned for any fractional
calendar months for which Rent is due. All payments required
1
<PAGE> 2
to be made by Sublessee pursuant to the terms hereof shall be paid in lawful
money of the United States of America, without notice, setoff, or deduction, at
the address of Sublessor set forth above, or such other place as Sublessor may
from time to time designate in writing.
4. Use. The Subleased Premises shall be used for the Permitted Uses set
forth in the Prime Lease and for no other purpose.
5. Assignment. Sublessee shall not assign this Sublease nor sublet the
Subleased Premises in whole or in part; and shall not permit Sublessee's
interest in this to be vested in any third party by operation of law or
otherwise.
6. Services and Rights. Notwithstanding anything herein contained, the
only services or rights to which Sublessee is entitled hereunder are those to
which Sublessor is entitled under the Prime Lease and that for all such services
and rights Sublessee will look to the Prime Lessor.
7. Indemnity. Sublessee shall neither do nor permit anything to be done
which would cause the Prime Lease to be terminated or forfeited by reason of any
right of termination or forfeiture reserved or vested in the Prime Lessor and
Sublessee shall indemnify and hold Sublessor harmless from and against all
claims of any kind whatsoever by reason of any breach or default on the part of
Sublessee under the Prime Lease or any other act or omission by Sublessee, its
employees, agents, contractors and invitees on or about the Subleased Premises
or the Prime Premises or otherwise arising out of or related to this Sublease
except and to the extent caused by the gross negligence or willful misconduct of
Sublessor.
8. Security Deposit. Sublessee shall pay the Sublessor on the execution
and delivery of this Sublease the sum of Seventeen hundred and eight five
dollars ($1,785.00) as security for the full and faithful performance of the
terms, covenants and conditions of this Sublease on Sublessee's part to be
performed or observed, including but not limited to payment of Rent and
additional rent or for any other sum which Sublessor may expend or be required
to expend by reason of Sublessee's default, including any damages or deficiency
in reletting the Subleased Premises, in whole or in part, whether such damage
shall accrue before or after summary proceedings or other re-entry by Sublessor.
If Sublessee shall fully and faithfully comply with all the terms, covenants and
conditions of this Sublease on Sublessee's part to be performed or observed, the
security, or any unapplied balance thereof, shall be returned to Sublessee after
the time fixed as the expiration of the demised term and after surrender of
possession of the Subleased Premises to Sublessor and/or Prime Lessor.
9. Possession. Sublessee hereby acknowledges that Sublessee has
accepted the Subleased Premises in their existing condition "as is" and that
Sublessor has made no representations or warranties concerning the condition of
the Subleased Premises, whether the condition complies with the requirements of
law or as to its fitness for the use intended by Sublessee.
10. Prime Lease. It is expressly understood, acknowledged and agreed by
Sublessee that all of the terms, conditions and covenants of the Prime Lease,
except as expressly modified by the terms of this Sublease, shall apply to this
Sublease, as though such
2
<PAGE> 3
terms, conditions and covenants were fully set forth herein. Sublessee shall
and hereby agrees to be subject to and bound by and to comply with all of the
provisions of the Prime Lease, except as expressly modified by the terms of
this Sublease, to satisfy all applicable terms and conditions of the Prime
Lease, except as expressly modified by the terms of this Sublease, for the
benefit of both Sublessor and Prime Lessor. It is understood and agreed that
wherever in those provisions of the Prime Lease the word "Tenant" appears, for
the purposes of this Sublease, the word "Sublessee" shall be substituted, and
wherever in those provisions of the Lease the word "Landlord" appears, for the
purposes of this Sublease, the word "Sublessor" shall be substituted. Upon the
breach of any of those terms, conditions or covenants of the Lease, except as
expressly modified by the terms of this Sublease, by Sublessee or upon the
failure of Sublessee to pay Rent or comply with any of the provisions of this
Sublease, Sublessor may exercise any and all rights and remedies granted to
Sublessor by the Lease. In the event of any conflict between this Sublease and
the Lease, except as otherwise specifically provided in this Sublease, the
terms of the Lease shall control. Sublessee hereby acknowledges that it has
read and is familiar with the terms of the Prime Lease and agrees that this
Sublease is subordinate and subject to the Prime Lease and that any termination
thereof without the fault of Sublessor shall likewise terminate this Sublease.
11. Late Charges. Sublessee's failure to pay rent promptly may cause
sublessor to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but
are not limited to, processing and accounting charges and late charges which
may be imposed on Sublessor by third parties. Therefore, if sublessor does not
receive any rent payment within ten (10) days after it becomes due, sublessee
shall pay sublessor a late charge equal to ten percent (10%) of the overdue
amount. The parties agree that such late charge represents a fair and
reasonable estimate of the costs sublessor will incur by reason of such late
payment.
12. Interest on Past Due Obligations. Any amount owed by sublessee to
sublessor which is not paid when due shall bear interest at the rate of fifteen
percent (15%) per annum from the due date of such amount. However, interest
shall not be payable on late charges to be paid by sublessee under this
sublease. The payment of interest on such amounts shall not excuse or cure any
default by sublessee under this sublease. If the interest rate specified in
this sublease is higher than the rate permitted by law, the interest rate is
hereby decreased to the maximum legal interest rate permitted by law.
13. Legal Costs. If sublessee or sublessor shall be in breach or
default under this sublease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach
or default of the defaulting Party under this sublease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the
provisions of this sublease is commenced, the court in such action shall award
to the party in whose favor a judgment is entered, a reasonable sum as
attorneys' fees and costs. The losing party in such action shall pay such
attorneys' fees and costs. Sublessee shall also indemnify sublessor against and
hold sublessor harmless from all costs, expenses, demands and liability
sublessor may incur if sublessor becomes or is made a party to any claim or
action (a) instituted by sublessee against any third party, or by any third
party against sublessee, or by or against any person
3
<PAGE> 4
holding any interest under or using the Property by license of or agreement
with sublessee; (b) for foreclosure of any lien for labor or material
furnished to or for sublessee or such other person; (c) otherwise arising out
of or resulting from any act or transaction of sublessee or such other person;
or (d) necessary to protect sublessor's interest under this sublease in a
bankruptcy proceeding, or other proceeding under Title 11 of the United States
Code, as amended. Sublessee shall defend sublessor against any such claim or
action at sublessee's expense with counsel reasonably acceptable to sublessor
or, at sublessor's election, sublessee shall reimburse sublessor for any legal
fees or costs sublessor incurs in any such claim or action.
14. Sole Agreement. This Sublease, its Exhibits and the Prime Lease
and its Exhibits constitute the entire agreement between the parties hereto
pertaining to the subject matter hereof, and the final, complete and exclusive
expression of the terms and conditions hereof. All prior agreements,
representations, negotiations and understandings of the parties, oral or
written, express or implied, are superseded hereby and merged herein.
15. Notices. All notices and demands that may or are required to be
given by either party to the other hereunder shall be in writing. All notices
and demands by Sublessor to Sublessee shall be personally delivered, posted or
sent by United States certified or registered mail, postage prepaid, addressed
to Sublessee at the Subleased Premises. All notices and demands by Sublessee to
Sublessor shall be personally delivered or sent by United States certified or
registered mail, postage prepaid, addressed to Sublessor at the Prime Premises,
or to such other place as Sublessor may from time to time designate in a notice
to the Sublessee.
16. Relationship. Nothing herein contained shall be construed as
creating a partnership or joint venture between Sublessor and Sublessee or
between Sublessor and any other party, or cause Sublessor to be responsible in
any way for the debts or obligations of Sublessee or any other party.
17. Severability. In case any provision of this Sublease is invalid,
illegal or unenforceable, such provision shall be severable from the rest of
this Sublease, and the validity, legality and enforceability of the remaining
provisions hereof shall not in any way be affected or impaired thereby.
18. Governing Law. This Sublease shall be governed by and construed in
all respects according to the laws of the State of California, as such laws are
applied to contracts between California residents entered into and to be
performed entirely within California.
19. Headings. Headings of the sections of this Sublease are inserted
for convenience only and shall not be deemed to constitute a part hereof.
20. Amendment. This Sublease may be modified or amended only by
written instrument duly executed by the parties hereto.
21. Counterparts. This Sublease may be executed in one or more
counterparts, each of which shall be deemed an original, but shall in the
aggregate constitute one and the same document.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed the day and year first above written.
Sublessee:
Ignite Incorporated
a California corporation
By: /s/ DAVID HIRSCHHORN
-------------------------------
Name: David Hirschhorn
Title: President
Sublessor:
ACG (U.S.) Inc.,
a California corporation
By: /s/ JOHN AUYEUNG
--------------------------------
John AuYeung, Ph.D.
President
PRIME LESSOR'S CONSENT
The undersigned, the Prime Lessor referred to in the foregoing Sublease,
hereby consents to subleasing of the Subleased Premises in accordance with the
terms and conditions of the foregoing Sublease. This consent does not
constitute any waiver of Prime Lessor's rights related to any other subleasing
or assignment of the Prime Premises or rights to consent to any amendment or
modification of the foregoing Sublease all in accordance with the terms and
conditions of the Prime Lease.
DAIMLER COMMENCE PARTNERS, L.P.,
a California limited partnership
By: CONIFER INVESTMENTS, INC.,
a California corporation
Its General Partner
By: /s/ MISAKO YUEN
---------------------------
Misako Yuen
President
Dated: 07/15/97
------------
5
<PAGE> 1
EXHIBIT 10.42
PRODUCTION AND DEVELOPMENT AGREEMENT
- --------------------------------------------------------------------------------
ATTACHMENT D
PROMISSORY NOTE
$200,000.00 CUPERTINO, CALIFORNIA FEBRUARY 3, 1997
For value received, Graphix Zone, Inc., a Delaware corporation ("Borrower"), at
42 Corporate Park, Suite 200, Irvine, CA 92714, promises to pay to the order of
Middlefield Ventures, Inc., a Delaware corporation ("Middlefield"), at 2200
Mission College Boulevard, PO Box 58119, RN6-26, Santa Clara, California
95052-8119, attention Assistant Treasurer, Mergers & Acquisitions, or any
subsequent holder of this Promissory Note ("Holder"), the principal sum of Two
Hundred Thousand Dollars ($200,000.00) together with interest from the date
hereof, on unpaid principal at the rate of eight percent (8%) per annum,
compounded daily, 365/360 day basis; provided, however, that rate at which
interest will accrue on unpaid principal under this Promissory Note will not
exceed the highest rate permitted by applicable law.
The term of this Promissory Note shall commence on February 3, 1997 and end on
February 3, 2000. Principal and interest shall be payable in lawful money of the
United States of America, without any deduction of any nature by way of set off,
counterclaim, or otherwise. Commencing on January 1, 1998, and on the first day
of each calendar quarter thereafter, during the term of this Note, Borrower
shall pay one eighth of the principal sum (ratably diminished by any amounts
canceled by Holder pursuant to that certain Production and Development Agreement
by and between Intel and Graphix Zone dated on even date herewith) and any
outstanding interest, and shall pay any unpaid amount of this Note no later than
February 3, 2000.
The unpaid principal sum of this Promissory Note, together with the interest
accrued thereon (the "Repayment Amount"), is subject to Intel Corporation's
conversion rights and/or obligations under Section 4.3 of the Production and
Development Agreement. Upon conversion of the Repayment Amount, this Promissory
Note shall terminate and Borrower's obligations to pay the Repayment Amount to
Holder shall be extinguished. This Promissory Note may be prepaid in cash at any
time without penalty, subject to Intel's conversion rights as set forth in
Section 4.3 of the Production and Development Agreement.
Borrower will be deemed to be in default under this Promissory Note and the
principal sum of this Promissory Note, together with all interest accrued
thereon, will immediately become due and payable in full upon any material
breach of the Production and Development Agreement not cured within thirty days
of written notice thereof.
Upon any default of Borrower under this Promissory Note, Middlefield will have,
in addition to its rights and remedies under this Promissory Note, full recourse
against any real, personal, tangible or intangible assets of Borrower, and may
pursue any legal or equitable remedies that are available to it. The Holder
shall not have the right to sell or assign this Promissory Note to a third
party, except as permitted in the Loan Agreement.
Borrower waives presentment for payment, protest, notice of protest and notice
of prepayment of this Promissory Note. Borrower agrees to reimburse Holder for
all its reasonable costs and expenses, including reasonable attorneys' fees, in
connection with the enforcement of this Promissory Note, whether or not any suit
is instituted. Should suit be commenced to collect this Promissory Note or any
portion thereof, such sum as the court may deem reasonable shall be added hereto
as attorneys' fees, including any fees awarded on any appeal. Suit as used
herein includes actions before the United States Bankruptcy Courts.
This Promissory Note shall be governed and construed according to the laws of
the State of California and shall be binding on the successors and assigns of
Borrower.
Graphix Zone, Inc.
By: /s/ N. H. BLOCK
---------------
Signature
N. H. Block
---------------
Printed Name
President
---------------
Title
- -------------------------------------------------------------------------------
Intel Corporation 14 Confidential
<PAGE> 1
EXHIBIT 10.43
WARRANT
THE WARRANT EVIDENCED OR CONSTITUTED HEREBY AND THE SHARES OF COMMON STOCK
ISSUABLE HEREUNDER HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), AND MAY NOT BE SOLD, OFFERED
FOR SALE, TRANSFERRED, PLEDGED HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT
UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO THE EFFECT
THAT REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii)
THE SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE
COMMISSION RULE 144.
WARRANT TO PURCHASE 613,718 SHARES OF
COMMON STOCK OF GRAPHIX ZONE, INC.
(Subject to Adjustment)
NO._______
THIS CERTIFIES THAT, for value received by Graphix Zone, a Delaware corporation
(the "Company"), the receipt and sufficiency of which is hereby acknowledged,
from Intel Corporation, a Delaware corporation ("Intel"), Intel or its
permitted registered assigns ("Holder"), is entitled, subject to the terms and
conditions of this Warrant, at any time after February 3, 1997 (the "Effective
Date"), and before 5:00 p.m. Pacific Time on February 3, 2003 (the "Expiration
Date"), to purchase from the Company, six hundred thirteen thousand, seven
hundred eighteen (613,718) fully paid and nonassessable shares of the Company's
Common Stock, $.01 par value per share (the "Warrant Stock"), at the Exercise
Price (as defined in Section 1.5 below). Both the number of shares of Warrant
Stock purchasable under this Warrant and the Exercise Price are subject to
adjustment as provided herein. This Warrant shall terminate on the Expiration
Date, and is subject to the Vesting provisions set out in Section 2.
1. CERTAIN DEFINITIONS. As used in this Warrant:
1.1. The term "Warrant Stock" shall mean the Common Shares, $0.01 par
value per share, of the Company, and any other securities and property at any
time receivable or issuable upon exercise of this Warrant, unless the context
otherwise requires.
1.2. The term "Warrant" as used herein, shall include this Warrant and
any warrant delivered in substitution or exchange therefor as provided herein.
1.3. The term "Registered Holder" shall mean any Holder in whose name
this Warrant is registered upon the books and records maintained by the Company.
1.4. The term "Fair Market Value" of a share of Warrant Stock as of a
particular date (the "Determination Date") shall mean:
(a) If traded on a securities exchange or Nasdaq, the Fair
Market Value shall be deemed to be the average of the closing prices of the
Common Stock of the Company on such trading market, over the 10 business days
ending three (3) days prior to the Determination Date;
<PAGE> 2
(b) If actively traded over the counter or on an electronic
bulletin board, the Fair Market Value shall be deemed to be the average of the
closing bid prices over the 20-day period ending three (3) days prior to the
Determination Date; and
(c) If there is no active public market, the Fair Market
Value shall be the value thereof, as determined in good faith by the Board of
Directors of the Company.
1.5 The term "Vested Shares" shall mean a set of Warrant Shares as
to which Holder has performed the acts described in Section 2.5.
1.6 The term "Vesting Date" shall mean the date on which Holder has
performed the acts necessary to cause such shares to become Vested Shares.
1.7 The term "Exercise Price" shall mean three dollars and forty
six cents ($3.46).
2. EXERCISE OF WARRANT
2.1 Payment.
Subject to compliance with the terms and conditions of this
Warrant and applicable securities laws, this Warrant may be exercised, in whole
or in part at any time on or before the Expiration Date, by surrendering this
Warrant at the principal office of the Company together with:
(a) the form of Notice of Exercise attached hereto as
Exhibit 1 (the "Notice of Exercise") duly executed by the Holder, and
(b) payment, (i) in cash (by check) or by wire transfer,
(ii) by cancellation by the Holder of indebtedness of the Company to the Holder
or (iii) by a combination of (i) and (ii), of an amount equal to the product
obtained by multiplying the number of shares of Warrant Stock being purchased
upon such exercise by the then effective Exercise Price (the "Exercise Amount").
2.2 Partial Exercise; Effective Date of Exercise.
In case of any partial exercise of this Warrant, the Company
shall cancel this Warrant upon surrender hereof and shall execute and deliver a
new Warrant of like tenor and date for the balance of the shares of Warrant
Stock purchasable hereunder. This Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above. The person entitled to receive the
shares of Warrant Stock issuable upon exercise of this Warrant shall be treated
for all purposes as the holder of record of such shares as of the close of
business on the date the Holder is deemed to have exercised this Warrant.
2.3 Stock Certificates; Fractional Shares.
As soon as practicable on or after such date, the Company shall
issue and deliver to the person or persons entitled to receive the same a
certificate or certificates for the number of whole shares of Warrant Stock
issuable upon such exercise, together with cash in lieu of any fraction of a
share equal to such fraction of the Fair Market Value of one whole share of
Warrant Stock as of the date of exercise of this Warrant. No fractional shares
of scrip representing fractional shares will be issued upon an exercise of this
Warrant.
-2-
<PAGE> 3
2.4 Vested Shares
Intel shall only have the right to exercise this Warrant with respect to
Warrant Shares which have become Vested Shares. The period of exercise shall
extend for a period of three years from the Vesting Date.
2.5 Vesting
A Warrant Share shall become a Vested Share as of the date that Holder
gives written notice to Company that, as provided in that certain Production and
Development Agreement dated as of February 3, 1997 it has:
(a) Converted to warrant obligations and canceled the unpaid portion of
the Equipment Loan provided in said Production and Development Agreement,
whereupon a number of Warrant Shares equal to the amount so canceled divided by
25% of the Fair Market Value (determined as of the Determination Date) of each
Warrant Share shall be deemed to be Vested Shares.
(b) Expended marketing funds as set out in Section 3.3.1 of the
Production and Development Agreement and Intel's giving notice of such
expenditures to GZ, a number of Warrants equal to the amount expended divided
25% of the Fair Market Value (determined as of the Determination Date) of each
Warrant Share shall be deemed to be Vested Shares.
2.6 Exercise Period
Intel may exercise its rights with respect to Vested Shares at any time
after the Vesting Date and before 5:00 p.m., Pacific Time, on the third
anniversary of the Vesting Date.
2.7 Net Issue Exercise
In lieu of the payment methods set forth in Section 2.1(b) above, the
Holder may elect to exchange the Warrant for shares of Warrant Stock equal to
the value of the amount of the Warrant being exchanged on the date of exchange.
If Holder elects to exchange this Warrant as provided in this Section 2.7,
Holder shall tender to the Company the Warrant for the amount being exchanged,
along with written notice of Holder's election to exchange up to the full amount
of the Warrant, and the Company shall issue to Holder the number of shares of
the Company's Warrant Stock computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Warrant Stock to be issued to
Holder.
Y = the number of shares of Warrant Stock purchasable under the
amount of the Warrant being exchanged (as adjusted to the date of such
calculation).
A = the Fair Market Value of one share of the Company's Common
Stock.
B = Exercise Price (as adjusted to the date of such calculation).
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All references herein to an "exercise" of the Warrant shall include an exchange
pursuant to this Section 2.7.
3. VALID ISSUANCE; TAXES.
All shares of Warrant Stock issued upon the exercise of this Warrant
shall be validly issued, fully paid and non-assessable, and the Company shall
pay all taxes and other governmental charges that may be imposed in respect of
the issue or delivery thereof. The Company shall not be required to pay any tax
or other charge imposed in connection with any transfer involved in the
issuance of any certificate for shares of Warrant Stock in any name other than
that of the Registered Holder of this Warrant, and in such case the Company
shall not be required to issue or deliver any stock certificate or security
until such tax or other charge has been paid, or it has been established to the
Company's reasonable satisfaction that no tax or other charge is due.
4. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES.
The number of shares of Warrant Stock issuable upon exercise of this
Warrant (or any shares of stock or other securities or property receivable or
issuable upon exercise of this Warrant) and the Exercise Price are subject to
adjustment upon occurrence of the following events:
4.1 Adjustment for Stock Splits, Stock Subdivisions or Combinations
of Shares.
The Exercise Price of this Warrant shall be proportionally
decreased and the number of shares of Warrant Stock issuable upon exercise of
this Warrant (or any shares of stock or other securities at the time issuable
upon exercise of this Warrant) shall be proportionally increased to reflect any
stock split or subdivision of the Company's Common Stock. The Exercise Price of
this Warrant shall be proportionally increased and the number of shares of
Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or
other securities at the time issuable upon exercise of this Warrant) shall be
proportionally decreased to reflect any combination of the Company's Common
Stock.
4.2 Adjustment for Dividends or Distributions of Stock or Other
Securities or Property.
In case the Company shall make or issue, or shall fix a record
date for the determination of eligible holders entitled to receive, a dividend
or other distribution with respect to the Warrant Stock (or any shares of stock
or other securities at the time issuable upon exercise of the Warrant) payable
in (i) securities of the Company or (ii) assets (excluding cash dividends paid
or payable solely out of retained earnings), then, in each such case, the Holder
of this Warrant on exercise hereof at any time after the consummation, effective
date or record date of such dividend or other distribution, shall receive, in
addition to the shares of Warrant Stock (or such other stock or securities)
issuable on such exercise prior to such date, and without the payment of
additional consideration therefore, the securities or such other assets of the
Company to which such Holder would have been entitled upon such date if such
Holder had exercised this Warrant on the date hereof and had thereafter, during
the period from the date hereof to and including the date of such exercise,
retained such shares and/or all other additional stock available by it as
aforesaid during such period giving effect to all adjustments called for by this
Section 4.
4.3 Reclassification.
If the Company, by reclassification of securities or otherwise,
shall change any of the securities as to which purchase rights under this
Warrant exist into the same or a different number of securities of any other
class or classes, this Warrant shall thereafter represent the right to acquire
such number and kind of securities as would have been issuable as the result of
such change with respect to the securities that were subject to the purchase
rights under this Warrant immediately prior to such
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<PAGE> 5
reclassification or other change and the Exercise Price therefore shall be
appropriately adjusted, all subject to further adjustment as provided in this
Section 4.
4.4. Adjustment for Capital Reorganization, Merger or Consolidation.
In case of any capital reorganization of the capital stock of
the Company (other than a combination, reclassification, exchange or subdivision
of shares otherwise provided for herein), or any merger or consolidation of the
Company with or into another corporation, or the sale of all or substantially
all the assets of the Company then, and in each such case, as a part of such
reorganization, merger, consolidation, sale or transfer, lawful provision shall
be made so that the Holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 4. The foregoing provisions of this Section 4.4 shall similarly
apply to successive reorganizations, consolidations, mergers, sales and
transfers and to the stock or securities of any other corporation that are at
the time receivable upon the exercise of this Warrant. If the per-share
consideration payable to the Holder hereof for shares in connection with any
such transaction is in a form other than cash or marketable securities, then the
value of such consideration shall be determined in good faith by the Company's
Board of Directors. In all events, appropriate adjustment (as determined in good
faith by the Company's Board of Directors) shall be made in the application of
the provisions of this Warrant with respect to the rights and interests of the
Holder after the transaction, to the end that the provisions of this Warrant
shall be applicable after that event, as near as reasonably may be, in relation
to any shares or other property deliverable after that event upon exercise of
this Warrant.
4.5. Reservation of Securities and Assets.
The Company shall reserve, for the life of the Warrant, such
securities or such other assets of the Company the Holder is entitled to receive
pursuant to this Section 4.
5. CERTIFICATE AS TO ADJUSTMENTS.
In each case of any adjustment in the Exercise Price, or number or type
of shares issuable upon exercise of this Warrant, the Chief Financial Officer of
the Company shall compute such adjustment in accordance with the terms of this
Warrant and prepare a certificate setting forth such adjustment and showing in
detail the facts upon which such adjustment is based, including a statement of
the adjusted Exercise Price. The Company shall promptly send (by facsimile and
by either first class mail, postage prepaid or overnight delivery) a copy of
each such certificate to the Holder.
6. LOSS OR MUTILATION.
Upon receipt of evidence reasonably satisfactory to the Company of the
ownership of and the loss, theft, destruction or mutilation of this Warrant, and
of indemnity reasonably satisfactory to it, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will execute and deliver
in lieu thereof a new Warrant of like tenor as the lost, stolen, destroyed or
mutilated Warrant.
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<PAGE> 6
7. RESERVATION OF COMMON STOCK
The Company hereby covenants that at all times there shall be reserved
for issuance and delivery upon exercise of this Warrant such number of shares
of Common Stock or other shares of capital stock of the Company as are from time
to time issuable upon exercise of this Warrant and, from time to time, will
take all steps necessary to amend its Certificate of Incorporation to provide
sufficient reserves of shares of Common Stock issuable upon exercise of this
Warrant. All such shares shall be duly authorized, and when issued upon such
exercise, shall be validly issued, fully paid and non-assessable, free and
clear of all liens, security interests, charges and other encumbrances or
restrictions on sale and free and clear of all preemptive rights, except
encumbrances or restrictions arising under federal or state securities laws.
Issuance of this Warrant shall constitute full authority to the Company's
officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for shares of Common Stock upon
the exercise of this Warrant.
8. TRANSFER AND EXCHANGE.
Subject to the terms and conditions of this Warrant and compliance with
all applicable securities laws, this Warrant and all rights hereunder may be
transferred, in whole or in part, on the books of the Company maintained for
such purpose at the principal office of the Company referred to above, by the
Registered Holder hereof in person, or by duly authorized attorney, upon
surrender of this Warrant properly endorsed and upon payment of any necessary
transfer tax or other governmental charge imposed upon such transfer. Upon any
permitted partial transfer, the Company will issue and deliver to the
Registered Holder a new Warrant or Warrants with respect to the shares of
Warrant Stock not so transferred. Each taker and holder of this Warrant, by
taking or holding the same, consents and agrees that when this Warrant shall
have been so endorsed, the person in possession of this Warrant may be treated
by the Company, and all other persons dealing with this Warrant, as the
absolute owner hereof for any purpose and as the person entitled to exercise
the rights represented hereby, any notice to the contrary notwithstanding;
provided, however, that until a transfer of this Warrant duly registered on
the books of the Company, the Company may treat the Registered Holder hereof
as the owner for all purposes.
9. RESTRICTIONS ON TRANSFER.
The Holder, by acceptance hereof, agrees that, absent an effective
registration statement filed with the U.S. Securities and Exchange Commission
("SEC") under the Act covering the disposition or sale of this Warrant or the
Warrant Stock issued or issuable upon exercise hereof, as the case may be, and
registration or qualification under applicable state securities laws, such
Holder will not sell, transfer pledge, or hypothecate any or all such Warrants
or Warrant Stock, as the case may be, unless either (i) the Company has
received an opinion of counsel to the effect that such registration is not
required in connection with such disposition or (ii) the sale of such
securities is made pursuant to SEC Rule 144.
10. COMPLIANCE WITH SECURITIES LAWS.
By acceptance of this Warrant, the holder hereby represents, warrants
and covenants that any shares of stock purchased upon exercise of this Warrant
shall be acquired for investment only and not with a view to, or for sale in
connection with, any distribution thereof; that the Holder has had such
opportunity as such Holder has deemed adequate to obtain from representatives
of the Company such information as is necessary to permit the holder to evaluate
the merits and risks of its investment in the Company; that the Holder is able
to bear the economic risk of holding such shares as may be acquired pursuant to
the exercise of this Warrant for an indefinite period; that the Holder
understands that the shares of stock acquired pursuant to the exercise of this
Warrant will not be registered under the Act (unless otherwise required
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<PAGE> 7
pursuant to exercise by the holder of the registration rights, if any,
previously granted to the registered Holder) and will be "restricted securities"
within the meaning of Rule 144 under the Act and that the exemption from
registration under Rule 144 currently is not available for at least two years
from the date of exercise of this Warrant, subject to any special treatment by
the Securities and Exchange Commission for exercise of this Warrant pursuant to
Section 2.2, and even then will not be available unless a public market then
exists for the stock, adequate information concerning the Company is then
available to the public, and other terms and conditions of Rule 144 are complied
with; and that all stock certificates representing shares of stock issued to the
Holder upon exercise of this Warrant may have affixed thereto a legend
substantially in the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN
AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED ("THE ACT"), AND MAY NOT BE SOLD, OFFERED
FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT
REGISTRATION UNDER THE ACT OR UNLESS EITHER (i) THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL TO THE EFFECT THAT REGISTRATION
IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE
SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND
EXCHANGE COMMISSION RULE 144.
11. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS.
This Warrant shall not entitle the Holder to any voting rights or other
rights as a stockholder of the Company. In the absence of affirmative action by
such Holder to purchase Warrant Stock by exercise of this Warrant, no provisions
of this Warrant, and no enumeration herein of the rights or privileges of the
Holder hereof shall cause such Holder hereof to be a stockholder of the Company
for any purpose.
12. REGISTRATION RIGHTS.
12.1. Definitions. As used in this Section 12:
(a) The terms "register", "registered" and
"registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the Act and the declaration or
ordering of the effectiveness of such registration statement;
(b) The term "Registrable Securities" means: (i) any
Common Stock issued or to be issued pursuant to exercise of the Warrant, and
(ii) any Common Stock or other securities issued as a dividend or other
distribution with respect to, or in exchange for, or in replacement of, the
Common Stock described in subsections (i) and (ii) of this Section 12.1(b);
provided, however, that any such securities shall cease to be Registrable
Securities with respect to a proposed offer or sale thereof when such securities
shall have been disposed of under SEC Rule 144 or in accordance with the plan of
distribution set forth in an effective registration statement under the Act; and
(c) The term "Holder" means any holder of outstanding
Registrable Securities or any person to which the registration rights provided
for in this Section 12 shall have been properly assigned in accordance with
Section 12.10 hereof.
12.2. Company Registration.
(a) Notice of Registration. If, at any time or from time
to time from and after the first anniversary of the Effective Date, the Company
shall determine to register any of its securities,
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<PAGE> 8
either for its own account or for the account of a security holder or holders
(other than a registration relating solely to employee stock option or purchase
plans or relating solely to an SEC Rule 145 transaction), the Company will:
(1) promptly and in any event within twenty (20)
days prior to the anticipated filing date of such registration statement, give
to each Holder written notice thereof which shall include a list of the
jurisdictions in which the Company intends to attempt to qualify such
securities under the applicable blue sky or other state securities laws; and
(2) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in any written
request or requests, made within ten (10) days after receipt of such written
notice from the Company, by any Holder or Holders, except as set forth in
Section 12.2(b) below.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 12.2(a)(1). In such event, the right of any Holder to
registration pursuant to this Section 12.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 12.2, if the
underwriter determines that marketing factors require a limitation of the
number of shares to be underwritten, the Company shall include in such
registration (i) first, all of the securities to be included in such
registration for the Company's own account, and (ii) second, up to the full
number of Registrable Securities and other securities of the Company sought to
be included in such registration by Holders and other security holders to whom
the Company has granted registration rights ("Other Holders"); and, if less than
the full number of such securities is to be included, the number to be included
shall be allocated pro rata on the basis of the total number of Registrable
Securities and other securities sought to be included in such registration by
the Holders and Other Holders. The Company shall advise all Holders of
Registrable Securities which would otherwise be registered and underwritten
pursuant hereto of any such limitations, and the number of shares of Registrable
Securities that may be included in the registration. If any Holder disapproves
of the terms of any such underwriting, such Holder may elect to withdraw
therefrom by written notice to the Company and the underwriter. The Registrable
Securities so withdrawn shall also be withdrawn from registration.
12.3. Expenses of Registration. All expenses incurred in connection
with any registration, qualification or compliance pursuant to Section 12.2,
including without limitation, all registration, filing and qualification fees,
printing expenses, fees and disbursements of counsel for the Company, expenses
of any special audits incidental to or required by such registration and the
fees and disbursements of one counsel retained by the Holders of Registrable
Securities covered by such registration, qualification or compliance shall be
borne by Company, except that the Company shall not be required to pay any
underwriters' discounts, commissions or stock transfer taxes relating to
Registrable Securities.
12.4. Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 12,
the Company will keep each Holder participating therein advised in writing as
to the initiation of such registration, qualification and compliance and as to
the completion thereof. At its expense (except as otherwise provided in
Section 12.3 above), the Company will:
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<PAGE> 9
(a) keep any such registration, qualification or
compliance pursuant to Section 12.2 above effective for a period of ninety (90)
days or until the Holder or Holders have completed the distribution described
in the registration statement relating thereto, whichever first occurs;
(b) furnish such number of prospectuses and other
documents incident thereto as a Holder from time to time may reasonably request;
(c) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statements as may be necessary to comply with
the provisions of the Act with respect to the disposition of all securities
covered by such registration statement;
(d) notify each Holder of Registrable Securities
covered by such registration statement, at any time when a prospectus relating
thereto covered by such registration statement is required to be delivered under
the Act, of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing; and
(e) furnish, at the request of any Holder, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 12, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statements with respect
to such securities becomes effective, (i) an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders and (ii) a
letter dated such date, from the independent certified public accountants of
the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders.
12.5. Indemnification.
(a) Indemnification by the Company. The Company will
indemnify each Holder of Registrable Securities with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 12, each of its officers and directors, and each person controlling
such Holder and each underwriter, if any, of such Registrable Securities and
each person who controls any such underwriter, against all claims, losses,
damages, costs, expenses and liabilities of any nature whatsoever (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any registration statement,
prospectus, offering circular or other documents (including any related
registration, statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
the Company of the Act or any state securities law or of any rule or regulation
promulgated under the Act or any state securities law applicable to the Company
and relating to action or inaction required of the Company in connection with
any such registration, qualification or compliance, and will reimburse each
such Holder, each of its officers and directors, and each person controlling
such Holder, and each such underwriter and each person who controls any such
underwriter, for any legal and other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage, cost,
expense, liability or action, except that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, cost, expense,
liability or action arises out of or is based on any untrue
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<PAGE> 10
statement or omission based upon written information furnished to the Company in
an instrument duly executed by any Holder or underwriter and stated to be
specifically for use therein, and except that the foregoing indemnity agreement
is subject to the condition that, insofar as it relates to any such untrue
statement (or alleged untrue statement) or omission (or alleged omission) made
in the preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the SEC at the time the registration statement becomes
effective or in the amended prospectus filed with the SEC pursuant to Rule
424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the
benefit or any underwriter or any Holder, if there is no underwriter, if a copy
of the Final Prospectus was furnished to the person or entity asserting the
claim, loss, damage, cost, expense, liability or action at or prior to the time
such action is required by the Act.
(b) Indemnification by the Holders. Each Holder will, if
Registrable Securities held by or issuable to such Holder are included in the
securities to which such registration, qualification or compliance is being
effected, indemnify the Company, each of its directors and officers, each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company within the meaning of the Act,
and each other Holder, each of such other Holder's officers and directors and
each person controlling such other Holder, against all claims, losses, damages,
costs, expenses and liabilities of any nature whatsoever (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other documents (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such other Holders, such directors, officers, persons or underwriters
for any legal or other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, cost, expense,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company in an instrument duly executed by such Holder and
stated to be specifically for use therein, except that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) made in the preliminary prospectus but eliminated or remedied in the
Final Prospectus, such indemnity agreement shall not inure to the benefit of
the Company or any underwriter or any Holder, if there is no underwriter, if a
copy of the Final Prospectus was furnished to the person or entity asserting
the claim, loss, damage, cost, expense, liability or action at or prior to the
time such action is required by the Act. In no event shall the indemnity under
this Section 12.5(b) exceed the gross proceeds from the offering received by
such Holder.
(c) Procedures for Indemnification. Each party entitled to
indemnification under this Section 12.5 (the "Indemnified Party"), shall give
notice to the party required to provide indemnification (the "Indemnified
Party") promptly after such Indemnified Party has actual knowledge of any claim
as to which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting therefrom,
provided that counsel for the Indemnifying Party, who shall conduct the defense
of such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified Party may
participate in such defense. Failure of the Indemnified Party to give notice
as provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 12.5, unless the failure or delay in giving notice has a
material adverse impact on the ability of the Indemnifying Party to defend
against such claim. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement that does not include as
an unconditional term thereof, the giving of a release from all liability in
respect to such claim or litigation. If
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<PAGE> 11
any such Indemnified Party shall have been advised by counsel chosen by it that
there may be one or more legal defenses available to such Indemnified Party that
are different from or additional to those available to the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense of such
action on behalf of such Indemnified Party and will reimburse such Indemnified
Party and any person controlling such Indemnified Party for the reasonable fees
and expenses of any counsel retained by the Indemnified Party, it being
understood that the Indemnifying Party shall not, in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for
such Indemnified Party or controlling person, which firm shall be designated in
writing by the Indemnified Party to the Indemnifying Party.
12.6 Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may reasonably request in writing and as
shall be required in connection with any registration, qualification or
compliance referred to in this Section 12.
12.7 Rule 144 Reporting. From and after such time that the Company
becomes a reporting company under the Exchange Act, with a view to making
available the benefits of certain rules and regulations of the SEC which may
permit the sale of Warrant Stock or Registrable Securities to the public without
registration, the Company agrees to:
(a) at all times make and keep public information available, as
those terms are understood and defined in SEC Rule 144;
(b) take such action as soon as practicable, including the
voluntary registration of its Common Stock under Section 12 of the Exchange Act,
as is necessary to enable the Holders to utilize Form S-3 for the sale of their
Registrable Securities;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act; and
(d) furnish to the Holder, so long as the Holder owns any
Warrant Stock or Registrable Securities, forthwith upon written request a
written statement by the Company that it has complied with the reporting
requirements of Rule 144, the Act and the Exchange Act, a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents so filed by the Company as may be reasonably requested in availing the
Purchaser of any rule or regulation of the SEC permitting the selling of any
such securities without registration.
12.8 Transfer of Registration Rights. The registration rights granted
by the Company under this Section 12 may be assigned by any Holder to any
permitted transferee or permitted assignee of the Warrant, Warrant Stock or
Registrable Securities, provided that such transfer may otherwise be and is
effected in accordance with applicable federal and state securities laws and
provided further that the Company is given written notice of such transfer at
the time of or within a reasonable time after such transfer, stating the name
and address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned.
12.9 Limitations on Subsequent Registration Rights. Any right given
by the Company to any holder or prospective holder of Company's securities in
connection with the registration of securities shall be conditioned such that it
shall be consistent with the provisions of this Section 12 and with the rights
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of the Holders provided in this Agreement. This Section 12 shall not limit the
right of the Company to enter into any agreements with any holder or
prospective holder of any securities of the Company giving such holder or
prospective holder the right to require the Company, upon any registration of
any of its securities, to include, among the securities which the Company is
then registering, securities owned by such holder, but only if such rights
provide that, if the underwriter in any such registration requires a reduction
in the number of securities to be included in such registration, then the
amount of securities included in any such registration at the request and on
behalf of such holder shall be reduced pro rata with any reduction in the
securities requested by the Holder to be included in such registration.
12.10 Limitation on Registration. The Company shall not be
obligated to effect any registration pursuant to Section 12.2 hereof if the
Registrable Securities intended to be included in such registration on behalf
of the Holders could be sold by the Holders to the public in an offering
without registration within a period of three consecutive months.
13. NOTICES.
Except as otherwise provided, all notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by first
class mail, postage prepaid, addressed (a) if to Intel, to 2200 Mission College
Boulevard, Mail Stop SC4-210, Santa Clara, California 95052-8119, Attn:
Treasurer, and (b) if to the Company, to 42 Corporate Park, Suite 200, Irvine,
California 92606, Attn: President or (c) to such other address as the receiving
party shall have furnished to the other in writing.
14. HEADINGS.
The headings in this Warrant are for purposes of convenience in
reference only, and shall not be deemed to constitute a part hereof.
15. LAW GOVERNING.
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Delaware.
16. NO IMPAIRMENT.
The Company will not, by amendment of its Certificate of Incorporation
or bylaws, or through reorganization, consolidation, merger, dissolution, issue
or sale of securities, sale of assets or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Registered Holder of this
Warrant against impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any shares of stock issuable
upon the exercise of this Warrant above the amount payable therefor upon such
exercise, and (b) will take all such action as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
non-assessable shares of Warrant Stock upon exercise of this Warrant.
17. NOTICES OF RECORD DATE. In case:
17.1 the Company shall take a record of the holders of its Common
Stock (or other stock or securities at the time receivable upon the exercise of
this Warrant) for the purpose of entitling them to receive any dividend or
other distribution, or any right to subscribe for or purchase any shares of
stock of any class or any other securities or to receive any other right; or
-12-
<PAGE> 13
17.2 of any consolidation or merger of the Company with or into
another corporation, any capital reorganization of the Company, any
reclassification of the Capital Stock of the Company, or any conveyance of all
or substantially all of the assets of the Company to another corporation in
which holders of the Company's stock are to receive stock, securities or
property of another corporation; or
17.3 of any voluntary dissolution, liquidation or winding-up of the
Company; or
17.4 of any redemption or conversion of all outstanding Common Stock;
then, and in each such case, the Company will mail or cause to be
mailed to the Registered Holder of this Warrant a notice specifying, as the
case may be, (i) the date on which a record is to be taken for the purpose of
such dividend, distribution or right, or (ii) the date on which such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation, winding-up, redemption or conversion is to take
place, and the time, if any is to be fixed, as of which the holders of record
of Common Stock (or such stock or securities as at the time are receivable upon
the exercise of this Warrant) shall be entitled to exchange their shares of
Common Stock (or such other stock or securities) for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding-up. Such notice shall
be delivered at least thirty (30) days prior to the date therein specified.
18. SEVERABILITY.
If any term, provision, covenant or restriction of this Warrant is held
by a court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
19. COUNTERPARTS.
For the convenience of the parties, any number of counterparts of this
Warrant may be executed by the parties hereto and each such executed
counterpart shall be, and shall be deemed to be, an original instrument.
20. NO INCONSISTENT AGREEMENTS.
The Company will not on or after the date of this Warrant enter into
any agreement with respect to its securities which is inconsistent with the
rights granted to the Holders of this Warrant or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any
way conflict with and are not inconsistent with the rights granted to holders
of the Company's securities under any other agreements, except rights that have
been waived.
-13-
<PAGE> 14
21. SATURDAYS, SUNDAYS AND HOLIDAYS.
If the Expiration Date falls on a Saturday, Sunday or legal holiday,
the Expiration Date shall automatically be extended until 5:00 p.m. the next
business day.
AGREED:
INTEL CORPORATION GRAPHIX ZONE, INC.
/s/ RON WHITTIER /s/ N. H. BLOCK
- ------------------------- --------------------
Signature Signature
Ron Whittier N. H. Block
- ------------------------- --------------------
Printed Name Printed Name
Senior Vice President President
- ------------------------- --------------------
Title Title
February 3, 1997 February 5, 1997
- ------------------------- --------------------
Date Date
LEGAL OK
/s/ DM 2/3/97
-14-
<PAGE> 1
EXHIBIT 11
GRAPHIX ZONE, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average number of shares
outstanding 11,043,679 4,661,401 1,406,688
------------ ------------ ------------
Earnings:
Net loss $(16,831,025) $(23,518,660) $(10,916,397)
Dividends and discounts recorded in connection
with preferred stock issuances (916,003) - -
------------ ------------ ------------
$(17,747,028) $(23,518,660) $(10,916,397)
Net loss per common share $ (1.61) $ (5.05) $ (7.76)
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
A. GZ Multimedia, Inc. (formerly Graphix Zone, Inc.), a California
corporation
B. StarPress, Inc., a Colorado corporation
C. Subsidiaries of StarPress, Inc.:
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> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 of Graphix Zone, Inc. (No. 333-09149) of our report dated August 18,
1995, with respect to the consolidated statements of operations, stockholders'
equity and cash flows of StarPress, Inc. (formerly known as Great Bear
Technology Incorporated) for the year ended June 30, 1995 included in the
Annual Report of Graphix Zone, Inc. (Form 10-K) for 1997 filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Walnut Creek, California
October 14, 1997
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors of
Graphix Zone, Inc.
We consent to the incorporation by reference in the Registration
Statement (No. 333-09149) on Form S-8 of Graphix Zone, Inc. (the "Company") of
our report dated October 8, 1997, relating to the consolidated balance sheets
of Graphix Zone, Inc. and subsidiaries as of June 30, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for the years then ended, and related schedule,
which report appears in the June 30, 1997 Annual Report on Form 10-K of
Graphix Zone, Inc.
Our report dated October 8, 1997 contains an explanatory paragraph that states
that 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. The consolidated Financial
Statements and Financial Statement Schedule do not include any adjustment that
might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
October 14, 1997
Orange County, California
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 726,443
<SECURITIES> 0
<RECEIVABLES> 1,784,977
<ALLOWANCES> (1,397,270)
<INVENTORY> 34,001
<CURRENT-ASSETS> 1,475,114
<PP&E> 375,000
<DEPRECIATION> (125,000)
<TOTAL-ASSETS> 1,751,684
<CURRENT-LIABILITIES> 10,608,611
<BONDS> 0
2,881,185
1,585,948
<COMMON> 127,455
<OTHER-SE> (13,502,662)
<TOTAL-LIABILITY-AND-EQUITY> 1,751,684
<SALES> 7,708,900
<TOTAL-REVENUES> 7,708,900
<CGS> 5,995,565
<TOTAL-COSTS> 5,995,565
<OTHER-EXPENSES> 17,926,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 592,966
<INCOME-PRETAX> (16,831,025)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,831,025)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,831,025)
<EPS-PRIMARY> (1.61)
<EPS-DILUTED> (1.61)
</TABLE>
